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.

Regardless of the life cycle stage of your business, awareness of and adherence to the varying and ever-changing state and local tax laws and regulations are critical. The lack of adherence with existing state and local tax laws and regulations, as well as the lack of awareness of coming changes or developments in those SALT rules can cost your business valuable time and money.

A business’ non-compliance with the state and local tax laws and regulations where they do business can result in a significant amount of employees’ time to address and resolve. That time is taken away from running the business.

Non-compliance can also lead to significant costs in the form of unpaid state and local tax liabilities (tax, interest, and penalties), plus professional fees to resolve state and local tax assessments and develop policies/procedures to ensure future compliance.

Whether your business is at the beginning of its life cycle at the start-up stage or near its end looking for a buyer, state and local tax questions may seem to be never-ending:

• What state and local taxes should I be filing?
• In what jurisdictions am I required to file?
• What is economic nexus and does it impact my business?
• How do I properly register and begin to file taxes in new states and localities?
• I hired a remote employee outside of our home state. What are the state and local tax obligations for my business as a result?
• Our business is planning to expand to a new location in another state. What taxes and fees are we responsible for because of this new office?
• Does the hiring of a third-party or independent contractor impact my state and local tax filings?
• We have our hands full enough, how can we get all these additional sales/use tax returns filed accurately and timely?
• We are looking to expand our business through acquisition – what should we be looking for to ensure that we are not also acquiring unpaid state and local tax liabilities?
• I am looking for a buyer for my business and any buyer will be requiring us to allow them to review our returns and records to ensure we do not have material unpaid tax liabilities. How can I ensure that we don’t have material unpaid tax liabilities?
• I just received this letter that we are under audit – our business does not have the time or expertise to ensure that the state properly identifies the true underpayment or overpayment – how can we make this happen?
• Our business just received this notice for payment of taxes, should I just pay it and hope the state goes away?
• Our competitor received incentives and credits from the state and local government, why didn’t our accountant do that for us?
• What is unclaimed property, and do I have to deal with this?

There are so many businesses that have unanswered state and local tax questions throughout their life cycles. HBK SALT, with its years of experience and expertise, has the answers to your state and local questions and can serve as your trusted SALT advisor throughout the life cycles of your business.

Read more on HBK’s SALT practice and our capabilities or contact us at HBKSalt@hbkcpa.com with questions.

With Covid-19 relief measures expiring across the board, taxpayers should be aware that the limitation on “excess business losses” (EBLs) is now in effect. This limitation is expected to impact many taxpayers and hinder their ability to offset taxable income with business losses. The EBL limitation was originally enacted by the TCJA and scheduled to apply to tax years 2018 through 2025. However, the CARES Act retroactively postponed the limitation until 2021, and the ARPA extended the limitation through 2026.

The limitation disallows any EBL of a non-corporate taxpayer. For 2021, EBLs are trade or business losses that exceed trade or business income (without regard to any deduction for Qualified Business Income or Net Operating Losses) by more than $524,000 for married individuals filing jointly or $262,000 for other taxpayers. In the case of a partnership or S corporation, the EBL limitation applies at the partner or shareholder level. Each partner’s or shareholder’s allocable share of trade or business income or loss is taken into account in applying the EBL limitation to such partner or shareholder.

Disallowed EBLs are treated as Net Operating Loss carryovers to the following tax year. Accordingly, the carryforward amount will not factor into the following year’s EBL limitation and the disallowance generally operates as a one-year deferral. (Note, however, that various versions of the Build Back Better Act have contained provisions under which the EBL would retain its character as a trade or business loss and be subject to annual testing under the limitation – potentially postponing deduction of the EBL over multiple years).

Some things to note:

• The EBL limitation applies after the application of (1) the passive activity loss limitation and (2) the at-risk loss limitation. Thus, if a loss is disallowed under either limitation, the loss will not be taken into account in applying the EBL limitation.
• Employee wages aren’t taken into account in computing the EBL, so EBLs cannot shelter employment income. It is unclear whether guaranteed payments from a partnership are taken into account in computing the EBL.
• When calculating the EBL limitation, taxpayers take into account the lesser of: (1) capital gain net income attributable to a trade or business, or (2) capital gain net income. Capital losses are not taken into account.
• It is unclear whether gain or loss from the disposition of an interest in a partnership or S corporation conducting an active trade or business would be taken into account in computing the EBL. We will advise as future guidance becomes available.

