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Value creation and ESG: Building a better future—and business

By:

A Senior in BerryDunn’s Accounting and Assurance Practice Group, Jake works with clients to prepare financial statements and gain an understanding of accounting and reporting requirements. He works primarily in the commercial and employee benefit sectors.

Jake Black
09.07.22

Read this if you are a construction or architecture and engineering firm looking at ESG initiatives at your organization.

Environmental, Social, and Governance (ESG) is an ever-growing topic that may have a significant impact on the future growth and sustainability of your company. Beyond the awareness of ESG, the key question is, “Why should I care?” While there are a multitude of answers to this question, there is one answer that can propel your business forward to outpace your competitors and create value. 

ESG initiatives for construction, engineering, and architectural firms can be broken down into four separate value creation opportunities: growth through competitive bidding, cost-reduction, investment optimization, and cultural enhancement. Here we look at the benefits of each that your company can leverage to improve your competitive advantage.

Growth through competitive bidding

According to recent data, the construction industry accounts for nearly half of total CO2 annual global emissions, including 27% from building operations, 10% in building materials and construction, and 10% in other construction activities. Combined with the US goal of net-zero emissions by 2050 set by the White House, there is a heightened focus on environmentally sustainable construction. As reduced emissions goals evolve at the state and local government level, there are increased opportunities for ESG-focused companies to expand into new geographic markets and continue to grow in existing ones. Particularly for government-driven projects, there has been increased screening of contractors for their prior and current sustainability performance. By improving your ESG profile, you may be able to get more government projects moving forward. 

Cost-reduction

When it comes to cost-reduction, ESG initiatives are often thought of in a negative light. Through a strong ESG program, there are a multitude of cost-saving opportunities. Operational costs can be reduced by implementing ESG initiatives that promote reduced water and energy consumption. Some key cost-saving opportunities for contractors, architects, and engineers may lie in the Social (behavior around people, political and social issues) and Governance (corporate behavior, including compensation and profits) pillars of ESG. Cultural enhancement is linked to reduced employee turnover, which can increase productivity and reduce labor and overhead costs. A strong ESG approach also lowers the risk of regulatory and legal intervention, which can reduce costs by eliminating project delays and mitigate risk of liability. 

Investment optimization

Shifting focus to employ an ESG-conscious approach could help minimize exposure to long-term investment risk due to environmental and sustainability concerns. While there are certainly upfront costs when implementing an ESG strategy, failure to act or explore now may eventually result in even greater expense in the future. Regulatory frameworks are in the process of being created that will ban or limit the use of certain building products. The cost of removing banned products and installing eco-friendly ones in the future will likely exceed the cost of using eco-friendly products today. ESG is a forward-thinking process that requires some up-front cost and effort that most believe will pay in dividends in the future. 

Cultural enhancement

ESG-conscious companies can attract and retain talent, improve employee morale and motivation, improve productivity, and lower costs. ESG components in the workforce can range from health and safety precautions on job sites to well-being initiatives and staff learning and development programs. Studies show that the Millennial and Gen Z generations place a larger importance on a company’s ESG program than former generations. These two generations will overwhelmingly account for the majority of the workforce in the next five to 10 years. ESG programs that place a focus on employee well-being are beneficial for the employee, employer, and in turn the environment. 

Implementing a strong ESG approach doesn’t happen all at once. By making small inroads in some of the areas mentioned above, you can better position your company for success in the future and take advantage of the many opportunities ESG may provide. 

If you have questions about ESG or have a question about your specific situation, please contact our construction team. We’re here to help you find and navigate new opportunities.

Topics: ESG

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BerryDunn experts and consultants

This is our second of five articles addressing the many aspects of business valuation. In the first article, we presented an overview of the three stages of the value acceleration process (Discover, Prepare, and Decide). In this article we are going to look more closely at the Discover stage of the process.

In the Discover stage, business owners take inventory of their personal, financial, and business goals, noting ways to increase alignment and reduce risk. The objective of the Discover stage is to gather data and assemble information into a prioritized action plan, using the following general framework.

