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Cash flow management 101: Basic steps for small businesses

08.18.20

Read this if you are a new business owner. 

Businesses always need money to survive, particularly in today's uncertain economic environment. Having enough money readily available is crucial to both short- and long-term viability. 

Short-term cash flow

In simple terms, cash flow is the amount of money that a business has on hand, whether that money is being paid out or received by the business. Managing the timing of the intake and outlay of funds can be complicated, and creating a cash flow management plan is a crucial part of running a successful business. Here are a few simple ways to improve your company's short-term cash flow:

  • Get references and run credit reports on new customers seeking credit to avoid taking on risky customers who may not be able to pay on time.
  • Require cash payments for the first 30 days to establish a payment routine with new customers.
  • Ask for deposits on upfront expenses to minimize the company outflow on materials.
  • Use technology whenever possible to bill customers and receive payments to lower processing costs and save time.
  • Bill customers as often as possible and follow up on overdue receivables to keep the money flowing in.
  • Link business operating accounts to sweep accounts to maximize earnings on idle funds.
  • Open a line of credit for sudden expenditures or to take advantage of unexpected growth opportunities.
  • Negotiate payment terms from suppliers and banks to extend credit, giving you more time to collect money from customers in order to pay these bills.
  • Only use company credit cards to pay vendors if you earn rewards and pay the cards off in 30 days.

Long-term cash flow

Once you are able to shore up these items, your immediate cash flow should improve. Looking at future cash flow is also important, as it can give you a clearer picture of what you can expect in months to come. Long-term intentional cash flow management is also essential to a business's survival. Here are some long-term cash flow tips that contribute to business sustainability: 

  • Streamline inventory processes to track inventory accurately, control costs, meet customer expectations, analyze data trends, and save time.
  • Monitor operating expenses using budgets to identify variances before they affect cash flow. Even a month of out of control costs can lead to negative cash flow and impact profits. 
  • Save six months of operating costs in an emergency fund to prepare for unexpected demands on your cash flow, from a client who doesn’t pay up to a sudden emergency that needs to be fixed immediately.
  • Pay cash when possible and use a line of credit to finance operations. Only use credit as a tool to long-term success, not as a band aid to cover up negative cash flow. Ultimately, profits will reduce your financing needs and the company will sustain on its own cash supply.
  • Develop a cash flow forecast as an important management tool. You should know what your cash balance will be a month from now, six months from now, and even a year from now. This will transform the way you manage your business.

Proper cash flow management is a key element of a healthy, growing business. By understanding and managing your cash flow and knowing your financials, you can save extra money for unexpected events and opportunities. If you have questions about cash flow management, or want to know more about your specific situation, contact the outsourced accounting services team at BerryDunn. We can walk you through these steps and assist in creating a cash flow forecast that will help you manage your business.

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Read this if you have offices in more than one state or are a SaaS company.

For many software-as-a-service (SaaS) providers, sales tax compliance remains a challenge. Approximately 20 states currently subject SaaS to tax, and taxability varies from state to state, which impacts many SaaS companies that scale rapidly and unknowingly expand their nexus footprint into these states.

In South Dakota v. Wayfair, Inc., the Supreme Court held that states may assert nexus on an out-of-state business that exceeds a reasonable economic threshold, whether or not the business has physical presence in the state. The 2018 ruling is particularly impactful to SaaS companies because:

  • Cloud-based offerings are delivered electronically without the need for in-state presence.
  • Following the decision, all states have enacted some form of legislation that adopts an economic nexus threshold (typically, this threshold is $100,000 in sales or 200 transactions).
  • With Wayfair standards now in place for over three years, historical noncompliance is becoming more material, and states are expected to increase enforcement.

The issue of sales tax compliance has become more pressing now for two key reasons:

First, liabilities and exposures are cumulative, and material exposures may continue to mount for companies that are noncompliant. This is especially relevant for companies that have failed to adhere to the Wayfair nexus standards. In addition, the increasing presence of remote employees will expand the nexus footprints of many technology companies that offer flexible work arrangements.

Second, while tech M&A activity is expected to slow for the remainder of 2022, some SaaS firms may still be looking to sell or raise capital. Sales tax exposure will remain a priority consideration during the due diligence process for any strategic deals taking place. Due to the short lifecycle of most technology companies, tax due diligence is key in preparing for an exit or capital raise.

The impact of evolving tax policy

An increasing number of states are amending the statutory definition of taxable services to include SaaS or are categorizing SaaS as taxable “tangible personal property.” For example, Maryland recently enacted legislation that imposes sales tax on certain digital products, including SaaS.

Adding to the complexity, states often construe certain technology-based services as taxable SaaS. For example, state administrative guidance and case law may interpret online advertising and data analytics services as taxable SaaS if software is the predominant component of the offering. Also, as noted above, the state-by-state treatment varies widely. For instance, New York aggressively subjects cloud-based offerings to sales tax, whereas California does not subject SaaS or electronically downloaded offerings to sales tax.

