Author Archive: Justine O'Sullivan

Conflicts of interest: When employees aren’t on your side

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One of the governing principles of the employee/employer relationship is that employees have a fiduciary duty to act in their employer’s interests. An employee’s undisclosed conflict of interest can be a serious breach of this duty. In fact, when conflicts of interest exist, companies often suffer financial consequences.

Ignorance isn’t bliss

Here’s a fictional example of a common conflict of interest: Matt is the manager of a manufacturing company’s purchasing department. He’s also part owner of a business that sells supplies to the manufacturer — a fact Matt hasn’t disclosed to his employer. And, in fact, Matt has personally profited from the business’s lucrative long-term contract with his employer.

What makes this scenario a conflict of interest isn’t so much that Matt has profited from his position, but that his employer is ignorant of the relationship. When employers are informed about their workers’ outside business interests, they can act to exclude employees, vendors and customers from participation in certain transactions. Or they can allow parties to continue participating in a transaction — even if it runs contrary to ethical best practices. But it’s the employer’s, not the employee’s, decision to make.

Cut off at the pass

Sometimes employees simply neglect to inform their employers about possible conflicts of interest. In other cases, they go to great lengths to hide conflicts — usually because they’re afraid it will jeopardize their jobs or they’re financially benefiting from them. These latter cases can be difficult to detect, which is why your company might fare better by playing offense.

For example, develop conflict of interest policies and communicate them to all employees. Provide specific examples of conflicts and spell out exactly why you consider the activities depicted to be deceptive, unethical and possibly illegal. Don’t forget to state the consequences of nondisclosure of conflicts, such as immediate termination.

Disclosing all

You might also require workers to complete an annual disclosure statement on which they list the names and addresses of their family members, their family’s employers and business interests, and whether the employees have an interest in those entities (or any others).

To help ensure accurate statements, provide employees with a hotline to call if they:

  • Have general questions or concerns about the policy,
  • Don’t understand how the policy relates to their unique circumstances, or
  • Want to report someone who appears to have a conflict of interest.

Also protect your business from conflicted vendors and customers. Before entering into a new agreement, compare the names and addresses on your employee disclosure statements with ownership information provided by prospective business partners.

Maintain standards

Conflicts of interest aren’t always clear cut because what one employer considers a serious conflict might seem negligible to another. But in general, the best way to promote your business’s success is by holding all stakeholders to the highest ethical standards. Contact us for more at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Leave your mark with a dynasty trust

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If a prime objective of your estate plan is to leave a lasting legacy, a dynasty trust may be the right estate planning vehicle for you. And, thanks to the substantially increased generation-skipping transfer (GST) tax exemption amount established by the Tax Cuts and Jobs Act, a dynasty trust is more appealing than ever.

GST tax and dynasty trusts

A dynasty trust allows substantial amounts of wealth to grow and compound free of federal gift, estate and GST taxes, providing tax-free benefits for your grandchildren and future generations. The longevity of a dynasty trust varies from state to state, but it’s becoming more common for states to allow these trusts to last for hundreds of years or even in perpetuity.

Avoiding GST tax liability is critical to a dynasty trust’s success. An additional 40% tax on transfers to grandchildren or others that skip a generation, the GST tax can quickly consume substantial amounts of wealth. The key to avoiding the tax is to leverage your $11.40 million GST tax exemption.

For example, let’s say you haven’t used any of your $11.40 million combined gift and estate tax exemption. In 2019, you transfer $10 million to a properly structured dynasty trust. There’s no gift tax on the transaction because it’s within your unused exemption amount. And the funds, together with all future appreciation, are removed from your taxable estate.

Most important, by allocating your GST tax exemption to your trust contributions, you ensure that any future distributions or other transfers of trust assets to your grandchildren or subsequent generations will avoid GST taxes. This is true even if the value of the assets grows well beyond the exemption amount or the exemption is reduced in the future.

Setting up a dynasty trust

A dynasty trust can be established during your lifetime, as an inter vivos trust or part of your will as a testamentary trust. An inter vivos transfer to a dynasty trust may have additional benefits associated with transferring assets that have greater appreciation potential out of your taxable estate.

