Your company probably has a contingency plan for such potential calamities as fires and natural disasters. But what about a fraud contingency plan? Even if you don’t believe that one of your trusted employees would ever steal from you, it pays to be prepared. A comprehensive fraud contingency plan can help facilitate an investigation and limit financial losses.
Imagine the possibilities
No contingency plan can cover every possibility, but yours should be as wide-ranging as possible. Work with your senior management team and financial advisor to devise as many fraud scenarios as you can dream up. Consider how your internal controls could be breached — whether the perpetrator is a relatively new hire, an experienced department manager, a high-ranking executive or an outside party such as a vendor.
Next, decide which scenarios are most likely to occur given such factors as your industry and size. For example, retailers are particularly vulnerable to skimming. And small businesses without adequate segregation of duties may be at greater risk for theft in accounts payable. Also identify the schemes that would be most damaging to your business. Consider this from both a financial and a public relations standpoint.
Put people to work
As you write your plan, assign responsibilities to specific individuals. When fraud is suspected, one person should lead the investigation and coordinate with staff and any third-party investigators. Put other employees to work where they can be most effective. For example, your IT manager may be tasked with preventing loss of electronic records and your head of human resources may be responsible for maintaining employee morale.
You’ll also want to define the objectives of any fraud investigation. Some companies want only to fire the person responsible, mitigate the damage and keep news of the incident from leaking. Others may want to seek prosecution of offenders as examples to others or to recover stolen funds. Your fraud contingency plan should include information on which employees will work with law enforcement and how they will do so.
Communicate inside and out
Employee communications are particularly important during a fraud investigation. Staff members who don’t know what’s going on will speculate. Although you should consult legal and financial advisors before releasing any information, aim to be as honest with your employees as you can. It’s equally important to make your response visible so that employees know you take fraud seriously.
Also designate someone to manage external communications. This person should be prepared to deflect criticism and defend your company’s stability, as well as control the flow of information to the outside world.
After you’ve created and implemented your fraud contingency plan, review and update it regularly to reflect business and personnel changes. Contact us for help making your plan at 205-345-9898.
© 2018 Covenant CPA
For several years now, cloud computing has been touted as the perfect way for companies large and small to meet their software and data storage needs. But, when it comes to choosing and deploying a solution, one size doesn’t fit all.
Many businesses have found it difficult to fully commit to the cloud for a variety of reasons — including complexity of choices and security concerns. If your company has struggled to make a decision in this area, a hybrid cloud might provide the answer.
Public vs. private
The “cloud” in cloud computing is generally categorized as public or private. A public cloud — such as Amazon Web Services, Google Cloud or Microsoft Azure — is shared by many users. Private clouds, meanwhile, are created for and restricted to one business or individual.
Not surprisingly, public clouds generally are considered less secure than private ones. Public clouds also require Internet access to use whatever is stored on them. A private cloud may be accessible via a company’s local network.
Hybrid computing, as the name suggests, combines public and private clouds. The clouds remain separate and distinct, but data and applications can be shared between them. This approach offers several potential advantages, including:
Scalability. For less sensitive data, public clouds give businesses access to enormous storage capabilities. As your needs expand or shrink — whether temporarily or for the long term — you can easily adjust the size of a public cloud without incurring significant costs for additional on-site or remote private servers.
Security. When it comes to more sensitive data, you can use a private cloud to avoid the vulnerabilities associated with publicly available options. For even greater security, procure multiple private clouds — this way, if one is breached, your company won’t lose access or suffer damage to all of its data.
Accessibility. Public clouds generally are easier for remote workers to access than private clouds. So, your business could use these for productivity-related apps while confidential data is stored on a private cloud.
Risks and costs
Using a blended computer infrastructure like this isn’t without risks and costs. For example, it requires more sophisticated technological expertise to manage and support compared to a straight public cloud approach. You’ll likely have to invest more dollars in procuring multiple public and private cloud solutions, as well as in the IT talent to maintain and support the infrastructure.