If you have any questions or believe that this limitation may impact you, please reach out to an HBK Tax Adviser.

Your New Year’s resolutions for your business could include starting and maintaining better-organized books and records. Keeping your company’s books organized and updated will help you make informed decisions in real-time. Following are a few easy ways, using Quickbooks, to maintain accurate and available information on your business’s performance throughout your fiscal year. • Reconcile bank statements and credit cards monthly. Knowing how much cash and credit you have readily available is a critical to conducting business. For up-to-date records of balances, perform bank and credit card reconciliations monthly with Quickbook’s Account Balances feature, then reconcile them with your bank’s balances at month-end. Not only will reconciling ensure the balances on your books match the bank’s, but the Balance Sheet accumulates and summarizes all your cash and credit card totals. Importing, categorizing, and reconciling these transactions each month will greatly improve the accuracy of not only your Balance Sheet but your Income Statement, so long as the transactions are coded correctly. For more information on reconciling, check out: https://quickbooks.intuit.com/accounting/bank-reconciliation/ • Organize a relevant numbered Chart of Accounts. To properly import and categorize your transactions, it is vital that you have a clean chart of accounts (COA)—that is, the accounts you use on the Balance Sheet and Income Statement are organized, relevant, and properly set up. Your accounts should also be numbered. While you might employ many accounts, to be sure that you are starting or assembling your records properly, list each under one of five Quickbooks account Types: Assets, Liabilities, Equity, Revenues, Expenses. As you set up your accounts under these Types, create Parent and Subaccounts to help group your accounts on the Balance Sheet and Income Statement for a more harmonious order of accounts, which will make it easier for you to assess your business’s financial health. To get started you might adopt the following list of commonly used numbered accounts: Balance Sheet:

• 1001 Checking Account
• 1002 Savings Account
• 1101 Accounts Receivable
• 1201 Equipment
• 1202 Accumulated Depreciation
• 2001 Accounts Payable
• 2101 Credit Card
• 3001 Draws
• 3101 Retained Earnings

Income Statement:

• 4001 Income
• 4010 Other Income
• 5001 Cost of Goods Sold (COGS): individual COG categories can be listed separately in the 5000 series
• 6001 Payroll
• 6002 Payroll Taxes
• 6003 Meals
• 6004 Entertainment
• 6005 Job Supplies
• 6006 Utilities
• 6007 Bank Charges
• 6008 Depreciation Expense
• 6009 Other Expense

Every company will have a different COA structure of individual accounts, but overall, your COA should be cohesive and formatted for ease of gathering and assessing financial performance as well as for benchmarking your performance to other similar businesses. Quickbooks allows you to modify pre-existing COA accounts. You can merge two accounts or deactivate pre-existing accounts. You can also edit the names and numbers of accounts you are already using. For more information on the Quickbooks COA, visit: https://quickbooks.intuit.com/r/accounting-money/chart-accounts/ Your Meals and Entertainment account serves as an example of why you should update and keep your COA current. Prior to the passage of the Tax Cuts and Jobs Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, 50 percent of your Meals and Entertainment expenditure was tax-deductible. Entertainment is no longer deductible for tax purposes. However, business meals provided by restaurants in 2021 and 2022 are fully deductible, and business-related meals not provided by a restaurant remain 50 percent deductible. Setting up separate accounts for these expenses will be helpful. • Lock your books. An easy step often forgotten in the bookkeeping and accounting process consists of locking your books by using a passcode to restrict access to entering information that precedes a certain date. For example, if you are finished entering information for December 2021, and you believe it is accurate, placing a passcode on your Quickbooks file dated December 30, 2021, will prevent mistakes in January, such as accidentally entering an invoice with a December date, from affecting your December accounting. In such a case, you would be prompted to enter the passcode, a friendly warning to keep you from rendering your December data incorrect. For more information on locking your books, go to: https://quickbooks.intuit.com/learn-support/en-us/help-article/close-books/close-books-quickbooks-online/L59LelyPM_US_en_US Getting your books and records organized is one way to get your business off to a good start in 2022. Accurate, up-to-date accounting will serve to relieve stress throughout the year. If you have questions or would like help getting better organized and structured, we’re here to help. Contact an HBK professional at 724-934-5300.

