The Manufacturing Industry Urgently Requires More Technology Education

Posted on January 16, 2018July 22, 2024 by Debra Barcuch

Educators, students, parents and manufacturers need a wake-up call. Technology education has improved manufacturing processes in recent years — sometimes in quantum leaps — but education isn’t keeping pace with the technological strides. And that’s leading to a talent gap that is becoming difficult to bridge.

There is a significant shrinking in the number of manufacturing workers. Part of the reason for the decline is that technology has eliminated many jobs. Another is a reduced interest in manufacturing work.

Stuck in the Industrial Age

Why? The manufacturing industry faces an image problem. There is a widespread perception that all jobs in the industry are dirty and dangerous, unstable, low-paying and likely to be the first sent offshore. As a result, young people don’t pursue careers in the field. This dampens motivation to expand education efforts.

Our education system places far too little emphasis on smart, connected product manufacturing, advanced material development and digital design integration in manufacturing. Instead it is stuck in the era of metalworking and welding.

As a result, students — your next potential employees — may not be aware of exciting developments like 3D prototyping and printing taking place within the industry. And those advances will create a multitude of new careers. It’s clean, exciting and challenging work, but few people know much about it.

Clearly, there is a pressing need for updates and improvements in education and training of manufacturing technology. But there is no real consensus on how to improve education and training in manufacturing. The industry is at a crossroads.

Currently, most technical training in the manufacturing field takes place at two-year technical, community or junior colleges. But there is little coordination between the schools, so the curriculums may veer all over the map. Little thought is given to a common goal.

In some cases, however, school programs link to companies involved in targeted manufacturing in certain parts of the country. For example, you may find education-company links in Rust Belt areas known for auto manufacturing and the Northwest for the aerospace industry. However, in regions where there is no dominant manufacturing force, two-year schools might not offer any courses in manufacturing technology.

The Online Role

Online education could play a more prominent role, but it’s been off to a slow start. Typically, online course are made available in computer programming, network management and other tech-driven studies. But manufacturing technology has been either minimal or nonexistent at most two-year colleges that offer online training.

There are exceptions. The Francis Tuttle Technology Center, based at three campuses within the Oklahoma City area, provides vocational and technical training to students, including middle-aged adults. The center offers several courses relating to manufacturing, such as advanced manufacturing, welding, precision machining and computer numerical control (CNC) programming. Some of the course work is done online.

Another example of progress is the Advanced Technology Education Center, an association of 39 specialized education organizations across the nation that focus on technical education. They generally target specific industries like auto manufacturing or are linked to a two-year community college.

Despite these inroads, the relative slow pace of advancement is frustrating. What’s more, the impact from education and training is far from immediate. There is a long lead time until educated workers actually make their mark in the workforce.

In the not-so-distant past, “replacement” employees in manufacturing were plentiful and turnover wasn’t as detrimental. Now it’s imperative for manufacturing firms to become more aggressive in strategic planning.

A Brighter Future?

If manufacturing is to be revitalized, with technology education gaining a stronger foothold, the various stakeholders must pitch in. To this end, here are six practical ways that can brighten the outlook.

1. Greater coordination is needed from federal, state and local government offices that can provide incentives to encourage manufacturing technology programs. If these branches of government work together, manufacturing technology training will be enhanced.

2. Manufacturing firms must reach out to junior and community colleges in an effort to stimulate education. Those colleges may not be fully aware of the shortage in trained workers and could be persuaded to pursue this avenue.

3. Two-year colleges should establish connections with businesses; it’s not a one-way street. By consulting with employers, the schools can structure curriculums to better match the needs and wants of the manufacturing sector.

4. Online education must be expanded on the college level. While this is particularly critical for the two-year schools where most manufacturing technology education takes place, it could be extended to include four-year colleges and universities.

5. Industry leaders need to show a more active presence, advocating for manufacturing technology education. Organizations such as the National Association of Manufacturers may be able to strengthen the public profile, and increased publicity should lead to more interest in the sector.

By learning about the possibilities, including a chance at a rewarding and fulfilling career, students will be more inclined to pursue degrees in manufacturing technology or at least take courses relating to the discipline. Educational efforts can also help parents and school counselors better understand how students can benefit.

With all these stakeholders pulling together, education can move forward and begin to catch up with the technology, which continues to evolve at breakneck speed.

Changing Corporate Culture

A confluence of events has put the manufacturing industry in jeopardy, but advances in technology can stem the tide. The key is to work up from the ground floor to impart the knowledge and education required to take advantage of the new technology. This changing of the corporate culture is one of the main challenges facing manufacturers in the coming years.

Lessons from Abroad

Perhaps the United States can take a page out of the book of its foreign counterparts.

