Cybersecurity Matters

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Investors, lenders and other stakeholders have been vocal in recent years about pushing companies to provide more information in their financial reports about cybersecurity. Could your company do a better job disclosing cyberrisks and recent hacks?

Most public companies could do better, according to recent testimony during congressional hearings by Jay Clayton, Chairman of the Securities and Exchange Commission (SEC). Here are ways his agency is attempting to “refresh” the disclosure guidance.

Updating the guidance

The SEC doesn’t expect to overhaul its Disclosure Guidance: Topic No. 2, Cybersecurity. Rather, it plans to consider whether important information about cybersecurity should be disclosed to stakeholders within the context of the existing rules. For example, companies may need to beef up their management’s discussion and analysis (MD&A) and footnote disclosures to reflect potential cyberrisks and material financial implications of data breaches.

The current guidance on cybersecurity, which was published in 2011, doesn’t include a specific requirement for companies to disclose computer system intrusions. The SEC’s effort to update the guidance comes amid concerns that more public companies have been experiencing attacks to their computer systems, but their disclosures haven’t been timely or informative enough.

Changes in the works

Regulators in the SEC don’t know whether the update will be issued in the form of staff-level guidance or a regulatory release approved by the SEC’s commissioners. But they’ve decided to address two key areas in the update:

  • Financial reporting controls and procedures that identify and disclose cybersecurity threats in a timely manner, and
  • Corporate strategies and policies regarding cybersecurity prevention, detection, and breach response.

Many companies welcome additional guidance from the SEC, because it can be difficult to determine the appropriate time to disclose a hack into their systems.

On the one hand, companies feel a responsibility to share relevant information openly and honestly with stakeholders. On the other, they don’t want to prematurely disclose information about a breach before they know the extent of the damage or to release inaccurate information that later needs to be revised. Company insiders may also be working with law enforcement, in which case they don’t want to disclose information that could compromise the investigation.

Team approach

Regardless of whether your business is public or private, it’s important to assemble a team of professional advisors — including legal, insurance and financial experts — to identify risk factors and to handle breach response, measure the impact and mitigate potential losses. We can help you provide transparent and timely information to your stakeholders.

© 2018

Businesses Aren’t Immune to Tax Identity Theft

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Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code and the best ways to get valuable data.

How it works

In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes. Business tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes.

For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these “employees” to claim refunds.

The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.

Red flags

There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if:

  • Your business doesn’t receive expected or routine mailings from the IRS,
  • You receive an IRS notice that doesn’t relate to anything your business submitted, that’s about fictitious employees or that’s related to a defunct, closed or dormant business after all account balances have been paid,
  • The IRS rejects an e-filed return or an extension-to-file request, saying it already has a return with that identification number — or the IRS accepts it as an amended return,
  • You receive an IRS letter stating that more than one tax return has been filed in your business’s name, or
  • You receive a notice from the IRS that you have a balance due when you haven’t yet filed a return.

Keep in mind, though, that some of these could be the result of a simple error, such as an inadvertent transposition of numbers. Nevertheless, you should contact the IRS immediately if you receive any notices or letters from the agency that you believe might indicate that someone has fraudulently used your Employer Identification Number.

Prevention tips

Businesses should take steps such as the following to protect their own information as well as that of their employees:

  • Provide training to accounting, human resources, and other employees to educate them on the latest tax fraud schemes and how to spot phishing emails.
  • Use secure methods to send W-2 forms to employees.
  • Implement risk management strategies designed to flag suspicious communications.

Of course, identity theft can go beyond tax identity theft, so be sure to have a comprehensive plan in place to protect the data of your business, your employees and your customers. If you’re concerned your business has become a victim, or you have questions about prevention, please contact us.

© 2018

4 Tips for Creating an Apprenticeship Program

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A shortage of skilled workers is a real concern in some of the nation’s largest industries. If you fear your business could find itself struggling to fill positions, one way to lay the groundwork for a solution is to create an apprenticeship program.

Apprenticeships are paid positions that focus on gradual, step-by-step training aimed at creating fully realized, often certified workers. By creating such a program, you can “stock the waters” with quality employees who are not only proficient in their professions but also invested in their industries. Here are four tips for getting started:

1. Think it through. Discuss your apprenticeship strategy with both your business’s leadership and your rank-and-file employees. Address questions such as:

• What are our biggest hiring challenges for technical jobs that don’t require a college degree?

• Do we already have employees who could participate in an apprenticeship program?

• How will our business change in the future and which skill sets will we most likely lack?
Ideally, your program will focus on the specific types of skilled workers who will be in shortest supply in the years to come.

