Monthly Archives: August 2017

Beware of the ongoing risk of employee misclassification

David Reape HighRes-08We live in an increasingly specialized society. As such, a subset of the workforce with distinctive skill sets that can perform high-quality services is increasing. Through independent contractor relationships, companies are able to access these services without the long-term entanglements of traditional employment.

And yet, risk remains. Classifying a worker as an independent contractor frees a business from payroll tax liability and allows it to forgo providing overtime pay, unemployment compensation, and other employee benefits. Also, independent status takes an individual off the company payroll, where an employee’s share of payroll taxes, plus income taxes, is automatically withheld.

For these reasons, the federal government views misclassifying a bona fide employee as an independent contractor as forcing a square peg into a round hole.

Key factors

The IRS has long been a primary enforcer of proper worker classification. When assessing worker classification, the agency will look at its 20 factor test to determine a worker’s proper classification. Key factors the IRS typically looks at include:

Level of behavioral control. This means the extent to which the company instructs a worker on when and where to do the work, what tools or equipment to use, whom to hire, where to purchase supplies and so on. Also, control typically involves providing training and evaluating the worker’s performance. The more control the company exercises, the more likely the worker is an employee.

Level of financial control. Independent contractors are more likely to invest in their own equipment or facilities, incur unreimbursed business expenses, and market their services to other customers. Employees are more likely to be paid by the hour or week or some other time period; independent contractors are more likely to receive a flat fee.

Relationship of the parties. Independent contractors are often engaged for a discrete project, while employees are typically hired permanently (or at least for an indefinite period). Also, workers who serve a key business function are more likely to be classified as employees.

The IRS examines a variety of factors within each category. You need to consider all of the facts and circumstances surrounding each worker relationship.

Protective measures

Once you’ve completed your review, there are several strategies you can use to minimize your exposure. When in doubt, reclassify questionable independent contractors as employees. This may increase your tax and benefit costs, but it will eliminate reclassification risk and possibly penalties.

From there, modify your relationships with independent contractors to better ensure compliance. For example, you might exercise less behavioral control by reducing your level of supervision or allowing workers to set their own hours or work from home.

Finally, consider using an employee-leasing company. Workers leased from these firms are employees of the leasing company, which is responsible for taxes, benefits and other employer obligations.

When in doubt, seek advice

At Ciuni & Panichi, Inc., we can help business leaders review the pertinent factors and use protective measures before and during an engagement. Contact David Reape, CPA, Tax Department Principal, at dreape@cp-advisors.com or 216-831-7171 to learn about the business advisory services available to help keep you in compliance today and into the future.

Three Midyear Tax Planning Strategies for Individuals

Midyear Tax Planning

april 15In the quest to reduce your tax bill, year-end planning can only go so far. Tax-saving strategies take time to implement, so review your options now. Here Nick Leacoma, CPA, Ciuni & Panichi, Inc. Tax Department Senior Manager, offers three strategies that can be more effective if you begin executing them midyear:

Consider your bracket
The top income tax rate is 39.6 percent for taxpayers with taxable income over $418,400 (singles), $444,550 (heads of households) and $470,700 (married filing jointly; half that amount for married filing separately). If you expect this year’s income to be near the threshold, consider strategies for reducing your taxable income and staying out of the top bracket. For example, you could take steps to defer income and accelerate deductible expenses. (This strategy can save tax even if you’re not at risk for the 39.6 percent bracket or you can’t avoid the bracket.)

You could also shift income to family members in lower tax brackets by giving them income-producing assets. This strategy won’t work, however, if the recipient is subject to the “kiddie tax.” Generally, this tax applies the parents’ marginal rate to unearned income (including investment income) received by a dependent child under the age of 19 (24 for full-time students) in excess of a specified threshold ($2,100 for 2017).

Look at investment income
This year, the capital gains rate for taxpayers in the top bracket is 20 percent. If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

Depending on what happens with health care and tax reform legislation, you also may need to plan for the 3.8 percent net investment income tax (NIIT). Under the Affordable Care Act, this tax can affect taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT applies to net investment income for the year or the excess of MAGI over the threshold, whichever is less. So, if the NIIT remains in effect (check back with us for the latest information), you may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

Plan for medical expenses
The threshold for deducting medical expenses is 10 percent of AGI. You can deduct only expenses that exceed that floor. (The threshold could be affected by health care legislation. Again, check back with us for the latest information.)

Deductible expenses may include health insurance premiums (if not deducted from your wages pretax); long-term care insurance premiums (age-based limits apply); medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account); and mileage driven for health care purposes (17 cents per mile driven in 2017). You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor.

