July 2016

Improve Your Chance of Submitting the Winning Bid

Posted on July 31, 2016 by Debra Barcuch

Safety First

Like the saying “You gotta be in it to win it,” many construction firm owners submit many bids for local jobs to be in it.

But to thrive and survive, you need to do more than just be in the bidding process. Your firm must be able to submit bids that have a reasonable chance of approval. And your firm must win often enough to thrive.

There’s no foolproof method for developing and submitting winning bids. Still, by following some basic principles, you can improve your chances.

Bidding is an art, not a science. Usually, the bidding process is reserved for the general contractor, but the architect and others might participate.

Although contracts may be awarded to the lowest bidder, the process often involves more than just cost. It also may involve the qualifications of the firm making the bid. Having an excellent reputation for quality and timely work may be just as important, if not more so, than offering the lowest price.

Use of Construction Bid Software

To help develop more successful bids, your firm might consider using some of the many bidding software programs available. Typically this software is used as part of the cost estimation and budgeting process. You also may subscribe to a database of construction costs, updated monthly. Although your firm may choose to maintain its own database to better reflect local pricing.

Materials and labor costs are critical parts of the equation. The software defines the materials and labor hours for a particular project and then calculates the job cost from the database. All you need to do is find a job defined in the database and the software does the “grunt work.” This reduces the possibility of leaving out some costs.

The software also lets you compare final job costs to the initial bid and fine tune your final bid by, for example, inserting lower or higher costs for materials and labor.

Construction bid software is relatively inexpensive. Most programs range from between $50 and $250, depending on the features. Usually, the program will be designed to work with Excel spreadsheets, although some are stand-alone.

Among the multiple benefits of this software are that it:

Helps general contractors keep track of financial data on a daily or even hourly basis,
Stores budget information in one location for easy access, and
Reduces to near zero the chances for errors in mathematical computations that can often crop from the human factor.

Five Steps of Bidding

Once you have acquired estimating software and become proficient at using it, you’ll be better equipped to submit bids. Although the process may vary, partly because of regional differences, there are essentially five important steps.

Assess the location and conditions of the job you’re bidding on. Notably, you must learn to say “no” to jobs that don’t make sense for your firm for such reasons as distance, extreme heat or cold or hazardous conditions. To be financially successful, you must know when to walk way from jobs where you’ll almost certainly lose money.
Itemize the materials that will be needed. Normally, you should figure on a 10% to 15% add-on for waste and service charges. If you acquire the materials yourself, it cut into your profit margin, but it may be necessary to secure the job.
Compare the work with jobs your firm has previously completed. This is where experienced construction firms gain an edge. For those just starting out, it’s inevitable that you will bid too high or too low for some jobs. Chalk it up to experience and learn from it. Over time, you should be able to work more expeditiously and efficiently, which will make it easier to estimate the time and costs required to complete a job.
Multiply your hourly rate by the hours estimated for the job and add the cost of materials. Tack on a percentage for overhead expenses such as insurance, licensing and transportation. Determine if your result makes sense from a client’s perspective. If your instincts tell you that the final number needs adjustment, take another look.
Submit the bid along with a detailed schedule. Most important, the client will want a firm completion date.

Best Position

Bidding can mean the difference between a successful business and going under. By using the latest software and other tools at you disposal, you can position your firm for the optimal opportunities.

Seven Popular Bidding Programs

The number of software programs available can be overwhelming. The following is a list of seven that are currently popular:

Quick Bid
Prebuilt ML
B2W Estimate
Co-construct
Stack
Clear Estimate
Plan Swift

For reviews of these and other products, go here.

Money Market Reform

Posted on July 31, 2016July 22, 2024 by Debra Barcuch

The deadline for implementation of the SEC’s new money market rules is fast approaching. October 14, 2016 is the date that these new regulations will go into effect. You will want to make sure that the cash investment option available in your company’s 401(k) plan is the most appropriate choice based on the new rules.

The genesis of these new rules is rooted in the Financial Crisis of 2008. At that time, one of the largest money market funds, the Primary Reserve Fund, “broke the buck”. This means that its net asset value, or NAV, fell below $1 per share. As a result, many investors rushed to pull their money out of money market funds, thus creating further instability. The SEC began to investigate how to prevent this from happening in the future. The result was new rules that govern how money market funds operate and invest their assets.