2. Look for partners. Successful apprenticeship programs often involve collaboration among various partners. These may include:

• Other similar businesses or organizations

• Industry or professional associations

• Labor organizations

• Educational institutions (for example, community colleges)

• Public agencies (such as police and fire departments)
The partner organizations can help you design the apprenticeship, provide some of the educational resources and assist in finding the apprentices themselves.

3. Build the engine. An apprenticeship program is like an engine — it will have many moving parts. To build your engine, start by identifying who will fill the leadership roles within your existing staff. Every program needs a champion (or several). Also, pinpoint who will provide the on-the-job training to each apprentice — these may be people different from those who are leading the program.

From there, anticipate where participants will receive “related instruction.” Most apprenticeship programs involve learning that takes place outside of the job itself, including classroom-based training. In addition, look into how you’ll allocate funds to compensate and reward apprentices as they achieve key milestones.

Last, but not least, target the end game. That is, define the point at which the apprenticeship will be completed and what type of certification might accompany it.

4. Consider registering the program. You can register your apprenticeship program with the U.S. Department of Labor. Doing so will place it within a network of registered apprenticeships that offers access to additional expertise and support. Your graduates will receive a national, industry-recognized credential, while your business may qualify for tax breaks at the state and/or federal level.

The challenge to obtaining federal registration — as well as to creating any effective apprenticeship program — is establishing and adhering to high-quality standards for training, education, and administration. We can help you assess the concept and determine whether it’s financially feasible for your business.

© 2018

2018 Q4 Tax Calendar: Key Deadlines for Businesses and Other Employers

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Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

October 15 

  • If a calendar-year C corporation that filed an automatic six-month extension:
    • File a 2017 income tax return (Form 1120) and pay any tax, interest, and penalties due.
    • Make contributions for 2017 to certain employer-sponsored retirement plans.

October 31

  • Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under “November 13.”)

November 13

  • Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

December 17 

  • If a calendar-year C corporation, pay the fourth installment of 2018 estimated income taxes.

© 2018

How to Trim the Fat From Your Inventory

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Inventory is expensive, and therefore, it needs to be as lean as possible. Here are some smart ways to cut back inventory without compromising revenue and customer service.

Objective inventory counts

Effective inventory management starts with a physical inventory count. Accuracy is essential to know your cost of goods sold — and to identify and remedy discrepancies between your physical count and perpetual inventory records. A CPA can introduce an element of objectivity to the counting process and help minimize errors.

Inventory ratios

The next step is to compare your inventory costs to those of other companies in your industry. Trade associations often publish benchmarks for:

  • Gross margin [(revenue – cost of sales) / revenue],
  • Net profit margin (net income / revenue), and
  • Days in inventory (annual revenue / average inventory × 365 days).

Your company should strive to meet — or beat — industry standards. For a retailer or wholesaler, inventory is simply purchased from the manufacturer. But the inventory account is more complicated for manufacturers and construction firms; it’s a function of raw materials, labor, and overhead costs.

The composition of your company’s cost of goods will guide you on where to cut. In a tight labor market, it’s hard to reduce labor costs. But it may be possible to renegotiate prices with suppliers.

And don’t forget the carrying costs of inventory, such as storage, insurance, obsolescence, and pilferage. You can also improve margins by negotiating a net lease for your warehouse, installing anti-theft devices or opting for less expensive insurance coverage.

Product mix

To cut your days-in-inventory ratio, compute product-by-product margins. Stock more products with high margins and high demand — and less of everything else. Whenever possible, return excessive supplies of slow-moving materials or products to your suppliers.

Product mix can be a delicate balance, however. It should be sufficiently broad and in tune with consumer needs. Before cutting back on inventory, you might need to negotiate speedier delivery from suppliers or give suppliers access to your perpetual inventory system. These precautionary measures can help prevent lost sales due to lean inventory.

Reorder point

Another important metric that’s not available from benchmarking studies is the reorder point. That’s the quantity level that triggers a new order. Reorder point is a function of your volume and the purchase order lead time. If your suppliers have access to your inventory system, they can automatically ship additional stock once inventory levels reach the reorder point.

Take inventory of your inventory

Often management is so focused on sales, HR issues and product innovation that they lose control over inventory. Contact us for a reality check. We can provide industry benchmarks and calculate ratios to help minimize the guesswork in managing your inventory.

© 2018

Supervisors Promoted From Within Call for Special Care

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When a supervisory position opens up, your immediate reaction as an employer may be to post a job opening to the general public. But don’t underestimate the value, efficiency and cost savings of an internal hire from your non-manager ranks.

Although promoting from within isn’t always feasible, when it is, you’ll likely be boosting that employee’s loyalty, eliminating (or greatly shortening) the onboarding process, and saving dollars on hiring costs. But, if you take this step, be prepared. These new supervisors typically need special care to avoid rocky transitions.

