March 2017

Four Financial Planning Tips to Help You Gain Success

Posted on March 30, 2017July 23, 2024 by Debra Barcuch

The following financial planning tips could help you achieve a similar — if not better — level of success than your parents or grandparents. These tips may seem like common sense, but the odds of you actually doing them are low. It’s not because you’re lazy (I hope). It’s because the financial balance sheet of many Americans has been plummeting since the 1980s. Also, your perception of the financial industry may not be exactly positive. I guess the question you have to ask yourself is: What have I got to lose — and also gain — by making a financial plan for my future?

1. Reduce Debts.

Yes, I’m going there first. Whether you are employed or starting a business, keeping debt in check is the first step to improving your financial position. Reports have shown that debt increases from your 20s through your 30s due to unpaid student loans as well as credit card debt, life changes and investments like buying a home.

Some young people get assistance from family members to pay off debt and get down payments for businesses or home purchases. If you are not in that position, there are trusted programs for student loan repayment as well as debt consolidation options through not-for-profit groups and banks. These programs reduce your monthly payments to improve cash flow.

Which leads me to options for business financing. Building a relationship with a trusted banker or CPA can help you explore options for financing a small business with better terms and lower interest rates. The most common and worst option is to use a credit card. Instead, explore SBA loans, business incubator programs in your community and even micro-loans from entrepreneurial organizations like BCL of Texas.

If possible, another way to manage debt is to increase your income. Ask for a raise. You may not get it, but you definitely won’t get it if you don’t ask. During performance reviews, cite the ways you have added value to the company, brought in or kept customers or improved processes. Prove your value with real examples.

Tip: To pay off your debt in less time, take the portion you were paying on a paid-off credit card, for example, and apply it to your next largest bill such as a car payment or your small business loan. You were paying that amount before, so you won’t miss it. As you pay off more debt, your monthly payment toward debt will stay the same but you will be able to apply a larger amount to specific bills — paying them off faster. Reserve debt like your mortgage until last because you receive an interest deduction on your taxes.

2. Increase Liquidity.

What is the result of paying off debt? Cash flow. Cash is king when trying to save money or run a business. There is often hidden cash in small businesses that don’t review accurate or timely financial statements. For example, we commonly discover invoices 60 days overdue or longer — money that should be in your account to support cash flow.

The leading cause of business failure — or a household for that matter — is insufficient cash flow. What often happens is that we spend what we earn. That is, any extra cash created from paid-off debt is spent on other needs and wants. It happens most often when we aren’t following a budget.

The ‘B’ word. When you don’t have a budget, you fall down through impulses and convenience. For example, eating out at bars, restaurants, expensive coffee shops and convenience stores is much more expensive than cooking food at home. You can still eat out, but a monthly budget for eating out will preserve your cash (and also give you an excuse with friends for staying in when you’re tired).

In the same way, a budget for your business will show you where expenses are increasing before they get out of control. Regular review of accounts receivables will support more timely customer payments. Accurate financial statements will keep your business in compliance for taxes and loan covenants as you grow.

Tip: If you haven’t already, invest in a program like QuickBooks® to easily and accurately record and monitor your financial position as well as pay bills, produce reports and support tax planning. Business owners, you can outsource bookkeeping to your CPA. You will benefit from well-organized financials and more time to attract new customers. Cornwell Jackson also offers outsourced payroll services.

3. Build Reserves and Investments.

A common rule of thumb for saving money has been to build an emergency fund that supports your household for six months. But let’s start small. A savings account that covers even one month of expenses is better than nothing.

Building reserves is easier without debt, but not impossible. By working from a budget for yourself and/or your business, you will naturally experience more cash flow. A portion of that cash can be set aside for emergencies and eventually for investments. Business owners, on average, should have cash reserves of 15 to 50 percent. Some financial planners suggest saving up to 40 percent of your personal income, living on 50 percent and giving 10 percent (more on giving in a moment).

If you don’t already participate in an employer-sponsored 401(k) plan, a simple IRA or a self-employment pension (SEP) for retirement, start saving now. Yes I know you may distrust Wall Street. Plus, a study by Harvard showed that most people aren’t wired to save for a rainy day. Who knows if saving will add up to anything or if you’ll even be around to enjoy it? I suggest having several different vehicles for saving to make it more fun. You can invest in bonds, land, a franchise, gold…the point is that savings allows you to have options to make investments when the timing and opportunities are right. Don’t you wish you had some shares of that latest app that just went public? Yeah, me too.

Tip: The key to savings? Don’t touch it. Some people transfer savings automatically from their paychecks to their savings and retirement accounts. Business owners can either build a percentage for savings into their customer agreements (i.e. raise prices) or allocate a portion of each invoice toward cash reserves. Out of sight is out of mind.

4. Pay it Forward.

When it comes to being generous, millennials are pretty great. We are more likely to share our assets out of generosity than from obligation. Sure, it’s partly for survival purposes and partly because we like doing stuff together.

When you have a stronger financial position, you can be even more generous. Your business may allow you to select a particular cause to support — donating a portion of your proceeds or doing team fund-raisers. You can also support the livelihoods of employees. It’s a commonly cited statistic from the Small Business Administration that small businesses create a larger percentage of new jobs in the U.S. (companies of 100 people or less) than larger companies.

Your business may even target a social cause. In Dallas, the United Way of Tarrant County actually held a pitch competition with the support of entrepreneurial groups to promote social change ideas.

You can also pay it forward personally. As I mentioned earlier, I support recruitment at my firm as well as new employee onboarding. My leadership position has not only improved my income, but also my ability to give back. And isn’t that higher sense of purpose what we crave most from our careers anyway?

Tip: Who has helped you along the way and which causes pull at your heart? Look in that direction to start giving back as you advance in your career or business aspirations. You need a bigger reason for working so hard or starting a business than making money. Previous generations have taught us that.