Every client we have talked to so far has plans and priorities outside of their business. Accordingly, the first topic in the Discover stage is to explore your personal plans and how they may affect business goals and operations. What do you want to do next in your personal life? How will you get it done?

Another area to explore is your personal financial plan, and how this interacts with your personal goals and business plans. What do you currently have? How much do you need to fund your other goals?

The third leg of the value acceleration “three-legged stool” is business goals. How much can the business contribute to your other goals? How much do you need from your business? What are the strengths and weaknesses of your business? How do these compare to other businesses? How can business value be enhanced? A business valuation can help you to answer these questions.

A business valuation can clarify the standing of your business regarding the qualities buyers find attractive. Relevant business attractiveness factors include the following:

  • Market factors, such as barriers to entry, competitive advantages, market leadership, economic prosperity, and market growth
  • Forecast factors, such as potential profit and revenue growth, revenue stream predictability, and whether or not revenue comes from recurring sources
  • Business factors, such as years of operation, management strength, customer loyalty, branding, customer database, intellectual property/technology, staff contracts, location, business owner reliance, marketing systems, and business systems

Your company’s performance in these areas may lead to a gap between what your business is worth and what it could be worth. Armed with the information from this assessment, you can prepare a plan to address this “value gap” and look toward your plans for the future.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

Next up in our value acceleration series is all about what we call the four C's of the value acceleration process. 

Article
The discover stage: Value acceleration series part two (of five)

Read this if you are a broker-dealer. 

Effective January 1, 2023, the Financial Industry Regulatory Authority (FINRA) and other industry self-regulatory organizations adopted certain changes to the securities industry continuing education (CE) and registration rules to train registered persons more effectively.

These upcoming changes, which include the annual Regulatory Element for each registration category and the extension of the Firm Element to all registered persons, are expected to help make sure all registered persons receive timely and relevant training. See below for some of these changes.

Annual Regulatory Element for each registration category Extension of Firm Element
of all registered persons

Annually, by December 31st, registered persons will be required to complete the CE Regulatory Element

Registered persons will receive content tailored specifically to each representative or principal registration category they hold

Failure to complete the Regulatory Requirement annually will cause the registered person to be automatically designated as CE inactive by FINRA

The CE rules have been amended to:

  • Extend the annual Firm Element requirement to all registered persons
  • Allow firms to consider their training programs relating to the anti-money laundering compliance meeting toward satisfying an individual's annual Firm Element requirement

The current minimum Firm Element training criteria has been revised to require the training to cover topics related to professional responsibility and the role, activities, or responsibilities of the registered person


Firms should begin to prepare now for these changes. FINRA and the CE Council are committed to developing resources and guidance to support firms as they assess their education needs and develop their training requirements. FINRA is committed to providing more information as it becomes available. 

What can you do now to comply with these upcoming rule changes by January 1, 2023?
Review FINRA’s Regulatory Notice 21-41 and FINRA’s CE Transformation resource page to become familiar with upcoming changes. Review the 2023 Regulatory Element topics on FINRA’s website.

If you have any questions about your specific situation or would like more information, please contact our Broker-dealers team. We're here to help. 

Article
Important changes to securities industry continuing education

This is the first article in our five-article series that reviews the art and science of business valuation. The series is based on an in-person program we offer from time to time.  

Did you know that just 12 months after selling, three out of four business owners surveyed “profoundly regretted” their decision? Situations like these highlight the importance of the value acceleration process, which focuses on increasing value and aligning business, personal, and financial goals. Through this process, business owners will be better prepared for business transitions, and therefore be significantly more satisfied with their decisions.

Here is a high-level overview of the value acceleration process. This process has three stages, diagrammed here:

The Discover stage is also called the “triggering event.” This is where business owners take inventory of their situation, focusing on risk reduction and alignment of their business, personal, and financial goals. The information gleaned in this stage is then compiled into a prioritized action plan utilized in future stages.