Technical education has a higher priority in other parts of the world, especially in the German-speaking enclave of Germany, Switzerland and Austria. Consider the common attributes in those three countries:

Early introduction of technology-based training to students,
Numerous internship or apprenticeship programs where on-the-job training is mixed with classroom courses,
Strong connections with employers,
Comparable educational offerings in different regions of the countries, and
A cultural tradition encouraging industrial and technical careers.

This priority put on technical education isn’t just limited to a small part of Europe. Other countries — including Australia, Mexico and the Scandinavian nations — emphasize vocational education. The U.S. should pick up the pace.

Tax Cut Law: Mostly Good News for Employers and Employees

Posted on January 15, 2018July 22, 2024 by Debra Barcuch

The most immediate concrete change the Tax Cuts and Jobs Act (TCJA) will bring about for employers is new payroll tax withholding rates. Here’s the latest word from the IRS: “We anticipate issuing the initial withholding guidance in January reflecting the new legislation, which would allow taxpayers to begin seeing the benefits of the change as early as February. The IRS will be working closely with the nation’s payroll and tax professional community during this process.”

Under the new law, the tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. Under prior law, the tax rates were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%

Sexual Harassment Subject to Nondisclosure Agreement

Under the new law, effective for amounts paid or incurred after December 22, 2017, no tax deduction is allowed for settlements, payouts, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.

In general, a taxpayer generally is allowed a deduction for ordinary and necessary expenses paid or incurred in carrying on a trade or business. However, among other exceptions, there’s no deduction for: illegal bribes, illegal kickbacks or other illegal payments; certain lobbying and political expenses; fines or similar penalties paid to a government for the violation of any law; and two-thirds of treble damage payments under the antitrust laws.

Family and Medical Leave

Another change involves tax incentives to encourage employers to pay employees — though not necessarily their full salaries — when they’re absent due to their own sickness or that of a family member. (Employers in several areas are already required to do so by their own state laws.)

To receive a general business tax credit in 2018 and 2019, employers must grant full-time employees a minimum of two weeks of annual family and medical leave during which they receive at least half of their normal wages. Ordinary paid leave that employees are already entitled to, such as vacation or personal leave, or any form of leave already required by state and local laws, doesn’t qualify for the tax credit.

Employees whose paid family and medical leave is covered by this provision must have worked for the employer for a year or more, and not had pay in the preceding year exceeding 60% of the highly compensated employee threshold, set at $120,000 for 2018 (which works out to $72,000).

The minimum credit equals 12.5% of the eligible employee’s wages paid during that leave, up to a maximum of 25%. Within that range, the amount of the credit rises as employees are paid more than the minimum of half their normal compensation during their leave period. Employers that qualify may claim the tax credit for a maximum of 12 days per year of family and medical leave.

Save the Savings?

While most authors of the TCJA are probably hoping employees who will see a higher paycheck will use the difference to stimulate the economy by spending it immediately, there’s another scenario employers might consider: Employers that are concerned their employees aren’t saving enough for retirement could suggest that some might elect to “bank” their tax cut “raise” in the form of an increased 401(k) contribution.

One tool for motivating employees to save more for the future is to provide some illustrations of the long-term impact of a higher savings rate. For example, a $50 increase in 401(k) savings deducted from a biweekly paycheck would accumulate around $50,000 in greater savings over a 20-year period, assuming a 6% annual growth rate.

It’s also noteworthy that early versions of the TCJA would have drastically reduced employee opportunities to save for retirement in a 401(k) using pre-tax dollars. One proposal that would’ve hit many taxpayers hard would have limited contributions by requiring them to combine participation in multiple plans, including mandatory employee contributions to defined benefit pensions.

Those ideas were dropped.

401(k) Loan Rule Change

The TCJA did, however, make some technical changes in the retirement plan arena. Most notable is that the new law gives a break to plan participants that have outstanding 401(k) loan balances when they leave their employers. Under current law, a participant with such a loan who fails to make timely payments due to his or her separation from the employer is deemed to have received a distribution in the amount of that outstanding balance, triggering adverse tax consequences. The participant, however, is permitted to roll that amount — assuming he or she has sufficient funds available — into an IRA without tax penalty if he or she does so within 60 days.

Under the new law, former employees in that situation have until the due date of their tax returns to move funds equal to the outstanding loan balances into IRAs without penalty. The same opportunity would apply if they were unable to repay their loans due to their plans’ termination.

Taxing Employee Awards

Some TCJA provisions affecting employee benefits seek to recoup tax relief granted in other parts of the law. For example, the TCJA tightens up the definition of employee achievement awards eligible for tax deductions on the part of employers, and exclusion from income taxation for the employees.

“Tangible” achievement awards still qualify, but the following award categories are no longer considered tangible: cash and cash equivalents, gift cards, gift coupons, gift certificates, vacations, meals, lodging, tickets to theater or sporting events, stocks and bonds.

The Inflation Effect and Other Changes

Another section of the law alters the inflation index used to periodically adjust the limits on contributions to health flexible spending accounts, health savings accounts, and the threshold for the value of health benefits subject to the 40% “Cadillac tax” (currently scheduled to take effect in 2020).