Overall, though, many businesses that have been reluctant to solely rely on either a public or private cloud may find that hybrid cloud computing brings the best of both worlds. Our firm can help you assess the financial considerations involved. Call us today at 205-345-9898.
© 2018 Covenant CPA
Your estate plan shouldn’t be a static document. It needs to change as your life changes. Year end is the perfect time to check whether any life events have taken place in the past 12 months or so that affect your estate plan.
And the plan should be reviewed periodically anyway to ensure that it still meets your main objectives and is up to date.
When revisions might be needed
What life events might require you to update or modify estate planning documents? The following list isn’t all-inclusive by any means, but it can give you a good idea of when revisions may be needed:
- Your marriage, divorce or remarriage,
- The birth or adoption of a child, grandchild or great-grandchild,
- The death of a spouse or another family member,
- The illness or disability of you, your spouse or another family member,
- A child or grandchild reaching the age of majority,
- Sizable changes in the value of assets you own,
- The sale or purchase of a principal residence or second home,
- Your retirement or retirement of your spouse,
- Receipt of a large gift or inheritance, and
- Sizable changes in the value of assets you own.
It’s also important to review your estate plan when there’ve been changes in federal or state income tax or estate tax laws, such as under the Tax Cuts and Jobs Act, which was signed into law last December.
Will and powers of attorney
As part of your estate plan review, closely examine your will, powers of attorney and health care directives.
If you have minor children, your will should designate a guardian to care for them should you die prematurely, as well as make certain other provisions, such as creating trusts to benefit your children until they reach the age of majority, or perhaps even longer.
Your durable power of attorney authorizes someone to handle your financial affairs if you’re disabled or otherwise unable to act. Likewise, a medical durable power of attorney authorizes someone to handle your medical decision making if you’re disabled or unable to act. The powers of attorney expire upon your death.
Typically, these powers of attorney are coordinated with a living will and other health care directives. A living will spells out your wishes concerning life-sustaining measures in the event of a terminal illness. It says what means should be used, withheld or withdrawn.
Changes in your family or your personal circumstances might cause you to want to change beneficiaries, guardians or power of attorney agents you’ve previously named.
Revise as needed
The end of the year is a natural time to reflect on the past year and to review and revise your estate plan — especially if you’ve experienced major life changes. We can help determine if any revisions are needed. Call us today at 205-345-9898.
© 2018 Covenant CPA
If you’re an executive or other key employee, your employer may offer you a nonqualified deferred compensation (NQDC) plan. As the name suggests, NQDC plans pay employees in the future for services currently performed. The plans allow deferral of the income tax associated with the compensation.
But to receive this attractive tax treatment, NQDC plans must meet many requirements. One is that employees must make the deferral election before the year they perform the services for which the compensation is earned. So, if you wish to defer part of your 2019 compensation, you generally must make the election by the end of 2018.
NQDC plans vs. qualified plans
NQDC plans differ from qualified plans, such as 401(k)s, in that:
- NQDC plans can favor highly compensated employees,
- Although your income tax liability can be deferred, your employer can’t deduct the NQDC until you recognize it as income, and
- Any NQDC plan funding isn’t protected from your employer’s creditors.
While some rules are looser for NQDC plans, there are also many rules that apply to them that don’t apply to qualified plans.
2 more NQDC rules
In addition to the requirement that deferral elections be made before the start of the year, there are two other important NQDC rules to be aware of:
1. Distributions. Benefits must be paid on a specified date, according to a fixed payment schedule or after the occurrence of a specified event — such as death, disability, separation from service, change in ownership or control of the employer, or an unforeseeable emergency.
2. Elections to make certain changes. The timing of benefits can be delayed but not accelerated. Elections to change the timing or form of a payment must be made at least 12 months in advance. Also, new payment dates must be at least five years after the date the payment would otherwise have been made.
Be aware that the penalties for noncompliance with NQDC rules can be severe: You can be taxed on plan benefits at the time of vesting, and a 20% penalty and interest charges also may apply. So if you’re receiving NQDC, check with your employer to make sure it’s addressing any compliance issues.
