Each day I talk to business leaders about what they like best – and least – about their Certified Public Accountants (CPAs). The responses range from, “I won’t buy a mobile phone without checking with Mary,” to “Mark is okay, but he likes my rival football team and that’s unacceptable.”

Clearly, there are many factors that can solidify or dissolve a relationship with a trusted advisor such as your CPA. Some, while not preferred, are tolerable; others are absolute deal breakers. Still, the services of a CPA are crucial to the success of any company. That’s why you should ask yourself these five questions to determine if your CPA is meeting your needs, or it’s time to move on to someone else.

Does my CPA understand my business and industry?

As the business development manager of a “Top 50” accounting and wealth management firm, I hear the term “generalist” quite often. In the accounting world, the label applies to a professional with clients in multiple industries. Traditionally, a CPA’s role was to have a working knowledge of each of their clients’ industries. Today, top firms specialize in precise areas of focus to ensure they are experts in the tax laws that govern their clients’ industries. For example, if you own a construction company and the only construction company your CPA works with is your own, are you certain you are taking advantage of every potential tax benefit and functional process available to streamline and grow your operations?

Am I getting the value I deserve?

Value has different meanings for different people. Accounting value is leverageable by:

• Knowing your CPA is always there when you have questions
• Trusting your CPA is current with the ever-changing tax laws that govern business owners
• Counting on your CPA to complete important tasks on time

Value is essentially whatever you perceive it to be. Knowing what is important to you and your business will help you identify problems when your expectations of value are not being met. Make sure you can define “value” when working with your CPA, who must be a trusted advisor to be effective.

Have I outgrown my CPA?

You likely have a good relationship with your CPA. He or she has been with you since the beginning, seen your kids grow up, been there through tough times and good. But does that alone ensure he or she is the best partner for your company today? Can he or she guide you through the complex scenarios your business faces? In many cases after a consultation with their CPA of so many years, a business owner realizes the CPA is not only overwhelmed by the company’s growth, but also ill-prepared to help the company capitalize on its success. This is a dangerous place for a business owner.

Am I receiving the level of service I have come to expect from my CPA?

Do you feel like every time you call, your CPA isn’t in, and it takes forever to get a return call? Are you only meeting with your CPA once a year to drop off your tax documents? Have you ever had to write an unexpectedly large check to the IRS without knowing in advance why you owed so much? Think about what services you believe are most valuable to you, then ask yourself, are you receiving the level of service that you expect from your current CPA?

Are accounting services the only services the firm offers?

In today’s world, accounting firms must take a holistic approach to providing added value and top-level financial services. Does Mike from XYZ Tax do your accounting, Mary from the bank your 401k, and Diane from ABC Investments a business succession plan? What if your business could work with one company in a single location for all that? When the left hand knows what the right hand is doing, you gain significant efficiencies. Can you afford to not have all of your trusted business advisors working together, sharing information, and strategizing about your best options?

Having a trusted advisor as your CPA is more than simply hiring someone who belongs to your club or likes the same sports teams you do. It’s about partnering with a reliable professional who is a specialist in your field of business and who will help guide you and your company to the next level of financial success and security.

HBK Principal and Cannabis Solutions Group leader Christopher Marrie will be featured at two upcoming local events related to business opportunities in the cannabis/hemp space. On February 11, Chris will moderate a panel of speakers at the Cannabis Private Investment Summit of Florida at Greenspoon Marder, LLP, in Ft. Lauderdale. The day-long Summit is for business owners, investors, financiers, industrialists and others considering investing in or starting a Cannabis business. Topics include: -An overview of legal cannabis -The benefits of an investment fund in the cannabis industry -Cannabis valuations -Medical cannabis and capitalizing on cannabis before the end of its prohibition -Identifying states prime for investment opportunities On February 21, Chris will participate in a roundtable discussion on the potential benefits and pitfalls of investing in cannabis and hemp-related projects at the Lake County Bar Association’s monthly lunch-and-learn at the Sidney & Berne Davis Art Center. Chris is a recognized authority on the industry, and has been instrumental in the development and growth of the HBK Cannabis Solutions Group. He has worked extensively with clients in all facets of the industry. If you are looking for business advisory, taxation, investment and/or wealth management advice relative to the Cannabis industry, we encourage you to register for one of these events. For more information about the services of the HBK Cannabis Solutions Group contact Christopher Marrie at CMarrie@hbkcpa.com or call 239-263-2111 . For registration or more information about the Cannabis Private Investment Summit of Florida, please visit REQUEST AN INVITATION HERE, or contact Info@kahnerglobal.com For more information on the Lake County Bar Association’s discussion of hemp, visit REGISTER HERE or contact the Lake County Bar Association at Admin@leebar.org or call 239-334-0047.