In the Prepare stage, business owners follow through on business improvement and personal/financial planning action items formed in the discover stage. Examples of action items include the following:

  • Addressing weaknesses identified in the Discover stage, in the business, or in personal financial planning
  • Protecting value through planning documents and making sure appropriate insurance is in place
  • Analyzing and prioritizing projects to improve the value of the business, as identified in Discover stage
  • Developing strategies to increase liquidity and retirement savings

The last stage in the process is the Decide stage. At this point, business owners choose between continuing to drive additional value into the business or to sell it.

Through the value acceleration process, we help business owners build value into their businesses and liquidity into their lives.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

Read more! In our next installment of the value acceleration blog series, we cover the Discover stage.

Article
The process: Value acceleration series part one (of five)

On November 8, 2022, Massachusetts voters approved a constitutional amendment to alter the state’s flat 5% income tax to add a 4% surtax on annual income exceeding $1 million. The so-called “millionaires tax,” also referred to as the “Fair Share Amendment,” is effective for tax years beginning on or after Jan. 1, 2023. The annual income level subject to the surtax would be adjusted yearly to reflect increases in the cost of living.

This measure is expected to bring in revenue of between $1.2 and $2 billion annually. The proceeds from the increased tax collections will support state budgets in the areas of education, roads, bridges, and public transportation. The measure passed with 52% voter support and is the sixth attempt to change the state’s flat income tax rate since 1962. This amendment is expected to affect about 0.6% of the state’s population, or about 20,000 taxpayers.

If you expect your income to exceed $1 million in 2023 and have questions regarding the recent legislation, please contact a member of our state and local tax team.

Article
Massachusetts voters pass "Millionaires tax"

The Pennsylvania Commonwealth Court (one of Pennsylvania’s appellate-level courts) has unanimously ruled that the Pennsylvania Department of Revenue (the Department) could not assert nexus against out-of-state online businesses that sell merchandise through Amazon’s Fulfillment by Amazon (FBA) program. (Online Merchants Guild v. Hassell, Commonwealth Court of Pennsylvania, No. 179 M.D. 2021, September 9, 2022).

Case details 

The Online Merchants Guild case is one of the first state court decisions since the US Supreme Court’s Wayfair decision to apply Due Process Clause nexus to internet sellers. The main issue before the court was whether non-Pennsylvania merchants that sell through Amazon’s FBA program are subject to the sales tax and personal income tax (PIT) provisions of the state’s tax code because Amazon stored their merchandise inventory in warehouses located in Pennsylvania. Fulfillment by Amazon is a service that allows businesses to outsource order fulfillment to Amazon. Businesses send products to Amazon fulfillment centers and when a customer makes a purchase, Amazon picks, packs, and ships the order. Ever since the US Supreme Court’s Quill decision, the Due Process Clause’s “minimum contacts” nexus has only required an out-of-state business to have purposefully availed itself of a state’s market, including purely economic connections with the state. 

Ultimately, the court held that the Department failed to provide sufficient evidence that non-Pennsylvania businesses selling merchandise through the FBA program have sufficient contacts with the state. The court reasoned the connections to the state were shown to be limited to the storage of merchandise by Amazon in one of Amazon’s Pennsylvania warehouses. As such, FBA sellers do not have sufficient contacts with the state such that the Department can mandate they collect and remit sales tax or pay PIT.

While analyzing the specific facts of this case, the court indicated that an FBA seller has no control over its merchandise once Amazon receives the inventory. Applying the Due Process Clause and the so-called stream-of-commerce theory, the court stated that it is “hard pressed to envision how, in these circumstances, an FBA merchant has placed its merchandise in the stream of commerce with the expectation that it would not be purchased by a customer located in [Pennsylvania], or has availed itself of [Pennsylvania’s] protections, opportunities, and services.”

The court also addressed the Department’s authority of its nexus-auditing policy of issuing Business Activity Questionnaires (BAQs) to the FBA sellers. The 2021 BAQ indicates that a business may be subject to tax due to the storage of merchandise in one of Amazon’s Pennsylvania warehouses. The Department argued that the BAQ was merely a “demand for information.” The court disagreed with the Department. The BAQ indicates that “[f]ailure to provide the information requested will result in additional enforcement actions,” language that clearly suggests the existence of pending enforcement actions according to the court. The court was critical of the Department’s arguments, stating that the Department’s statutory investigative powers apply to the records of taxpayers, not individuals or entities the Department suspects may be taxpayers. The court went on to say that the Department does not have “unfettered authority to seek business information from any person or entity it desires for the purpose of determining its status as a taxpayer.”