No deferral of employment tax
Another important NQDC tax issue is that employment taxes are generally due when services are performed or when there’s no longer a substantial risk of forfeiture, whichever is later. This is true even though the compensation isn’t actually paid or recognized for income tax purposes until later years.
So your employer may withhold your portion of the tax from your salary or ask you to write a check for the liability. Or your employer might pay your portion, in which case you’ll have additional taxable income.
Questions about NQDC — or other executive comp, such as incentive stock options or restricted stock? Contact us. We can answer them and help you determine what, if any, steps you need to take before year end to defer taxes and avoid interest and penalties. Call us at 205-345-9898.
© 2018 Covenant CPA
The Tax Cuts and Jobs Act (TCJA) has enhanced two depreciation-related breaks that are popular year-end tax planning tools for businesses. To take advantage of these breaks, you must purchase qualifying assets and place them in service by the end of the tax year. That means there’s still time to reduce your 2018 tax liability with these breaks, but you need to act soon.
Section 179 expensing
Sec. 179 expensing is valuable because it allows businesses to deduct up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. Sec. 179 expensing can be used for assets such as equipment, furniture and software. Beginning in 2018, the TCJA expanded the list of qualifying assets to include qualified improvement property, certain property used primarily to furnish lodging and the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
The maximum Sec. 179 deduction for 2018 is $1 million, up from $510,000 for 2017. The deduction begins to phase out dollar-for-dollar for 2018 when total asset acquisitions for the tax year exceed $2.5 million, up from $2.03 million for 2017.
100% bonus depreciation
For qualified assets that your business places in service in 2018, the TCJA allows you to claim 100% first-year bonus depreciation • compared to 50% in 2017. This break is available when buying computer systems, software, machinery, equipment and office furniture. The TCJA has expanded eligible assets to include used assets; previously, only new assets were eligible.
However, due to a TCJA drafting error, qualified improvement property will be eligible only if a technical correction is issued. Also be aware that, under the TCJA, certain businesses aren’t eligible for bonus depreciation in 2018, such as real estate businesses that elect to deduct 100% of their business interest and auto dealerships with floor plan financing (if the dealership has average annual gross receipts of more than $25 million for the three previous tax years).
Traditional, powerful strategy
Keep in mind that Sec. 179 expensing and bonus depreciation can also be used for business vehicles. So purchasing vehicles before year end could reduce your 2018 tax liability. But, depending on the type of vehicle, additional limits may apply.
Investing in business assets is a traditional and powerful year-end tax planning strategy, and it might make even more sense in 2018 because of the TCJA enhancements to Sec. 179 expensing and bonus depreciation. If you have questions about these breaks or other ways to maximize your depreciation deductions, please contact us at 205-345-9898.
© 2018 Covenant CPA
Many retail businesses implement careful controls over the use of their cash registers. For this reason, register-disbursement schemes are among the least costly types of cash frauds. Without such controls, however, businesses risk significant losses. Here’s how to make sure your company is doing everything it can to prevent this type of fraud.
Issuing fictitious refunds and falsely voiding sales are a couple of common ways employees steal money. Both methods involve paying out cash without a corresponding return of inventory and usually result in abnormally high inventory shrinkage levels.
But high shrinkage is just one way to spot cash register disbursement fraud. Other red flags include:
- Disparities between gross and net sales,
- Decreasing net sales (increasing sales returns and allowances),
- Decreasing cash sales relative to credit card sales,
- Forged or missing void or refund documents,
- Increasing void or refund transactions by individual employees, and
- Multiple refunds or voids just under the review limit.
Any of these warning signs may warrant investigation. A fraud expert can help you determine whether discrepancies have innocent explanations or indicate a more serious problem.
Your business can prevent cash register theft by taking preventive measures. These include having written ethics policies and providing employees with antifraud training. In many cases of register theft, several employees are aware that it’s happening. So be sure to provide a confidential hotline or other means for employees to report unethical behavior without fear of reprisal.