These are just a few ideas for slashing your 2017 tax bill. To benefit from midyear tax planning, consult Nick Leacoma, CPA, at 216-831-7171 or nleacoma@cp-advisors.com. If you wait until the end of the year, it may be too late to execute the strategies that would save you the most tax.

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FASB: Close-up on Restricted Cash

The FASB wants to fix inconsistent reporting

DanReilly-07 HighResThe Financial Accounting Standards Board (FASB) has amended U.S. Generally Accepted Accounting Principles (GAAP) to clarify the guidance on reporting restricted cash balances on cash flow statements. Until now, Accounting Standards Codification Topic 230, Statement of Cash Flows, didn’t specify how to classify or present changes in restricted cash. Over the years, the lack of specific instructions has led not-for-profit entities and other businesses to report transfers between cash and restricted cash as operating, investing or financing activities — or a combination of all three.

The new guidance essentially says that none of the above classifications are correct.

FASB members hope the amendments will cut down on some of the inconsistent reporting practices that have been in place because of the lack of clear guidance.

FASB Prescriptive guidance
Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash, still doesn’t define restricted cash or restricted cash equivalents. But the updated guidance requires that transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents be excluded from the entity’s operating, investing and financing activities. In other words, the details of those transfers shouldn’t be reported as cash flow activities in the statement of cash flows at all.

Instead, restricted cash and restricted cash equivalents balances and activities are treated the same as other cash and cash equivalents balances and activities on the statement of cash flows.  If the cash flow statement includes a reconciliation of the total cash balances for the beginning and end of the period, the FASB wants the amounts for restricted cash and restricted cash equivalents to be included with cash and cash equivalents. When, during a reporting period, the totals change for cash, cash equivalents, restricted cash and restricted cash equivalents, the updated guidance requires that these changes be explained.

Moreover, a not-for-profit entity or other business must provide narrative and/or tabular disclosures about the nature of restrictions on its cash and cash equivalents.

Effective dates
The updated FASB guidance goes into effect for public companies in fiscal years that start after December 15, 2017. Not-for-profit entities and private companies have an extra year before they have to apply the changes. Early adoption is permitted. Please contact Dan Hout-Reilly, CPA, CVA, Ciuni & Panichi, Inc. Audit and Accounting Service Department Manager, at 216.831.7171 or dhout-reilly@cp-advisors.com if you have additional questions about reported restricted cash or any other items on your organization’s statement of cash flows.

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Private Companies and Financial Reporting

Taxes and Cost Segregation

 

Private Companies and Financial Reporting

Private companies:  Consider these financial reporting shortcuts

private publicFor years, private companies and their stakeholders have complained that the Financial Accounting Standards Board (FASB) catered too much to large, public companies and ignored the needs of smaller, privately held organizations that have less complex financial reporting issues. In other words, they’ve said that U.S. Generally Accepted Accounting Principles (GAAP) are too complicated for them. The FASB answered these complaints by approving the establishment of the Private Company Council (PCC), a new body to improve the process of setting accounting standards for private companies.  The PCC advises the FASB on appropriate accounting treatment for private companies.  Under PCC’s advice the FASB has issued some Accounting Standards Updates (ASUs) that apply exclusively to private companies.

“Little GAAP”
Currently there are four ASUs that apply only to private companies:

  1. ASU No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill. Under this alternative, private companies may elect to amortize goodwill on their balance sheets over a period not to exceed 10 years, replacing the requirement to test for impairment annually with a requirement to test when a triggering event occurs that indicates the asset may be impaired.
  2. ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach. This alternative provides entities with a practical expedient to qualify for cash flow hedge accounting treatment when they use vanilla interest rate swaps to convert variable-rate borrowings into fixed-rate borrowings.
  3. ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This allows a lessee to elect an alternative not to apply VIE guidance to a lessor entity under certain circumstances.  It’s important to note that the FASB is currently considering expanding this alternative: In June 2017, the FASB issued a proposal that would expand the accounting alternative to include all private company common control arrangements if both are not public business entities.
  4. ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. This alternative exempts private companies from recognizing certain hard-to-value intangible assets — such as non-competes and certain customer-related intangibles — acquired in a business combination, separately from goodwill.  If elected, the guidance established with ASU 2014-02 must be adopted to amortize goodwill.

No effective dates or preferability assessments
After the FASB issued these alternatives, it updated the guidance to remove the effective dates. It also has exempted private companies from having to make a preferability assessment before adopting one of these accounting alternatives. Under the previous rules, a private company that wanted to adopt an accounting alternative after its effective date had to first assess whether the alternative was preferable to its accounting policy at that time.