As we begin 2020 and many have committed to (and already broken?) New Year‘s resolutions, we recommend one that is easy to keep: when dating documents from now through December 31, use the full “2020” to denote the year, as opposed to just writing/typing “20”.

Doing so will not only generate a sense of accomplishment for keeping at least ONE resolution by year’s end, it may also protect you from potential fraud. Signing documents with an abbreviation (e.g. 1/20/20) may make them more susceptible for manipulation, resulting in a greater risk of the signer falling victim to deceptive practices. Consider the following scenarios:

-You write a personal check to your new boyfriend or girlfriend in the amount of $5,000 on February 14, 2020 as an intended “shopping spree” Valentines Day gift. You date the check 2/14/20. Several month pass –and you realize this is not the person you want to spend the rest of your life with– so you part ways. If the check was not cashed within a reasonable time frame, it would not be honored by your bank so, no big deal. Fast forward to the year 2021 when your ex finds the check and decides to edit the date to 2/14/2021 (by tacking the final two digits onto the end of the date) so the bank will cash the check. Since the bank was unaware that the check was altered, you are now out $5,000 a full year after writing the check.

-You provide your shady landlord, with whom you’ve had several disputes, a document of notice for intent to vacate his property (i.e. You’re finally moving out!). You sign and date the document using the abbreviation 4/25/20. Now, assume the landlord refuses to return your security deposit, so you take him to small claims court. There, the landlord claims you overstayed your lease and remained on the property long after you informed him that you would vacate, which would allow him to retain the good faith deposit you paid in the beginning of your contract with him. He produces the document that you signed, but has altered the date to read 4/25/2019, thus “proving” that you stayed a full year after you told him of your intent to vacate. Assuming you did not keep a copy of the signed document, you will likely have a hard time proving the actual date on which you officially signed the notice. This may end up costing you your deposit, not to mention court costs.

While these scenarios may seem exaggerated, they both highlight how easily documents can be manipulated, especially this year. Clearly, in both scenarios writing out 2020 in reference to the date would have protected these documents and rendered them much harder to change.

The simple addition of a few pen strokes –by writing the full year of 2020 when dating documents– can save you potential headaches, and maybe even considerable money, down the line. Also, it will give you added peace of mind that your documents are secure. This is one New Year’s resolution that is definitely worth keeping.

Under the Tax Cuts & Jobs Act (TCJA), taxpayers are now limited to a deduction of $10,000 for state and local taxes. One state that has been impacted heavily by this provision is New Jersey.

New Jersey has higher than average state taxes, and state officials have been looking for a solution or work around to this cap since TCJA was passed. Ultimately, New Jersey unanimously passed the “Pass-Through Business Alternative Income Tax Act.” The Act has passed and was signed by the Governor on December 13, 2019. It went into effect January 1, 2020 and it is expected that this legislation will save New Jersey business owners between $200-$400 million annually on their federal tax bills.

Through this Act, New Jersey is effectively modifying their “state and local” taxes such that they become an income tax through an “elective entity-level” tax for businesses, allowing them to be taken as a business expense. The Act will allow flow through businesses located within the state of New Jersey to elect to pay income taxes at the entity level instead of at the personal level.

State officials have noted that litigation over this issue is likely, although they believe that they have the authority to make these changes.

Since this is a developing story, we will keep you apprised of developments as they occur. If you have specific questions, please contact an HBK advisor in one of our offices in the state of New Jersey or through the HBK Tax Advisory Group.

Many companies choose to pay stipends to employees as a method of compensating them for incurred business expenses. This is especially true in construction companies, where it is widely viewed as a common industry practice. While the approach of using stipends in this manner is widespread, many construction companies fail to properly plan for and/or execute them, which can result in additional taxes owed by both the company and the employee.

In the simplest terms, a stipend is a monetary advance to an employee that allows an him or her to pay for various business expenses. Depending on how the stipend is structured, it can either be taxable income to the employee, or a non-taxable reimbursement. In order to keep the stipend non-taxable, a company must implement an accountable reimbursement plan, whereby employees complete expense reports proving that all business-related expenses are being reimbursed through the payment of the stipend. If a company does not have an accountable plan, or it is not followed (e.g. expense reports are not submitted or do not provide the appropriate documentation to support the expenses claimed), then the stipend paid to the employee may be re-characterized as taxable income.