Remote work

The recent adoption of remote-work models further complicates the determination of nexus and sales tax obligations, as companies hire employees in states where they have not previously had a physical presence. The vast majority (84%) of all technology businesses surveyed in BDO’s 2022 Technology CFO Outlook Survey expect to see some impact on their total tax liability as a result of onboarding out-of-state remote workers.

The presence of in-state employees is a nexus-creating activity irrespective of whether the company’s sales exceed economic nexus thresholds. Therefore, if a SaaS company has employees working in a different state than its headquarters, it is critical to track employee start dates by state and consider the potential sales tax obligations.

Understanding your risk exposure

In an exit scenario, CFOs don’t want surprises, and buyers don’t want to absorb liabilities. SaaS companies must carefully analyze their sales and use tax posture in the deal context to understand risks and proactively address any shortcomings. Failure to adopt appropriate tax compliance procedures at the onset of nexus-creating activities can lead to a material exposure.

Given the complex nature of SaaS sales tax, technology companies must address compliance in a step-by-step phased approach:

  • Nexus study
    An initial nexus study consists of an examination of a company’s state specific activities in determining whether it has a filing obligation in various states. This includes an analysis of both physical presence (e.g., property, payroll, in-state services, etc.) and state-by-state economic nexus standards.
  • Taxability analysis
    Once the company’s nexus profile is established, a comprehensive taxability analysis is required to determine whether the states identified in the nexus study subject SaaS and other ancillary services to sales tax. Depending on the nature of the company’s offerings, this may involve in-depth research on a state-by-state basis. For instance, if the company is providing a technology-based service that is potentially classified as a nontaxable service rather than SaaS, research in the material states is required to develop a supportable position. In addition, the taxability process will include an assessment of potential mitigating factors, such as tax-exempt customers, sale-for-resale exemptions and use tax remittance, on a customer-by-customer basis.
  • Potential exposure quantification/remediation
    If the company has nexus in states that subject its offerings to tax, the exposure should be quantified to determine the magnitude of exposure in those states. This will help to determine whether to proactively remediate the exposure through participation in state voluntary disclosure programs. Voluntary disclosure participation allows a company that is historically noncompliant to pay the applicable back taxes in exchange for a limited lookback period (typically three to four years) with the waiver of penalties. 
  • Sales tax compliance automation
    Once the company has addressed its potential exposure in the applicable states, it will have a subsequent filing obligation. Depending on the complexity, an automated sales-tax solution is often recommended to assist with the nexus, taxability and filing compliance going forward. An automated solution often increases efficiencies, saves time and helps mitigate tax compliance risk. 

Developing a plan to address sales tax prior to undergoing a diligence process is key to better understanding and controlling the compliance process. Failure to do so may lead to material escrow or purchase price allocation to remediate a sales tax issue that could have otherwise been prevented. 

Way forward

Understanding state and local taxes (SALT) can make a big difference for technology companies, especially SaaS businesses. Non-compliance with tax standards could lead to financial risks and even affect customer relationships.

There is ample M&A opportunity to consider in 2022, with valuations leveling off and cash reserves ready to be spent. Nearly two-thirds of tech firms (65%) plan to buy, sell, or partner this year, according to BDO data. Tech companies should prepare for deal making by being proactive about sales and tax compliance. Not doing so can block deals in the pipeline, as buyers and investors are keenly aware of tax compliance obligations.

Consulting a third party on SALT compliance, especially regarding economic nexus standards and taxability, may help SaaS firms receive the full value of their companies, mitigate exposure and liability, and empower company leaders to feel prepared when it comes time to sell.

If you have questions about your specific situation, please contact our Consulting and Compliance team. We're here to help.

Written by Angela Acosta, Thomas Leonardo, and Matthew Dyment. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com

Article
Breaking down sales and use tax compliance for SaaS companies

Read this if you use QuickBooks Online.

With gas prices so high, you need to track your travel costs as closely as possible. Consider getting a tax deduction for your business mileage.

If you drive even a little for business, it’s easy to let mileage costs slide. After all, it’s a pain to keep track of your tax-deductible mileage in a little notebook and do all the calculations required. If you do rack up a lot of business miles, you probably forget to track some trips and end up losing money.

QuickBooks Online offers a much better way. Its Mileage tools include simple fill-in-the-blank records that allow you to document individual trips. You can either enter the starting point and destination and let the site calculate your mileage and deduction or enter the number of miles yourself.

If you use QuickBooks Online’s mobile app, it can track your miles automatically as you drive (as long as you have the correct settings turned on). Here’s a look at how all of this works.