What’s Next?

This guide is really a wake-up call to prepare you for business ownership or new financial opportunities. You have the power and the intelligence to influence our economy. Get started now. For more tips:

The AICPA has a campaign called “Feed the Pig” that offers many resources
Your local bank or credit union likely has a resources section for increasing savings or exploring financing
You can join a local entrepreneurial or small-business mentoring group for ideas as well as accountability for your goals. Find your group in the Dallas/Fort Worth area using the Meetup app.
Read new articles on Cornwell Jackson’s blog and in our Knowledge Base section.

Download the Whitepaper: Financial Planning for Millennials Gaining Career Success

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. Did we mention that he’s a millennial and will take any opportunity to be outdoors, including outdoor grilling? Contact him at mike.rizkal@cornwelljackson.com.

4 Tips for Claiming Higher Education Credits

Posted on March 29, 2017July 19, 2024 by Debra Barcuch

The Internal Revenue Code offers two federal income tax credits for post-secondary education expenses: the American Opportunity credit, and the Lifetime Learning credit.

The Basics of Higher Education Credits

The American Opportunity credit can be up to $2,500 per eligible student per year. More specifically, the credit equals:

100% of the first $2,000 of an eligible student’s qualified expenses, plus
25% of the next $2,000 of qualified expenses.

So, the maximum annual credit for an eligible student is $2,500. Families with several eligible students can claim multiple American Opportunity credits. However, the credit can be claimed only for the first four years of a student’s undergraduate education. Also, this credit is phased out at higher income levels. Finally, 40% of the allowable American Opportunity credit is generally refundable, which means that amount can be collected even if the taxpayer has no federal income tax liability.

The Lifetime Learning credit can be up to $2,000 per year. More specifically, the credit equals 20% of the first $10,000 of an eligible student’s qualified expenses. However, only one Lifetime Learning credit can be claimed on your return, regardless of how many students in your family may be eligible for the credit. The Lifetime Learning credit is also subject to a phase-out rule that takes effect at much lower income levels than the American Opportunity credit phase-out rule.While these credits aren’t new, you should be aware of several recent developments that might affect your 2016 federal income tax return if you have students in your family who may be eligible for these credits. In light of these developments, here are four tips to help preserve and maximize your credits.

Don’t Claim Computer Costs Unless Required by School

The U.S. Tax Court recently decided that the cost of a computer isn’t eligible for the American Opportunity credit unless the school specifically requires the student to have one. In this case, the taxpayer bought a computer for his college English class, because he needed the computer to prepare a paper while he was traveling. According to the Tax Court, the cost of the computer wasn’t a qualifying expenditure for the American Opportunity credit, because having a computer wasn’t a condition of the student’s enrollment. (Djamal Mameri v. Commissioner, T.C. Summary Opinion 2016-47)

Claim Credits When Tuition Is Paid (Not When It’s Billed or Due)

In another recent Tax Court decision, the taxpayer was a student at Arizona State University. In December 2011, the taxpayer prepaid his tuition for the spring semester of 2012. The tuition bill wasn’t actually due until January 2012. The taxpayer then claimed a $2,500 American Opportunity credit on his 2012 federal income tax return, based on the tuition for the 2012 spring semester. (Lucas McCarville v. Commissioner, T.C. Summary Opinion 2016-14)

The IRS disallowed the taxpayer’s credit for 2012, citing tax code provisions that stipulate that tuition payments made in the current year (2011 in this case) for educational sessions that begin in the first three months of the following year (2012 in this case) are eligible for the American Opportunity credit only in the current year (the year of payment, which was 2011 in this case).

The taxpayer had already claimed the maximum $2,500 American Opportunity credit on his 2011 return. So he was attempting to include the payment for the spring 2012 semester tuition (paid in 2011) on his 2012 return in order to claim a $2,500 American Opportunity credit for that year. The Tax Court agreed with the IRS, requiring credits to be claimed in the year in which a bill is paid, regardless of when it’s due.

Ask a Tax Pro to Help Reconcile Credits with Tuition Statements

Tax law requires post-secondary educational institutions to supply annual Form 1098-T, Tuition Statement, to taxpayers and the IRS. Taxpayers are supposed to use the amount of qualified tuition and related fees reported on these forms to calculate their allowable education credits. In turn, the IRS can use the same information to see if taxpayers got it right. But this common-sense provision won’t work the way it is supposed to anytime soon. As a result, there will be ongoing confusion about tuition and fee information reported on Form 1098-T.

For pre-2016 years, Form 1098-T issued by educational institutions could report either:

Payments received by the institution during the year for qualified tuition and related fees, or
Amounts billed by the institution during the year for qualified tuition and related fees.

Many institutions chose to report amounts billed, because that information was more easily retrieved from their accounting systems. However, the amount billed during the year isn’t what a taxpayer needs to know to calculate the allowable credit for that year. Instead, taxpayers need to know the amount paid during the year. Therefore, the information reported on Form 1098-T can be misleading to both taxpayers who claim education credits and to the IRS when reviewing the credits.

Congress attempted to correct this situation by requiring educational institutions to report qualified tuition and related fees paid during the year, starting with Form 1098-T issued for 2016. However, many institutions complained that they didn’t have time to reprogram their accounting systems to provide that information. The IRS caved by giving institutions the option to continue reporting amounts billed during the year on Form 1098-T issued for both 2016 and 2017.

Therefore, Form 1098-T issued for both 2016 and 2017 can report either:

The total amount billed by the institution during the year for qualified tuition and related fees, or
The total amount paid to the institution during the year.

Taxpayers must base their education credit calculations on amounts paid during the year, but Form 1098-T for 2016 and 2017 may not supply that information. As a result, reconciling credit amounts claimed on tax returns with tuition and fee amounts reported on Form 1098-T will continue to be problematic for many taxpayers.