Cover the basics

Don’t make the mistake of promoting an employee to supervisor and then immediately 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 bumpy road, what would have made it smoother? Basic subjects that should be part of a supervisor boot camp include:

• Employee goal-setting

• Performance assessment

• Performance management

• Conflict resolution
Also, leadership training will be needed to supplement the nuts-and-bolts topics.

Assign a mentor

In devising a training program, you can’t anticipate every stumbling block a new supervisor will face. So, it’s important to give that person a mentor who, ideally, 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 take place. These check-ins don’t need to go on forever; three to six months may be all it takes.

Prepare for the worst

Unless the new supervisor will be moving to another department, prepare him or her for the challenges associated with becoming the boss of former co-workers. Just to name a few:

• Resentment from employees who believe they should have gotten the promotion instead of the person you chose,• Efforts by former co-workers to exploit friendship with their new boss by asking for or expecting special treatment, and• Difficulties the new supervisor may have in delivering honest but critical performance appraisals to former co-workers.
It will be tempting for new supervisors to downplay their authority over former co-workers. But they need to understand going in that there’s no getting around the fundamental change in the relationship. That change will probably require a cutback in purely social interaction with their former co-workers.

Give it a shot

The good news is that, if you have chosen wisely, a new supervisor will be able to surmount these hurdles. And the potential benefits can be striking. Our firm can provide more information and other budget-smart hiring ideas.

© 2018

Keep it SIMPLE: A Tax-Advantaged Retirement Plan Solution for Small Businesses

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If your small business doesn’t offer its employees a retirement plan, you may want to consider a SIMPLE IRA. Offering a retirement plan can provide your business with valuable tax deductions and help you attract and retain employees. For a variety of reasons, a SIMPLE IRA can be a particularly appealing option for small businesses. The deadline for setting one up for this year is October 1, 2018.

The basics

SIMPLE stands for “savings incentive match plan for employees.” As the name implies, these plans are simple to set up and administer. Unlike 401(k) plans, SIMPLE IRAs don’t require annual filings or discrimination testing.

SIMPLE IRAs are available to businesses with 100 or fewer employees. Employers must contribute and employees have the option to contribute. The contributions are pretax, and accounts can grow tax-deferred like a traditional IRA or 401(k) plan, with distributions taxed when taken in retirement.

As the employer, you can choose from two contribution options:

1. Make a “nonelective” contribution equal to 2% of compensation for all eligible employees. You must make the contribution regardless of whether the employee contributes. This applies to compensation up to the annual limit of $275,000 for 2018 (annually adjusted for inflation).

2. Match employee contributions up to 3% of compensation. Here, you contribute only if the employee contributes. This isn’t subject to the annual compensation limit.

Employees are immediately 100% vested in all SIMPLE IRA contributions.

Employee contribution limits

Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE IRA.

SIMPLE IRAs offer greater income deferral opportunities than ordinary IRAs, but lower limits than 401(k)s. An employee may contribute up to $12,500 to a SIMPLE IRA in 2018. Employees age 50 or older can also make a catch-up contribution of up to $3,000. This compares to $5,500 and $1,000, respectively, for ordinary IRAs, and to $18,500 and $6,000 for 401(k)s. (Some or all of these limits may increase for 2019 under annual cost-of-living adjustments.)

You’ve got options

A SIMPLE IRA might be a good choice for your small business, but it isn’t the only option. The more-complex 401(k) plan we’ve already mentioned is one alternative. Some others are a Simplified Employee Pension (SEP) and a defined-benefit pension plan. These two plans don’t allow employee contributions and have other pluses and minuses. Contact us to learn more about a SIMPLE IRA or to hear about other retirement plan alternatives for your business.

© 2018

Behavioral Job Interviews Offer a Glimpse of What Could Be

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Once an employer identifies a prospect for an open position and sets up an interview, another great challenge arises: How do you effectively use the interview to determine whether this person is right for your organization?

One way is behavioral interviewing — a technique in which you frame your questions to candidates to elicit real-world stories from previous work experience. The answers your interviewees give can offer a glimpse of what could be.

Examples to consider

It’s important to structure your questions so that the candidate can’t reply with only a “yes” or “no” answer. In some cases, your “questions” might not literally be questions.

For example, if you’re looking for a customer service rep, you could say, “Tell me about a time you’ve had to handle a dissatisfied customer.” Look for detailed responses that appear honest and heartfelt.

Or let’s say the open position is for a manager or executive. You might ask something along the lines of, “Talk about a situation in which you were asked to do something or tackle a strategic objective that tested your personal values. How did you react? What was the ultimate result?” Listen for how the candidate describes his or her value system and what steps he or she took to resolve the situation.

Best practices

When coming up with behavioral interview questions, begin with the job description. (If it hasn’t been updated in a while, you may want to do that first.) Be sure the queries you come up with are relevant to the duties and skills listed in the description, as well as the challenges the candidate will face if hired and the culture of your organization. To keep the interview from going too long, devise, say, three to five questions that will offer the most insight.

Instruct your managers to use identical language and present the questions in the same order to interviewees. Consistency is key when trying to weigh applicants’ responses against one another.

More revealing

Behavioral interviews may take a little more preparation than a more ad hoc, impromptu approach. But many employers believe these types of questions reveal much more about how an employee will perform when on the job. Our firm can provide more information and ideas.

© 2018

Assessing the S Corp

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The S corporation business structure offers many advantages, including limited liability for owners and no double taxation (at least at the federal level). But not all businesses are eligible – and, with the new 21% flat income tax rate that now applies to C corporations, S corps may not be quite as attractive as they once were.

Tax comparison

The primary reason for electing S status is the combination of the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when distributed to the shareholder. Instead, S corp tax items pass through to the shareholders’ personal returns and the shareholders pay tax at their individual income tax rates.

But now that the C corp rate is only 21% and the top rate on qualified dividends remains at 20%, while the top individual rate is 37%, double taxation might be less of a concern. On the other hand, S corp owners may be able to take advantage of the new qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.

You have to run the numbers with your tax advisor, factoring in state taxes, too, to determine which structure will be the most tax efficient for you and your business.

S Eligibility Requirements

If S corp status makes tax sense for your business, you need to make sure you qualify – and stay qualified. To be eligible to elect to be an S corp or to convert to S status, your business must:

  • Be a domestic corporation and have only one class of stock,
  • Have no more than 100 shareholders, and
  • Have only “allowable” shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders.

In addition, certain businesses are ineligible, such as insurance companies.

Reasonable compensation

Another important consideration when electing S status is shareholder compensation. The IRS is on the lookout for S corps that pay shareholder-employees an unreasonably low salary to avoid paying Social Security and Medicare taxes and then make distributions that aren’t subject to payroll taxes.

Compensation paid to a shareholder should be reasonable considering what a nonowner would be paid for a comparable position. If a shareholder’s compensation doesn’t reflect the fair market value of the services he or she provides, the IRS may reclassify a portion of distributions as unpaid wages. The company will then owe payroll taxes, interest and penalties on the reclassified wages.

Pros and cons

S corp status isn’t the best option for every business. To ensure that you’ve considered all the pros and cons, contact us. Assessing the tax differences can be tricky — especially with the tax law changes going into effect this year.

© 2018

4 ways to Encourage Use of an Employee Assistance Program

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Unfortunately, it’s not uncommon for good employees to battle personal problems, such as substance dependence, financial or legal woes, or mental health issues. These struggles can negatively affect their productivity and the working environment around them.

Employers can help by offering an employee assistance program (EAP). An EAP helps assist at-risk employees in finding the professional help they need. An employee who enrolls in the EAP may, for example, immediately be put in touch with a counselor or social worker.

A common problem faced by many employers who establish an EAP is lack of participation. Whether because of lack of awareness of the program or the stigmas attached to certain personal issues, employees often don’t actively pursue enrollment. Here are four ways to encourage use:

1. Put it in writing — everywhere. Update educational materials, both electronic and print, to highlight EAP services and the issues they address. Use bold graphics and clear, easy-to-read text. Don’t limit a description of your EAP to your employee handbook. Mention it regularly in other employee communications, such as benefits materials and your company newsletter.

2. Offer electronic entry points. Maximize the use of online technology so employees can discreetly gather information and understanding of both what your EAP offers and their personal challenges. You might, for example, add an interactive self-assessment tool to your website that helps users gauge their level of stress, other mood issues, and excessive use of alcohol or other drugs.

3. Go public. To the extent that it’s appropriate and feasible, open up topics to face-to-face discussion. Doing so can help minimize the shame and misunderstandings that may accompany certain forms of struggle. For example, offer brown bag lunch-’n-learn events with presentations on topics such as time management, overcoming financial challenges and stress management.

4. Be comprehensive. Put all your work-life balance initiatives under the EAP umbrella. Many employees are more comfortable starting slow rather than leaping immediately into a behavioral health-related service. Use work-life balance as an introductory step, where appropriate counseling on depression, anxiety and other issues may eventually come into play.

These are just a few ways to take the mystery out of your EAP and make it more effective. Doing so can help you retain good employees and maximize productivity. Let us know if you’d like more information or other ideas.

© 2018