Your fraud detection and deterrence program should also include training internal auditors to regularly perform horizontal analysis of income statements. Horizontal analysis — which compares financial statement line items from one period to the next — can identify suspicious trends, such as an increasing number of cash refunds.
Taking these simple steps can prevent significant losses. But signs of extensive cash register theft usually indicate bigger issues. Contact us. We can help you nip theft in the bud by strengthening internal controls and, when necessary, assemble evidence for criminal prosecutions and civil lawsuits. Call us today at 205-345-9898.
© 2018 Covenant CPA
If your estate includes forms of intellectual property (IP), such as patents and copyrights, it’s important to know how to address them in your estate plan. Although these intangible assets can have great value, in many ways they’re treated differently from other property types.
2 estate planning questions
For estate planning purposes, IP raises two important questions: 1) What’s it worth? and 2) How should it be transferred? Valuing IP is a complex process, so it’s best to obtain an appraisal from an experienced professional.
After you know the IP’s value, it’s time to decide whether to transfer the IP to family members, colleagues, charities or others through lifetime gifts or through bequests after your death. The gift and estate tax consequences will affect your decision, but also consider your income needs, as well as who’s in the best position to monitor your IP rights and take advantage of their benefits.
If you’ll continue to depend on the IP for your livelihood, for example, hold on to it at least until you’re ready to retire or you no longer need the income. You also might want to retain ownership if you feel that your children or other transferees lack the desire or wherewithal to exploit its economic potential and protect it against infringers.
Achieving your objectives
Whichever strategy you choose, it’s important to plan the transaction carefully to ensure that your objectives are achieved. There’s a common misconception that, when you transfer ownership of the tangible medium on which IP is recorded, you also transfer the IP rights. But IP rights are separate from the work itself and are retained by the creator — even if the work is sold or given away.
Suppose, for example, that you leave to your child a film, painting or written manuscript. Unless your estate plan specifically transfers the copyright to your child as well, the copyright may pass as part of your residuary estate and end up in the hands of someone else.
Revise your plan accordingly
If you own patents or copyrights, you probably have great interest in who’ll take possession of your work after you’re gone. Addressing IP in your estate plan can give you peace of mind that your wishes will be carried out, but the law surrounding such property can be complex. Discuss your options with us by calling 205-345-9898.
© 2018 Covenant CPA
Business owners are constantly bombarded with terminology and buzzwords. Although you probably feel a need to keep up with the latest trends, you also may find that many of these ideas induce more anxiety than relief. One example is change management.
This term is used to describe the philosophies and processes an organization uses to manage change. Putting change management into practice in your company may seem scary. What is our philosophy toward change? How should we implement change for best results? Can’t we just avoid all this and let the chips fall where they may?
About that last question — yes, you could. But businesses that proactively manage change tend to suffer far fewer negative consequences from business transformations large and small. Here are some ways to implement change management slowly and, in doing so, make it a little less scary.
Set the tone
When a company creates a positive culture, change is easier. Engaged, well-supported employees feel connected to your mission and are more likely to buy in to transformative ideas. So, the best place to start laying the foundation for successful change management is in the HR department.
When hiring, look for candidates who are open to new ideas and flexible in their approaches to a position. As you “on board” new employees, talk about the latest developments at your company and the possibility of future transformation. From there, encourage openness to change in performance reviews.
Strive for solutions
The most obvious time to seek change is when something goes wrong. Unfortunately, this is also when a company can turn on itself. Fingers start pointing and the possibility of positive change begins to drift further and further away as conflicts play out.
Among the core principles of change management is to view every problem as an opportunity to grow. When you’ve formally discussed this concept among your managers and introduced it to your employees, you’ll be in a better position to avoid a destructive reaction to setbacks and, instead, use them to improve your organization.
Change from the top down
It’s not uncommon for business owners to implement change via a “bottom-up” approach. Doing so involves ordering lower-level employees to modify how they do something and then growing frustrated when resistance arises.