Instead of using the regular consumer price index (also known as the CPI-U), annual limit adjustments will be set using the “chained CPI-U.” That “chained” version tends to rise at a slower rate than the unchained index. The same formula change was made applicable to IRA contribution limits.

Finally, here are three other changes affecting employee benefits:

Employees’ ability to exclude the value of employer-provided reimbursements for moving expenses has been taken away. (An exception is made for active-duty military personnel, however.)
Employers can no longer deduct the cost of qualified transportation fringe benefits granted to employees, such as reimbursement for commuting expenses. And, similarly:
Employers can no longer deduct payments to employees who commute to work by bicycle.

When you add it all up, many employers and employees are likely to be happy with the overall effects of the TCJA. The task of digesting all the changes might cause a few headaches in the short run, however.

Many Businesses Will Celebrate Tax Cuts in the New Tax Year

Posted on January 12, 2018 by Debra Barcuch

Most U.S. businesses will receive a big tax cut starting with their 2018 tax years, thanks to the new law that was enacted on December 22. But some industries (such as retail, hospitality and banking) generally expect to reap more benefits than others (such as certain professional practices).

The provisions in the law — known as the Tax Cuts and Jobs Act (TCJA) — are generally effective for tax years beginning after December 31, 2017 (except where noted otherwise). And, unlike the provisions for individual taxpayers, many of these provisions are permanent.

Here’s an overview of some of the changes that affect businesses.

Tax Breaks for Pass-Through Businesses

Under prior law, net taxable income from pass-through business entities — including sole proprietorships, S corporations, partnerships and limited liability companies (LLCs) that are treated as sole proprietorships or as partnerships for tax purposes — was simply passed through to owners and taxed at the owners’ rates.

For tax years beginning after December 31, 2017, the new tax law establishes a new deduction based on a noncorporate owner’s share of a pass-through entity’s qualified business income (QBI). This break is available to eligible individuals, estates and trusts. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels.

The QBI deduction isn’t allowed in calculating the noncorporate owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.

Limitation on W-2 Wages

For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the noncorporate owner’s share of:

50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.
“Qualified property” means depreciable tangible property (including real estate) owned by a qualified business as of the tax year end and used by the business at any point during the tax year for the production of QBI.

Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 or $315,000 for a married individual who files jointly. Above those income levels, the W-2 wage limitation is phased in over a $50,000 range or over a $100,000 range for married individuals who file jointly.

Limitation on Service Business Income

The QBI deduction generally isn’t available for income from specified service businesses, such as most professional practices. Under an exception, however, the service business limitation does apply until an individual owner’s taxable income exceeds $157,500 or $315,000 for a married individual who files jointly. Above those income levels, the service business limitation is phased in over a $50,000 range or over a $100,000 range for married joint-filers.

Important note: The W-2 wage limitation and the service business limitation don’t apply as long as taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.

Corporate Tax Cut

Under prior law, C corporations paid graduated federal income tax rates of 15%, 25%, 34% and 35% on taxable income over $10 million. Personal service corporations (PSCs) paid a flat 35% rate.

For tax years beginning after December 31, 2017, the TCJA establishes a flat 21% corporate rate. That reduced rate also applies to PSCs.

Elimination of Corporate Alternative Minimum Tax (AMT)

Under prior law, the corporate AMT was imposed at a 20% rate. However, corporations with average annual gross receipts of less than $7.5 million for the preceding three tax years were exempt. For tax years beginning after December 31, 2017, the TCJA repeals the corporate AMT.

Capital Asset Expensing and Depreciation Provisions

In general, businesses will be able to deduct more for capital expenditures in the first year they’re placed in service, and in some cases depreciate any remaining amounts over shorter time periods. Two key tax breaks allow for accelerated expensing:

1. Expanded Section 179 deductions. Under the TCJA, for qualifying property placed in service in tax years beginning after December 31, 2017, the maximum Sec. 179 deduction increases to $1 million (up from $510,000 for tax years beginning in 2017) and the Sec. 179 deduction phaseout threshold increases to $2.5 million (up from $2.03 million for tax years beginning in 2017).

The TCJA also expands the definition of eligible property to include certain depreciable tangible personal property used predominantly to furnish lodging. The definition of qualified real property eligible for the Sec. 179 deduction is also expanded to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property.

2. More generous first-year bonus depreciation. Under the TCJA, for qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage is increased to 100% (up from 50% in 2017). The 100% deduction is allowed for both newand used qualifying property.

In later years, the first-year bonus depreciation deduction is scheduled to be reduced as follows:

80% for property placed in service in calendar year 2023,
60% for property placed in service in calendar year 2024,
40% for property placed in service in calendar year 2025, and
20% for property placed in service in calendar year 2026.