Going forward, money market funds will be split into one of three categories: Government, Retail, or Institutional. Only the funds classified as government funds will have a stable NAV of $1 per share, and maintain full liquidity. The retail and institutional funds could have floating NAVs and potential redemption fees or gates during times of market volatility. Many mutual fund providers have already started re-classifying their funds. The government funds will also have to invest 99.5% of their assets in government securities.

This creates a need for plan fiduciaries to evaluate their plan’s cash option to ensure that it remains the most prudent choice for plan participants.

Retirement Plan Industry Update information provided by RPS Retirement Plan Advisors.

DOL Fiduciary Rule

Posted on July 31, 2016 by Debra Barcuch

In April of this year, the Department of Labor (DOL) issued its final Fiduciary rule, which expands the definition of an “investment advice fiduciary” under the Employee Retirement Income and Security Act of 1974 (ERISA). This rule is also known as the Conflict of Interest Rule. Under the old guidelines, there was a 5-part test to determine if a service provider was a fiduciary. This new rule simplifies that determination process. Basically, any provider receiving compensation for providing advice or recommendations to an ERISA plan, including IRAs, will be deemed a fiduciary. This will include recommendations for investment options, as well as recommendations to roll-over or transfer money into or out of an ERISA plan.

In addition, certain types of compensation like commissions, 12b-1 fees, finder’s fees, and variable compensation, will be prohibited under the new rule, unless the service provider enters into a BIC, or Best Interest Contract, with the client. These BICs will grant prohibited transaction exemptions, but will be extensive documents. Service providers could find them costly to implement.

Even If you work with a level fee-based advisor who already acknowledges their fiduciary status, the new rule could still impact your company’s retirement plan. You will need to monitor service providers and what types of education, advice or recommendations they are providing.

Retirement Plan Industry Update information provided by RPS Retirement Plan Advisors.

Communication: Establishing Timing and Deliverables for Your Succession Plan – Phase III

Posted on July 30, 2016 by Debra Barcuch

When I work with small business owners, particularly family-owned businesses in manufacturing and distribution, succession planning is stalled because of a lack of communication. Owners don’t want to face the sometimes tough conversations around who will take over the business and what that will mean for family members, employees or customer relationships. Before beginning the final phase of building your succession plan, consider the following questions:

How will you communicate the plan to leaders, clients, employees, family?
What can reinforce buy-in and cooperation?
What contracts and documents must be in place?
What is the exact timetable and launch?

Usually, I try an objective process of elimination. If there are family members in the business, I ask if any are interested — and able — to operate the company. Based on the owner’s responses, we take a look at other scenarios such as a leveraged buy-out or ESOP arrangement. And finally, we look at the potential for selling to an outside buyer (e.g. private equity, competitor, affiliated vendor).

Based on the owner’s selection of a Plan A and Plan B succession scenario, we have to plan communication with family and management. The depth and detail of communication is directly related to how significant each family member’s or management leader’s role will be in Plan A or Plan B. The smaller the role, the less detailed you will be in communication. Key topics of discussion may or may not include:

How your buyout or retirement will be handled and impact on the business operationally and financially going forward
How the plan will affect each stakeholder in particular – who will be offered stock or ownership
How you are dealing with family members not involved in the business — helping them understand that the business is like any other stock in their portfolio
Your planned date of exit
Getting feedback on their concerns

There may be some hard conversations. This is where you can seek help from your advisory team to guide the conversation. For example, I’ve seen situations in which a child thinks the parent will bring him into the business, but the child doesn’t have any experience or education. You may also have one child already working in the business and another who isn’t. The parents want to be fair to both children, but it’s not necessarily the best decision to hand the reins of the company to both.

The same conversations must be discussed with management. Depending on the details of Plan A and Plan B, you want to avoid a mass exodus of skilled management. Therefore, discussions of transition should also include compensation of key employees to support retention and timely — rather than sudden — exits.

Set up the Timetable and Deliverables

The final timetable is of utmost importance so that you can address issues and gaps in your plan, properly structure your exit and leave the company in good hands.

