Author Archive: Justine O'Sullivan

M&A transactions: Avoid surprises from the IRS

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If you’re considering buying or selling a business — or you’re in the process of a merger or acquisition — it’s important that both parties report the transaction to the IRS in the same way. Otherwise, you may increase your chances of being audited.

If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction.

What’s reported?

When buying business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:

  • Equipment,
  • Buildings and improvements,
  • Software,
  • Furniture, fixtures and
  • Intangibles (including customer lists, licenses, patents, copyrights and goodwill).

In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.

IRS scrutiny

The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the IRS finds that different allocations are used, auditors may dig deeper and the investigation could expand beyond just the transaction. So, it’s in your best interest to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.

The tax implications of buying or selling a business are complicated. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way to avoid unwanted attention. To lock in the best postacquisition results, consult with us before finalizing any transaction. Contact us for more at 205-345-9898 and [email protected].

© 2019 CovenantCPA

Odd word, cool concept: Gamification for businesses

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“Gamification.” It’s perhaps an odd word, but it’s a cool concept that’s become popular among many types of businesses. In its most general sense, the term refers to integrating characteristics of game-playing into business-related tasks to excite and engage the people involved.

Might it have a place in your company?

Internal focus

Sometimes gamification refers to customer interactions. For example, a retailer might award customers points for purchases that they can collect and use toward discounts. Or a company might offer product-related games or contests on its website to generate traffic and visitor engagement.

But, these days, many businesses are also using gamification internally. That is, they’re using it to:

  • Engage employees in training processes,
  • Promote friendly competition and camaraderie among employees, and
  • Ease the recognition and measurement of progress toward shared goals.

It’s not hard to see how creating positive experiences in these areas might improve the morale and productivity of any workplace. As a training tool, games can help employees learn more quickly and easily. Moreover, with the rise of social media, many workers are comfortable sharing with others in a competitive setting. And, from the employer’s perspective, gamification opens all kinds of data-gathering possibilities to track training initiatives and measure employee performance.

Specific applications

In most businesses, employee training is a big opportunity to reap the benefits of gamification. As many industries look to attract Generation Z — the next big demographic to enter the workforce — game-based learning makes perfect sense for individuals who grew up both competing in various electronic ways on their mobile devices and interacting on social media.

For example, safety and sensitivity training are areas that demand constant reinforcement. But it’s also common for workers to tune out these topics. Framing reminders, updates and exercises within game scenarios, in which participants might win or lose ground by following proper or improper work practices, is one way to liven up the process.

Game-style simulations can also help prepare employees for management or leadership roles. Online training simulations, set up as games, can test participants’ decision-making and problem-solving skills — and allow them to see the potential consequences of various actions before granting them such responsibilities in the real-word situations. You might also consider rewards-based games for managers or project leaders based on meeting schedules, staying within budgets, or preventing accidents or other costly mistakes.

Intended effects

Naturally, gamification has its risks. You don’t want to “force fun” or frustrate employees with unreasonably difficult games. Doing so could lower morale, waste time and money, and undercut training effectiveness.

To mitigate the downsides, involve management and employees in gamification initiatives to ensure you’re on the right track. Also consider involving a professional consultant to implement established and tested “gamified” exercises, tasks and contests. We can help you identify and assess the potential costs involved and keep those costs in line. Contact us at 205-345-9898 and [email protected] for assistance.

© 2019 CovenantCPA

You may have to pay tax on Social Security benefits

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During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. And when you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed.

If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If you are taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.)

Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates.

Calculate provisional income

To determine how much of your benefits are taxed, you must calculate your provisional income. It starts with your adjusted gross income on your tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your provisional income. Now apply the following rules:

  • If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed.
  • If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50% of your Social Security benefits as income. For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income.
  • If your provisional income is more than $44,000, and you file jointly, you must report up to 85% of your Social Security benefits as income on Form 1040. For single taxpayers, if your provisional income is more than $34,000, the general rule is that you must report up to 85% of your Social Security benefits as income.

Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.

For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result.

Avoid a large tax bill

If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax withheld from the payments by filing a Form W-4V with the IRS. Otherwise, you may have to make estimated tax payments.