Important note: For certain property with longer production periods, the preceding cutbacks are delayed by one year. For example, the 80% deduction rate will apply to property with long production periods that are placed in service in 2024.

Deductions for Passenger Vehicles Used for Business

For new or used passenger vehicles that are placed in service after December 31, 2017, and used over 50% for business, the maximum annual depreciation deductions allowed under the TCJA are:

$10,000 for the first year,
$16,000 for the second year,
$9,600 for the third year, and
$5,760 for the fourth and subsequent years until the vehicle is fully depreciated.

For 2017, the limits under the prior law for passenger cars are:

$11,160 for the first year for a new car or $3,160 for a used car,
$5,100 for the second year,
$3,050 for the third year, and
$1,875 for the fourth and subsequent years.

Slightly higher limits apply to light trucks and light vans.

Limits on Business Interest Deductions

Prior law generally allowed full deductions for interest paid or accrued by a business (subject to some restrictions and exceptions). Under the TCJA, affected corporate and noncorporate businesses generally can’t deduct interest expense in excess of 30% of “adjusted taxable income,” starting with tax years beginning after December 31, 2017.

For S corporations, partnerships, and LLCs that are treated as partnerships for tax purposes, this limit applies at the entity level, rather than at the owner level.

For tax years beginning in 2018 through 2021, you must calculate adjusted taxable income by adding back allowable deductions for depreciation, amortization and depletion. After 2021, these amounts aren’t added back when calculating adjusted taxable income.

Business interest expense that’s disallowed under this limitation is treated as business interest arising in the following taxable year. Amounts that can’t be deducted in the current year can generally be carried forward indefinitely.

Important note: Some taxpayers are exempt from the interest deduction limitation, including:

Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years,
Real property businesses that elect to use a slower depreciation method for their real property, and
Farming businesses that elect to use a slower depreciation method for farming property with a normal depreciation period of 10 years or longer.

Another exemption applies to interest expense from dealer floor plan financing. For example, this exemption applies to dealers that finance purchases or leases of motor vehicles, boats or farm machinery.

Deductions for Business Entertainment and Certain Employee Fringe Benefits

Under prior law, taxpayers could generally deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.

Under the TCJA, deductions for business-related entertainment expenses are completely disallowed for amounts paid or incurred after December 31, 2017. Though meals purchased while traveling on business are still 50% deductible, the 50% disallowance rule also now applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises won’t be deductible.

In addition, the TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. And the new law eliminates deductions by employers for the cost of providing qualified employee transportation fringe benefits (for example, parking allowances, mass transit passes, and van pooling). However, those benefits are still tax-free to recipient employees.

Foreign Tax Provisions

The TCJA includes many changes that will affect business taxpayers with foreign operations. In conjunction with the new 21% corporate tax rate, these changes are intended to encourage multinational companies to conduct more operations in the U.S., with the resulting increased investments and job creation in this country.

More Provisions

Other noteworthy provisions of the TCJA that might affect your business include:

Cash method accounting. The new law liberalizes the eligibility requirements for electing the more-flexible cash method of accounting, making that method available to many more medium-size businesses. Also, eligible businesses are excused from the chore of doing inventory accounting for tax purposes.

Net operating losses (NOLs). For NOLs that arise in tax years ending after December 31, 2017, the maximum amount of taxable income for a year that can be offset with NOL deductions is generally reduced from 100% to 80%. In addition, NOLs incurred in those years can no longer be carried back to an earlier tax year (except for certain farming losses). Affected NOLs can be carried forward indefinitely.

Excess business losses. A new limitation applies to deductions for “excess business losses” incurred by noncorporate taxpayers. Losses that are disallowed under this rule are carried forward to later tax years, and then they can be deducted under the rules that apply to NOLs. This new limitation applies after applying the passive activity loss rules. However, it only applies to an individual taxpayer if the excess business loss exceeds the applicable threshold.

Like-kind exchanges. The Section 1031 rules that allow tax-deferred exchanges of appreciated like-kind property are allowed for only real estate for exchanges completed after December 31, 2017. Under the TCJA, like-kind exchanges of personal property assets aren’t permitted. However, prior law applies if one leg of an exchange was completed as of December 31, 2017, but another leg of the exchange remained open on that date.

Officers’ compensation. Deductions for compensation paid to principal executive officers generally can’t exceed $1 million a year. A transition rule applies to amounts paid under binding contracts that were in effect as of November 2, 2017.

R&D expenses. Under prior law, eligible research and development expenses can be deducted in the current period. Starting with tax years beginning after December 31, 2021, specified R&D expenses must be capitalized and amortized over five years, or 15 years if the R&D is conducted outside the U.S.

Rehab credits. For amounts paid or incurred after December 31, 2017, the TCJA repeals the 10% rehabilitation credit for expenditures on pre-1936 buildings. The new law continues the 20% credit for qualified expenditures on certified historic structures, but the credit must be spread over five years. Certain transition rules apply.

