HBK CPAs & Consultants (HBK) announced the signing of a conclusive merger agreement with the Spire Group of Clark, New Jersey. The merger gives HBK its northernmost office and the newest office in its mid-Atlantic region, which is comprised of Princeton and Cherry Hill in New Jersey and Blue Bell, Pennsylvania.

“We are pleased to welcome the Spire Group team to HBK,” noted HBK Mid-Atlantic Principal-in-Charge, Jim Bartolomei, who made the announcement. “They are a group of outstanding and accomplished professionals who will strengthen our position in the region.”

The Spire Group is comprised of 50 team members, five of whom are joining HBK as Principals. The firm has operated as the Spire Group since 2012 with the merger of two of the region’s leading full-service CPA and consulting firms, SGA Group of Clark, and Carr Daley Sullivan & Weir of Livingston, New Jersey.

“The Spire Group was built on the pillars of client service, entrepreneurship and a culture that is centered around our team members’ success,” noted Spire Managing Principal Tom Angelo. “We found those same pillars in the HBK family. We are excited to be able to bring our talents and expertise to scale collectively with the breadth and depth of HBK. Together, we will bring tremendous opportunities to our clients and our team members in the years to come.”

The Spire Group was recognized as one of the “Top 50 Best Workplaces of 2017” by Inc. magazine, was a “Best Firms to Work For” selection for the past four years by Accounting Today, and was chosen as one of the “Best Places to Work” for the past four years by NJBIZ.

In addition to its tax, advisory and assurance practice, Spire operates Spire IT. Spire IT was founded in 2010 to provide businesses reliable technology and consulting services.

“We are excited to welcome these proven leaders to our growing team,” said Christopher M. Allegretti, CPA, CEO and Managing Principal of HBK. “The Spire Group has succeeded at building an award-winning culture and growing a highly-respected office in a very competitive market. And their successful IT practice is proof of their innovative and entrepreneurial practice style.”

HBK CPAs & Consultants (HBK) is one of the fastest growing CPA firms in the country according to the 2018 Inside Public Accounting (IPA) magazine poll.

The survey, which calculates firm size based on reported growth in net revenue, ranks HBK as the fourth fastest-growing CPA firm in the Great Lakes region. The region includes firms in Illinois, Indiana, Michigan, Ohio and Wisconsin.

HBK has consistently been listed in the IPA’s “Top 100 CPA Firms” over the past two decades. Additionally, HBK is a perennial “Top 100 Accounting Firm” according to Accounting Today (AT) magazine rankings. In 2014 and 2017, AT also listed HBK as one of the fastest growing firms in the U.S.

HBK CEO and Managing Principal Christopher Allegretti, CPA, credits his team’s efforts to work in collaboration across specialty and industry-specific service lines and throughout widespread geographic regions.

“Our focus is collaboration, working together,” he said. “We tap the depth of our resources to their fullest extent, the collective expertise of hundreds professionals in five states.”

Allegretti added that collaboration contributes to the firm’s strength in developing all-inclusive solutions. “Developing a comprehensive understanding of a client’s financial circumstances as a basis for helping them grow and protect their wealth is a hallmark of our practice and has been a great differentiator for us.”

Knowledge management is the process of recording and managing an organization’s mission-critical knowledge.

One way to use it is to mitigate the ill effects of turnover. How? First collect and categorize knowledge as either explicit (already documented) or tacit (only in employees’ heads).

To gather tacit knowledge, get employees’ buy-in, conduct interviews and use an intranet to facilitate online discussions.

With all this information, you can more quickly disseminate a departing employee’s know-how and more easily train new hires.

2018 marks the 15th consecutive, annual observation of October as Cyber Security Month, as sponsored by the Department of Homeland Security.

The goal of the campaign is to raise awareness about the importance of cyber security.

Did You Know:

1. Last year, employee errors were at the heart of 17% of breaches (including: failing to shred confidential information, sending an email to the wrong person, or misconfiguring a web server).

2. Ransomware, which initially appeared in 2013, is the top variety of malicious software prevalent today.

3. Statistically, about 22% of people click on phishing emails sent to them. Unfortunately, those who opt to click on phishing emails are highly likely to continue doing so.

Important Steps to Take:

1. Implement a Cyber Security Awareness Campaign within your organization.

2. Back up your data and verify the completeness and accuracy of individual and company backups.

3. Update your hardware and software with vendor-supplied updates on a timely basis.

HBK can assist you with any cyber security topics or questions. Please contact Matt Schiavone at mschiavone@hbkcpa.com, Bill Heaven at wheaven@hbkcpa.com, or Steve Franckhauser at sfranckhauser@hbkcpa.com for assistance.