For this reason, another important principle of change management is transforming a business from the top down. Every change, no matter how big or small, needs to originate with leadership and then gradually move downward through the organizational chart through effective communication.
As the cliché goes, change is scary — and change management can be even more so. But many of the principles of the concept are likely familiar to you. In fact, your company may already be doing a variety of things to make change management far less daunting. Contact us at 205-345-9898 to discuss this and other business-improvement ideas.
© 2018 Covenant CPA
A tried-and-true year end tax strategy is to make charitable donations. As long as you itemize and your gift qualifies, you can claim a charitable deduction. But did you know that you can enjoy an additional tax benefit if you donate long-term appreciated stock instead of cash?
2 benefits from 1 gift
Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you may be able to enjoy two tax benefits:
- If you itemize deductions, you can claim a charitable deduction equal to the stock’s fair market value, and
- You can avoid the capital gains tax you’d pay if you sold the stock.
Donating appreciated stock can be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.
Stock vs. cash
Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 37% and your long-term capital gains rate is 20%. Let’s also say you itemize deductions.
If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.
By instead donating the stock to charity, you save $5,366 in federal tax ($1,666 in capital gains tax and NIIT plus $3,700 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,700.
Watch your step
First, remember that the Tax Cuts and Jobs Act nearly doubled the standard deduction, to $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly. The charitable deduction will provide a tax benefit only if your total itemized deductions exceed your standard deduction. Because the standard deduction is so much higher, even if you’ve itemized deductions in the past, you might not benefit from doing so for 2018.
Second, beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 60% and 30%, respectively, for cash donations).
Finally, don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.
Minimizing tax and maximizing deductions
For charitably inclined taxpayers who own appreciated stock and who’ll have enough itemized deductions to benefit from itemizing on their 2018 tax returns, donating the stock to charity can be an excellent year-end tax planning strategy. This is especially true if the stock is highly appreciated and you’d like to sell it but are worried about the tax liability. Please contact us with any questions you have about minimizing capital gains tax or maximizing charitable deductions at 205-345-9898.
© 2018 Covenant CPA
With millions of dollars at stake, an overextended real estate developer has a lot to lose if lack of funds causes a project to collapse. To attract investment capital, some developers have been known to resort to financial statement fraud. If you’re considering financing a project, you need to know how to spot such deception.
Ample opportunity to cheat
There are many ways to falsify a financial picture. For projects in the planning phase, a company seeking financing may provide overstated appraisals of the completed property. Or it may fail to mention its inability to secure utility access or approval from local authorities to rezone the property’s intended location.
For projects already under construction, the developer may inflate the percentage of development completed or amount of materials already purchased. Or a developer could neglect to report funds received from previous lenders or investors.
Sweat the small stuff
To avoid shady deals, review project proposals carefully. For example:
Look at supporting documents. In their rush to “improve” financials by manipulating income statements, balance sheets and cash flow statements, some companies may overlook supporting documents such as project-related budgets and forecasts. Compare these to the company’s primary financial statements and, if you find discrepancies, ask for a detailed explanation.
Scrutinize line items. Certain financial statement line items tend to correspond to each other. For example, labor expense and the accounts payable balance should increase at a rate similar to the percentage of construction completed to date. If line items appear out of sync, ask to see the books of original entry such as the accounts payable aging reports or salary expense reports.
Employ analytical techniques. Common size analysis can help you verify the integrity of specific line items. The process converts each item to a percentage of a base number. For example, to analyze wages and benefits expense, you would divide wages and benefits expense by revenue. Once you’ve converted every line item on the income statement to a percentage of revenue, you can compare the percentages within a reporting period and against prior and subsequent reporting periods.
Given the inherent complexity of commercial and residential construction projects, there are plenty of ways for unscrupulous developers to con lenders and investors. Contact us at 205-345-9898. We can help you determine whether a project’s financial statements appear sound.
© 2018 Covenant CPA