Setting up 

To get started, click the Mileage link in QuickBooks Online’s toolbar. The screen that opens will eventually display a table that contains information about your trips, but you need to do a little setup first. Click the down arrow next to Add Trip in the upper right corner and select Manage vehicles. A panel will slide out from the right. Click Add vehicle.

 
You’ll need to supply information about your vehicles before you can start entering trips.

You’ll need to supply the vehicle’s year, make, and model. Do you own or lease it, and on what date was the vehicle purchased or leased and put into service? Do you want to have your annual mileage calculated by entering odometer readings or have QuickBooks Online track your business miles driven automatically? When you’re done making your selections and entering data, click Save.

Entering trip data

You can download trips as CSV files or import them from Mile IQ, but you’re probably more likely to enter them manually. Click Add Trip in the upper right corner. In the pane that opens, you’ll enter the date of the trip and either the total miles or start and end point. You’ll select the business purpose and vehicle and indicate whether it was a round trip. When you’re done, click Save. The trip will appear in the table on the opening screen, and your current possible total deduction will be in the upper left corner, along with your total business miles and total miles.

If you want to designate a trip as personal, click the box in front of the trip in that table. In the black horizontal box that appears, click the icon that looks like a little person, then click Apply. Now, the trip will appear in the Personal column and will not count toward your business tax-deductible mileage. 

When you select a trip in the Mileage table, you can mark it as personal so it’s not included in your business tax-deductible miles.

Personal trips can count, too

If you use your vehicle(s) for personal as well as business purposes, tracking some of those miles can also mean a tax deduction. For tax year 2022, you can deduct 18 cents per mile for your travel to and from medical appointments. Note: Medical mileage is only deductible if medical exceeds a certain percent of AGI. Be sure to check with the IRS yearly tax code, as they update the mileage amounts annually.

And if you do volunteer work for a qualified charitable organization, the miles you drive in service of it can be deducted at the rate of 14 cents per mile. You can also claim the cost of parking and tolls, as long as you weren’t reimbursed for any of these expenses. Obviously, the IRS wants you to keep careful records of your charitable mileage, and QuickBooks Online can provide them.

QuickBooks Online doesn’t track these deductions, but you’ll at least have a record of the miles driven.

Auto-track your miles

The easiest way to track your mileage in QuickBooks Online is by using its mobile app. You can launch this and have it record your mileage automatically as you’re driving. Versions are available for both Android and iOS, and they’re different from each other. They also have more features than the browser-based version of QuickBooks Online, like maps, rules, and easier designation of trips as business or personal.

 
The iOS version of Mileage in the QuickBooks Online app

In both versions, you’ll need to click the menu in the lower right corner after you’ve opened the QuickBooks Online app and select Mileage. Make sure Auto-Tracking is turned on. Your phone’s location services tool must be turned on, too. There are other settings that vary between the two operating systems. You can search the help system of either app to make sure you get your settings correct if the onscreen instructions aren’t clear enough.

Of course, you won’t see the fruits of your mileage deductions until you file your 2022 taxes. But you can factor these savings in as you’re doing your tax planning during the year. Please contact the Outsourced Accounting team if you’re having any trouble with QuickBooks Online’s Mileage tools, or if you have questions with other elements of the site.

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How QuickBooks Online helps you track mileage

Read this if you use QuickBooks Online.

You should be running reports in QuickBooks Online on a weekly—if not daily—basis. Here’s what you need to know.

You can do a lot of your accounting work in QuickBooks Online by generating reports. You can maintain your customer and vendor profiles. Create and send transactions like invoices and sales receipts, and record payments. Enter and pay bills. Create time records and coordinate projects. Track your mileage and, if you have employees, process payroll.

These activities help you document your daily financial workflow. But if you’re not using QuickBooks Online’s reports, you can’t know how individual elements of your business like sales and purchases are doing. And you don’t know how all of those individual pieces fit together to create a comprehensive picture of how your business is performing. 

QuickBooks Online’s reports are plentiful. They’re customizable. They’re easy to create. And they’re critical to your understanding of your company’s financial state. They answer the small questions, like, How many widgets do I need to order?, and the larger, all-encompassing questions like, Will my business make a profit this year?

Getting the lay of the land

Let’s look at how reports are organized in QuickBooks Online. Click Reports in the toolbar. You’ll see they are divided into three areas that you can access by clicking the labeled tabs. Standard refers to the comprehensive list of reports that QuickBooks Online offers, displayed in related groups. Custom reports are reports that you’ve customized and saved so you can use the same format later. And Management reports are very flexible, specialized reports that can be used by company owners and managers.