Contact us to help you with the exact calculations on whether your Social Security will be taxed. We can also help you with tax planning to keep your taxes as low as possible during retirement. 205-345-9898 and [email protected].

© 2019 CovenantCPA

Bartering: A taxable transaction even if your business exchanges no cash

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Small businesses may find it beneficial to barter for goods and services instead of paying cash for them. If your business engages in bartering, be aware that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

Income is also realized if services are exchanged for property. For example, if a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory.

Barter clubs

Many business owners join barter clubs that facilitate barter exchanges. In general, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

Bartering is generally taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,000 credit units one year, and that each unit is redeemable for $1 in goods and services. In that year, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income at a 24% rate.

Required forms

By January 31 of each year, the barter club will send you a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services, and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

If you don’t contract with a barter exchange but you do trade services, you don’t file Form 1099-B. But you may have to file a form 1099-MISC.

Many benefits

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. Contact us for more information at 205-345-9898 and [email protected].

© 2019 CovenantCPA

Fraud guides may help criminals hack your data

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Fraud experts have long known that “dark web” sites provide information, support and illicit goods to hackers and other criminals. But security company Terbium Labs recently published a report analyzing a treasure trove of fraud guides for sale on shady sites. These “educational” publications provide crooks with detailed instructions on exploiting security weaknesses to hack networks, obtain financial information and steal identities.

Effective tips

Although Terbium found that most of the guides it downloaded were relatively useless, there were still plenty that provided effective tips on compromising networks and disrupting antifraud procedures. The guides cover everything from account takeovers to phishing to counterfeit documents to stolen credit cards. Often, they discuss specific companies. For example, a “Bank Drop Creation Guide” provides detailed instructions on how to create a fraudulent bank account at nine specific financial institutions.

Some of the most dangerous information contained in these fraud guides tells would-be hackers how to use social engineering to breach companies’ security. Using the above example, a guide might contain a script crooks can follow to persuade a bank employee that a fraudulent account is legitimate.

Prized data

Terbium’s analysis of the guides found that certain types of personal information were particularly prized by thieves. Email addresses, which enable phishers to personalize their come-ons and track down a target’s full name and social media accounts, led this list. Passwords, not surprisingly, were a close second. User names, Social Security numbers and dates of birth were also highly sought after.

Among financial data, hackers prefer payment card information — though they show a clear preference for credit cards over debit cards. Card numbers are considered easy to obtain (millions of card numbers are available on the dark web), so the guides provide tips on maximizing profits before fraudulent purchases trigger alarms with the victim or card company.

What can you do?

Given the number of fraud perpetrators and wealth of information available to help them commit crimes, you may wonder how you can protect your personal financial or business’s customer data.

Individuals can reduce their risk by ignoring suspicious emails and disclosing financial information only on sites that provide SSL certificate authentication and encryption. Also, they should share even innocuous-seeming information, such as email addresses, only when necessary. Businesses need to work with experts to build a data security system that addresses their specific risks — and to update it religiously. Also, be sure to implement policies and procedures that prevent employees from inadvertently assisting fraud perpetrators. Contact us for help creating internal controls that will reduce your company’s fraud vulnerabilities at 205-345-9898 and [email protected].

© 2019 CovenantCPA

4 negative outcomes of jointly owning property with a family member

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A common estate planning mistake that people make is to own property jointly with an adult child or other family member. True, adding a loved one to the title of your home, bank account or other property can be a simple technique for leaving property to that person without the need for probate. But any convenience gained is usually outweighed by a variety of negative consequences. Here are four:

1. Higher gift and estate taxes. Depending on the size of your estate, joint ownership may trigger gift and estate taxes. When you add a family member’s name to an asset’s title as joint owner, for example, it’s considered a taxable gift of half the asset’s value. And your interest in the asset — including any future appreciation — remains in your taxable estate. These taxes usually can be minimized or even eliminated by transferring the asset to an irrevocable trust.

2. Higher income taxes. Generally, property transferred at death receives a stepped-up basis, allowing your heirs to sell it without incurring capital gains tax liability. But if you add an heir to the property’s title as joint owner, only your interest in the property will enjoy this benefit. Any appreciation in the value of your heir’s interests between the date he or she is added to the title and the date of your death is subject to capital gains tax.