Beware of Fraud Prevention Measures

Fraudulent claims for higher education tax credits have become common. So, Congress enacted two anti-fraud controls that apply to 2016 returns:

First, you can’t claim the American Opportunity credit for a student who doesn’t have a federal tax identity number (TIN) issued on or before the due date of the return for that year. For a U.S. citizen, the TIN is his or her Social Security number (SSN). Noncitizens can obtain TINs that aren’t SSNs.

Second, when you file your tax return, you must include the educational institution’s employer identification number (EIN) on Form 8863, Education Credits, for each student for whom you claim the American Opportunity or Lifetime Learning credit.

Need Help?

College is expensive. So, why not let Uncle Sam help make it more affordable via higher education tax credits? Contact us about navigating the rules to ensure you maximize the credits that are currently available under the tax law.

Relying on Audit Techniques Guides

Posted on March 28, 2017July 19, 2024 by Debra Barcuch

IRS examiners usually do their homework before meeting with taxpayers and their professional representatives. This includes reviewing any relevant Audit Techniques Guides (ATGs) that typically focus on a specific industry or audit-prone business transaction.

Auditor Specialization

In the past, IRS examiners were randomly assigned to audit taxpayers from all walks of life, with no real continuity or common thread. For example, after an examiner audited a dentist, the next assignment he or she received might have been a fishing boat captain or a convenience store owner. Therefore, there was little chance to develop expertise within a particular niche.

To remedy this, the IRS created its Market Segment Specialization Program (MSSP), which expanded rapidly during the 1990s. The MSSP allowed IRS auditors to focus on specific sectors. Through education and experience, examiners became better equipped to identify and detect noncompliance with the tax code.

The IRS started publishing ATGs as an offshoot of the MSSP. Most ATGs target major industries, such as construction, manufacturing and professional practices (including physicians, attorneys and accountants). Other ATGs address issues that frequently arise in audits, such as executive compensation and fringe benefits.

The IRS periodically revises and updates the ATGs and adds new ones to the list.

IRS Jumps into Golden Parachutes

In February 2017, the IRS updated its Audit Techniques Guide (ATG) on golden parachute payments. After a corporate takeover, officers who leave the company may receive “golden parachutes.” Such payments may be controversial with shareholders if they exceed severance given to other departing employees. Golden parachute payments are nondeductible and could trigger a 20% penalty if deemed excessive.

A parachute payment doesn’t include any reasonable amount paid for services to be rendered before, on or after the date of change in ownership or control. Certain exceptions may be made for qualifying small business corporations. And payments to or from a qualified pension or profit-sharing plan, 403(a) annuity, simplified employee pension or SIMPLE plan aren’t considered parachute payments.

The new ATG explains how examiners can detect golden parachute payments, including a nine-step guide and flowchart to performing a parachute examination. It also provides a laundry list of documents to review in connection with these issues.

The IRS updated several ATGs, including ones for conservation easements and cost segregation studies, at the end of 2016. Though designed to help IRS examiners prepare for audits, ATGs are available to the public. So, small business taxpayers can review them, too — and gain valuable insights into issues that might surface during audits.

A Closer Look at ATGs

What does an ATG cover? The IRS compiles information obtained from past examinations of taxpayers and publishes its findings in ATGs. Typically, these publications explain:

The nature of the industry or issue,
Accounting methods commonly used in an industry,
Relevant audit examination techniques,
Common and industry-specific compliance issues,
Business practices,
Industry terminology, and
Sample interview questions.

The main goal of ATGs is to improve examiner proficiency. By using a specific ATG, an examiner may, for example, be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the taxpayer resides. The guides also help examiners plan their audit strategies and streamline the audit process.

Over time, the information and experience gained about a particular market segment can help examiners conduct future audits with greater efficiency. Some of this information is incorporated into periodic ATG updates. Furthermore, IRS examiners are routinely advised about industry changes through trade publications, trade seminars and information sharing with other personnel.

Site Visits and Interviews

ATGs also identify the types of documentation that taxpayers should provide and information that might be uncovered during a tour of the business premises. These guides may be able to identify potential sources of income that could otherwise slip through the cracks.

For example, the ATG for the legal profession identifies revenue streams derived from outside the general practice, such as serving on a board of directors, speaking engagements, and book writing or editing. The guide encourages IRS examiners to inquire about potential revenue sources during the initial interview with the taxpayer.

Other issues that ATGs might instruct examiners to inquire about include:

Internal controls (or lack of controls),
The sources of funds used to start the business,
A list of suppliers and vendors,
The availability of business records,
Names of individual(s) responsible for maintaining business records,
Nature of business operations (for example, hours and days open),
Names and responsibilities of employees,
Names of individual(s) with control over inventory, and
Personal expenses paid with business funds.

For example, one ATG focuses specifically on cash-intensive businesses, such as liquor stores, salons, check-cashing operations, gas stations, auto repair shops, restaurants and bars. It highlights the importance of reviewing cash receipts and cash register tapes for these types of businesses.

Cash-intensive businesses may be tempted to underreport their cash receipts, but franchised operations may have internal controls in place to deter such “skimming.” For instance, a franchisee may be required to purchase products or goods from the franchisor, which provides a paper trail that can be used to verify sales records.

Likewise, when auditing a liquor store owner, examiners are taught to search for off-book wholesalers and check cashers. For gas stations, examiners must check the methods of determining income, rebates and other incentives. Restaurants and bars should be asked about net profits compared to the industry average, spillage, pouring averages and tipping.

Bottom Line

During an audit, IRS examiners focus on those aspects that are unique to the industry, as well as ferreting out common means of hiding income and inflating deductions. ATGs are instrumental to that process.

Although ATGs were created to benefit IRS employees, they also help small businesses ensure they aren’t engaging in practices that could raise red flags. To access the complete list of ATGs, visit the IRS website. And for more information on hot tax issues that may affect your business, contact your tax advisor.