Domestic production activities deduction (DPAD). The DPAD, which could be up to 9% of eligible income, is eliminated for tax years beginning after December 31, 2017.

Lobbying expenses. The deduction for local lobbying expenses is eliminated.

Contact Your Tax Pro

The TCJA is almost 500 pages long and covers a wide range of topics. We’ve summarized only the highlights here. For more detailed information, contact your tax advisor for insight into how the changes will impact your specific business.

Avoid Hiring Mistakes with a Systematic Process

Posted on January 10, 2018July 23, 2024 by Debra Barcuch

Often, bad hiring decisions don’t become apparent for weeks or months. Then, it might take much longer to rectify hiring mistakes, whether that means a termination or resolving the performance issues. Here are some of the most commonly reported hiring mistakes, and some tips for avoiding them.

Consider the Consequences

Perhaps the biggest error is moving too quickly. A rushed hiring process usually means cutting corners — not searching broadly enough for the best candidate and short-circuiting the candidate assessment process. If you need to move quickly, just devote more time to the process (and enlist support) instead of trying to streamline it.

One way to motivate yourself not to rush a hiring decision is to think about the impact that a poor hire can have. Depending on the individual’s shortcomings, the effects of a poor performer can ripple throughout your whole organization.

For example, a new employee’s bad attitude can spread like a virus. Also, when a worker isn’t carrying his or her own weight, for whatever reason, those left to pick up the slack can become resentful. Finally, consider how much of your time or a supervisor’s time can be sapped trying to rehabilitate an underperforming employee or to bring an underqualified hire up to speed.

Getting in a hurry to fill a vacancy may lead you to only interview job candidates who respond to help-wanted ads. Often, however, the best fit for the job is someone who isn’t looking for work and, therefore, won’t see your ad. If finding qualified applicants is a problem, consider turning your employees into recruiters by asking them to recommend good candidates they may know. You might motivate them to do so by offering a reward if the recommendation leads to a new hire.

Cast a Wide Net

Once you have applications that look promising, conduct reference checks — don’t waste this opportunity by taking this step too lightly! It’s true that, when asked to give job references, many companies aren’t willing to give more than basic employment information, such as when the person in question worked for them. This isn’t surprising, given the litigious culture we live in. Former employees who are given negative references sometimes head to court claiming unfair treatment. Likewise, a company that fails to provide critical information (such as a history of violence in the workplace) could also end up in the hot seat.

With this reluctance in mind, you’ll have to be more persistent to get real information. If the references provided to you are skimpy or you can’t get a return call, tell the applicant you need more contacts, possibly including personal references. Also, if the applicant was a supervisor, try to talk to people that he or she supervised.

Grill References Thoroughly

When you talk to references, in addition to verifying basic facts, use open-ended questions rather than inquiries that can be answered with a simple yes or no. For example, you can ask:

How would you describe the candidate’s job performance?
How did the candidate deal with high-pressure situations?
How did he or she solve problems?
How did the candidate work in terms of cooperation with coworkers?

Also, characterize the responsibilities and qualifications that the candidate listed on his or her resume, and ask the reference if they accurately describe the applicant. Resume-padding is rampant.

Finally, listen for the silence that can speak volumes. As noted earlier, fear of litigation often prevents people from giving useful information, such as “the former employee had a poor work attendance record.” Within reason, you should take note if the reference neglects to say something flattering when given the opportunity, or seems to dodge a question. Consider whether he or she is masking a negative response.

Suppose, for instance, you say, “Tell me about John’s leadership skills.” If the answer you get is something along the lines of, “Here at Acme Co., we encourage all of our employees to develop leadership skills,” you might reasonably surmise that John’s leadership skills aren’t exemplary.

Look for Flaws

Many books have been written on how to interview job candidates. Here are just three tips for rooting out characteristics you’d want to avoid in an employee:

Poor attitude. A negative, cynical complainer might hide those traits when talking to you. However, the more of your people the job candidate encounters, the greater the chances that you’ll get a hint of that personality type. Give candidates a chance to meet separately with some people they would work with. That’s a helpful opportunity for the applicants to learn more about your organization. It also gives you additional lenses through which to view them, as other employees provide feedback. It’s a good idea to also ask for feedback from others who weren’t part of the interview, for example, the receptionist. Often applicants are less guarded around people they see as uninvolved in the hiring process.
Over-the-top ambition. Although you probably want to hire employees who hope to climb the ranks, watch for signs that the candidate is only interested in finding a job as a short-term stepping stone. Insights can be gleaned from such standard questions as, “Where do you see yourself in three (or five or ten) years?”
Dependency. Some employees are needy and require more support and direction from supervisors than you’d hope or expect. How can you spot such people before hiring them? You may be able to gauge a person’s ability to confront a challenge independently by asking him or her to describe a previous work situation. For instance, you might say: “Tell me about a time when you had to solve a problem with your job by yourself, and how you did it.”