A partial view of the list of QuickBooks Online’s Standard reports 

Standard reports

The Standard Reports area is where you’ll do most—if not all—of your reporting work. The list of available reports is divided into 10 categories. You’re most likely to spend most of your time in just a few of them, including:

  • Favorites. You’ll be able to designate reports that you run often as Favorites and access them here, at the top of the list.
  • Who owes you. These are your receivables reports. You’ll come here when you need to know, for example, who is behind on making payments to you, how much individual customers owe you, and what billable charges and time haven’t been billed.
  • Sales and customers. What’s selling and what’s not? What have individual customers been buying? Which customers have accumulated billable time?
  • What you owe. These are your payables reports. They tell you, for example, which bills you haven’t paid, the total amount of your unpaid bills (grouped by days past due), and your balances with individual vendors.
  • Expenses and vendors. What have I purchased (grouped by vendor, product, or class)? What expenses have individual vendors incurred? Do I have any open purchase orders?

The Business Overview contains advanced financial reports that we can run and analyze for you. The same goes for the For my accountant reports. Sales tax, Employees, and Payroll will be important to you if they’re applicable for your company.

Working with individual reports


Each individual report in QuickBooks Online has three related task options.

To open any report, you just click its title. If you want more information before you do that, just hover your cursor over the label. Click the question mark to see a brief description of the report. If you want to make the report a Favorite, click the star so it turns green. And clicking the three vertical dots opens the Customize link. 

When you click the Customize link, a vertical panel slides out from the right, and the actual report is behind it, grayed out. Customization options vary from report to report. Some are quite complex, and others offer fewer options. The Sales by Customer Detail report, for example, provides a number of ways for you to modify the content of your report so it represents exactly the “slice” of data you want. So you can indicate your preferences in areas like:

  • Report period
  • Accounting method (cash or accrual)
  • Rows/columns (you can select which columns should appear and in what order, and group them by Account, Customer, Day, etc.)
  • Filter (choose the data group you want represented from several options, including Transaction Type, Product/Service, Payment Method, and Sales Rep)

Once you’ve run the report, you can click Save customization in the upper right corner and complete the fields in the window that opens. Your modification options will then be available when you click Custom reports, so you can run it again anytime with fresh data.


You can customize QuickBooks Online’s reports in a variety of ways.

We’ll go into more depth about report customization in a future article. For now, we encourage you to explore QuickBooks Online’s reports and their modification options so that you’re familiar with them and can put them to use anytime. Contact our Outsourced Accounting team if you have any questions about the site’s reports, or if you need help making your use of QuickBooks Online more effective and productive.

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Getting started with reports in QuickBooks Online

Read this if you use QuickBooks Online.

Are you taking on a worker who’s not an employee? QuickBooks Online includes tools for tracking and paying independent contractors.

The COVID-19 pandemic created millions of self-employed individuals and small businesses. Whether they chose to, or circumstances forced them to, these new entrepreneurs had to learn new ways to get paid and to prepare their income taxes.

If you’re thinking about taking on a contract worker, you, too, will have to educate yourself on the paperwork and processes required to comply with the IRS’ rules for his or her compensation. It’s much easier than hiring a full-time employee, but it still takes some knowledge of how QuickBooks Online handles these individuals.

You’ll also need to make certain that the person you’re hiring is indeed an independent contractor and not an employee. The IRS takes this distinction very seriously. If you’re at all unsure of your new hire’s employment status, we can help you sort it out.

Creating records for contractors

Once new contractors have accepted your offer, you’ll need to have then fill out an IRS Form W-9. You can download a copy here. Employees complete the more detailed Form W-4 so that the employer can withhold income taxes correctly, but you won’t have to withhold taxes for your contract workers. They will be responsible for calculating and paying quarterly estimated taxes and filing an IRS Form 1040 every year. 

You, though, will be responsible for sending them an IRS Form 1099-NEC (Non-Employee Compensation) every January if you paid them more than $600 during the previous year. You do not need to send a 1099-NEC to a corporation or to an LLC that is treated as a C Corp or an S Corp. 

You can complete the Vendor Information window for each independent contractor, checking the box in front of Track payments for 1099.

Using the information the contractors provide, you can create records for them in QuickBooks Online. If you don’t have a QuickBooks Payroll subscription, you can set them up as 1099 vendors. Click the Expenses tab in the toolbar and then on the Vendors tab. Click New vendor in the upper right to open the Vendor Information window. Complete the fields for the worker and be sure to check the box in front of Track payments for 1099, as shown in the partial image above.

The vendor records you create will appear in QuickBooks Online’s Vendors list (again, Expenses | Vendors). Click on one to open it. You can toggle between two tabs here. The first, Transaction List, will eventually display all your financial dealings with that contractor. Vendor Details opens the record you just created, which you can edit from this screen.

Paying contractors

When independent contractors send you invoices, you’ll return to this same screen. There are three ways you can pay them. Click the down arrow next to New Transaction in the upper right corner to see your options (or look down at the end of the row while you’re in list view). You can record the debt as a Bill if you want to pay it later (or if that’s the way you structure your recordkeeping). If you’re paying it right away, you can create an Expense or write a Check

You can choose an option from this vendor action menu to pay your independent contractors.