Source of Statistics – 2018 Verizon Data Breach Investigations Report (DBIR)

Words have power. This is especially true when it comes to defining roles and responsibilities in an organization.

Therefore, it follows that up-to-date, accurate job descriptions form the foundation of every organization’s staffing efforts. Without clear, focused documentation of what each position entails and its corresponding expectations/objectives, you may struggle to hire and retain good employees. This may drastically undermine productivity.

The solution is relatively simple: Regularly review your job descriptions to ensure they are current and comprehensive. Check to see whether they list outdated procedures or other outmoded elements, such as software that you have since phased out.

If you do not already have written job descriptions for each position, you need not panic. Ask employees in those jobs to document their responsibilities and everyday duties. Each worker’s manager should then verify and, if necessary, help revise the description.

After you have updated your job descriptions, you can use them to increase organizational efficiency. Weed out the marginal duties from essential ones. Eliminate superfluous and redundant tasks, focusing each position on activities that generate revenue or eliminate expenses. You may be able to make improvements in other areas, too, such as:

Workload distribution: Are workloads properly distributed among employees? If not, rearrange them. You may find this necessary when job duties change.

Cross-training: Can your employees handle their co-workers’ responsibilities? In emergencies, and as a fraud-prevention measure, having workers who can handle each other’s jobs temporarily can serve an organization well.

Recruiting: Are you hiring people with the right skills? Up-to-date job descriptions provide a better road map for finding ideal candidates to fill your open positions.

Performance evaluations: Are employees doing their best? Detailed job descriptions allow managers to better determine whether workers are completing their assigned duties and if they’re meeting — or exceeding — expectations.

Get started soon
The longer you wait to review and rewrite job descriptions, the harder it will be to revise them. Once you’ve got them up to date, the task becomes much easier from year to year.

It’s easy to get frustrated when an employee is failing to produce the volume or quality of work a business owner expects. Sometimes leaders or managers of a company are tempted to play the blame game. However, pointing a finger at a struggling worker only exacerbates a bad situation.

In truth, performance improvement must be a two-way street. There’s no doubt that an under-achieving team member must step up and do better. But it is incumbent on an employer to provide information, tools and support to help his or her improvement efforts.

Map the Route

To get started, before addressing an employee, fully investigate the performance issue. This means first defining the nature and degree of the problem and then determining whether or not management has done the best job possible in helping the employee to be successful. For example, when and how well was the employee trained? Someone hired years ago may have been taught to do a job differently than it now needs to be done today.

Also, is the employee aware that his or her work is considered subpar? Has anyone discussed the problem with the employee or put it in writing? Staff members who aren’t sure whether they’re on the right track often wait for feedback, rather than proactively seeking guidance. That means a company leader may need to act at the first sign an employee isn’t meeting expectations, rather than hoping the situation will remedy itself.

Embark on the Journey

Once the issue has been established, the manager needs to meet with the employee, clearly and specifically stating performance concerns and informing him or her know that the objective is to work together to find a solution.

After naming the specific performance issues, it is best to ask the employee how he or she feels the situation can be corrected, including offering predetermined suggestions. There may be issues a leader is not aware of, such as tools that are in disrepair or missing, or poor lighting in the employee’s workspace. It’s crucial for a manager to be open to such input. If the employee attributes the subpar performance to lack of clarity about expectations, the remedy might be as simple as weekly meetings with his or her manager to go over what needs to be accomplished. If the employee reports feeling overwhelmed and unable to prioritize tasks, additional training on organizational skills or better use of technology may be in order.

Arrive at the Destination

Work with the employee to create a performance improvement plan that includes specific goals and a timeline for achieving them. Then follow up regularly. If the goals and timeline are met, the benefits of having a more productive team member are tremendous. If they aren’t met, it is up to a company leader to consider what further action to take. Finally, it is important to date and document meetings and conversations regarding an employee’s performance as a standing practice.

Employee retention isn’t about only strong compensation packages and company-wide recognition. It’s also about making the effort to help struggling employees find success. When the person in question is, underneath it all, a good worker, it’s a trip well worth taking.

An Open Letter to Business Owners:

Are you thinking about selling your business? Regardless of your reasons or circumstance, my first question as a professional advisor looking to help you would be, “Why do you think you are ready to sell now?” Your answer to that one question will likely give me the information I need to provide a helpful response.