After creating the trust, you must determine which assets to transfer to it. Because the emphasis is on protecting appreciated property, consider funding the trust with securities, real estate, life insurance policies and business interests.

Finally, you must appoint a trustee. Your choices may include a succession of family members or estate planning professionals. For most people, however, a safer approach is to use a reputable trust company with a proven track record, as opposed to assigning this duty to family members who might not be born yet.

If you think a dynasty trust might be right for your family, talk with us before taking action. A currently effective dynasty trust is irrevocable — meaning that, once you create it, you may be unable to modify the arrangement if your family dynamic changes. Contact us with questions at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Build long-term relationships with CRM software

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Few businesses today can afford to let potential buyers slip through the cracks. Customer relationship management (CRM) software can help you build long-term relationships with those most likely to buy your products or services. But to maximize your return on investment in one of these solutions, you and your employees must have a realistic grasp on its purpose and functionality.

Putting it all together

CRM software is designed to:

  • Gather every bit and byte of data related to your customers,
  • Organize that information in a clear, meaningful format, and
  • Integrate itself with other systems and platforms (including social media).

Every time a customer contacts your company — or you follow up with that customer — the CRM system can record that interaction. This input enables business owners to track leads, forecast and record sales, assess the effectiveness of marketing campaigns, and evaluate other important data. It also helps companies retain valuable customer contact information, preventing confusion following staff turnover or if someone happens to be out of the office.

Furthermore, most CRM systems can remind salespeople when to make follow-up calls and prompt other employees to contact customers. For instance, an industrial cleaning company could set up its system to automatically transmit customer reminders regarding upcoming service dates.

Categorizing your contacts

Customers can be categorized by purchase history, future product or service interests, desired methods of contact, and other data points. This helps businesses reach out to customers at a good time, in the right way. When companies flood customers with too many impersonal calls, direct mail pieces or e-mails, their messaging is much more likely to be ignored.

Naturally, an important part of maintaining any CRM system is keeping customers’ contact data up to date. So, you’ll need to instruct sales or customer service staff to gently touch base on this issue at least once a year. To avoid appearing pushy, some businesses ask customers to fill out contact info cards (or request business cards) that are then entered into a drawing for a free product or service — or even just a free lunch!

Encouraging buy-in

A properly implemented CRM system can improve sales, lower marketing costs and build customer loyalty. But, as mentioned, you’ll need to train employees how to use the software to get these benefits. And buy-in must occur throughout the organization — a “silo approach” to CRM that focuses only on one business area won’t optimize results.

Establish thorough use of the system as an annual performance objective for sales, marketing and customer service employees. Some business owners even offer monthly prizes or bonuses to employees who consistently enter data into their CRM systems.

Making the right choice

There are many CRM solutions available today at a wide variety of price points. We can help you conduct a cost-benefit analysis of this type of software — based on your company’s size, needs and budget — to assist you in choosing whether to buy a product or, if you already have one, how best to upgrade it. Contact us today at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Tax Advisory

It’s a good time to check your withholding and make changes, if necessary

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Due to the massive changes in the Tax Cuts and Jobs Act (TCJA), the 2019 filing season resulted in surprises. Some filers who have gotten a refund in past years wound up owing money. The IRS reports that the number of refunds paid this year is down from last year — and the average refund is lower. As of May 10, 2019, the IRS paid out 101,590,000 refunds averaging $2,868. This compares with 102,582,000 refunds paid out in 2018 with an average amount of $2,940.

Of course, receiving a tax refund shouldn’t necessarily be your goal. It essentially means you’re giving the government an interest-free loan.

Law changes and withholding

Last year, the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks. In general, the amount withheld was reduced. This was done to reflect changes under the TCJA — including the increase in the standard deduction, suspension of personal exemptions and changes in tax rates.

The new tables may have provided the correct amount of tax withholding for some individuals, but they might have caused other taxpayers to not have enough money withheld to pay their ultimate tax liabilities.

Conduct a “paycheck checkup”

The IRS is cautioning taxpayers to review their tax situations for this year and adjust withholding, if appropriate.

The tax agency has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the increased child credit, the new dependent credit and the repeal of dependent exemptions. You can access the IRS calculator at https://bit.ly/2aLxK0A.