When you click one of these, QuickBooks Online opens a form with many of the contractors’ details already filled in. You’ll need to complete any additional fields at the top of the screen, and then either record the payment or debt under Category details or Item details, depending on how you do your bookkeeping. Either way, you’ll be able to enter the quantity and rate and/or amount and mark it billable (with a markup percentage, if you’d like) to a customer or project.

You’re probably going to want our help here, since there’s more than one way to pay independent contractors. If you subscribe to QuickBooks Payroll, you can use the service’s contractor features, which include the ability to invite your contractors to fill out their own records in QuickBooks Online. You may also want to add an account to your Chart of Accounts, and we’d want to offer guidance there. And you need to ensure that you’re classifying payments correctly, so they’ll appear in 1099 reports and 1099s themselves.

Creating records for independent contractors and paying these individuals seem like they should be simple operations. But anytime you’re dealing with payroll issues, you’re dealing with peoples’ livelihoods – and the IRS. We strongly encourage you to let us help you get this right. Contact the Outsourced Accounting team, and we’ll make sure you’re handling your worker payments with absolute accuracy.

Article
Hiring an independent contractor? How QuickBooks Online can help

Read this if you invest in research and development. 

Businesses that invest in research and development, particularly those in the technology industry, should be aware of a major change to the tax treatment of research and experimental (R&E) expenses. Under the 2017 Tax Cuts and Jobs Act (TCJA), R&E expenditures incurred or paid for tax years beginning after December 31, 2021, will no longer be immediately deductible for tax purposes. Instead, businesses are now required to capitalize and amortize R&E expenditures over a period of five years for research conducted within the U.S. or 15 years for research conducted in a foreign jurisdiction. The new mandatory capitalization rules also apply to software development costs, regardless of whether the software is developed for sale or license to customers or for internal use.

Tax implications of mandatory capitalization rules

Under the new mandatory capitalization rules, amortization of R&E expenditures begins from the midpoint of the taxable year in which the expenses are paid or incurred, resulting in a negative year one tax and cash flow impact when compared to the previous rules that allowed an immediate deduction.

For example, assume a calendar-year taxpayer incurs $50 million of US R&E expenditures in 2022. Prior to the TCJA amendment, the taxpayer would have immediately deducted all $50 million on its 2022 tax return. Under the new rules, however, the taxpayer will be entitled to deduct amortization expense of $5,000,000 in 2022, calculated by dividing $50 million by five years, and then applying the midpoint convention. The example’s $45 million decrease in year one deductions emphasizes the magnitude of the new rules for companies that invest heavily in technology and/or software development.

The new rules present additional considerations for businesses that invest in R&E, which are discussed below.

Cost/benefit of offshoring R&E activities

As noted above, R&E expenditures incurred for activities performed overseas are subject to an amortization period of 15 years, as opposed to a five-year amortization period for R&E activities carried out in the US. Given the prevalence of outsourcing R&E and software development activities to foreign jurisdictions, taxpayers that currently incur these costs outside the US are likely to experience an even more significant impact from the new rules than their counterparts that conduct R&E activities domestically. Businesses should carefully consider the tax impacts of the longer 15-year recovery period when weighing the cost savings from shifting R&E activities overseas. Further complexities may arise if the entity that is incurring the foreign R&E expenditures is a foreign corporation owned by a US taxpayer, as the new mandatory capitalization rules may also increase the US taxpayer’s Global Intangible Low-taxed Income (GILTI) inclusion.

Identifying and documenting R&E expenditures

Unless repealed or delayed by Congress (see below), the new mandatory amortization rules apply for tax years beginning after December 31, 2021. Taxpayers with R&E activities should begin assessing what actions are necessary to identify qualifying expenditures and to ensure compliance with the new rules. Some taxpayers may be able to leverage from existing financial reporting systems or tracking procedures to identify R&E; for instance, companies may already be identifying certain types of research costs for financial reporting under ASC 730 or calculating qualifying research expenditures for purposes of the research tax credit. Companies that are not currently identifying R&E costs for other purposes may have to undertake a more robust analysis, including performing interviews with operations and financial accounting personnel and developing reasonable allocation methodologies to the extent that a particular expense (e.g., rent) relates to both R&E and non-R&E activities.

Importantly, all taxpayers with R&E expenditures, regardless of industry or size, should gather and retain contemporaneous documentation necessary for the identification and calculation of costs amortized on their tax return. This documentation can play a critical role in sustaining a more favorable tax treatment upon examination by the IRS as well as demonstrating compliance with the tax law during a future M&A due diligence process.