3. Exposure to creditors’ claims. Unlike property transferred to a properly designed trust, jointly held property may be exposed to claims by the joint owner’s creditors (and also claims from a former spouse).

4. Loss of control. A joint owner has the right to sell his or her interest to an outside buyer without your consent and the buyer may be able to go to court to force a sale of the property. In addition, when you die, the entire property will go to the surviving owner(s), regardless of the terms of your will or other estate planning documents.

If you currently jointly own property with a family member, contact us at 205-345-9898 and [email protected]. We can suggest alternative estate planning techniques to ease any gift, estate and income tax liability, and limit your exposure to creditors’ claims.

© 2019 CovenantCPA

Grading the performance of your company’s retirement plan

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Imagine giving your company’s retirement plan a report card. Would it earn straight A’s in preparing your participants for their golden years? Or is it more of a C student who could really use some extra help after school? Benchmarking can tell you.

Mind the basics

More than likely, you already use certain criteria to benchmark your plan’s performance using traditional measures such as:

  • Fund investment performance relative to a peer group,
  • Breadth of fund options,
  • Benchmarked fees, and
  • Participation rates and average deferral rates (including matching contributions).

These measures are all critical, but they’re only the beginning of the story. Add to that list helpful administrative features and functionality — including auto-enrollment and auto-escalation provisions, investment education, retirement planning, and forecasting tools. In general, the more, the better.

Don’t overlook useful data

A sometimes-overlooked plan metric is average account balance size. This matters for two reasons. First, it provides a first-pass look at whether participants are accumulating meaningful sums in their accounts. Naturally, you’ll need to look at that number in light of the age of your workforce and how long your plan has been in existence. Second, it affects recordkeeping fees — higher average account values generally translate into lower per-participant fees.

Knowing your plan asset growth rate is also helpful. Unless you have an older workforce and participants are retiring and rolling their fund balances into IRAs, look for a healthy overall asset growth rate, which incorporates both contribution rates and investment returns.

What’s a healthy rate? That’s a subjective assessment. You’ll need to examine it within the context of current financial markets. A plan with assets that shrank during the financial crisis about a decade ago could hardly be blamed for that pattern. Overall, however, you might hope to see annual asset growth of roughly 10%.

Keep participants on track

Ultimately, however, the success of a retirement plan isn’t measured by any one element, but by aggregating multiple data points to derive an “on track to retire” score. That is, how many of your plan participants have account values whose size and growth rate are sufficient to result in a realistic preretirement income replacement ratio, such as 85% or more?

It might not be possible to determine that number with precision. Such calculations at the participant level, sometimes performed by recordkeepers, involve sophisticated guesswork with respect to participants’ retirement ages and savings outside the retirement plan, as well as their income growth rates and the long-term rates of return on their investment accounts.

Ask for help

Given the importance of strong retirement benefits in hiring and retaining the best employees, it’s worth your while to regularly benchmark your plan’s performance. For better or worse, doing so isn’t as simple as 2+2. Our firm can help you choose the relevant measures, gather the data, perform the calculations and, most important, determine whether your retirement plan is really making the grade. Contact us at [email protected] and 205-345-9898 for more!

© 2019 CovenantCPA

Put a number on your midyear performance with the right KPIs

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We’ve reached the middle of the calendar year. So how are things going for your business? Conversationally you might say, “Pretty good.” But, analytically, can you put a number on how well you’re doing — or several numbers for that matter? You can if you choose and calculate the right key performance indicators (KPIs).

4 common indicators

There are a wide variety of KPIs to choose from. Here are four that can give you a solid snapshot of your midyear position:

1. Gross profit. This figure will tell you how much money you made after your manufacturing and selling costs were paid. It’s calculated by subtracting the cost of goods sold from your total revenue.

2. Current ratio. This ratio will help you gauge the strength of your cash flow. It’s calculated by dividing your current assets by your current liabilities.