As an employer, you hope that your employees are not only able to work through problems on their own, but also capable of applying what they learn to future issues. This same step should apply to how you fine-tune your hiring process. Take note of what works well and use that to create a hiring procedures checklist that will help as you continue to build your organization. Consistently adhering to an experience-tested process helps prevent costly hiring mistakes.

Tax Reform: Topics of Special Interest for Individuals

Posted on January 9, 2018 by Debra Barcuch

As you’ve heard by now, the Tax Cuts and Jobs Act (TCJA) includes a number of changes that will affect individual taxpayers in 2018 and beyond. Significant attention has been given to the reduced tax rates for most individuals and the new limit on deducting state and local taxes. But there is more to the story. Here’s a summary of some of the lesser-known provisions in the new law.

Repeal of the ACA Penalty for Individuals

The Affordable Care Act (ACA) requires individuals to pay a penalty if they aren’t covered by a health plan that provides at least minimum essential coverage. That penalty is also known as the “shared responsibility payment.” Unless an exception applies, the penalty is imposed for any month that an individual doesn’t have minimum essential coverage in effect.

The new tax law permanently repeals the ACA penalty for individuals for months beginning in 2019. But the penalty is still in force for all of 2018. The new tax law doesn’t change the ACA mandate for employers, however.

Revamped “Kiddie Tax”

Under prior law (in effect before the TCJA), unearned income of children above an annual threshold was taxed at their parents’ rates if those rates were higher. This so-called “kiddie tax” is imposed on individuals up to age 24 if they’re full-time students. For 2017, the unearned income threshold was $2,100. Unearned income beneath the threshold was taxed at the children’s rates. Earned income was also taxed at the children’s rates.

For 2018 through 2025, the TCJA stipulates that a child’s earned income is taxed at the standard rates for single taxpayers while unearned income is taxed using the rates and brackets that apply to trusts and estates. This change will make the kiddie tax much easier to calculate.

Restriction on Casualty and Theft Loss Deductions

For 2018 through 2025, the TCJA eliminates deductions for personal casualty and theft losses. However, it provides an exception for losses incurred in federally-declared disasters.

Another exception for losses, which aren’t due to federally-declared disasters, allows deductions for personal casualty and theft losses if the taxpayer has personal casualty gains. That happens when insurance proceeds exceed the basis of the damaged, destroyed or stolen property. In this situation, personal casualty and theft losses are allowed up to the amount of the taxpayer’s personal casualty gains.

Itemized Deduction Phase-Out Rule Eliminated

Under prior law, individuals with high levels of income were subject to a phase-out rule that could eliminate up to 80% of the most common itemized deductions, including the tax breaks for mortgage interest, property taxes and charitable donations.

For 2018 through 2025, the TCJA eliminates the itemized deduction phase-out rule. But some of the itemized deduction rules are changed (and limited) by other provisions in the new law. For example, the TCJA limits the deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 for married people who file separately).

Changes to Charitable Deduction Rules

The TCJA also increases the charitable deduction limit for some gifts. Under prior law, the deduction for cash contributions to public charities and certain private foundations was limited to 50% of your adjusted gross income (AGI).

For 2018 and beyond, the new law increases the deduction limit to 60% of AGI. Deductions that are disallowed by the 60% rule can generally be carried forward for five years.

But not all changes to the charitable deduction rules are taxpayer friendly. The TCJA also eliminates deductions for donations to obtain seating rights at college athletic events, for 2018 and beyond.

Under prior law, you could treat 80% of such payments as a charitable donation if:

- The payment was to or for the benefit of a college, and
- The payment would be treated as a deductible charitable donation except for the fact that the payment entitled you to receive (directly or indirectly) the right to buy tickets to athletic events of the college.

Restrictions on Deducting Gambling-Related Expenses

For 2018 through 2025, the TCJA limits deductions for a year’s out-of-pocket gambling-related expenses and gambling losses (combined) to that year’s gambling winnings.

Under prior law, a professional gambler could deduct out-of-pocket gambling-related expenses as a business expense. Only deductions for actual gambling losses were limited to gambling winnings.

Sweeping Changes

The TCJA is the biggest piece of tax reform legislation that’s been enacted since the landmark Tax Reform Act of 1986. It’s expected to have a major impact on individual taxpayers in 2018. Want to learn more? Consult with your tax advisor; it’s never too soon to plan for this year and beyond.

New Law Eliminates Miscellaneous Itemized Deductions

The new tax law eliminates most itemized deductions, starting in 2018. Under prior law, the following deductions were deductible if they exceeded 2% of your adjusted gross income. For 2018 through 2025, this change eliminates deductions for a wide variety of expenses, such as:

Tax-Related Expenses

Tax preparation expenses,
Tax advice fees, and
Other fees and expenses incurred in connection with the determination, collection, or refund of any tax.

Expenses Related to Taxable Investments

Investment advisory fees and expenses,
Clerical help and office rent for office used to manage investments,
Expenses for home office used to manage investments,
Depreciation of computer and electronics used to manage investments,
Fees to collect interest and dividends,
Your share of investment expenses passed through to you from partnership, limited liability company or S corporation,
Safe deposit box rental fee for box used to store investment items and documents, and
Other investment-related fees and expenses.

Expenses Related to Production of Taxable Income

Hobby expenses (limited to hobby income),
IRA trustee/custodian fees if separately billed to you and paid by you as the account owner,
Loss on liquidation of traditional IRAs or Roth IRAs,
Bad debt loss for uncollectible loan made to employer to preserve your job, and
Damages paid to former employer for breach of employment contract.

Unreimbursed Employee Business Expenses

Education expenses related to your work as an employee,
Travel expenses related to your work as an employee,
Passport fees for business trips,
Professional society dues,
Professional license fees,
Subscriptions to professional journals and trade publications,
Home office used regularly and exclusively in your work as an employee and for the convenience of your employer,
Depreciation of a computer that your employer requires you to use,
Tools and supplies used in your work as an employee,
Union dues and expenses,
Work clothes and uniforms if required for your work and not suitable for everyday use,
Legal fees related to your work as an employee, and
Job search expenses to seek new employment in your current profession or occupation.

2017 Tax Law Impacts Accounting for Long-Term Contracts

Posted on January 8, 2018July 23, 2024 by Debra Barcuch

Concept of construction and design. 3d render of blueprints and designer tools on the panorama of construction site.

Many commercial construction projects can extend beyond one year. Federal tax law provides special rules for accounting for these long-term contracts (Internal Revenue Code Section 460). The rules apply to all long-term contracts unless the contract is exempt due to several exceptions provided by the tax law.

Not a Long-term Contract

These contracts are not considered a long-term contract, and are therefore exempt from the accounting for long-term contract rules.

Contracts with architects, engineers or construction management
Contracts for industrial and commercial painting
Contracts completed before the end of the same tax year the contract commenced
Contracts with de minimis (minor) elements of eligible construction activities

Exempt for AMT Purposes

Any individual business owner who is subject to Alternative Minimum Tax (AMT) must use the percentage of completion accounting method on long-term contracts, unless the business structure is a small C Corp (eff. 2018) or engages exclusively in home construction contracts (80% or more of the estimated total costs are expected to be attributable to 1) buildings containing 4 or less dwelling units and 2) improvements to real property located at the building site and directly related to the dwelling unit)

Talk to your CPA to determine if you will be subject to the increased AMT threshold for single or married filing jointly tax status.

To track expenses and income on non-exempt long-term contracts, contractors are typically required to use the “percentage of completion” accounting method for income tax reporting. The main disadvantage of this method is the inability to do much tax planning or tax deferment for things like accrued losses, uninstalled materials or retainage receivables, which can result in accelerated taxable income when compared with other accounting methods.

One of the exceptions to the tax law applies to companies with average gross receipts for the prior three years under $10 million. Under the new tax law effective for 2018, that threshold has been raised to $25 million. Now, long-term contracts of companies with average annual gross receipts under $25 million are considered exempt from the restrictive and complicated rules of Code Section 460.

For companies with average annual gross receipts above $25 million, compliance with the tax rules under Code Section 460 remains your only option.

If your CPA has not talked to you about the potential tax saving benefits of a different accounting method for your non-exempt long-term contracts — or explored if your company’s long-term contract status is now exempt — this year is a good time to ask about it. Because the accounting method chosen for each long-term contract must remain the same through the life of each contract, choosing the right accounting method is critical for any new long-term construction contract in 2018.

What is a long-term contract?

Before we explore various accounting methods, here is the simple definition of a long-term contract according to the tax code.

Long-term contracts are those that on the contract commencement date are reasonably expected to not be completed by the end of the tax year.

Ironically, under this definition, a contract that is expected to take a week to complete could be a long-term contract. For example, if a contractor with a calendar year-end begins work on December 27 and expects to end on January 2 – the contract is a long-term contract.

Due to the complexity of accounting for long-term contracts tax rules — with their exceptions — as well as the variable nature of construction revenue, we often find that contractors are using a catch-all accounting method across all contracts. The key pitfalls of using the same accounting method for all long-term contracts over time may include:

paying tax earlier than necessary;
potential noncompliance with IRS rules as the company’s revenue grows;
and noncompliance discovered during an IRS tax audit, which could result in additional taxes and penalties.

Are you compliant?

Interestingly, contractors that may have used a noncompliant accounting method under the former $10 million threshold may now be compliant under the new $25 million threshold for 2018 contracts.

Let’s say that a contractor’s average annual gross receipts for three trailing tax years were $15 million. The company wasn’t using the percentage of completion accounting method per the tax law for 2016 and prior years. The contractor is non-compliant with its accounting for long-term contracts with respect to 2016 and earlier years. If the IRS were to audit 2016 (and earlier) years, the non-compliance could result in significant tax, penalties, and interest.

Unfortunately for the contractor, the company is stuck with the non-compliant method in accounting for 2017 because changes from non-compliant methods in accounting must be filed prior to the end of the tax year. The risk of being assessed significant tax, penalties, and interest remains.

However, this same company will not need to change the accounting method for new long-term contracts in 2018 because, due to the increased threshold in the new tax law, these new contracts are exempt from Section 460.

Alternatively, companies under the $10 million threshold that have used the percentage of completion accounting method for long-term contracts could do an evaluation by comparing the amount of income tax they would have paid in past years (considering both regular tax and AMT if the company is a partnership or S-corporation) had they used a different method of accounting. If there is significant tax savings, a change in accounting method should be considered. This will not qualify as an automatic change in accounting method. A user fee of $9,500 will apply and Form 3115 notifying the IRS of the desired change will need to be filed before the end of the 2018 tax year.

As you can see, there are nuances to this area of the federal tax code. To prepare for the changes in 2018, each company should review accounting methods for long-term contracts with a CPA knowledgeable in this area of the federal tax code.

Continue Reading: What are Accounting Methods for Long-Term Contracts?

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

What are the Accounting Methods for Long-Term Contracts?

Posted on January 4, 2018July 23, 2024 by Debra Barcuch

The following are the primary accounting methods for long-term contracts, explained briefly, for smaller and larger contractors.

Smaller Contractors

Ave. Gross Receipts < $10 million (or < $25 million starting in 2018)

Completed Contract Method

No revenue is reported or costs deducted until the contract is complete:
Generally considered complete when 95% of expected costs have been incurred
Aggressive billing and collections do not impact income
Biggest tax deferral opportunity

The disadvantages of this method occur when several contracts finish in the same year, causing a spike in income and a spike in the tax rate. Contractors also cannot deduct losses on a contract until the job is complete.

Note that home contracts are exempt from Section 460 and that the completed contract method is generally used by home builders.

Cash Method

Revenue reported when collected
Costs deducted when paid
Large deferral opportunities by managing billings and acceleration of payment of costs

The disadvantages of the cash accounting method with long-term contracts is that contractors must spend cash to claim deductions and delay receipts to defer income, which is counter to smart business planning. Aggressive billing may result in acceleration of income. Also, a declining economy could mean large tax bills in down years due to the inevitable reversal of income deferrals.

Accrual Method

Revenue reported when billed
Costs deducted when incurred

The disadvantages to the accrual accounting method are that aggressive billing generally results in acceleration of revenue, accrued losses on contracts are not deductible until the job is complete and tax planning techniques may be counter to business planning.

Percentage of Completion Method

Ongoing recognition of revenue and income, computed by the stage of project completion when compared to total costs to complete the project
Based on estimated future costs

The disadvantages to the percentage of completion accounting method are that accrued losses on contracts are not deductible and income can be accelerated due to things like uninstalled materials charged to jobs, overbillings by subcontractors or underestimated total costs to complete a job. The accuracy of the method is dependent upon the accuracy of estimates. Inaccurate estimates could result in inaccurate reporting of tax.

A Note About Alternative Minimum Tax (AMT)

For C-corporations, AMT was repealed for 2018 forward.

The 2018 tax law increased the AMT exemptions for individuals, however AMT continues to apply. Percentage of completion is required for AMT purposes. Thus the difference in income between percentage of completion and the income under the taxpayer’s method of accounting for long-term contracts is an adjustment for AMT purposes. If the contractor is organized as a partnership, S-corporation, or sole proprietorship, the owners should evaluate the effect of AMT when selecting their accounting method.

Home builders, as an exception, are permitted to use the completed contract method for AMT.

Larger Contractors

Ave. Gross Receipts > $10 million (or > $25 million starting in 2018)

Larger contractors are required to use the Percentage of Completion method under Code Section 460.

To offset the potential for accelerated income, companies may elect a 10% method, which defers recognition of revenue or costs until a job is at least 10% complete. This method is also allowable under AMT. It may be useful in instances when a contract commences toward the end of a tax year.

Larger companies are also required to use a look-back approach once a job is complete. Income in prior years is recalculated using actual costs, which may result in a change in gross profit for the prior year. Tax is recalculated and compared to tax actually paid for the year. Interest is calculated on the resulting over or under payment.

Code Section 460 also requires companies to allocate certain overhead costs to contracts. This may provide a deferral opportunity if the contractor is diligent in estimating overhead costs that may be allocated to the contract in future years.

To select the most advantageous accounting method or to determine if your company should change its accounting method in 2018, controllers and CFOs may need the guidance of a CPA knowledgeable in accounting for long-term contract rules. It helps to get a second opinion to support the right accounting method for your contracts that is both tax law compliant and offers the best potential for tax planning or deferral.

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