One area where companies may run into difficulties with employee reimbursement stipends is in the area use of a personal vehicle for business purposes. The easiest method to use is to base the reimbursement on the number of business miles driven multiplied by the IRS standard mileage rate, which is currently 57.5 cents per mile. If a company provides a stipend to an employee prior to the business usage of the car, the company will need to take great care in reconciling the expense report provided by the employee. If business usage is less than the stipend provided, the employee should reimburse the company for the excess funds received.

It’s clear that establishing an accountable reimbursement plan is essential for any company providing stipends to employees for business expenses. For more information, please contact Richard P. Mishock at RMishock@hbkcpa.com or reach out to your HBK advisor.

A budget—or a proforma, forecast, or projection—is a financial prediction of what might happen over a given time period. As such, manufacturing businesses use budgets to prepare for the year ahead. Executives, managers, and financial professionals employ budgets to aid in their decision-making and to ensure their company is on the right path toward meeting its financial goals.

Think of budgeting as a short-term financial planning process for your business. While a budget itself doesn’t serve to increase profits, it can help you gain the visibility needed to make the kind of decisions that increase profitability, improve cash flow, and otherwise better your company’s financial position. A budget can also help you identify red flags and allow you to take quick action to either mitigate or prevent an issue from having negative financial consequences.

Budget for More Than Your Profit
Preparing budgets takes time and insight, likely from many areas of your business: prior year trends, sales forecasts, internal projects, changes in your industry. Also, be sure to include all areas of your financial performance in your budgeting considerations. Some manufacturers only focus their budgeting efforts on their profit or loss, but other areas can be just as important to your future. For instance:

1. Is your business planning to invest in new equipment? If so, you could encounter a cash outlay that is not reflected on a proforma income statement. A cash forecast can help you plan for a major purchase while ensuring that you do not affect the business’s daily operations.
2. Are your sales increasing? Will you need to hire new employees? Understanding your compensation and training costs at a detailed level can help you make good decisions as you grow, such as the right timing for adding new hires.
3. Does your lender require you to meet covenants? Review your covenant agreements and consider preparing forecasts for these financial metrics so that you understand how to remain in good standing.

Prepare for Change
No matter how much time and effort you spend on a budget, it’s not likely to be perfect. Change is constant. So when conditions change, or when you find yourself outperforming or not meeting your budget, what should you do?

The worst thing to do is discard your budget. Even imperfect budgets have great value. Determine why your results differ from your projections. Can you learn from past budget flaws to become more precise in the future?

Consider making changes to your budget or creating a rolling budget. A rolling budget predicts a full year ahead, for example, as opposed to a calendar or fiscal year. Rolling budgets help you project financial performance on an ongoing basis.

For questions or to discuss budgeting options for your company, contact a member of the HBK CPAs & Consultants’ Manufacturing Team at 330-758-8613.

Internal Revenue Code section 280E prevents businesses engaged in the trafficking of a Schedule I or II controlled substance* from taking federal income tax deductions for ordinary and necessary business expenses—allowing deductions only for costs of goods sold. However, in certain situations, S corporation shareholders may receive a tax benefit from these otherwise non-deductible expenses due to stock basis ordering rules.

Generally, losses may be deducted by a taxpayer only to the extent of their basis, that is, the amount invested. Basis is adjusted in the following order: (1) income, (2) non-dividend distributions, (3) non-deductible expenses, and (4) losses.

When a shareholder’s loss or deduction items are disallowed due to basis limitations, they are suspended and carried over to the succeeding taxable year. The suspended losses and deductions are treated as incurred in that succeeding year, are added to the shareholder’s loss and deduction items actually incurred during that year. Under Treas. Reg. 1.1367-1(g), however, a shareholder can elect to have basis adjusted in a different order: (1) income, (2) non-dividend distributions, (3) losses, and (4) non-deductible expenses. The effect of the election is that any unused non-deductible expenses are carried forward until they are used to reduce stock or debt basis. Once the election is made, the shareholder must continue to use that ordering rule unless the IRS approves a change back to the standard rule. The election may be made on an original return or an amended return.

Consider the following illustration:

George is the sole shareholder in an S corporation. At the beginning of the year, he has $100,000 in basis. The company has a taxable loss of $250,000 for the year, plus $600,000 of non-deductible expenses.

If the shareholder makes—or has previously established—a 1.1367-1(g) election, they can apply $100,000 of taxable loss to their basis first. The loss will be taken on their individual return and the remainder—$150,000 of losses and $600,000 of non-deductible expenses—carries forward to the next year.