3. Inventory turnover ratio. This ratio will warn you ahead of time if certain items are moving more slowly than they have in the past. It also will tell you how often these items are turned over. The ratio is calculated by dividing your cost of goods sold by your average inventory for the period.

4. Debt-to-equity ratio. This ratio will measure your company’s leverage, or how much debt is being used to finance your assets. It’s calculated by dividing your total liabilities by shareholder’s equity.

Customized KPIs

KPIs aren’t limited to widely used ratios. You can make up your own and apply them to any area of your business.

For example, let’s say the company’s goal is to improve its response time to customer complaints. Its KPI might be to provide an initial response to complaints within 24 hours, and to eventually resolve at least 80% of complaints to the customer’s satisfaction. You can track response times and document resolutions and eventually calculate this KPI.

As another example, say your business wants to improve its closing rate on sales leads. Its KPI could be to convert 50% of all qualified leads into customers over the next six months with the goal of raising this percentage to 60% next year.

Notice that these KPIs are both specific and measurable. Just saying that your company wants to “provide better customer service” or “close more sales” won’t produce a sound KPI.

Good decisions

Midyear is the perfect time to stop, take a breath and objectively assess your company’s performance. This way, if things are really going well, you can determine precisely why and keep that momentum going. And if they’re not, you can figure out how you’re ailing and adjust your budget and objectives accordingly. Our firm can help you choose the KPIs that will provide the information you need, as well as help you apply that data to good business decisions. 205-345-9898, [email protected].

© 2019 CovenantCPA

2019 Q3 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 third quarter of 2019. 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.

July 31

  • Report income tax withholding and FICA taxes for the second quarter of 2019 (Form 941) and pay any tax due. (See the exception below, under “August 12.”)
  • File a 2018 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 12

  • Report income tax withholding and FICA taxes for the second quarter of 2019 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 16

  • If a calendar-year C corporation, pay the third installment of 2019 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    • File a 2018 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2018 to certain employer-sponsored retirement plans.

© 2019 CovenantCPA

How experts use data analysis to detect fraud

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Data analytics is changing the way many businesses operate. It’s also changing how forensic accountants do their jobs, providing fraud experts with the means to mine massive mounds of data like never before.

3 techniques

These analytical techniques are among the most efficient and effective at detecting occupational fraud:

1. Association analysis. This method can help identify suspicious relationships by quantifying the odds of a combination of data points occurring together. In other words, it calculates the likelihood that, if one data point occurs, another will, too. If the combination occurs at an atypical rate, a red flag goes up. For example, association analysis might find that a certain supervisor tends to be on duty when inventory theft occurs.

2. Outlier analysis. Outliers are data points outside the norm for a given data set. In many types of data analysis, outliers are simply disregarded, but these items come in handy for fraud detection. Experts know how to distinguish and respond to different types of outliers.

Contextual outliers are significant in certain contexts but not others. For example, a big jump in wages on a retailer’s financial statements might be notable in April but not in December — when seasonal workers come aboard.

Collective outliers are a collection of data points that aren’t outliers on their own but deviate significantly from the overall data set when considered as a whole. If, for instance, several public company executives sold off substantial blocks of stock in the business on the same day, it might signal suspicious behavior.

3. Cluster analysis. Here, experts group similar data points into a set and then further subdivide them into smaller, more homogeneous clusters. Data points within a cluster are similar to each other and dissimilar to those in other clusters. The greater the similarities within a cluster and the differences between clusters, the easier it is for an expert to develop rules that apply to one cluster but not the others.

Cluster analysis has long been used for market segmentation of consumers. But it can also detect fraud, particularly when combined with outlier analysis. Outlier clusters — those that are farthest from the nearest cluster when clusters are mapped out on a chart — generally merit extra scrutiny for suspicious activity. A fraud expert might, for example, use cluster analysis to evaluate group life insurance claims. The expert would look for clusters of large beneficiary or interest payments, or long lags between submission and payment.

High tech and old school

If you hire experts to uncover suspected fraud in your organization, don’t be surprised if they break out the data analytics tools. But they’ll also likely use some old-school methods — including interviewing employees — to find possible suspects and financial losses. Contact us to discuss at 205-345-9898 and [email protected].

© 2019 CovenantCPA