The New York City Department of Finance (DOF) recognizes that taxpayers and return preparers affected by the COVID-19 outbreak may be unable to meet certain New York City filing and payment deadlines. Therefore, DOF Commissioner Jacques Jiha exercised his authority under the Administrative Code of the City of New York to allow for a waiver of penalties for DOF-administered business and excise taxes due between March 16, 2020, and April 25, 2020. Taxpayers may request to have the penalties waived on a late-filed extension or return, or in a separate request.

Read the full NYC Department of Finance Memorandum please click here.

Please note that this notice only applies to New York City, as New York State is yet to issue any formal guidance regarding filing or payment extensions.

HBK will continue to follow developments and provide guidance and clarity surrounding COVID-19 business issues. To discuss COVID-19’s effect on your business, contact your HBK advisor.

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.

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.

HBK is in the cyber security business. Our Risk Advisory Services group exists to serve our clients and help ensure they remain healthy, active and viable. That is our business, ethical and moral purpose. We also realize that we alone cannot entirely handle your cyber security needs, because so much of cyber security is a function of business culture and self-awareness.

Here are five reasons cyber security starts and ends in the business setting:

1. Laws put the burden on your business to protect cyber data. If you peruse the California Consumer Privacy Act, the New York Department of Financial Services Cyber Security Regulations, the Ohio Cyber Security Safe Harbor Law, the Florida Information Protection Act, and the mother of all data regulations, the General Data Protection Regulation of the European Union, you will find two common denominators: none of them make it illegal to steal data and all of them make it incumbent on the business to protect data.

Each regulation sets forth actions businesses must take to protect data. This type of law used to be reserved for national security matters—power plants, national emergencies, disaster recovery—but state governments in the U.S. and foreign sovereigns are delivering a clear message that these laws apply generally. You are responsible for protecting data, and if you do not you will be punished.

2. The burden to protect cyber data is being pushed by big businesses to small and medium businesses (SMBs) under contractual mandates. Large multinational businesses are being attacked through their vendors. Target took a data breach hit because of an HVAC vendor. Capital One just announced a data breach allegedly caused by an employee of one of its vendors.

Large businesses are now insisting that their vendors adopt safe cyber hygiene practices or risk losing the business. The role of “vendor risk manager” has risen to the top of the charts as supply chain logistics expand and state laws mandate cyber security measures. SMBs risk losing their best customers if they do not tow the line on cyber security.

3. Blind Faith in outsourced IT and cyber security measures does not work. Pay close attention. Pushing problems to a third party does not solve problems, it merely hides them. Many SMB’s outsource IT and presume that their vendor has cyber security covered. This is flawed for two major reasons. First, IT vendors are only one part of the cyber security solution. Second, IT companies are particularly susceptible to data attacks because they are an entry point into your systems. SMBs must be assured that the people they pay are addressing cybersecurity. As one CFO recently told me, he is afraid of what he doesn’t know. That type of self-realization is healthy. Have your vendors demonstrate their cyber security.

4. Cyber Insurance underwriting guidelines will not accept cyber security indifference from management. Financing a cyber data breach or a ransomware heist is a big financial deal. CEOs, COOs, CFOs and BODs are tasked with managing the business vessel. Running afoul of cyber insurance guidelines can deprive a business of the requisite financial resources provided by insurance during a cyber data calamity. Good business management practices as well as operating agreements, by-laws and partnership agreements entrust these levels of decision to management. If C-level management and boards do not fulfill their obligations, they place the financial status of the business in peril. Study the cyber security laws and regulations listed in item 1 of this article. They are aimed directly at management.

5. Fiduciary Duty of Company Officers. Talk to your business lawyers about the respective duties owed to companies by their officers. Most state laws place this high level of responsibility upon the company officers. Fiduciary duties are non-delegable.

We do not have the luxury of cyber police patrolling the data streets of homes and businesses. Security always begins with the individual. Never confuse law enforcement with security. It is incumbent upon each person to do their part in cyber and data security because each person is a link in the cyber data chain. HBK understands this reality and bases its cyber security services on understanding the human, technical and management elements as being inextricably intertwined. In the end, you are only as secure as your weakest link.