Impact on financial reporting under ASC 740

Taxpayers also need to consider the impact of the mandatory capitalization rules on their tax provisions. In general, the addback of R&E expenditures in situations where the amounts are deducted currently for financial reporting purposes will create a new deferred tax asset. Although the book/tax disparity in the treatment of R&E expenditures is viewed as a temporary difference (the R&E amounts will eventually be deducted for tax purposes), the ancillary effects of the new rules could have other tax impacts, such as on the calculation of GILTI inclusions and Foreign-Derived Intangible Income (FDII) deductions, which ordinarily give rise to permanent differences that increase or decrease a company’s effective tax rate. The U.S. valuation allowance assessment for deferred tax assets could also be impacted due to an increase in taxable income. Further, changes to both GILTI and FDII amounts should be considered in valuation allowance assessments, as such amounts are factors in forecasts of future profitability.

The new mandatory capitalization rules for R&E expenditures and resulting increase in taxable income will likely impact the computation of quarterly estimated tax payments and extension payments owed for the 2022 tax year. Even taxpayers with net operating loss carryforwards should be aware of the tax implications of the new rules, as they may find themselves utilizing more net operating losses (NOLs) than expected in 2022 and future years, or ending up in a taxable position if the deferral of the R&E expenditures is material (or if NOLs are limited under Section 382 or the TCJA). In such instances, companies may find it prudent to examine other tax planning opportunities, such as performing an R&D tax credit study or assessing their eligibility for the FDII deduction, which may help lower their overall tax liability.

Will the new rules be delayed?

The version of the Build Back Better Act that was passed by the US House of Representatives in November 2021 would have delayed the effective date of the TCJA’s mandatory capitalization rules for R&E expenditures until tax years beginning after December 31, 2025. While this specific provision of the House bill enjoyed broad bipartisan support, the BBBA bill did not make it out of the Senate, and recent comments by some members of the Senate have indicated that the BBB bill is unlikely to become law in its latest form. Accordingly, the original effective date contained in the TCJA (i.e., taxable years beginning after December 31, 2021) for the mandatory capitalization of R&E expenditures remains in place.
 
The changes to the tax treatment of R&E expenditures can be complex. While taxpayers and tax practitioners alike remain hopeful that Congress will agree on a bill that allows for uninterrupted immediate deductibility of these expenditures, at least for now, companies must start considering the implications of the new rules as currently enacted. 

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Mandatory capitalization of R&E expenses—will the new rules impact your business?

Read this if you have a cybersecurity program.

This week President Joe Biden warned Americans about intelligence that indicated Russia may be preparing to conduct cyberattacks on our private sector businesses and infrastructure as retaliation for sanctions applied to the Russian government (and the oligarchs) as punishment for the invasion of Ukraine. Though there is no specific threat at this time, President Biden’s warning has been an ongoing message since the invasion began. There is no need to panic, but this is a great time to re-visit your current security controls. Focusing on basic IT controls goes can make a big difference in the event of an attack, as hackers tend to go after the easy, low hanging fruit. 

  1. Access controls
    Review and understand how all access to your networks is obtained by on-site employees, remote employees, and vendors and guests. Make sure that users are maintaining strong passwords and that no user is connecting remotely to any of your systems without some form of multi-factor authentication (MFA). MFA can come in the form of a token (in hand or built-in) or as one of those numerical codes you have delivered to your phone or email. Poor access controls are simply the difference between leaving your house unlocked versus locked when you leave to go somewhere. 
  2. Patching
    One of the most common audit findings we have to date and one of the biggest reasons behind successful attacks is related to unpatched systems. Software patches are issued by software providers to address vulnerabilities in systems that act as an unlocked door to a hacker, and allow hackers to leverage the vulnerability as a way to get into your systems. Ensuring your organization has a robust patch management program in place and that systems are up-to-date on needed patches is critical to your security operations. Think of an unpatched system like a car with a broken window—sure the door is locked, but any thief can reach through the broken window and unlock the car. 
  3. Logging 
    Account activity, network traffic, system changes—these are all things that can be easily logged and with the right tools, configured to alert you to suspicious activity. Logging that is done correctly can alert management to suspicious activity occurring on your network and notifies your security team to investigate the issue. Consider logging and alerting like your home’s security camera. It may alert you to the activity outside, but someone still needs to review the footage and react to it to mitigate the threat.  
  4. Test backups and more
    Making sure that your systems are successful backed up and kept separate from your production systems is a control we are all familiar with. Organizations should do more than just make sure their backups are performed nightly and maintained, but need to make sure that those data backups can be restored back to a useable state on a regular basis. More so than backups, we also often hear in the work we do that our client’s test only parts of their disaster recovery and failover plans—but have never tested a full-scale fail-over to their backup systems to determine if the failover would be successful in the event of an event or disaster. Organizations shouldn’t be scared to do a full-scale failover test, because when the time comes, you may not have the option to do a partial failover and just hope that it occurs successfully. Not testing your backups is like not test driving a car before you buy it. Sure it looks nice in the lot, but does it actually run? 
  5. Incident Management Plan 
    We often review Incident Management Plans as part of the work we do, and often note that the plans are outdated and contain incorrect information. This is an ideal time to make sure your plans are current and reflect changes that may have occurred, like your increasingly remote work force, or that systems have changed. An outdated Incident Management Plan is like being sick and trying to call your doctor for help only to find out your doctor has retired. 
  6. Training—phishing attacks
    Hackers’ most common approach to gain access to systems and deploy crippling ransomware attacks is through phishing campaigns via email. Phishing campaigns trick a user into either providing the hacker with credentials to log into systems or to download malware that could turn into ransomware through what appears to be legitimate business correspondence. Training end-users on what to look for in verifying an email’s authenticity is critical and should be seen as an opportunity that benefits the entire organization. Testing users is also critical so management understands the current risk and what is needed for additional training. Security teams should also have other supporting controls to help prevent phishing emails and detection tools in place in case a user does fall for an email. Not training your employees on security is like not coaching your little league team on how to play baseball and then being surprised you didn’t win the game because no one knew what to do. 