Let’s say, for example, you have seven years to exit. In year three, you may arrange to step out of the CEO role and take on a support role of transitioning relationships and training management. Making such transitions over time is usually best to preserve customer relationships and value of the business.

Owners must also set up a timetable for addressing and solving issues and gaps in the plan. Perhaps you need to restructure entities for a better tax position upon sale. You may have outstanding debt and collections that need cleaning up. You will need to schedule a valuation to determine the true value (or estimation of value) of all company assets. You will also need to revisit your organizational chart to determine hiring of key management and/or transition of management.

The last 30 days of your succession planning involve reviewing your written Plan A and Plan B, establishing a timetable to address gaps and issues, and ensuring that many documents are updated and in place. Some of the key documents in a succession plan can include the following:

A one page executive summary succession Plan A and Plan B in writing
A management emergency plan
Shareholder agreements – buy /sell
Review of wills and estate plan documents
Purchase price formula or method with discounts and terms
Final proforma balance sheet, income statement and cash flow

Remember, you are not alone in this planning. Rely on your designated succession planning quarterback, such as your CPA, to keep everyone on your advisory team informed and involved. You will be amazed at the sense of relief after handling a critical piece in business ownership — that is, how to leave your business in good hands.

For more information on guiding your small business through succession planning, download the whitepaper: Do You Need a Succession Planning Starter Kit?

Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas.

DOL Announces Increased Civil Penalties for Violations of Federal Laws

Posted on July 30, 2016 by Debra Barcuch

DOL Announces Increased Civil Penalties for Violations of Federal Laws

The Department of Labor recently issued final rules that will increase the civil penalties assessed to employers for violating various federal laws. The higher penalties are part of a law passed last year and are scheduled to begin with those assessed after August 1, 2016. This article explains why the penalties are increasing and some of the new amounts.

Penalties Going Up for Violations Related to Employment of Temporary Non-immigrant Workers

The DOL issued two interim final rules that will increase civil penalties for violations related to the employment of temporary non-immigrant workers under the H-1B and H-2B visa programs.

Descriptions and Penalties

H-1B visa program. The H-1B visa is used by U.S. employers to hire foreign workers in areas of specialized knowledge or technical expertise, such as scientists, engineers, or computer professionals. American employers that apply for the visa must prove there are no qualified U.S. workers that could fill the positions, and must ensure that the H-1B visa holders are paid the same as their U.S. counterparts.

The following H-1B visa program penalties are increasing August 1, 2016:

1. The civil penalty for violations pertaining to strikes, lockouts, displacement of U.S. workers, notification, misrepresentation of material facts, etc. is going from $1,000 to $1,782;

2. The civil penalty for willful violations pertaining to wages, working conditions, misrepresentation of material facts, etc. is increasing from $5,000 to $7,251; and

3. The civil penalty for each willful violation that caused the displacement of a U.S. worker is rising from $35,000 to $50,758 per violation.

H-2B visa program. This visa program allows American employers who meet specific regulatory requirements to bring foreign nationals to the U.S. to fill temporary non-agricultural jobs. There are civil penalties on employers for violations including those related to wages, impermissible deductions, prohibited fees and expenses, and improper refusal to employ or hire U.S. workers.

Effective August 1, 2016, the related civil penalty is increasing from $10,000 to $11,940 per violation.

Background Information

On November 2, 2015, Congress passed the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. It directed federal agencies to adjust civil penalties for inflation each year. Agencies were instructed to determine the last time civil penalties were increased and publish interim final rules to adjust penalties for inflation from that date. The amount of increase can’t exceed 150% of the existing penalty amount.

A DOL Fact Sheet explains that penalties are imposed on employers to encourage greater compliance. “These penalties, however, are less effective when they haven’t been raised for decades to keep up with inflation,” the DOL states. Recognizing this, Congress passed a law in 1990 directing agencies to adjust their civil monetary penalties to keep up with inflation, defining a civil monetary penalty as a penalty for a specific amount or maximum amount set by federal law that is assessed or enforced by a federal agency.

“But a low cap on these increases together with complicated rounding rules kept many penalties from accomplishing Congress’s stated goal of keeping up with inflation over time,” the DOL adds.

Furthermore, some agencies, such as the Occupational Safety and Health Administration (OSHA), were exempt from the 1990 law, so the agency’s penalties haven’t increased since 1990. That’s why Congress passed the Inflation Adjustment Act in 2015 to begin annually adjusting penalties using a more straightforward method than the 1990 law.

DOL Civil Penalties

The DOL will increase more than 20 civil penalty amounts, effective with civil penalties assessed after August 1, 2016, with associated violations that occurred after November 2, 2015. For example:

Minimum wage and overtime. The civil penalty for repeated or willful violation of the minimum wage and overtime provisions in the FLSA will increase from $1,100 to $1,894 per violation.

Child labor. The civil penalty for violations will increase from $11,000 to $12,080.

FMLA. The civil penalty for willful violation of the requirement that employers post and keep on their premises a notice about the FMLA and the procedures that employees may use to file complaints will increase from $110 to $163.

OSHA Penalties

OSHA’s maximum penalties, which were last adjusted in 1990, will increase by 78%. In addition, going forward, the agency will adjust its penalties for inflation each year based on the Consumer Price Index.

Serious violations. The top OSHA penalty for serious violations will increase from $7,000 to $12,471 and its top penalty for willful or repeated violations will rise from $70,000 to $124,709.

Other Agencies and Laws

This article only covers some of the increased penalties. For example, under the Employee Retirement Income Security Act, there will be several higher penalties for violations including:

Failure to furnish documents to certain employees, former participants and beneficiaries;
Failure to maintain records; and
Failure (or refusal) to file an annual report on Form 5500.

There will also be increased penalties assessed on some employers by the Employee Benefits Security Administration, Mine Safety & Health Administration and under the Office of Workers’ Compensation Programs. In addition, the DOL (along with the Department of Homeland Security) has adjusted penalties associated with the H1B and H2B temporary guest worker program (see right-hand box).

Click here for a chart showing all of the penalty adjustments.

This article only lists some of the increased penalties employers may face. For more information about your company’s situation, consult with your employee benefits adviser or employment attorney.

Manufacturer’s Operating Report Knowledge Can Be Golden

Posted on July 28, 2016 by Debra Barcuch

Your dealership likely prepares and sends operating reports to your manufacturer every month. How you use the reports beyond sending them to the factory can have a big impact on your dealership’s profitability.

Here are three ideas for using your monthly operating report as a tool to stay on track as the year progresses.

1. Keep an Eye on Revenue.

Every manufacturer’s report is different, but yours likely contains, in some format, a summary of that month’s operating revenue. These figures can quickly tell you which departments are the moneymakers and which lag behind expectations.

Let’s say that the current month’s operating report for a dealership shows that it brought in the following in gross revenues: $2 million in new car sales, $750,000 in used car sales, $140,000 in parts sales, $61,000 in service income and $56,000 in body shop income.

You also can see how income from your store’s various departments compare with the prior month, as well as a year ago, the dealership’s projected budget, benchmarks and so on. Let’s assume that you projected $2.25 million in new car sales for the current month. With sales coming in at only $2 million, you are concerned that first quarter sales are off to a slow start and, thus, choose to move up by several weeks a new car sales promotion you had planned to run in two months.

Another example involves gross revenue versus turnover. Take Dealer A, who buys a vehicle for $20,000, holds it for 90 days and finally sells it making a $3,000 gross profit. Many dealers would be pleased with this outcome. But let’s also consider Dealer B, who spends the same $20,000, sells the vehicle in 30 days but only achieves a 10 percent profit margin or $2,000 gross profit. The difference is that Dealer B does three times the sales in the same 90 days, doubling his total gross income compared to Dealer A.

There are many other ways to use your operating report to analyze front-end operations.

2. Figure Out the Reasons Behind the Numbers.

When you analyze the back end of your operations, for example, you’ll look at income and expenses in the service, parts and body shop departments.

Let’s say that you have a gross profit of $33,000 in the service department. This alarms your manufacturer, because it’s less than 55 percent of your monthly service sales and shows that your gross profit percentage has slipped from the target of 65 percent. But it shouldn’t be a major concern if the reason for the shortfall is that the department was busier than usual refurbishing used cars for sale next month — and profits for that venture won’t start showing up until the following month.

3. Consider other Benchmarks.

Monthly operating reports are also a way for you to measure your dealership’s performance against more complex benchmarks. Consider, for instance, the concept of “service absorption.” This is defined as the sum of total parts, service and body shop gross profits divided by the sum of total fixed expenses plus dealer salary plus parts, service and body shop sales expense. (If your report doesn’t have this category, you could calculate it from the other data provided.)

Let’s say that your store’s benchmark range for service absorption is 85 to 100 percent, but your current operating report shows your store coming in at 83.8 percent for the month. This figure is only slightly below the bottom of your benchmark range. Nonetheless, you might want to take steps to lower expenses or bump up revenue for the next month to be sure your store is in the benchmark range.

Achieving a service absorption of 85 percent or higher will give you a competitive advantage over your competition, because the new and used departments only need to cover 15 percent or less of your dealership’s total fixed expenses. Thus, you can afford to take less gross profit on an individual sale.

Knowledge Can Be Golden

By studying your manufacturer’s operating reports, you can arrive at countless insights, from your day supply of vehicles to the gross profit per technician to determine an adequate employee count in the back end. All of this knowledge can be golden, because it helps you recognize strengths, pinpoint weaknesses and set goals for the rest of the year. Don’t let it go unnoticed.

Professional Service KPIs: Know Your Numbers, Define Value

Posted on July 27, 2016July 23, 2024 by Debra Barcuch

A well-managed PSO anticipates change with the right key performance indicators — helping leaders look ahead instead of always over their shoulders. Whether PSOs are considering M&A, structuring pricing or forecasting capacity, it comes down to numbers.

Every service organization should have a list of key performance indicators (KPIs) that measure how well the business is doing. KPIs will be different for every organization, but in general PSOs should look at the following five:

Annual Revenue per Billable Consultant – Total revenue divided by the number of billable consultants — this should minimally equal one to two times the fully loaded cost of the consultant
Annual Revenue per Employee – Total revenue divided by the total number of employees (billable and nonbillable) – this should be close two times the fully loaded cost per person
Billable Utilization – Calculated by dividing the total billable hours by 2,000 (the average utilization per employee) – this KPI is central to profitability and signals the need to expand or contract the workforce
Project Overrun – Percent of budgeted cost to actual cost – consistent project overruns eat into profits and signal inefficient project governance
Profit Margin – Calculated as revenue that remains after paying for the direct costs of delivering a project (payroll, transportation, materials, etc.) – can be fixed-price or not to exceed price or related to hourly time and expense.

Because they sell knowledge and service, PSOs realize revenue growth and profits mainly by leveraging people effectively. Time is truly money in a PSO. Not every minute can be billed, and many PSOs support nonbillable activities such as volunteering to enhance their team culture. However, the ratio of billable activities must be high enough to achieve per person revenue goals and margins. By the same token, nonbillable employees must be a smaller percentage of the overall employment base compared to billable employees.

Effective KPIs are monitored and reviewed regularly. This can happen during senior leadership team or sales meetings, but the emphasis is on regular review. The biggest squeak gets the grease, and leaders must commit to change before they will see it in their organizations.

Here are some of the ways that PSOs can improve the five primary KPIs:

Leveraging senior-level professionals for high-level consulting and project oversight
Delegating project management and technical services to mid-level professionals
Right-pricing engagements
Defining and focusing on ‘A’ clients
Increasing efficiency of project delivery through processes, productization and automation
Outsourcing nonbillable or repetitive tasks that relate to running the organization

Such methods sound like common sense in theory, but we are still dealing with people. Depending on the size of the organization, prioritize which methods to pursue first that would make the biggest impact on profits.

Do you have low-profit clients that need to be transitioned to another service provider?
Do you have senior professionals unaware of tasks they could delegate (or unwilling)?
Are your processes inefficient because they are tailored too much for each client, and therefore impossible to delegate?
Are you underpricing your services or underestimating the actual time it will take to deliver them?
Are you sacrificing client service in the pursuit of new business?

Every PSO experiences these challenges. Being aware of them is the first step to discussing solutions to eliminate them.

In any event, one of the simplest ways to boost KPIs is to limit the time that owners and senior staff spend working in the business rather than on it. This relates to all of those time-consuming administrative, financial and operational tasks that must be done, but could be done more efficiently and cost-effectively by someone else — allowing professionals to focus on billable client work.

At Cornwell Jackson, our tax and business services teams have worked with clients for many years to optimize back-office functions, but also assist with business strategy and planning. We have supported PSOs in determining the best KPIs, the optimal level of staffing and timely introduction of accounting tools and processes that enhance their growth. For more information on how your PSO can face today’s growth challenges head-on with a qualified outsourced relationship, contact us.

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of approximately 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.

The Financial Rewards of Buying a College Condo for Your Kid’s University Housing

Posted on July 25, 2016 by Debra Barcuch

Photo Credit: Claire L. Evans, Flickr

With real estate prices recovering in many markets, it might make sense to buy a condo where your child can live during college. He or she can live there while attending school, and you can avoid “throwing away” money on dorm costs or rent for an apartment. If you buy a place that has extra space, you also can rent it to your child’s friend(s) to offset some of the ownership costs.

Additionally, you may be able to sell the condo for a gain after the four or five (or maybe even six) years that it takes for your son or daughter to graduate. A gain may be even more likely if you have more than one child — and you can persuade a younger child to attend the same college as an older sibling. Here are some tax issues to consider before you buy a condo near campus.

Rules about Deducting College Condo Ownership Costs

The federal income tax rules generally prevent you from deducting losses from owning and renting out a residence to a family member. But an exception applies when you rent at market rates to the family member who uses the property as his or her principal home. This loophole is open to you if you buy a condo and rent it out to your college kid (and any roommates) at market rates.

As long as you charge market rent, you can — subject to the passive activity loss (PAL) rules explained later — deduct the mortgage interest and write off all the other operating expenses, including utilities, insurance, association fees, security monitoring, cleaning, maintenance and repairs. As a bonus, you can depreciate the cost of the structure (but not the land) over 27.5 years, even if its market value is increasing.

Where will your cash-strapped college student get the money to pay you market rent for the condo? The same place he or she would get the cash to pay for a dorm room or apartment rent. You can gift your child up to $14,000 annually without any adverse federal tax consequences. If you’re married, you and your spouse, combined, can give up to $28,000. Your child can then use that money to write monthly rent checks back to you.

For recordkeeping purposes, your child should send checks that say “rent” on the memo line. It’s also helpful for you to open a separate checking account to handle rental income and expenses. Taking these steps will minimize problems with the IRS if you get audited.

Key point: Even if you don’t charge your child market rent for the condo, you can still deduct the property taxes. Designate the condo as your second home, and then you can also deduct the interest on up to $1.1 million of combined mortgage debt on your main home and the condo as an itemized deduction on your personal tax return (subject to the phaseout rule for high-income folks that normally applies to these deductions).

Watch Out for PAL Rules

The condo is likely to generate tax losses after you consider depreciation deductions. If so, the PAL rules generally apply. The fundamental concept is simple: You can deduct PALs only to the extent you have passive income from other sources, such as positive taxable income from other rental properties or gains from selling them.

A special exception allows you to deduct up to $25,000 of annual PALs from rental real estate provided:

Your adjusted gross income before the real estate loss is less than $100,000, and
You “actively participate” in the rental activity.

Active participation means you’re making management decisions, such as approving tenants, signing leases and authorizing repairs.

If you qualify for this exception, you won’t need any passive income to claim a deductible rental loss of up to $25,000 annually. However, if your adjusted gross income (AGI) is between $100,000 and $150,000, the special exception gets proportionately phased out. If your AGI exceeds $150,000 and you have no passive income, you can’t currently deduct any passive rental real estate losses. Fortunately, any unused losses will be carried forward to future tax years, and you can deduct them when you sell the condo.

Expect More Tax Benefits When You Sell

When you sell a rental property that you’ve owned for more than a year, the profit — the difference between sales proceeds and the tax basis of the property after subtracting depreciation — is a long-term capital gain.

For most folks, the maximum federal tax rate on long-term gains is 15%. But if you are in the top federal bracket, the maximum rate is 20%. Higher-income taxpayers may also owe the 3.8% net investment income tax on rental property gains. Also be aware that, if you’re in the 25% regular income tax bracket or above, part of the gain — the amount equal to your cumulative depreciation write-offs — is taxed at a maximum federal rate of 25%.