Insights

  • The Department did not appeal to Pennsylvania’s Supreme Court “as of right” within 30 days. As such, the Commonwealth Court’s precedential opinion will likely be the final word in the nexus saga for Amazon FBA sellers in Pennsylvania, especially due to the fact that Amazon now collects sales tax on Pennsylvania sales. From the Department’s perspective, the outcome of this case is limited to a narrow situation—Amazon FBA sellers. If there is another fact pattern where a business is aware of its inventory in the state, it is possible nexus may be asserted by the state.
  • The tax period at issue in Online Merchants Guild preceded the enactment of Pennsylvania’s marketplace facilitator nexus statute. Although most states’ marketplace facilitator nexus laws have existed for several years, it is possible that other states will continue to attempt to collect sales tax from marketplace sellers for periods before the enactment of those laws.
  • The outcome of this case is limited to sales tax and PIT. It did not address Pennsylvania’s corporate net income tax (CNIT). Pennsylvania’s CNIT imposition statute includes an “owning property in the state” provision. Would the decision under the same fact pattern, but for CNIT purposes, have been different? Without a legislative amendment, businesses should analyze their specific facts and circumstances, apply Pennsylvania’s CNIT rules, and address whether they have nexus in the state for CNIT purposes.
  • This case was originally prompted by a trade association (Online Merchants Guild) in response to a Business Activities Questionnaire (BAQ) request it received as part of the Department of Revenue’s voluntary disclosure program for retailers with inventory in Pennsylvania in 2021. As a result of the decision, we expect the Department to update their administrative guidance on this topic.

Written by Ilya Lipin, Melissa Myers and Zach Lutz. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com

Article
Pennsylvania: Remote sales via Amazon FBA did not create sales tax and personal income tax nexus.

Read this if you are responsible for cybersecurity or are a member of a board of directors.

The board’s role in the oversight of organizational risk is increasingly complicated by cybersecurity concerns. Cybersecurity risk is pervasive and will affect companies in a variety of ways. The responsibility for detailed cyber risk oversight within the board should be well documented and communicated, and may often touch various committees across the board, including but not limited to risk, audit, and compliance. With the increasing complexity surrounding cybersecurity, it is also important for the board to evaluate existing experience and skills, identify gaps, and address those gaps through succession planning or leveraging advisors.

Additionally, all directors need to maintain continual knowledge about evolving cyber issues and management’s plans for allocating resources with respect to the preparedness in responding to cyber risks. Such knowledge helps boards assess the priority-driven and investment decisions put forth by management needed in critical areas.

Here are some critical questions that boards and management should be considering with respect to mitigating cyber security risk for their organizations. They may be useful as a starting point for boards to use in their discussions and as a guide when looking at their oversight of management’s plans for addressing potential cyber risks.

General

  • What is the threat profile and risk tolerance of our organization based on our business model and the type of data our organization holds?
  • Is the cyber risk management plan documented, including the identification, protection, and disposal of data?
  • Has the cyber risk management plan been tested?
  • Does our organization’s cybersecurity strategy align with our threat profile and risk tolerance?
  • Is our cybersecurity risk viewed as an enterprise-wide issue and incorporated into our overall risk identification, management, and mitigation process?
  • What percentage of our IT budget is dedicated to cybersecurity?
  • Does that allocation conform to industry standards?
  • Is it adequate based on our threat profile?
  • What are stakeholder demands and priorities for cybersecurity? Data privacy? Data governance? What interactions has the company or board had with shareholders regarding cybersecurity?
  • What is the interaction model between senior management and the board for communications regarding cybersecurity?
  • Has the regulatory focus on the board’s cybersecurity responsibility been increasing? If so, what is driving that focus?

Board cybersecurity oversight

  • How is oversight of cybersecurity structured (committee vs. full board) and why? Is this structure well documented in the appropriate governance charters?
  • Is cybersecurity an area considered and reported as a director competency? If so, have skill/experience gaps been identified together with plans to resolve those gaps?
  • Is there a cybersecurity expert on the board?

Overall cybersecurity strategy

  • Does the board play an active part in determining an organization’s cybersecurity strategy?
  • What are the key elements of a good cybersecurity strategy?
  • Is the organization’s cybersecurity preparedness receiving the appropriate level of time and attention from management and the board (or appropriate board committee)?
  • How do management and the board (or appropriate board committee) make this process part of the organization’s enterprise-wide governance framework?
  • How do management and the board (or appropriate board committee) support improvements to the organization’s process for conducting a cybersecurity assessment?

Risk assessment: risk profile

  • What are the potential cyber threats to the organization?
  • Who is responsible for management oversight of cyber risk?
  • Has a formal cyber assessment been performed? Does it need to be updated?
  • Do management and the board understand the organization’s vulnerabilities and how it may be targeted for cyber-attacks?
  • What do the results of the cybersecurity assessment mean to the organization as it looks at its overall risk profile?
  • Is management regularly updating the organization’s inherent risk profile to reflect changes in activities, services, and products?

Risk assessment: cyber maturity oversight

  • Who is accountable for assessing, managing, and monitoring the risks posed by changes to the business strategy or technology and are those individuals empowered to carry out those responsibilities?
  • Is there someone dedicated full-time to our cybersecurity mission and function, such as a Chief Information Security Officer (CISO)?
  • Is our cybersecurity function properly aligned within the organization? (Aligning the CISO under the CIO may not always be the best model as it may present a conflict. Many organizations align this function under the risk, compliance, audit, or legal functions, while others with a direct or “dotted line” reporting to the CEO.)
  • Do the inherent risk profile and cybersecurity maturity levels meet risk management expectations from management, the board, and shareholders? If there is misalignment, what are the proposed plans to bring them into alignment?

 Cybersecurity controls

  • Do the organization’s policies and procedures demonstrate management’s commitment to sustaining appropriate cybersecurity maturity levels?
  • What is the ongoing practice for gathering, monitoring, analyzing, and reporting risks?
  • How effective are the organization’s risk management activities and controls identified in the assessment?
  • Are there more efficient or effective means for achieving or improving the organization’s risk management and control objectives?
  • Are there controls in place to ensure adequate, accurate and timely reporting of cybersecurity related content?
  • How does the company remain apprised of laws and regulations and ensure compliance?
  • What cloud services does our organization use and how risky are they?
  • How are we protecting sensitive data?

Threat intelligence and collaboration

  • What is the process for gathering and validating inherent risk profile and cybersecurity maturity information?
  • Does our organization share threat intelligence with law enforcement?
  • What third parties does the organization rely on to support critical activities and does the organization regularly audit their level of access?
  • What is the process to oversee third parties and understand their inherent risks and cybersecurity maturity?

Cybersecurity metrics

  • Have we defined appropriate cybersecurity metrics, the format, and who should be reporting to the board?
  • How regularly should a board obtain IT metric information?
  • Is the information meaningful in a way that invokes a reaction and provides a clear understanding of the level of risk willing to be accepted, transferred, or mitigated?
  • How is the board actively monitoring progress or lack of progress and holding management accountable?

Cyber incident management and resilience

  • How does management validate the type and volume of cyber-attacks?
  • Does the organization have a comprehensive cyber incident response and recovery plan? Does it involve all key stakeholders—both internal and external? Does it include a business disaster recovery communication process?
  • How does an incident response and recovery plan fit into the overall cybersecurity strategy?
  • Is the board’s response role clearly defined?
  • Is the cyber incident response reviewed and rehearsed at least annually? Do rehearsals include cyber incident exercises?
  • Is there a culture of cyber awareness and reporting at all levels of the company?
  • Is the company adequately insured and is coverage reviewed at least annually?

Cybersecurity education

  • How does the board remain current on cybersecurity developments in the market and the regulatory environment?
  • Currently, how does the board evaluate directors' knowledge of the current cyber environment and cybersecurity issues impacting their organizations?
  • Do boards currently have the skill sets necessary to adequately oversee cybersecurity? How is the board identifying and evaluating the necessary director skills and experience in this area?
  • Are directors provided with educational opportunities in this area?
  • Is regular cybersecurity education provided to the entire organization?

Cybersecurity disclosure

  • Has oversight of cybersecurity reporting been defined for management and the board?
  • Are company policies and procedures to identify and manage cybersecurity risk, management’s role in implementing cybersecurity policies and procedures, board of directors’ cybersecurity expertise and its oversight of cybersecurity risk, being included within the financial statement and proxy disclosures?
  • Does the company have a mechanism for timely reporting of material cybersecurity incidents?
  • Have updates about previously reported material cybersecurity threats and incidents been included in the financial statements?

If you have any questions about cybersecurity programs, communicating with your board about cybersecurity, or have a specific question about your company or organization, please contact our IT security experts. We're here to help. 

Article
Board oversight of cybersecurity: Questions to ask

Read this if you think your organization may have to prepare an HRSA audit.

Many healthcare providers who have never done an audit before may be required by the Health Resources and Services Administration (HRSA) agency to do so this year because they received Provider Relief Funding (PRF). We’re helping you prepare by answering some common queries about the PRF audit:

Will my organization have to complete a PRF audit?

The HRSA requires organizations to complete a federal single audit when they expend more than $750,000 of federal funding in one year, regardless of whether those federally sourced funds came directly from the federal government or were passed from a state or local government. Healthcare providers who received $10,000 or more from the PRF during a given period must report on usage.

For many providers, this is the first time they’ve received over $750,000 in federal funding. As a result, these providers will need to complete the single audit for the first time.

Other providers, especially physician practices, may not meet the single audit expense threshold, but that doesn’t mean they’re free from audit obligations. While they may not have to complete a single audit, if they received funding from the PRF, they may need to complete a HRSA-required audit—and the data requests for these audits are, in some cases, more involved than those for the single audit.

What will the HRSA’s PRF audit look like?

The audit will address the data used by the providers to report on their usage of PRF money. That means they will need to provide support for lost revenue and expenses that justify the use of the funds that they received.

The HRSA is going to drill down on the revenue numbers, specifically looking at the general ledger (GL) and other select revenue tests. On the expenses side, they’re going to look at the GL, invoice dates, payments and more.

To complete this audit, HRSA will require a significant amount of supporting documentation. Ideally, most of these documents should already have been copied and set aside as support in anticipation of financial reporting requirements. Below is a partial list of items that could be requested during the audit:

  • General Ledger details
  • Listing of expenses reimbursed with PRF payments grouped into specified categories
  • Listing of patient care revenue by payer
  • Listing of other sources of assistance
  • Listing of expenses reimbursed with the other assistance received
  • Detailed inventory listing of IT supplies
  • Budget attestation from CEO or CFO and board minutes showing ratification of the budget before March 27, 2020
  • Documentation of lost revenue methodologies
  • Audit financial statements
  • CMS cost reports for Medicare and Medicaid
  • Other supporting documentation

If certain documentation isn’t available, providers will need to request copies from their vendors. Missing documentation may make it difficult to justify the use of funds, in which case, providers may have to repay a portion or all of their provider relief funding.

It’s possible that certain expenses were not allowable under PRF. However, that doesn’t necessarily mean providers will have to repay their funds. Providers may have other lost revenue or expenses that would be allowed under PRF—but only if they have the documentation to prove it. That’s why it’s crucial that providers have all relevant documentation for expenses and lost revenue over the periods they received provider relief funding.

What challenges should I anticipate when it comes to completing the audit?

According to the 2022 BDO Healthcare CFO Outlook Survey, 35% of respondents identified CARES Act/PRF reporting as a regulatory concern.

Much of this concern likely stems from a lack of resources as well as audit inexperience. Many providers who will have to complete an HRSA audit don’t have the necessary resources to dedicate to navigating the process. In addition, they may not know the type, scope, or time frame of documentation they need to pull. They may also struggle to locate certain documentation, especially documentation that’s more than two years old.