In the current environment, information security is an asset to any organization and needs to be supported so that you can protect your organization from cyberattacks of all kinds. While we can never guarantee that having controls in place will prevent an attack from occurring, they make it a lot more challenging for the hacker. One more analogy, and then I’m done, I promise. Basic IT controls are like speedbumps in a neighborhood. While they keep most people from speeding (and if you hit them too fast they do a number on your car), you can still get over them with enough motivation. 

If you have questions about your cybersecurity controls, or would like more information, please contact our IT security experts. We’re here to help.

Article
Cyberattack preparation: A basics refresher

Read this if you are a plan sponsor of a 401(k) plan.

The trend of US workers leaving their jobs and employers struggling with high levels of employee turnover continues to gain momentum. Another 4.5 million US workers quit their jobs in November alone, according to data from the US Bureau of Labor Statistics. Meanwhile, the number of job openings in the US remains elevated at 10.6 million, as companies across sectors and industries continue to have a hard time recruiting and retaining employees.

How are the issues related to what is now called the “Great Resignation” affecting plan sponsors in particular? The current environment not only makes it hard to build and manage an effective workforce, but plan sponsors also may face problems down the road when departing workers leave their 401(k) balances with their previous employers. These abandoned accounts can lead to penalties, additional administrative fees, and administrative challenges for employers.

How can plan sponsors resolve these issues?

Fortunately, there are some easy ways for plan sponsors to limit the potential burden of abandoned 401(k) accounts. Plan sponsors should start by ensuring that they have up-to-date contact information before an employee’s final day with the organization. Cell phone numbers, email addresses, and mailing addresses are critical data points to gather. Email addresses and other digital contact information are especially important in today’s increasingly digital world.

Existing rules can help employers resolve smaller abandoned accounts. By law, employers are allowed to cash out small, vested accounts of $1,000 or less. For vested account balances between $1,000 and $5,000, employers are permitted to move these assets to an Individual Retirement Account.

Currently, there is no specific guidance for account balances larger than $5,000. Because of this, employers have relied on Field Assistance Bulletin (FAB) 2014-01, which is meant for participants in terminated defined contribution plans. Under this bulletin, plan sponsors are instructed to send a certified letter to the participant’s last known address; keep records on attempts to reach the missing participant; ask co-workers how to find the missing participant; and call the missing participant’s cell phone, among other instructions.

To help mitigate these issues in the future, some employers are adopting auto-portability benefits. These tools automatically transfer small balances to new employers. Plan sponsors that offer auto-portability benefits should explain how this tool works to departing employees.

Plan document language on forfeitures and cash-outs

For participants who leave before they are fully vested in a 401(k) plan, employer contributions are typically placed in forfeiture accounts. Employers can write this section of the plan document in a variety of ways, so it is crucial to understand how your specific plan establishes the timing and use of the forfeiture account.

For example, forfeitures can be paid at the time of termination or when the participant hits a five-year break in service. Employers wanting to access non-vested amounts more quickly should consider amending the plan document to allow access to non-vested amounts at the time of termination (as opposed to the time of distribution).

While plan documents can set cash-out thresholds (within the minimum and maximum allowable amounts), plans may elect the small balance cash-out option for accounts under $5,000. Rollover balances also can be disregarded when determining the $5,000 threshold, but the plan document must include this caveat.

Opportunity in the next plan restatement cycle

Every six years, the Internal Revenue Service requires employers with qualified, pre-approved plans to re-write or restate their basic plan documents. The current restatement cycle for defined contribution plans will close on July 31, 2022. 