For more information or to review your cyber security responsibilities and readiness, contact Steve Franckhauser at 614.228.4000 or sfranckhauser@hbkcpa.com.

The Indiana Department of Revenue has taken a new position regarding whether documentation fees are subject to sales tax. It is effective April 2, 2019.

As always, fees for services performed after the transfer of a vehicle or trailer are not considered part of the sales price; therefore, they are NOT subject to sales tax. (For this purpose, the transfer takes place upon physical delivery as a purchaser takes possession and control of the property, regardless of whether the title has yet been transferred.) The dealer must maintain adequate records noting all services pertaining to the fees charged. The records must also detail any services performed after the transfer in order to be exempted from sales tax. Fees charged for services performed prior to a customer taking physical possession of the vehicle or trailer ARE subject to sales tax. Doc fees have historically been treated as a service NOT subject to sales tax. This is no longer the case and the change stems from the state allowing dealers to charge a “convenience fee” relative to the titling services they offer.

As a reminder, the General Assembly added IC 9-14.13-3 effective July 1, 2016, which established a separate “convenience fee” allowing dealers to charge for services that, in the past, had been excluded from the retail unitary transaction and were reflected by the documentation fee. As such, fees qualifying as separate “convenience fees” are NOT subject to sales tax. While dealers may still charge a separate documentation fee [in addition to the convenience fee], any other services attributable to documentation fees will be considered seller service charges, which are necessary for sale completion as per IC 6-2.5-1-5(a)(3) and these WILL be subject to sales tax.

The bottom line: effective April 2, 2019, a dealer’s Documentation Fees are most likely subject to sales tax.

If you have questions on the Information Bulletin #28S policy changes, please contact Rex Collins at 317.504.7900 or RCollins@hbkcpa.com

*This is the first in a series of articles addressing the impact of the TCJA on the Manufacturing industry.

TCJA: A Recap

The Tax Cuts and Jobs Act (TCJA) that was signed into law in December 2017 introduced changes to the Internal Revenue Code (IRC) the likes of which have not been seen since the Tax Reform Act of 1986. Many of these new or altered provisions directly affect manufacturers, and in this and subsequent articles of a series of articles, Monitoring Manufacturing: Effects of the New Tax Code, I’ll address those likely to have the most impact on our industry.

Pros & Cons of Cash Basis Accounting

One of the most beneficial additions to the IRC resulting from the TCJA is the opportunity for some manufacturers to switch to a cash basis method of accounting. Under prior law, businesses with inventories were typically required to use the accrual method, which generally requires income to be recognized when it is earned and expenses to be recognized when they are incurred.

The major pitfall to the accrual method of accounting is that it often accelerates the recognition of income and the related tax payments. That can create a cash flow problem. Under the cash basis of accounting, income is recognized when the money is received and expenses are deducted when they are paid. Improved cash flow is just one benefit associated with cash accounting; for example, the business can accelerate tax deductions by paying expenses prior to the end of its tax year.

Who is eligible?

The TCJA allows businesses with average annual gross receipts of less than $25 million – based on their previous three tax years – to adopt a cash accounting method and thereby potentially defer the recognition of income to future tax years. In addition, businesses under that $25 million threshold are no longer required to account for their cost of goods sold using inventories.

Instead, they can use a method of accounting that treats inventories as non-incidental materials and supplies or that mimics their financial accounting treatment of inventories. As such, the business can expense inventory as it is actually paid for, rather than being required to capitalize it – that is, not expense it. It is a very favorable change in that it will add to the business’s deduction for cost of goods sold. Treating inventories as non-incidental materials and supplies also exempts the business from applying Section 263A, which requires certain costs ordinarily expensed to be capitalized as part of inventory for tax purposes. Combining these opportunities could yield considerable benefits.

The TCJA expands the pool of businesses that are eligible to use the cash method of accounting. It is likely that many manufacturers previously prohibited from using the cash basis method of accounting will now be eligible. Nonetheless, it is imperative to conduct a thorough analysis of your specific circumstances.

For questions or to arrange a study of the potential opportunities for your company, contact a member of the HBK CPAs & Consultants’ Manufacturing team at (330) 758-8613.