Situations where changes are needed

There are a number of situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:

  • Adjusted your withholding in 2018, especially in the middle or later part of the year,
  • Owed additional tax when you filed your 2018 return,
  • Received a refund that was smaller or larger than expected,
  • Got married or divorced, had a child or adopted one,
  • Purchased a home, or
  • Had changes in income.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payment is due on Monday, June 17.)

We can help

Contact us to discuss your specific situation and what you can do to remedy any shortfalls to minimize taxes due, as well as any penalties and interest. We can help you sort through whether or not you need to adjust your withholding. 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Hire your children this summer: Everyone wins

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If you’re a business owner and you hire your children (or grandchildren) this summer, you can obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, save for college and learn how to manage money. And you may be able to:

  • Shift your high-taxed income into tax-free or low-taxed income,
  • Realize payroll tax savings (depending on the child’s age and how your business is organized), and
  • Enable retirement plan contributions for the children.

It must be a real job

When you hire your child, you get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill, your self-employment tax bill (if applicable), and your state income tax bill (if applicable). However, in order for your business to deduct the wages as a business expense, the work performed by the child must be legitimate and the child’s salary must be reasonable.

For example, let’s say a business owner operates as a sole proprietor and is in the 37% tax bracket. He hires his 16-year-old son to help with office work on a full-time basis during the summer and part-time into the fall. The son earns $10,000 during 2019 and doesn’t have any other earnings.

The business owner saves $3,700 (37% of $10,000) in income taxes at no tax cost to his son, who can use his 2019 $12,200 standard deduction to completely shelter his earnings.

The family’s taxes are cut even if the son’s earnings exceed his or her standard deduction. The reason is that the unsheltered earnings will be taxed to the son beginning at a rate of 10%, instead of being taxed at his father’s higher rate.

How payroll taxes might be saved

If your business isn’t incorporated, your child’s wages are exempt from Social Security, Medicare and FUTA taxes if certain conditions are met. Your child must be under age 18 for this to apply (or under age 21 in the case of the FUTA tax exemption). Contact us for how this works.

Be aware that there’s no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes nonparent partners.

Start saving for retirement early

Your business also may be able to provide your child with retirement benefits, depending on the type of plan you have and how it defines qualifying employees. And because your child has earnings from his or her job, he can contribute to a traditional IRA or Roth IRA. For the 2018 tax year, a working child can contribute the lesser of his or her earned income, or $6,000 to an IRA or a Roth.

Raising tax-smart children

As you can see, hiring your child can be a tax-smart idea. Be sure to keep the same records as you would for other employees to substantiate the hours worked and duties performed (such as timesheets and job descriptions). Issue your child a Form W-2. If you have any questions about how these rules apply to your situation, don’t hesitate to contact us at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Antifraud checklist for construction companies

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According to the Association of Certified Fraud Examiners’ Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse, organizations victimized by fraud lose a median $130,000. But construction companies, in particular, are even harder hit, with a median loss of $227,000. What can you do to protect your construction business? Adopt this checklist.

Ways to tighten controls

An effective strategy for minimizing fraud is to tighten your internal controls. Make sure the following are part of your policies and procedures:

Surprise audits and jobsite visits. These visits can not only help detect fraud, but also send a strong message that combating fraud is a priority — which is a powerful deterrent.

Segregation of duties. Avoid situations in which one person handles multiple financial or accounting tasks. For example, the person who processes cash transactions shouldn’t also prepare the company’s bank deposits.

Bank statements. Have monthly bank statements sent to you or a manager independent of the accounting function. Canceled checks should be reviewed for unfamiliar payees and forged signatures.

Purchase monitoring. Name someone other than the purchasing agent — you or an estimator, for instance — to review vendor invoices, purchase orders and other documents. Use prenumbered purchase orders. Physically check materials and supplies to ensure they correspond to what was ordered in terms of quantity and quality.

Kickbacks and bid-rigging. If your company is suddenly winning bids that you haven’t in the past and that seem like a stretch, verify that your bid processes have been followed. Sometimes employees disguise illegal activities as change orders, so be sure to scrutinize each change order.