Self-Employment Tax Reduction Strategies for Spouse-Owned Businesses

Posted on March 27, 2017 by Debra Barcuch

If you own a profitable, unincorporated business with your spouse, you’re probably fed up with high self-employment (SE) tax bills.

Self-Employment Tax Basics

For 2016, the maximum 15.3% self-employment (SE) tax rate hits the first $118,500 of net SE income. For 2017, the 15.3% rate hits the first $127,200 of net SE income. It includes 12.4% for the Social Security tax component and 2.9% for the Medicare tax component.

Above the Social Security tax ceiling, the Social Security tax component goes away, but the Medicare tax component continues at a 2.9% rate before rising to 3.8% at higher income levels.

If you have an unincorporated small business in which both you and your spouse participate, you may have been treating it as a 50/50 spouse-owned partnership or as a spouse-owned LLC that’s treated as a 50/50 partnership for tax purposes. The more profitable your business is, the more you’re paying in SE tax bills. That’s because you and your spouse must separately calculate your respective SE tax bills. For 2017, that means you will each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business.

An unincorporated business in which both spouses are active is typically treated as a partnership that’s owned 50/50 by the spouses — or a limited liability company (LLC) that’s treated as a partnership for tax purposes and owned 50/50 by the spouses. In either case, you and your spouse must separately calculate your respective SE tax bills.

For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. (See “Self-Employment Tax Basics” at right.) Those bills can mount up if your business is profitable. Here are three ways spouse-owned businesses can lower their combined SE tax hit.

1. Establish that You Don’t Have a Spouse-Owned Partnership (or LLC)

To illustrate the adverse tax consequences of operating a spouse-owned partnership, suppose you expect your business to generate $250,000 of net SE income in 2017. You and your spouse must separately calculate SE tax. So each of you will owe $19,125 ($125,000 x 15.3%), for a combined total of $38,250. To make matters worse, your SE tax bill is likely to increase every year due to inflation adjustments to the Social Security tax ceiling and the growth of your business.

These adverse effects apply only if you have a business that is properly treated as a 50/50 spouse-owned partnership or a spouse-owned LLC that’s properly treated as a 50/50 partnership for federal tax purposes.

Several IRS publications attempt to create the impression that involvement by both spouses in an unincorporated business automatically creates a partnership for federal tax purposes. For example, the Tax Guide for Small Business says, “If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement.”

However, in many cases, the IRS will have a tough time making the argument that a business is a 50/50 spouse-owned partnership (or LLC). Consider the following quote from an IRS private letter ruling: “Whether parties have formed a joint venture is a question of fact to be determined by reference to the same principles that govern the question of whether persons have formed a partnership which is to be accorded recognition for tax purposes. Therefore, while all circumstances are to be considered, the essential question is whether the parties intended to, and did, in fact, join together for the present conduct of an undertaking or enterprise.”

The IRS private letter ruling identifies these factors, none of which is conclusive, as evidence of this intent:

The agreement of the parties and their conduct in executing its terms,
The contributions, if any, that each party makes to the venture,
Control over the income and capital of the venture and the right to make withdrawals,
Whether the parties are co-proprietors who share in net profits and who have an obligation to share losses, and
Whether the business was conducted in the joint names of the parties and was represented to be a partnership.

In many situations where both spouses have some involvement in an activity that has been treated as a sole proprietorship or in an activity that has been operated as a single-member LLC (SMLLC) that has been treated as a sole proprietorship for tax purposes, only some of the factors listed in the private letter ruling are present. Therefore, the IRS may not necessarily succeed in arguing that the business is a spouse-owned partnership (or LLC).

That argument may be especially weak when:

The spouses have no discernible partnership agreement, and
The business hasn’t been represented as a partnership to third parties, such as banks and customers.

If your business can more properly be characterized as a sole proprietorship or as an SMLLC that is treated as a sole proprietorship for tax purposes, only the spouse who is considered the proprietor owes SE tax.

Let’s assume the same facts as in the previous example, except that you take a supportable position that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2017, the SE tax bill would be $23,023 [($127,200 x 15.3%) + ($122,800 x 2.9%)]. That’s much less than the combined SE tax bill from the first example ($38,250).

2. Establish That You Don’t Have a 50/50 Spouse-Owned Partnership (or LLC)

Not all businesses are owned 50/50 by their owners. Say your business can more properly be characterized as a partnership (or LLC) that’s owned 80% by one spouse and 20% by the other spouse, because one spouse does much more work than the other.

This time, let’s assume the same facts as in the previous example, except that you take a supportable position that your business is an 80/20 spouse-owned partnership (or LLC). In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000.

For 2017, the SE tax bill for the 80% spouse would be $21,573 [($127,200 x 15.3%) + ($72,800 x 2.9%)], and the SE tax bill for the 20% spouse would be $7,650 ($50,000 x 15.3%). The combined total SE tax bill is $29,223 ($21,573 + $7,650), which is significantly lower than the total from the first example ($38,250).

3. Liquidate Spouse-Owned Partnership and Hire One Spouse as an Employee

This strategy is a little more complicated than the previous strategies. First, you’ll need to dissolve your existing spouse-owned partnership or spouse-owned LLC that’s treated as a partnership for federal tax purposes, and start running the operation as a sole proprietorship or SMLLC treated as a sole proprietorship for federal tax purposes. Even if the partnership (or LLC) owns assets and has liabilities, this step is generally a tax-free liquidation under the partnership tax rules.

The second step is to hire one spouse as an employee of the new proprietorship (SMLLC). Pay that spouse a modest cash salary, and withhold 7.65% from the salary checks to cover the employee-spouse’s share of Social Security and Medicare taxes. As the employer, the proprietorship must pay another 7.65% directly to the government to cover the employer’s half of Social Security and Medicare taxes. However, since the employee-spouse’s salary is modest, the Social Security and Medicare tax hits will also be modest.