Finally, remember those carryover passive losses that we talked about earlier? You get to use them to shelter all or part of the gain from selling the place.

Act Quickly but Not Hastily

While the idea of buying a college condo can be attractive purely from a tax perspective, it makes sense only if you expect to make money on the investment. If you can buy relatively low now and sell high later, you’ll come out ahead. But if you don’t expect to be able to make a profit on a future sale, you may be better off simply paying for your child to live in a dorm or apartment.

The start of school is just around the corner, so act fast if you think this investment opportunity will work for you. Before you meet with a realtor, contact your tax professional for more information.

Compensation Matters: Determining Your Own Pay

Posted on July 21, 2016 by Debra Barcuch

If your dealership’s new car sales are putting a smile on your face and your used car and service departments are merrily humming along, you might think now’s the time to give yourself a hefty — and perhaps overdue — pay increase.

But before you compensate yourself for the amount you believe you deserve, take stock: The IRS is in the business of scrutinizing top executives’ salaries, bonuses and distributions or dividends. Various stakeholders also may be examining your self-compensation decisions. Here are some factors to consider before setting your new pay.

What’s the Right Balance?

Let’s start with the basics. Your compensation is obviously affected by the amount of cash in your dealership’s bank account. But just because your financial statements report a profit, it doesn’t necessarily mean you’ll have cash available to pay owner-employees a higher salary or large bonus or make annual distributions. Net income and cash flows aren’t synonymous.

Other business objectives — such as buying new equipment, repaying debt and sprucing up your showroom — vie for your kitty. So, it’s a balancing act between owner-employees’ compensation on the one hand and capital expenditures, expansion plans and financing goals on the other.

What if Your Dealership Is a C-Corporation?

If you operate as a C corporation, your dealership’s income is taxed twice. First, it’s taxed at the corporate level. Then, it’s taxed again at the personal level as you draw dividends — an obvious disadvantage to those owning this corporation type.

C corporation owner-employees might be tempted to classify all the money they take out as salaries and bonuses, which the company can deduct, to avoid the double tax on dividends. But the IRS is wise to this strategy. It is on the lookout for excessive compensation to owner-employees and may reclassify above-market compensation as dividends, potentially resulting in additional income tax as well as interest and penalties.

The IRS also may monitor a C corporation’s accumulated earnings. Generally similar to retained earnings on your balance sheet, accumulated earnings measure the buildup of undistributed earnings. If these earnings get too high and can’t be justified for such things as a planned expansion, the IRS may assess a tax on them.

What about S-Corporations?

S corporations, limited liability companies and partnerships are examples of flow-through entities, which aren’t taxed at the entity level. Instead, income flows through to the owners’ personal tax returns, where it’s taxed at the individual level.

Dividends (typically called “distributions” for flow-through entities) are tax-free to the extent that an owner has tax basis in the business. Simply put, basis is a function of capital contributions, net income and owners’ distributions. Distributions in excess of basis are subject to ordinary income tax, but they’re not subject to payroll taxes.

So, the IRS has the opposite concern with flow-through entities: Agents are watchful of owner-employees who underpay themselves to minimize payroll taxes. If the IRS thinks you’re downplaying salary in favor of payroll-tax-free distributions, it may reclassify some of your distributions as salary. In turn, while your income taxes won’t change, you’ll owe more in payroll taxes — plus any interest and penalties due.

Do You Reflect the Market?

Above- or below-market compensation raises a red flag to the IRS, and that’s definitely undesirable. Not only will the agency evaluate your compensation expense — possibly imposing extra taxes, penalties and interest — but a zealous IRS auditor might turn up other challenges to your records.

What’s more, it might cause a domino effect, drawing attention in the states where you do business. Many state and local governments face budget shortages and are hot on the trail of the owner-employee compensation issue.

Who Else Might be Concerned?

Other parties may have a vested interest in how much you’re getting paid, too. Lenders, franchisors and minority shareholders might think you’re impairing future growth by paying yourself too much.

If a silent owner, factory representative or lender, for instance, decides your showroom looks shabby and sees flat sales, your salary expense and dividends might become the subject of debate.