The current restatement cycle provides an opportunity to amend your plan to make it beneficial to employers and employees when team members leave your organization. Your advisor can help review your plan documents and make the most of your plan restatement process in the context of current trends in the labor market and your organization’s objectives. As always, if questions arise, please don’t hesitate to contact our Employee Benefits Audit team.

Article
Easing the potential burden of abandoned 401(k) accounts 

Read this if you work in finance or accounting or rely on financial reporting information.

Does your financial close process provide the information you need to make educated business decisions? 

Timely reporting of financial results is key to stakeholder decision making. As a result of market and regulatory obligations, companies and organizations are confronted with increasingly strict guidelines for the delivery of timely, accurate reports. Enormous amounts of information on transactions must be processed in a limited timeframe. This requires a great deal of effort on the part of your accounting and finance teams. 

The typical financial close process can be broken down into the following segments:

While this workflow seems straightforward enough, the financial close is not a single flat process, but the combination of many interrelated and often codependent processes—each with its own stages. The closing and reporting process is complex, and involves many different data suppliers and dependencies. Think your billing department, accounts payable, cash receipt, procurement, and more. All of these areas are likely to have data inputs that go into your financial close.
 

It often ends up looking like this when you consider each task:


 
To make the situation more challenging, as companies and organizations grow, the closing process can become more onerous and take longer to complete. Tasks in the financial close process are often added to an existing process—a process that may be more reactionary and based in historical practice, and may not have been well thought-out or planned for the current environment. Adding these tasks and increasing data inputs and outputs adds additional pressure to an incredibly important, but often forgotten task: analysis.

The majority of finance departments spend the bulk of their time on the financial close itself. Unfortunately, this can lead to delays, uncovering mistakes well after the fact, and reports lagging behind current business operations. The later the analysis is performed and the reports are distributed, the less useful they become for decision making. 

Financial close optimization

The good news? There is a strategy to optimize your financial close process, called financial close optimization, or fast closing. Fast closing is the periodic and structured closing and reporting process, in which all knowledge about the financial facts is collected and distributed to stakeholders more quickly.

There is an emerging trend for more frequent financial reporting, which allows companies and organizations to be more nimble and responsive to financial results, especially when facing an unprecedented crisis like the COVID-19 pandemic. Optimizing the financial close process allows for quicker reporting of business results to give stakeholders a more timely financial picture.

We understand the scarcity of human and financial resources continues to prove challenging to financial teams. Creating a culture of continuous improvement is a challenging task for almost any finance team—but given the benefits of a fast closing and the increased costs of a longer close, is this something that can be ignored any longer?

Look out for our next article on tips and strategies to optimize your financial close, which can lead to:

  • Freeing up resources to provide finance teams more time for a deeper analysis of operating performance and other strategic objectives
  • Providing more accurate and timely reporting
  • Improving the organization’s audit readiness 
  • Lessening the need for traditional routine tasks 
  • Increasing focus on clients, patients, and customers by spending more time looking ahead to possible opportunities. 

If you have any questions on how to improve your financial close, please contact us. We’re here to help.

Article
Financial close: Increasing complexity calls for improving processes  

Read this if you are interested in building a thriving workforce.

As businesses across the country continue to struggle to find and keep employees during the pandemic-influenced Great Resignation, it is time to build a workplace that sends a clear message to employees: “We care about you as a person. We trust you to do great work. Your well-being matters.” 

Many leaders and HR teams will send communications that emphasize the importance of people and the value of well-being. Despite this messaging, many organizations are missing opportunities to make well-being a natural part of day-to-day operations. The resulting disconnect between messaging and reality can result in employee frustration, disengagement, and cynicism. We’ve compiled a list of some of the most common workplace factors that can disrupt an organization’s intentions to build a strong well-being culture. 

Negative influences on building a strong well-being culture

 


Overcoming the challenges to your well-being goals takes time. And while it is natural for organizations to think of employee well-being as the responsibility of human resources and leadership, in reality well-being is a product of every part of the employee experience. In other words, it’s everyone’s job.

Well-being program considerations

Understanding the pain points for employees is an essential element of any successful well-being program, even if those pain points exist outside the domain of traditional well-being and wellness programs. Here are some things to consider:

  • Find out what matters to your employees, as every organization is different. Use surveys, interviews, and focus groups to understand priorities and do something meaningful with what you learn.
  • Make a plan to address operational challenges. Put simply, outdated technology and inefficient business processes stress employees out.
  • Assess your well-being strategy to identify strengths, gaps, and opportunities for improvement.
  • Develop and implement a strategic well-being plan that aligns with your organizational culture and goals. 
  • In the midst of planning a big system implementation of organizational change? Consider ways to integrate well-being as part of high-stress initiatives. 

Does your organization’s messaging about well-being line up with the employee experience? Have questions or need ideas about your specific situation? Contact our well-being consulting team. We’re here to help.

Article
Workplace well-being: More than words and good intentions