Here are a few answers I’ve heard over the years of working with clients getting ready to sell their businesses:

• I was approached by a competitor who offered me a lot of money.

• I was approached by a private equity group who said they buy businesses like mine.

• My industry is changing and I don’t think I want to spend the time and money to keep up.

• My spouse has decided it is time for us to retire and start doing some things we have put off for years.

• My spouse has become ill and I need to be around to help.

• My children have no interest in taking over the business.

• I thought I’d shut the doors and sell off the assets, but figured I would see if anyone would buy it first.

• I want to use the proceeds from the sale of this business to start another business I am more passionate about.

• I just think now is the right timing for us to get a great price.

• There’s so much more that can be done with this business to benefit our clients, employees and community, but we just don’t want to risk our capital to expand at this stage of our lives.

These are just some of the answers I’ve heard, and they all provide important information, the exact reason or reasons why someone believes they are ready to sell. The sale of a business is one of the most significant transactions I can be involved in as an adviser looking to help you navigate this challenging transaction.

So what critical information will I get from your answer? Your timeline is one very important piece. Are you already talking with a potential buyer, investment banker or business broker? Or perhaps at the beginning of a two-to-three year exit plan? Regardless of where you are in the process, one of the best things I can do for you is let you know that HBK Corporate Finance will provide a no-obligation analysis of your business and talk with you about how to prepare, market, present and sell your business in a manner that keeps you in the driver’s seat.

Most of the time business owners feel they have very few, if any, people they can talk to about selling a business. In nearly every case they do not want their competitors, their customers, their employees or their community – and in some cases, even family members – to know of their plans. On top of all the financial considerations, selling a business can be emotional. Having someone to talk to about what to expect and how to lay out and implement a thoughtful plan can provide you with much-needed peace of mind.

Feel free to call me at 239-482-5522 or reach out to me at kveres@hbkswealth.com

Investment advisory services are offered through HBK Sorce Advisory LLC, doing business as HBKS Wealth Advisors. NOT FDIC INSURED – NOT BANK GUARANTEED – MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL – NOT INSURED BY ANY STATE OR FEDERAL AGENCY

Overview

The Tax Cuts and Jobs Act (the Act) created a new Business Interest Deduction limitation, effective for tax years starting after December 31, 2017. This new provision limits the deduction for business interest for all businesses, though an exception to the limitation applies for businesses who meet the gross receipts test, discussed below.

What is the Business Interest Deduction?

Businesses are allowed to deduct any interest paid or accrued on debt that is properly allocable to a trade or business, and is not considered investment income. Historically, this interest deduction has not been subject to many limitations.

Scope: Then and Now

Internal Revenue Code (IRC) Section 163(j) is the code section that provides for a limitation on the deduction for business interest. Prior to the Act, this provision had a limited application and only applied to U.S. corporations or U.S. branches of foreign corporations to prevent businesses from stripping earnings and avoiding U.S. taxation. The Act changed this code section to apply to all taxpayers and all debt, even if the debt arises from a related-party transaction.

The Limitation

The deduction is limited to the sum of business interest income, 30 percent of adjusted taxable income (ATI), and floor plan financing interest. ATI is generally taxable income, computed without regard to:

• activity that is not allocable to the trade or business;
• business interest expense or business interest income;
• depreciation, amortization, or depletion (for tax years beginning before January 1, 2022);
• net operating losses under Section 172; or
• the new 20% qualified business income deduction under Section 199A.

Floor plan financing interest is generally defined as interest paid or accrued on debt used to finance the acquisition of motor vehicles held for sale or lease, and which is secured by the inventory acquired.

If the limitation applies, the disallowed business interest will carry forward to the succeeding taxable year.

Gross Receipts Test Exemption – Small Businesses

There is an exemption from the limitation for small businesses with average annual gross receipts for the three taxable years ending prior to the taxable year at hand that is less than $25,000,000. However, taxpayers in controlled groups and partnerships may be required to aggregate gross receipts, so this should be considered when calculating whether or not the limitation should apply.

Carve Outs

Farming, real estate businesses, dealerships and certain public utility businesses successfully lobbied to avoid the application of this limitation. For dealerships, floor plan financing is fully deductible without limitation. However, these dealerships are excluded from 100% bonus depreciation on any of their assets.

Farming and real estate businesses may elect out of the new 30% limitation, but they will be required to use the Alternative Depreciation System (“ADS”) to depreciate their depreciable assets. Businesses using ADS are not eligible for 100% bonus depreciation. If the election is made, it is irrevocable, and ADS treatment will apply to all depreciable assets that are already owned or will be purchased in the future.