Forgoing an initial preferability assessment allows private companies to adopt a private company accounting alternative when they experience a change in circumstances or management’s strategic plan. It also allows private companies that were unaware of an accounting alternative to adopt the alternative without having to bear the cost of justifying preferability.

Right for you?
Simplified reporting sounds like a smart idea, but regulators, lenders and other stakeholders may require a private company to continue to apply traditional accounting models, especially if the company is large enough to consider going public or may merge with a public company. We can help private companies weigh the pros and cons of electing these alternatives. To learn more, contact George Pickard, CPA, MSA, Ciuni & Panichi, Inc. Senior Manager at gpickard@cp-advisors.com or 216-831-7171.

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Credit Cards and Fraud

Business Operations and Income Statements

 

Credit Cards and Fraud

Having a policy can thwart fraud

mbkWhen it comes to fraud in any organization, credit cards are frequently a fraudster’s tool. Because the use of credit cards is so commonplace today, there’s always the risk of improper charges to your account. Credit card misuse could hurt your organization financially and jeopardize its reputation in the community. Always remember that physically locking credit cards only protects you from unauthorized use by those who have never been in possession of the card. Online purchases don’t require physically having the card, just knowledge of the card information. But there are ways to protect your organization against credit card fraud. Developing a credit card use policy is an important first step.

Certain components make sense
While each organization’s policy will vary according to its circumstances and priorities, certain components are both commonsense and essential. It’s important, for example, to address eligibility by setting restrictions on which employees may have or use your organization’s credit cards. You might, for example, want to limit cards to full-time employees who:

  • Travel regularly for their jobs,
  • Purchase large volumes of goods and services for the organization’s use, or
  • Otherwise incur regular business expenses of a kind appropriately paid by credit card.

You also should require written approval from a supervisor prior to having a credit card issued to an employee. In addition, your policy should clearly identify prohibited uses for the cards, such as cash advances, bank checks, traveler’s checks and electronic cash transfers — and explicitly state that the credit cards may never be used for personal expenses. You also might bar using the card for purchases of alcohol or other items inconsistent with your organization’s mission and values. Additionally, you may want to prohibit capital purchases, which often need to go through a more layered approval process. Finally, your policy should specify that reimbursement for returns of goods or services must be credited directly to the card account. The employee should receive no cash or refunds directly.

Spending limits should be specified, preapproval required
In addition to restricting the types of purchases, your policy should set a spending limit. Or you can rely on the specific limit set with the issuer for each card if that limit is in sync with the user’s needs. Do you know you can make more than one payment per month on a credit card? If you must use corporate credit cards, low credit limits are amongst your best tools to limit exposure to fraud. Many nonprofits require all employees to seek preapproval (usually in writing) prior to incurring any credit card charge as a proper internal control. Clearly state in your policy that unauthorized credit card purchases and charges without appropriate documentation are the responsibility of the employee, including any related late fees or interest.

Documentation and statement reconciliation are key
Employees must provide documentation — usually the original itemized receipt — to support all charges. For meal purchases, require employees to provide the names of everyone in attendance and a description of the meal’s business purpose to comply with IRS regulations. Request that all original receipts be submitted to the accounting department in an organized manner, and provide users with a standardized format to expedite processing by requiring department coding and descriptions of each charge. Supervisors should indicate their review and approval of the charges by a signature and date on the receipt or on the required form. Your accounting department should reconcile monthly credit card statements, and the statements should be reviewed by an executive or board member.

Enforcement should be mentioned
A policy without an enforcement mechanism is simply a piece of paper. Your policy should state that violations will result in disciplinary action, up to and including termination of employment and, where appropriate, criminal prosecution. Once you communicate your credit card policy, require the employee to sign an acknowledgment stating that he or she has read and understands the policy and procedures governing credit card use before receiving the card.

The right steps
Credit card use is sometimes a convenient way to handle expenses, particularly for event planning and travel. So if your not-for-profit permits credit card use, make sure that you have controls in place to deter and guard against misuse. Also implement similar controls for debit and purchase card use. Our best advice is:  Don’t go it alone. Ciuni & Panichi, Inc. has a team dedicated to working with not-for-profit organizations. The team provides accounting and 990 preparation as well as management advisory services. Additionally the firm provides consulting services on fundraising strategies, board and volunteer engagement, and marketing. Contact Mike Klein, CPA, Partner, at mklein@cp-advisors.com or 216-831-7171 to learn more.

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