If the shareholder has not made the election, the $100,000 of beginning basis will be reduced by $100,000 of the non-deductible expenses. The entire $250,000 loss is then carried forward to the next year. However, the $500,000 of non-deductible expenses exceeding the basis are not deductible and do not carry forward. By making the election, the shareholder receives a tax benefit even though the expenses are in theory non-deductible.

	Election under 1.1367-1(g)	Stock Basis Ordering Rules
Basis:
Beginning basis	100,000	100,000
Non-deductible expenses		(600,000)
Non-deductible expenses in excess of basis – not carried forward		500,000
Stock basis before losses	100,000	0
Losses incurred	(250,000)	(250,000)
Suspended losses carried forward	150,000	250,000
Stock basis before non-deductible expenses	0
Non-deductible expenses	(600,000)
Suspended non-deductible expenses carried forward	600,000
Ending stock basis	0	0
Suspended losses carried forward	150,000	250,000
Suspended non-deductible expenses carried forward	600,000

On the surface, the 1.1367-1(g) election seems like a good idea. It allows the use of a tax-deductible loss now instead of a future year. However, making the election could have negative consequences for S corporation shareholders, as any deductions for non-deductible expenses that aren’t used up due to basis limitations are lost.

These rules affect all S corporation shareholders, but it’s particularly important for cannabis companies because under the limitations of the Controlled Substances Act they tend to have large amounts of non-deductible expenses. Taking advantage of the stock basis ordering rules is an involved process requiring many considerations; it is critical to use a tax preparer familiar with these rules. Making a 1.1367-1(g) election without considering the consequences, or being unaware of the carryover rules and tracking non-deductibles incorrectly, could be extremely costly. Make sure you have a CPA who knows the rules and can apply them to your benefit.

* The Controlled Substances Act (CSA) is the statute establishing federal U.S. drug policy under which the manufacture, importation, possession, use, and distribution of certain substances is regulated. It was passed by the 91st United States Congress as Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970 and signed into law by President Richard Nixon.[1] The Act also served as the national implementing legislation for the Single Convention on Narcotic Drugs.

As a cybersecurity professional, I’m often asked by clients if they should buy cybersecurity insurance. My answer is “definitely,” but not without considerations. For one, you should determine the value of what you are trying to protect. And when evaluating a policy, ensure that you are clear on exactly what the policy covers—and maybe more importantly, what it doesn’t.

Cybersecurity insurance policies come in many forms, from a “quick” cyber policy, where applying requires you only to answer three or four questions, to a full-length application policy. The protection level and policy costs vary accordingly; quick policies may include multiple coverage exclusions or costly gaps. For example, lack of applying security patches may trigger an exclusion pertaining to your coverage. If you implement a recognized cybersecurity control framework, you will likely be able to find policies with more coverage at lower costs. This could also help lower your probability of later being denied coverage under your cyber insurance policy by inadvertently answering a crucial application question incorrectly.

A follow-up question I often get: Can I mitigate my business’s cyber-risk through a cyber policy, or should I implement cybersecurity controls to improve my cybersecurity posture?

I posed the question to Joseph Brunsman, author of multiple published cyber insurance articles, and a book on cyber insurance, he stated, “Cyber insurance is a crucial component – but arguably the last component – in the defensive posture of business. I would prefer, as would the regulators who can bring sizable fines and consent orders, cyber insurers, and attorneys who specialize in post-breach litigation, that businesses do everything in their power to avoid a breach. After that first breach occurs, insurance companies begin to take a hard look at internal cybersecurity postures. Increasingly insurers are demanding specific controls be implemented as a prerequisite to coverage. If businesses fail to adopt the correct posture, they could quickly find themselves with no recourse but to pay for every breach out of pocket. Taken as a whole, businesses need to consider their cybersecurity posture now; while it’s convenient, and before it’s mandatory.”

HBK Risk Advisory Services can help develop and implement a cybersecurity program that fits your organization’s risk appetite and budget. Our assessment will offer a road map for continual improvement through cost-effective solutions. Call us at 330-758-8613, or email me at wheaven@hbkcpa.com for more information or to schedule an assessment. As always, we’re happy to answer your questions and discuss your concerns.

Internal theft is a persistent problem for dealers. It is estimated that dealership employees are stealing the equivalent of $9 per employee per day, so a dealership with 100 employees is suffering a theft loss of $234,000 each year.

With the impact to dealers so high, what can you do to prevent and protect yourself from fraud? Listed below are a few internal controls that if implemented could help prevent theft.