Real Property Business – Election Comparison

So, How does it Work?

Let’s use a hypothetical company, ABC Corporation, and assume it exceeds the small business exemption. ABC Corporation is in the business of residential rental property and, for illustration purposes, will not elect out of the business interest limitation. For the taxable year, ABC Corporation has the following income statement:

ABC Corporation can only deduct $30,000,000 of its $49,000,000 of net interest expense. The remaining $19,000,000 of disallowed interest expense will carry forward until used in a future year. The $19,000,000 disallowance is calculated as follows:

$50,000,000 interest expense – $1,000,000 interest income = $49,000,000 net interest expense

$49,000,000 net interest expense – $30,000,000 interest expense limitation = $19,000,000 disallowance

ABC Corporation will have taxable income of $45,500,000 if they do not elect out, but will have taxable income of $25,500,000 if they do elect out. Therefore, the election out is most beneficial in the current year where there is high business interest expense. However, electing out will likely decrease the depreciation deduction for the current year and future years, thus slightly increasing taxable income. The decision of whether or not an election out should be made should therefore take into account the impact on current and future depreciation.

Effect of Depreciation, Amortization, and Depletion on ATI and the Deduction

The larger the ATI, the larger the deduction. Starting in 2022, ATI will be reduced by depreciation, amortization, and depletion. Therefore, the deduction will likely decrease for many businesses at that point. Looking at our example above, if depreciation and amortization were included in the calculation of ATI, ABC corporation would have $52,150,000 of taxable income. The following shows this calculation:

ATI would be $74,500,000 because depreciation and amortization amount are not added back. ATI of $74,500,000 is then multiplied by 30%, which results in a limitation for business interest in the amount of $22,350,000. Taxable income ($74,500,000) is then reduced by the limitation amount ($22,350,000) to equal $52,150,000 of taxable income.

Conclusion

The new business interest expense limitation can be complicated, depending on the type of business and the business’s average gross receipts. For businesses that qualify to elect out of the limitation, it is important to compare the effects of the deduction limitation and the depreciation adjustments on overall taxable income for the current and future years. For businesses that will be subject to the limitation, planning should focus on the method of providing future financing since the limitation may restrict cash flow.

Please consult your tax advisor or a member of the HBK Tax Advisory Group to determine whether or not this limitation applies to your business.

Earlier this year, the Financial Accounting Standards Board (FASB) issued a revised lease accounting standard. The new standard – Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)” – may impact many contractors that lease vehicles, equipment or buildings.

FASB standards apply to all contractors that must maintain financial statements that comply with generally accepted accounting principles (GAAP). GAAP-compliant statements are required by lenders and bonding companies for most privately held contractors and public contractors, as well. The new financial reporting and accounting procedures are likely to affect some of the financial ratios stipulated in various types of loan covenants and surety agreements. Now is a good time to proactively plan in order to try to pre-empt potential problems.

The Changes

Under existing accounting rules, operating leases generally do not appear on a company’s balance sheet. This applies to all types of operating leases, including leases for vehicles, equipment, office machines, and office or warehouse space.

Under the new standard, you will be required to record the present value of the scheduled lease payments as a liability on the balance sheet. This liability would be balanced by recording the “right-of-use” value of the property or equipment as an asset. (There could be minor additional adjustments to the asset to reflect broker’s fees or other direct costs.)

The new standard allows an exception for short-term leases or those lasting less than 12 months that do not include a renewal option the lessee is “reasonably certain” to exercise. This means even short-term leases must appear on the balance sheet if they include extension options that meet these criteria.

The Impact

The most significant effect of the new lease accounting rules for most contractors will be their impact on commonly used financial metrics, particularly the working capital ratio and the debt-to-equity ratio. Many loan agreements and surety contracts require contractors to maintain these ratios at specified levels and to submit financial statements that demonstrate compliance. As a result, many contractors could find themselves out of compliance because of lease obligations that drive up their current liabilities and total liabilities.

Operating Leases v. Finance Leases

The existing standard makes a distinction between operating leases and capital leases, such as those that offer a bargain purchase option at the end of the lease. Because capital leases are generally regarded as a form of financing, they are already recorded on the balance sheet as a liability.

Under the new standard, this distinction is less important, since all leases over 12 months in duration will now appear on the balance sheet. The interest and amortization expenses for the two types of leases are handled differently, but these distinctions will not affect most contractors significantly. The new standard also changes the terminology somewhat, referring to finance leases instead of capital leases.

Other Related Matters

Many leases in the construction industry involve company owners who purchase property and lease it back to their businesses. The new lease accounting rules apply to such related party leases the same as third party leases, based on the “legally enforceable” terms of the lease agreement.

How to Prepare

For publicly traded companies, the new lease accounting standard will take effect for reporting periods beginning after Dec. 15, 2018. For privately held companies, the new standard goes into effect for reporting periods beginning after Dec. 15, 2019. Companies can begin applying the standard sooner if they choose.

Although the effective date seems to be far in the future, implementation of this standard will generally be overlapping with the implementation of FASB’s new revenue recognition standard. Because of this, companies should begin responding to this new standard sooner rather than later through the following methodology:

1. Understand the new standard and monitor changes in interpretation that are naturally expected to occur.

2. Create a cross-functional implementation team (e.g. finance, legal, operations, human resources, I.T.) and plan to implement the new standard.

3. Identify and communicate with stakeholders regarding the potential impacts to financial metrics, covenants, and other agreements (e.g. compensation).

4. Populate lease data and establish required judgments, estimates and accounting policy elections.

How HBK Can Help

HBK’s multidisciplinary team of accounting, tax and valuation professionals are available to assist in assessing how the new leases standard will impact you. Existing attest clients will receive training services on the technical aspects of the new standard as well as advice on project management and planning. Further assessment and implementation services are available to non-attest clients.

WHAT IS AN S CORPORATION?
S Corporations are “flow-through” tax entities, meaning income, deductions, credits and other activity are allocated to shareholders to be reported on their individual tax returns. When shareholders are allocated losses from an S Corporation they can use the losses to offset income from other sources — if the losses pass three tests, the first two of which, “stock basis” and “at-risk” limitation rules, are the subject of this article. Both are based on how the loss was funded.

The goal of stock basis and at-risk limitation rules is to limit a shareholder’s use of losses to those that have been personally funded by the shareholder. S Corporation shareholders can take losses to the extent of their personal investment in the corporation. Losses funded by loans from unrelated parties or loans from the shareholders of funds that are not at risk cannot be deducted. Instead, the losses are suspended and carried forward until the shareholder increases their stock basis and amount at risk.

TEST NO. 1: STOCK BASIS
A shareholder’s initial stock basis is determined by how they acquire their interest in the S Corporation: the money and other property a shareholder contributes to start the corporation or the amount paid to purchase shares in the corporation. If S Corporation shares are gifted, the recipient is also gifted the donor’s basis in the shares. The basis of inherited shares is adjusted to the fair market value at time of the decedent’s death.

From the initial basis, a shareholder’s basis can be increased by capital contributions, personal loans to the corporation, and income allocated to the shareholder; or decreased by distributions, repayment of loans from the shareholder, and losses allocated to the shareholder. If a shareholder has stock basis in excess of their loss at the end of the tax year, they pass the first test in determining whether or not they can deduct the loss.

TEST NO. 2: AT-RISK LIMITATION
To deduct an S Corporation loss, the taxpayer must also be sufficiently at risk. Simply stated, a shareholder’s amount at risk is the extent to which they have dipped into their own pocket to fund operations. In a partnership, partner tax basis includes their share of the partnership debt, including loans from third parties and banks. This often results in differences between partner basis and at-risk basis because the partners have basis for partnership debt but are not at risk. In an S Corporation stock basis and at-risk basis are often the same because shareholders typically do not receive stock basis for their share of S Corporation debt. There is one significant exception: an S Corporation shareholder’s basis includes money loaned by the shareholder to the corporation.

While an S Corporation shareholder receives stock basis for loans made to the corporation they are not always at risk for the debt. A shareholder is only at risk for loans it makes to the corporation if the shareholder is at risk for the funds loaned to the corporation. We often encounter scenarios where a shareholder personally borrows money and loans the proceeds to the S Corporation, a so-called “back-to-back” loan. A shareholder is not at risk for a back-to-back loan unless they are personally liable for the repayment of the loan, or if they have pledged property other than S Corporation property or their S Corporation stock as security for the loan. If the loan to the shareholder is “nonrecourse,” meaning they are not personally liable for the repayment, they will not receive at-risk basis by loaning the proceeds to their S Corporation.

If you are a shareholder in an S Corporation that has incurred a loss during the tax year, and you pass the stock basis and at-risk tests, you’re two-thirds of the way home in terms of being able to deduct your losses.

This is the first in a series. Read Can You Deduct Your S Corporation Losses? Passive Activity Loss Rule