Budget analysis. Prepare annual budgets — for your company and each job — and regularly compare actual results to budgets. Scrutinize large or unanticipated discrepancies.

Payroll practices. Have someone independent of your accounting department verify the names and pay rates on your payroll. If you don’t already, pay employees using direct deposit, rather than with checks or cash.

Vacation policy. Require full-time employees to take time off every year. Fraud is often exposed when the perpetrator isn’t there to cover it up.

Many benefits

These are just some of the many internal controls contractors should implement to protect their businesses. In addition to preventing and revealing fraud, solid internal controls can help avoid accounting errors, reduce waste and boost cash flow by making billing, purchasing and other processes more efficient. Contact us for more information at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Beware if your estate plan leaves specific assets to specific heirs

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Planning your estate around specific assets is risky and, in most cases, should be avoided. If you leave specific assets — such as homes, cars or stock — to specific people, you may inadvertently disinherit them.

Illustrating the problem

Let’s say Debbie has three children — Abbie, Mary Kate and Lizzie — and wishes to treat them equally in her estate plan. In her will, Debbie leaves a $500,000 mutual fund to Abbie and her home valued at $500,000 to Mary Kate. She also names Lizzie as beneficiary of a $500,000 life insurance policy.

When Debbie dies years later, the mutual fund balance has grown to $750,000. In addition, she had sold the home for $750,000, invested the proceeds in the mutual fund and allowed the life insurance policy to lapse. But she neglected to revise her will. The result? Abbie receives the mutual fund, with a balance of $1.5 million, and Mary Kate and Lizzie are disinherited.

Even if Debbie continued to own the home, it could have declined in value after she drafted her will (rather than increased), leaving Mary Kate with less than her sisters.

Avoiding this outcome

It’s generally preferable to divide your estate based on dollar values or percentages rather than specific assets. Debbie, for example, could have placed the mutual fund, home and insurance policy in a trust and divided the value of the trust equally between her three children.

If it’s important to you that specific assets go to specific heirs — for example, because you want your oldest child to receive the family home or you want your family business to go to a child who works for the company — there are planning techniques you can use to avoid undesired consequences. For example, your trust might provide for your assets to be divided equally but also provide for your children to receive specific assets at fair market value as part of their shares. If you have questions regarding the division of your assets to your heirs, contact us. We can review your plan and address your concerns. 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

The simple truth about annual performance reviews

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There are many ways for employers to conduct annual performance reviews. So many, in fact, that owners of small to midsize businesses may find the prospect of implementing a state-of-the-art review process overwhelming.

The simple truth is that smaller companies may not need to exert a lot of effort on a complex approach. Sometimes a simple conversation between supervisor and employee — or even owner and employee — can do the job, as long as mutual understanding is achieved and clear objectives are set.

Remember why it matters

If your commitment to this often-stressful ritual ever starts to falter, remind yourself of why it matters. A well-designed performance review process is valuable because it can:

  • Provide feedback and counseling to employees about how the company perceives their respective job performances,
  • Set objectives for the upcoming year and assist in determining any developmental needs, and
  • Create a written record of performance and assist in allocating rewards and opportunities, as well as justifying disciplinary actions or termination.

Conversely, giving annual reviews short shrift by only orally praising or reprimanding an employee leaves a big gap in that worker’s written history. The most secure companies, legally speaking, document employees’ shortcomings — and achievements — as they occur. They fully discuss performance at least once annually.

Don’t do this!

To ensure your company’s annual reviews are as productive as possible, make sure your supervisors aren’t:

Winging it. Establish clear standards and procedures for annual reviews. For example, supervisors should prepare for the meetings by filling out the same documentation for every employee.

Failing to consult others. If a team member works regularly with other departments or outside vendors, his or her supervisor should contact individuals in those other areas for feedback before the review. You can learn some surprising things this way, both good and bad.

Keeping employees in the dark. Nothing in a performance review should come as a major surprise to an employee. Be sure supervisors are communicating with workers about their performance throughout the year. An employee should know in advance what will be discussed, how much time to set aside for the meeting and how to prepare for it.