The third step is to consider setting up a Section 105 medical expense reimbursement plan for the employee-spouse. Use the plan to cover your family’s out-of-pocket medical expenses, including health insurance premiums, by making reimbursement payments to the employee-spouse out of the proprietorship’s business checking account. Deduct the plan reimbursements as a business expense of the proprietorship. On the employee-spouse’s side of the deal, the plan reimbursements are free of federal income, Social Security and Medicare taxes because the plan is considered a tax-free fringe benefit.

The fourth step is to deduct, on the sole proprietorship’s (SMLLC’s) tax schedule, the medical expense plan reimbursements, the employee-spouse’s cash salary, and the employer’s share of Social Security and Medicare taxes. These deductions also reduce the proprietor’s net SE income and the SE tax bill for the business.

Finally, you’ll need to calculate the SE tax bill for the spouse who is treated as the proprietor. This minimizes the SE tax hit, because the maximum 15.3% SE tax rate applies to no more than $127,200 of SE income (for 2017), vs. up to $254,400 if you continue to treat your business as a 50/50 spouse-owned partnership (or LLC).

Important note: If you have employees other than the spouse, your business may have to cover them under a Section 105 medical expense reimbursement plan.

Consult a Tax Pro

SE taxes can quickly add up, but there are several strategies that spouse-owned businesses can use to reduce their combined total bill. Consult your tax advisor before using any of these strategies to avoid any potential pitfalls and make the optimal choice for your business.

The Rules Surrounding National Origin Discrimination

Posted on March 24, 2017 by Debra Barcuch

When it comes to employment discrimination based on national origin, the Equal Employment Opportunity Commission (EEOC) plays a key role in enforcing the related civil rights laws. This type of discrimination, says the EEOC, “involves treating people — applicants or employees — unfavorably because they’re from a particular country or part of the world, because of ethnicity or accent, or because they appear to be of a certain ethnic background — even if they are not.”

An Example

In a recent case, the EEOC accepted a $60,000 settlement agreement with an employer that the EEOC said was guilty of pay discrimination based on national origin. A Hispanic supervisor for a New Mexico–based manufacturer complained to the EEOC that a newly hired white supervisor was paid more than she was. The Hispanic supervisor had even trained the white employee when he came on board.

Contributing to the charge of national origin discrimination was the fact that the Hispanic employee had been instructed not to speak Spanish on the production floor, even though it was part of her job to do so, said the EEOC. That is, her job involved translating for other employees who only spoke Spanish.

In addition to being ordered to pay $60,000 to the plaintiff, the manufacturer in this case agreed to the EEOC’s demand that it implement changes. That is, the company agreed to adopt a new policy that prohibits discrimination and “includes an explanation [for employees] of how to report discrimination and an assurance of non-retaliation to employees who complain.”

Citizenship Status Discrimination Rules

The Immigration Reform and Control Act of 1986 declares it illegal for employers to make hiring or firing decisions based on an individual’s immigration status, “unless required to do so by law, regulation or government contract,” according to the EEOC.

That means, for example, that you cannot limit your hiring to U.S. citizens and permanent residents. In addition, “employers may not refuse to accept lawful documentation that establishes the employment eligibility of an employee, or demand additional documentation beyond what is legally required, when verifying employment eligibility … based on the employee’s national origin or citizenship status,” the EEOC states. Job applicants may decide which of the Form I-9 documents they wish to show to verify employment eligibility.

Reverse Discrimination?

Occasionally anti-discrimination litigation takes an interesting turn. For example, a California-based distributor of Mexican-style food was recently charged with discriminating against non-Hispanic job applicants.

According to the EEOC complaint, the company discouraged non-Hispanic applicants from seeking open positions, asking them if they spoke Spanish “even when speaking Spanish was not a job requirement.” (A resolution has not yet been reached.)

National Origin Discrimination Has a Long Reach

In its basic explanation of the nature of national origin discrimination, the EEOC notes that it covers not only hiring and pay practices, but “any aspect of employment,” including job assignments, training opportunities and fringe benefits.

A national origin discrimination case can also arise from charges of harassment. Where does the EEOC draw the line? Harassment doesn’t include “simple teasing, offhand comments, or isolated incidents that are not very serious.” But the line is crossed “when it is so frequent or severe that it creates a hostile or offensive work environment, or when it results in an adverse employment decision.”

“English-Only” Rule

As indicated in the two cases cited above, language requirements can be taken as evidence of illegal discrimination. Employers can require English language fluency only “if it is necessary to perform the job effectively,” states the EEOC.

Similarly, requiring employees to speak only English on the job is prohibited unless this practice “is needed to ensure the safe and efficient operation of the employer’s business and is put in place for nondiscriminatory reasons.”

Similarly, you cannot base a hiring decision on a prospective employee’s accent “unless the accent seriously interferes with the employee’s job performance.”

Not Limited to Employer and Employee

According to the EEOC, discrimination also can be indirect, aimed at the spouse or close associate of an employee if that person is “of a certain national origin.”

And not only can employers face discrimination charges when coworkers and supervisors harass an employee, but they can face them if the perpetrators are clients or customers of the business. For that reason, employees should be instructed to report harassment from any source related to the company.

Handling discrimination is always a delicate issue, but if a customer is the alleged perpetrator, a whole new layer of caution may be required. The bottom line is that employers shouldn’t simply look the other way if evidence of discrimination is presented. While it might not always be possible to prevent, demonstrating to the complaining employee that you take the matter seriously can go a long way toward heading off more serious problems.

Promote From Within Successfully: A Management Cookbook

Posted on March 22, 2017July 23, 2024 by Debra Barcuch

Promoting non-supervisory employees to management roles can be a morale-booster for the promoted employee, and for others. Seeing a fellow employee move up the ladder gives coworkers reason to expect that, someday, they could rise to that level as well. Also, homegrown talent can be more economical, both by avoiding recruitment costs and because the initial compensation requirements of a promoted employee may be less.

The trick, however, is to know when an employee is ready to assume that higher level of responsibility. One fundamental indicator may be that he or she is a self-starter who doesn’t require a lot of supervision from you. Does the employee demonstrate independent problem-solving skills and address issues proactively?

Does the employee exhibit concern for the success of the organization as a whole, as opposed to focusing mainly on personal advancement? If you’re considering an employee for a supervisory position, pay attention to how he or she talks about the job and the company. Good leaders are able to see how their own work relates to the overall operation and success of the business.

A Key Ingredient in Your Management Cookbook: Expressed Desire

Has the employee expressed a desire to become a manager? Chances are, those who talk seriously about such an ambition have at least some concept of what’s involved in the job. While ambition doesn’t guarantee the employee will be an effective manager, it may weed out those who know themselves well enough to recognize they wouldn’t thrive in a supervisory role.

Another strong indicator is that the employee has already assumed an informal leadership role among peers and isn’t resented by coworkers for having done so. That suggests a basic capacity to take on more responsibility as well as a tendency to look out for peers. Coworkers wouldn’t likely respect a team member who appeared to seek advancement without keeping the team’s interests in mind.

Here are a few more strong hints about suitability for promotion:

Mastery of the current job. An employee who wants to move up before having demonstrated a high level of proficiency at his or her current job might lack the patience and stamina required of a strong supervisor.
Exceeding expectations. Naturally you want to promote hard workers. But in addition, employees who go above and beyond can, by example alone, raise the bar for the people they supervise.
Creativity. No management cookbook is sufficient to address all the issues a supervisor will face. An employee who has demonstrated an ability to apply original solutions to solve problems can be a versatile supervisor, and
Acceptance of responsibility. Supervisors need to have the self-confidence to acknowledge mistakes without defensiveness. Self-confidence and humility can go hand-in-hand, and employees have more respect for bosses who don’t pretend to be infallible.

Assign a Mentor as Part of a “Supervisor Boot Camp”

Once you find an employee who exhibits all or most of these qualities, don’t make the mistake of promoting that person and then moving on to other priorities. Most newly minted supervisors, no matter how strongly they performed in previous positions, will need some training and mentoring to grow into their new roles.

What specifically might they need? First, reflect upon your own experience for some ideas. If you had a smooth transition to a supervisory role, what made that possible? If it was a rocky road, what would have made it easier for you?

Basic subjects that should be part of a supervisor boot camp include employee goal-setting, performance assessment, performance management, and conflict resolution. Also, leadership training will be needed to supplement the nuts-and-bolts topics.

You can’t anticipate every stumbling block a newly promoted supervisor will face in devising a training program, so it’s important to give that person a mentor who has made the same transition. Putting some structure around the mentoring program at first — such as a scheduled weekly check-in session — can give rise to important discussions that might not otherwise have taken place.

New Challenges

Finally, unless the new supervisor will be moving to another department, it’s important to prepare him or her for the challenges associated with becoming the boss of former coworkers. To name a few:

Resentment from employees who believe they should have gotten the promotion instead of the one you chose,
Efforts by former coworkers to exploit friendship with their new boss by asking for or expecting special treatment, and
The difficulty the new supervisor may have in delivering honest but critical performance appraisals of former coworkers.

Although it will be tempting for new supervisors to downplay their authority over former coworkers, they should understand before they agree to accept a promotion that there’s no getting around the fundamental change in the relationship. That change, they must understand, will probably require a cutback in purely social interaction with their former coworkers.

Keep in mind, if you have chosen wisely, a new supervisor will be able to surmount these hurdles.

Paper Packaging Makes a Comeback

Posted on March 20, 2017 by Debra Barcuch

Good old-fashioned paper is continuing to return to the manufacturing process.

For some companies, environmental concerns prompted the switch back to paper from styrofoam peanuts, bubble film and other plastic-based materials in packaging since paper is recyclable and reusable.

Other manufacturers discover that customers are dissatisfied or simply refuse to accept shipments packed in plastic. This is the case in certain parts of Europe and states that have landfill restrictions, such as California. Customers and employees also appreciate the cleanliness of paper and its lack of static electricity, which can annoy handlers and be hazardous to electronic equipment.

Switching back to paper, of course, requires spending money on machines that process paper into fill, cushioning, carton linings and product wrappings. But that initial investment is likely to be offset by critical, long-term financial benefits. Here are a few:

Labor and material costs drop. Kraft paper is slightly less expensive than plastic peanuts. But the major savings comes from labor. Packing speed is quicker and handling is trimmed, with fewer trips between the warehouse and packing area.
Storage needs decline. Foam peanuts require vast amounts of space, while paper stays compactly rolled up until it is put into the processing machines, creating just-in-time packing material.
Cleaning costs fall. Paper produces little dust, while peanuts create particles that settle everywhere on equipment and floors.

The paper processing systems are broadly adaptable to fit different production environments. Some of the potential benefits include:

Flexibility. Dispensers can be set up in work cells, over conveyor lines or packing tables.
Ease. An operator presses a foot pedal to dispense, crumple and cut the paper to a pre-set length. Automatic lifters can take the strain out of handling the heavy rolls and operators can replace an empty roll quickly.
Adjustability. Both the speed of dispensing and length of paper can be altered.

One Example

A converter machine can turn a 30-inch-wide, three-ply roll of paper into 8-inch-wide pads that are suitable to replace the bubble film protecting shipments.

One manufacturer of medical instruments experienced an 18 percent drop in material costs after the switch from plastic to paper. In addition, the manufacturer found the pads require less space than bubble film to provide the same level of protection, allowing the company to trim its carton size by as much as 25 percent. This, of course, reduced shipping costs.

Consider all the issues involved in using paper packaging versus other materials. Getting rid of plastic and peanuts can save space, the environment and money.

Financial Planning for Millennials Gaining Career Success

Posted on March 17, 2017July 23, 2024 by Debra Barcuch

We know it’s a tough transition to stare at your 30s and say good-bye to youth. Seriously, though, millennials have great opportunities to transform how people live, work and do business in the next three decades. With that power comes great responsibility to manage your finances wisely. This article will stare into the abyss of mortality with you and help you recognize the possibilities to soar rather than settle.

We’ve paid so much attention to millennials in the past decade because frankly, there are a lot of us. Current estimates put our generation at 86 million in the U.S.; that’s 7 percent larger than the Baby Boom generation according to Barron’s. By 2020, millennials are expected to be 50 percent of the US workforce and 40 percent of all voters. Our generation will have significant influence over working conditions (already happening) and over the role of government (with unified efforts).

There may be several minor issues holding millennials back from success:

Debt
Older retirement ages
Fewer available jobs
Time
Distrust of institutions

Did I say minor issues? Yes, you can either accept your fate as doomed or do what many millennials are doing: build a career from scratch. Some call it a portfolio career, in which an individual has several jobs or enterprises happening at the same time. Others just call that being entrepreneurial.

Entrepreneurial Potential

Reports in Entrepreneur and Forbes call millennials the “most entrepreneurial generation.” I’m not sure that’s true given that the “greatest generation” built a new economy after World War II with a lot of closely held and family-owned businesses that later became household names. They, like us, had little choice but to pick up their feet and make something out of a changing society. Their kids, the Boomers, eventually cut their long hippie hair and followed suit (see what I did there?) and either went into mom and dad’s business or took the college route to a white-collar profession. Today, Boomers are working longer or starting new businesses with the idea that retirement is not about lounging by a pool (because boring). It’s about the ability to choose how you work.

Millennials do seem to have entrepreneurial characteristics, probably by necessity because it’s been so difficult to find employment that fits their degrees. They have:

Optimism
Digital skills
Networks
Practicality

Most people our age were taught that everybody gets a fair shot and that it’s fun to work in groups. Our networks have expanded from local to global and we would rather shop online than bother with a store — unless it’s to try something on and then buy it online.

We are open to new technologies and we catch on to them pretty quickly to make life easier. Plus, we prefer to find people with skills we don’t possess and then collaborate to achieve a goal. These four characteristics move us toward leadership in a company or entrepreneurship, both of which can improve our financial position for the future.

I was fortunate. I started at Cornwell Jackson as a first-year auditor in 2004 right out of college from Texas Tech. I was doubly fortunate to have a lot of mentorship and professional development through my family and the firm, which helped me move into leadership positions to support the audit team as well as recruiting. I became a partner in 2015. A great part of my job is helping young leaders and entrepreneurs create financial stability through strong accounting processes and skills.

The good news is that you have time. On average, an entrepreneur doesn’t take the leap into business ownership until his or her late 30s or early 40s. You can still get your financial house in order to plan for small business ownership — or even a side venture from your “day job.”

Continue Reading: Financial Planning Tips to Help You Gain Success

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. Did we mention that he’s a millennial and will take any opportunity to be outdoors, including outdoor grilling? Contact him at mike.rizkal@cornwelljackson.com.

5 Tips for Managing Inventory

Posted on March 16, 2017 by Debra Barcuch

If you’re like many dealers, your vehicle inventory may have yo-yoed over the last few years. You likely experienced a glut of new cars during the recession, while used cars generally continued to move — sometimes with not enough supply to meet the demand. Then, typically, your manufacturer adjusted production, sending fewer cars — and far fewer trucks and SUVs — your way.

Perhaps more than ever, you must stay focused on your inventory. Here are five tips to help your dealership keep its supply at a realistic level.

1. Avoid overstocks in the first place.

One way is to regularly evaluate your inventory control tools and establish some best practices for sustaining a feasible volume. Consult with your technology adviser, for example, to see what new vehicle-tracking hardware and software have hit the market.

Also reassess any inventory rules of thumb you may follow. One line of thinking holds that an inventory-to-sales ratio should be about 2-to-1. If you plan to sell 50 units, you should keep at least 100 vehicles on your grounds. But which formula works best for you in today’s market?

2. Share your stock.

Consider teaming up with other dealers selling the same brand to reduce your new-car stock. Just be sure these “pooling partners” are close enough geographically to make sharing practical, but far enough away to avoid direct competition.

3. Order only what you know will move quickly.

Closely track pattern failures in any or all of the vehicles you stock. Meet with your CPA regularly to discuss whether you’re getting the inventory data you need and assessing it properly. And do what you can to make your inventory turn.

If a used car customer is interested in a particular vehicle that’s out of stock, for example, keep a record of the request in case the vehicle comes into inventory later. Put this document in a shared (electronic) place that all salespeople — including your auction buyers — can reference.

4. Evaluate your website and online practices.

If business at your dealership is still slow, use the extra time to assess your website and overall Internet presence with the simple goal of moving more stock. Remember, most buyers do homework on the Internet first, and you want potential customers to linger on your site — not skip off to your competition’s website. Consider using video, which can be effective in getting potential customers to act. Web research firm eMarketer estimates that currently, 88 percent of all Internet users are video viewers.

Some dealerships feature sports stars or other celebrities in their videos to attract viewers. And video customer testimonials can be a powerful tool. Also be sure to evaluate your e-mail responses.

5. Do your homework.

Always do your homework to make sure your prices are competitive, and that these are the prices you’re advertising. One strategy holds that you should price vehicles for subprime (and other) buyers. Some dealers, for example, look for vehicles they can buy $1,000 to $1,500 under wholesale book, believing that allows them to cover their lenders’ fee structure and still make a good gross profit.

Two Perspectives on the FMLA

Posted on March 15, 2017July 22, 2024 by Debra Barcuch

In most cases, the verdict on the Family and Medical Leave Act (FMLA) is … it’s working. However, in a 2007 report from the Department of Labor, both employers and employees expressed concerns about the law and how it affects their day-to-day lives.

FMLA Basics

The FMLA covers businesses with 50 or more eligible staff members. Eligible employees are those that have worked for a company for the 12 months prior with at least 1,250 hours of service.

Covered employers must grant up to 12 work weeks of unpaid leave during a 12-month period for the following reasons:

The birth and care of the employee’s newborn child.
The adoption or foster care placement of a son or daughter.
To care for an immediate family member (spouse, child or parent) with a serious health condition.
When the employee is unable to work because of a serious health condition. Many states have additional laws that grant employees leave beyond the FMLA.

When the FMLA was passed back in 1993, it was greeted with apprehension, mostly from employers who worried that staffers would take advantage of it. To follow up on those and other concerns, the Department of Labor (DOL) requested feedback from both sides. Generally, a report of this nature is compiled when legislators are considering rule changes. But the purpose of this study was to generate a discussion about how the FMLA plays out in the workplace.

After collecting more than 15,000 comments, the DOL summarized them in a Request for Information Report. Not surprisingly, employee comments were generally more favorable than those made by employers, as you’ll see in the excerpts below.

How Employees Feel

In part, the FMLA was passed to allow employees the time needed to recuperate from illness, seek medical treatment or care for certain family members without fear of losing their jobs.

“When my mother was diagnosed with lung cancer my brother and I decided I would be the one to take her to all her appointments and therapy. I would’ve had to lose my job or leave it without FMLA. It was difficult for the people I worked with because it put a strain on the office, however, they were, for the most part, emotionally supportive as well.” Besides the obvious benefits to themselves and their families, some employees said they returned to work feeling more productive and more motivated.

“Thanks to the FMLA, I was able to take three months off … in order to take care of my husband when he was reduced to a state of complete dependency … and I developed a keen sense of loyalty to my employer, which has more than once prevented me from looking for work elsewhere.” Do employees see any weaknesses in the FMLA? Some felt the leave should be paid and there should be more time off allowed. Others would like the law to cover a broader range of family members, such as siblings and grandparents.

How Employers Feel

Clearly, some managers are dissatisfied about how the FMLA affects their businesses. Many concerns centered on the vague provisions of the law, plus the uncertainty that there will be adequate staff coverage.

“Dealing with such situations is extremely difficult. Supervisors do not know if the employee will come in to work on any given day. They do not know if the employee will work an entire shift … Without proper notice, a supervisor cannot make plans for a replacement.” In certain industries, FMLA absences can be devastating to operations.

“My company is a manufacturing facility … Unfortunately, the production process is often slowed down or brought to a halt when an employee is out on FMLA.” In other cases, a missing employee can inconvenience customers, as well as staff members.

“An office worker who shows up one hour late for work may find some extra paperwork on his desk … A flight attendant who reports at 10 a.m. for a 9 a.m. departure … has either (a) forced 100-400 passengers to wait and miss later connections, or (b) caused the airline to reposition another flight attendant onto the aircraft because, by federal regulation, an aircraft cannot board passengers or take off without a minimum number of flight attendants. The ripple effects of such delays can affect an infinite number of passengers, as well as numerous coworkers.” To make matters worse, unscheduled absences in certain jobs, such as 911 operators, can be detrimental to public health.

“Employees are given free license to call in sick on a day-to-day basis … The remaining employees are working an enormous amount of short notice overtime and are denied their own personal and family time in order to cover these absences. The number of overtime hours being worked leads to overtired people making critical life and death decisions in an emergency driven environment.” Here are four other complaints employers cited about the FMLA:

1. Better definitions are needed. The FMLA states that a “serious health condition” relates to a “period of incapacity of more than three consecutive calendar days and treatment of two or more times by a health care provider.” Employers argue that this definition is too general to limit absences to conditions that actually are serious.

2. The verification process needs tightening. Employees are expected to document their illnesses (or those of family members). But, some maintain that their conditions are unpredictable and getting medical certification for every flare-up can be expensive. Meanwhile, employers are frustrated because the FMLA-required medical certifications do not give clear guidance about how much time off is needed.

3. There is no clear distinction between other laws. Employers complain the FMLA overlaps with other laws, like the Americans With Disabilities Act (ADA). In response to the comments, the Labor Department admitted that, “employee requests for medical leave often are covered by both statutes.” As a result, many employers asked the DOL to implement a definitive process for administering leave requests with regard to the two statutes.

4. Unscheduled absences are hard to handle. Unscheduled “intermittent leave,” which is allowed under the FMLA, is “the single most serious area of friction between employers and employees” and a “central defining theme in the comments,” the DOL report stated. Scheduled leave is far less frustrating because employers have time to develop adequate solutions. But nearly 25 percent of those who took FMLA leave took at least some of it intermittently.

Problems are frequent in time sensitive, public health and safety operations, including police and fire departments, hospitals, long-term care facilities, transportation, manufacturers and services like electric utilities during a power outage.

The DOL report states that, while intermittent leave is the source of much tension in the workplace, the agency does not currently plan to intervene. With this list of complaints, do employers see any benefits from the FMLA? According to the report, many comments emphasized “the positive impact the FMLA has on employee morale and how it increases worker retention and lowers turnover costs.” By reducing turnover, some argued the law reduces employer costs.

A Step in the Right Direction

The Labor Department acknowledges that better communication is necessary to further educate employers and employees about the FMLA. Although no legislative or regulatory changes are currently under consideration, the report is a step towards improved communication. It allowed employers and employees to voice their concerns, as well as view the FMLA from the other side. At the same time, policymakers can use the report to see how the law affects the lives and operations of businesses and employees in the real world.

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