Here Comes the Judge

If you or your dealership is involved in a lawsuit, the courts might impute reasonable (or replacement) compensation expense. This is common in divorces and minority shareholder disputes. The amount a court prescribes for compensation affects business value, which, in turn, affects damages awards and asset distributions. In divorce, reasonable compensation also affects child support and alimony awards.

When a court imputes reasonable compensation, it typically considers compensation studies and other factors that include salary history, responsibilities, experience, geographic location and the dealership’s performance.

Are You Being Prudent?

One of the major advantages of being a dealership owner is having a big say in all manner of decisions. But when it comes to your compensation, make sure you’re being prudent. Otherwise, you may find yourself in hot water with the IRS and others who have an interest in your business.

Small Employers Get 7-Day Safe Harbor for 401k Deposits

Posted on July 20, 2016 by Debra Barcuch

Photo Credit: Julian Pett, Flickr

Small employers* now have added certainty in knowing their time frame for transmitting employee 401(k) contributions to the plan. Compliance with deadlines is important, because holding on to employee contributions too long constitutes a prohibited transaction that could result in penalties. The U.S. Department of Labor’s establishment of a safe harbor period eases up the rules and can help small employers avoid this dilemma.

What a Difference a Day Makes

Why is it so important that employee contributions be deposited into the appropriate plan on time? Employees don’t see the activity involved in moving their money. They tend to assume that their contributions are deposited into the plan on the day you withhold it from their paychecks. As the saying goes, “timing is everything,” especially in a volatile stock market. Employees who believe their investments were harmed by a delayed deposit could sue for a breach of fiduciary duty.

The DOL has long required that amounts withheld from an employee’s paycheck — such as elective deferrals to a 401(k) plan — must be transmitted to the plan on the earliest reasonable date.

In the case of a pension plan (including 401(k) plans), the DOL had set an outside limit of the 15th business day of the month following the month in which such amounts would have been available to the employee.
In the case of welfare plans, the outside limit is 90 days from the withholding.

Despite setting these outside limits, if an audit should occur, the DOL will look for the earliest date by which the contributions could have been transmitted to the plan. If the agency determines that this date is earlier than the outside limit, it will be the earlier date that applies. In some cases this may be just a few business days.

For employers, the difficulty is in adhering to the earliest-reasonable-date rule. After that time, employee amounts are considered plan assets and holding onto them is a prohibited transaction.

Since January 14, 2010, small employers have been granted a little breathing room. As long as the employee contributions are deposited into the plan within seven business days of the date they are withheld from the employee’s paycheck, they will be deemed to be handled in a timely manner. This is true even if the amounts are deposited in an account of the plan, but not yet credited to specific participants. This is the seven-day safe harbor rule, and it can apply even if the funds could have been deposited earlier, therefore, employers can use this rule to avoid prohibited transaction violations of the general rule.

The safe harbor rule can be used for 401(k) elective contributions as well as for participant contributions to any plan, or for participant loan repayments.

Is the Safe Harbor Rule Optional?

The simple answer is yes. Even if small employers deposit the funds after seven business days, they may still rely on the general rule to avoid a prohibited transaction — assuming the money was transferred as soon as possible.

Also, the safe harbor is applied on a deposit-by-deposit basis. So, an employer can miss the seven-day window for a particular pay period and instead use the earliest-reasonable-date approach and may then use the seven-day safe harbor for subsequent payroll periods.

If a small employer misses the seven-day safe harbor date and also misses the earliest reasonable date, penalties are calculated from the earliest date contributions could have been deposited, not from the safe harbor date.

Why did the DOL issue the safe harbor rule? They did it to address concerns from employers and advisers about the previous rules and the uncertainty they brought. Also, the DOL admitted that it was expensive and time consuming to pursue violations. We devote “significant enforcement resources to cases involving delinquent employee contributions, and the vast majority of applications under the Department’s Voluntary Fiduciary Correction Program involve delinquent employee contribution violations,” a DOL spokesperson said. With the safe harbor, small employers will be able to make timely deposits and rest assured they are within the law.

*For this purpose, small employers are defined as having fewer than 100 plan participants, determined at the beginning of the plan year.

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