New Department
• Perform frequent unannounced physical inventory counts
• Establish strict inspection procedures
• Allow no options or equipment to be removed without an internal repair order

Used Department
• Maintain an approved list of wholesalers and do business only with those approved
• Verify dealer licenses and sales tax permits
• Review all wholesale transactions that result in a loss and retail transactions with low grosses

Parts Department
• All parts and repair orders need to be computer generated with changes crossed off and initialed by the manager. Then the ticket should be properly voided with the corrected ticket referencing the original document.
• Establish a clear policy for discounted purchases by customers and employees
• Frequently check shipments of parts in company vehicles

Service Department
• Service work should be spot checked to ensure parts charged are being used in the repair order
• During month end procedures, all WIP should be computed and inventoried and all repair orders should be listed
• Ensure no unit leaves the shop without proper payment arrangements being made

Other Items
• Department managers must sign off on payrolls approving the individual and amount
• Bank statements should be delivered to the dealer unopened and should be reviewed for unusual items and cancelled checks. It should also be reconciled by an individual with no access to cash.
• Further, special procedures should be developed to control electronic banking transactions.
• Make sure all clearing accounts are current (payroll tax withholdings, vehicle payoffs)

Fraud can have devastating effects on profits. If are not protecting yourself against fraud, you need to get there. You do not want to be the dealer who has fraud resulting in a $200,000 hit to the bottom line.

Clint Whitehair can be reached by email at CWhitehair@hbkcpa.com or by phone at 317-886-1624.To discuss ways to implement a system of Internal Controls to avoid internal fraud at your dealership or for any other inquiries, contact a member of the HBK DIG at 330-758-8613.

Dealers can’t afford to carry a lot of dead weight. You have to run lean and mean. That is particularly true when it comes to your staff. When an employee is absent or late excessively, it can have a meaningfully negative impact on operations.

Dealing with employee absenteeism raises two questions: what is excessive and how as a manager to deal with it? For example, your policy provides for 15 days off a year for parts department employees, but one of your employees has taken all 15 days within the last two months: is that excessive? A talented mechanic is habitually late, 15 or 20 minutes or sometimes a half hour, two or three times a week. Is that excessive and what do you do about it?

DEFINING ABSENTEEISM
So what is excessive? If you consult with your attorney, the likely answer is, “It depends.” There’s really no strict rule or standard as to what is considered excessive absenteeism. It is more about whether or not the absenteeism violates your policy.

There are exceptions, such as when the absenteeism is covered under the Family and Medical Leave Act (FMLA). The FMLA permits time off of up to 12 weeks for medical treatment of the employee or a dependent family member. Your policy can require an employee to use other compensated time off first, before the FMLA time begins.

ESTABLISHING POLICY
Policies for absenteeism can be flexible, and often are, as dealership employees are typically close-knit groups, even family-like, in many instances. A flexible policy might have different requirements for various dealership departments or job classifications, or might allow for more time off during times when business is typically slow.

Still, the dealer needs a set policy for absenteeism. In the past those policies have broken down time off into different categories, such as vacation time and sick leave. But over the years we have seen that such categorization often forces employees to lie, such as calling in sick when they aren’t. So we recommend policies that simply provide for a set number of days of paid absence, regardless of reason – vacation, personal, sick. You don’t need to know and your employees don’t need to lie. Clearly state that any additional time off must be approved by management as unpaid leave. Most dealers find a vacation calendar helpful, where vacations are scheduled in advance and spaced so as not to leave the dealership understaffed.

Some dealers tend to shy away from rigid rules and prefer more general policies that permit supervisors to make determinations about excessive absenteeism. But while you want to be flexible you have to be careful because flexibility often leads to inconsistency, which can spur accusations of favoritism and even wrongful termination lawsuits. It may be best to consult an employment attorney when drafting any HR policy.

ADDRESSING ABSENTEEISM
When absenteeism is a problem with an individual, it is important to have a discipline program in place. All counseling and verbal warnings should be documented. If not, it can be problematic if you have to defend yourself in court against accusations of wrongful termination. Human Resources or management should be involved in any discussions with employees on absentee issues, and an employee’s file should contain records of notices issued, counseling provided, all warnings and steps taken in an attempt to correct the behavior. Only then can the dealer be in a strong position to take action including terminating employment when warranted.

Whatever your policy, it is most important that it clearly spells out attendance and punctuality expectations as well as job requirements. If your policy is simple, straightforward and easy to understand, your employees are likely to follow it.

Rex Collins is a Principal at HBK CPAs & Consultants. He directs HBK’s Dealership Industry Group, which provides tax, accounting, transaction, and operational consulting exclusively to dealers. Rex can be reached by email at RCollins@hbkcpa.com or by phone at 317-886-1624.