Finding the right people to sift through the information to ensure its accuracy can be extremely difficult, especially if the documents are not filed electronically. This problem is even greater right now, given the professional services labor shortage that makes it difficult to hire the right people for the job if they aren’t already employed at your organization.

What should my next steps be?

To get ready for a potential HRSA audit, there are at least three immediate steps you should take:

  1. Select a responsible point person. One person should be responsible for coordinating the process to ensure that nothing falls through the cracks or is overlooked.
  2. Keep your PRF filing reports on hand. Pull any related supporting documentation and collate it into one place if it isn’t already.
  3. Identify what support is needed by doing a gap analysis. Determine where you need additional support or expertise and seek to close these gaps before the notification of any audit process.

Insufficient documentation may result in the recapture of provider relief funding by the HRSA. Fortunately, a lack of documentation is preventable with the right support and resources in place.

Article
HRSA audit preparation: All you need to know

Read this if you are a business owner or involved in estate planning.

I have some good news, and I have some bad news. Here’s the bad news. Inflation impacts our lives in countless ways—spending, interest rates, savings, business decisions—driven by economic cycles beyond our control. Price increases are observable across the entire spectrum of goods and services. Businesses able to pass on increases in sustainability may continue benefiting from these general increases, but only to a point. These increases are characteristic of late expansion and slowdown phases of economic cycles and typically top out in a contractionary phase. Economic policy, by way of restrictive monetary policies, aims to reign in the acceleration rate of inflation. This impact is typically subject to a time lag in observation. Economic decline, holding all else equal, typically results in lower overall profitability and depressed business value. Increased uncertainty, holding all else equal, typically results in higher costs of capital, which in turn results in depressed business value. Bad news indeed.

Now for the good news. A potential silver lining exists. You may have the ability to transfer a larger portion of ownership of privately held business interests at lower levels of value—while annual exclusions are increasing because of inflation. Here’s how.

Federal gift tax annual exclusion increasing

For the tax year ending December 31, 2022, the federal gift tax annual exclusion is $16,000 per individual ($32,000 per married couple choosing to split gifts) for 2022. IRC § 2503 (b)(2) allows for inflationary adjustments to annual gift tax exclusion, but only in $1,000 increments. Based on inflationary adjustments, the federal gift tax annual exclusion for 2023 is $17,000 per individual ($34,000 per married couple choosing to split gifts). The gift tax annual exclusion allows a taxpayer to gift a certain amount to a recipient each year without using any of the taxpayer’s lifetime exemption amount. 

For gifts over and above an annual exclusion amount, each taxpayer receives a lifetime transfer tax exemption, which is unified for both federal gift and estate taxes. At current 2022 levels, the lifetime exemption amount is $12.06 million for each taxpayer, or $24.12 million for married couples. Inflationary adjustments impact this amount as well. For 2023 the lifetime exemption is $12.92 million for each taxpayer, or $25.84 million for married couples. That is an increase of almost $900,000 per taxpayer in one year. 

Gifting strategies

Knowing the current and future annual exclusion and lifetime exemption amounts, privately held business owners may make use of efficient gifting strategies in straddling the calendar year reference date of valuation. In this example, the subject company and subject interest would be valued on distinct sides of the calendar year with one primary analysis using very similar financial data (a balance sheet as of December 31, 2022, may closely resemble a balance sheet on January 1, 2023). The primary analysis may allow the privately held business owners to accomplish 2022 and 2023 planning in one fell swoop.

If transfers through gifting are already part of your overall long-term wealth and estate plan, accelerating parts of these plans may make sense—particularly as lifetime exemptions are at historically high levels. 

2017 Tax Cuts and Jobs Act 

The 2017 Tax Cuts and Jobs Acts provides for reversion of the lifetime exemption amount back to $5 million (adjusted for post-2011 inflation) for each taxpayer and $10 million (adjusted for post-2011 inflation) for married couples after the year 2025.

If considering gifting strategies as part of your overall wealth and estate plan, consult your professional legal and accounting teams to fully understand whether additional gifts can or should be made in 2022 and in 2023 for tax planning purposes.

Article
An inflationary silver lining for privately held businesses