Failing to follow through. Make sure supervisors identify key objectives for each employee for the coming year. It’s also a good idea to establish checkpoints in the months ahead to assess the employee’s progress toward the goals in question.

Put something in place

As a business grows, it may very well need to upgrade and expand its performance evaluation process. But the bottom line is that every company needs to have something in place, no matter how basic, to evaluate and document how well employees are performing. Our firm can help determine how your employees’ performance is affecting profitability and suggest ways to cost-effectively improve productivity. 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Selling your home? Consider these tax implications

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Spring and summer are the optimum seasons for selling a home. And interest rates are currently attractive, so buyers may be out in full force in your area. Freddie Mac reports that the average 30-year fixed mortgage rate was 4.14% during the week of May 2, 2019, while the 15-year mortgage rate was 3.6%. This is down 0.41 and 0.43%, respectively, from a year earlier.

But before you contact a realtor to sell your home, you should review the tax considerations.

Sellers can exclude some gain

If you’re selling your principal residence, and you meet certain requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion is also excluded from the 3.8% net investment income tax.

To qualify for the exclusion, you must meet these tests:

  1. The ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date.
  2. The use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Handling bigger gains 

What if you’re fortunate enough to have more than $250,000/$500,000 of profit when selling your home? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Other tax issues

Here are some additional tax considerations when selling a home:

Keep track of your basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.

Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

If you’re selling a second home (for example, a vacation home), be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

Your home is probably your largest investment. So before selling it, make sure you understand the tax implications. We can help you plan ahead to minimize taxes and answer any questions you have about your situation. Call or email us- 205-345-9898, info@covenantcpa.com.

© 2019 CovenantCPA

Consider a Roth 401(k) plan — and make sure employees use it

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Roth 401(k) accounts have been around for 13 years now. Studies show that more employers are offering them each year. A recent study by the Plan Sponsor Council of America (PSCA) found that Roth 401(k)s are now available at 70% of employer plans, up from 55.6% of plans in 2016.

However, despite the prevalence of employers offering Roth 401(k)s, most employees aren’t choosing to contribute to them. The PSCA found that only 20% of participants who have access to a Roth 401(k) made contributions to one in 2017. Perhaps it’s because they don’t understand them.

If you offer a Roth 401(k) or you’re considering one, educate your employees about the accounts to boost participation.

A 401(k) with a twist

As the name implies, these plans are a hybrid — taking some characteristics from Roth IRAs and some from employer-sponsored 401(k)s.

An employer with a 401(k), 403(b) or governmental 457(b) plan can offer designated Roth 401(k) accounts.

As with traditional 401(k)s, eligible employees can elect to defer part of their salaries to Roth 401(k)s, subject to annual limits. The employer may choose to provide matching contributions. For 2019, a participating employee can contribute up to $19,000 ($25,000 if he or she is age 50 or older) to a Roth 401(k). The most you can contribute to a Roth IRA for 2019 is $6,000 ($7,000 for those age 50 or older).

Note: The ability to contribute to a Roth IRA is phased out for upper-income taxpayers, but there’s no such restriction for a Roth 401(k).

The pros and cons

Unlike with traditional 401(k)s, contributions to employees’ accounts are made with after-tax dollars, instead of pretax dollars. Therefore, employees forfeit a key 401(k) tax benefit. On the plus side, after an initial period of five years, “qualified distributions” are 100% exempt from federal income tax, just like qualified distributions from a Roth IRA. In contrast, regular 401(k) distributions are taxed at ordinary-income rates, which are currently up to 37%.

In general, qualified distributions are those:

  • Made after a participant reaches age 59½, or
  • Made due to death or disability.

Therefore, you can take qualified Roth 401(k) distributions in retirement after age 59½ and pay no tax, as opposed to the hefty tax bill that may be due from traditional 401(k) payouts. And unlike traditional 401(k)s, which currently require retirees to begin taking required minimum distributions after age 70½, Roth 401(k)s have no mandate to take withdrawals.

Not for everyone

A Roth 401(k) is more beneficial than a traditional 401(k) for some participants, but not all. For example, it may be valuable for employees who expect to be in higher federal and state tax brackets in retirement. Contact us if you have questions about adding a Roth 401(k) to your benefits lineup at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA