Highlights from the March 15, 2023, HBK Manufacturing Solutions webinar hosted by James Dascenzo, CPA, Principal, National Director of HBK Manufacturing Solutions; and Amy Reynallt, MBA, CMA, HBK Senior Manager.

Watch the webinar here.

Recommendations for manufacturers

What was discussed in Part 1 in February:

Focus for Part 2: What steps to take next, given current concerns and the state of economy in 2023. Many of the actions are recommended regardless of the state of the economy.

Communicate.

Look ahead.

Create a contingency plan.

Evaluate internal controls.

Continue addressing your labor needs.

Commit to continuous improvement.

Watch for legislative and regulatory changes.

Penalties have been increased to $15,625 per violation for serious, and other than serious, posting requirements.

Instance by instance citation for serious violations, including lockout/tagout, machine guarding, permit-required space, respiratory problems, falls, trenching, and recordkeeping.

New hires are more likely to have accidents, so have plans that keep safety top of mind.

Highlights of the February 22, 2023, HBK Risk Advisory Services webinar hosted by William J. Heaven, CPA/CITP. CISA, CSCP, Senior Director

Watch On Demand.

The National Institute of Standards and Technology (NIST) defines IT Security as, “The technological discipline concerned with ensuring that IT systems perform as expected and do nothing more; that information is provided adequate protection for confidentiality; that system, data and software integrity is maintained; and that information and system resources are protected against unplanned disruptions of processing that could seriously impact mission accomplishments.”

The International Association of Privacy Professionals (IAPP) defines data privacy as, “Privacy is the right to be left alone, or freedom from interference or intrusion. Information Privacy is the right to have some control over how your personal information is collected and used.”

Privacy focuses on the governance and use of data. Security tries to keep us from being a victim of a malicious cyber attack. They are often intertwined or confused.

Why be concerned about privacy? Our information is being captured and mined all the time. One expression of that is the suggestions or recommendations from location services on your phone.

Prominent trends in privacy

Data localization: Where is your data? You need to know where it is, especially give the multitude of cloud opportunities.

Enhancing computations regarding data, or artificial intelligence (AI):

Remote monitoring: trying to balance security and privacy:

More ways to manage privacy for customers:

Many states are enacting their own privacy laws. We should have some type of federal legislation on privacy, but nothing is expected any time soon.

Globally, enforcement of the Europe Union’s General Data Protection Regulation (GDPR) continues to increase, and its influence has spread to America.

Monitoring and tracking privacy regulations

The IAPP is an excellent resource for privacy information. Resources include reports and documents, privacy regulation tracking, and information on specific regulations.

Privacy tracking legislation is in different phases of development, and state by state.

California consumer privacy act models much like GDPR. And has already been amended, including by the California Privacy Rights Act, which went into effect January 1, 2023. Businesses must comply if they meet one of three requirements:

Creating Privacy Controls

Consider privacy frameworks, such as ISACA and ISO 29100:2011

Frameworks have privacy principles, like GDPR’s:

ISACA has 14 privacy principles

Principles can be converted into controls and controls can be evaluated as to how they equate to a privacy program.

Key requirements of a privacy program:

Privacy controls are the administrative, technical, and physical safeguards employed within an agency to ensure compliance with applicable privacy requirements and to manage privacy risks.

Sample: Choice and Consent

Principle: To ensure appropriate and necessary consents have been obtained

Control: What you must have where the collection of personal data takes place

Maturity: Gauging the maturity of your program in terms of rating metrics from one to five: incomplete, initial, managed, defined, quantitatively managed, optimized

Ways to start: inventory your data, know where your customers are, then follow the regulations. If you have privacy concerns, you can look at privacy frameworks for principles to turn into controls, create a privacy program, and measure your program’s maturity.

Highlights from the February 16, 2023 HBK Manufacturing Solutions webinar hosted by James Dascenzo, CPA, Principal, National Director of HBK Manufacturing Solutions; and Amy Reynallt, MBA, CMA, HBK Senior Manager.

Watch On Demand.

Overview

Industrial production fell in six of the last eight months of 2022 with the worst or most significant declines in November and December.

Manufacturing is the largest section of industrial production, about 75 percent, and declined more than industrial production as a whole. Challenges to manufacturers included slower demand, higher borrowing costs, and fear of a recession.

Initial figures show an increase in production January 2023. Generally, there is still an overall decline, though with some good news mixed in.

Is manufacturing in a recession?

Institute for Supply Management report

As baby boomers retire, younger people are moving into management positions and need training and education to be able to manage effectively. Those extra efforts to train and keep workers, to “upskill” them, have become more important in recent years.

Interest rates

Overview of economic status

National Association of Manufacturers’ Perspective

A 2022 NAM survey:

What are manufacturing planning to do to get through these uncertain economic times?

Five topics of interest to manufacturers in 2023:

Overall theme: there is uncertainty so manufacturers have to prepare for that in their business plan, which are key in times of uncertainty.

Labor trends

Need an active recruiting and retention initiatives.

Second chance hiring: look at nontraditional sources for employees, including part-time.

Expect an ongoing shortage of skilled workers:

Compensations package increases: seeing more competition for workers including in areas not seen before, like warehousing.

Supply chain trends

Technology trends

Mergers & Acquisitions trends

Highlights from the January 25, 2023 HBK Risk Advisory Services webinar hosted by William J. Heaven, CPA/CITP/CISA, SCSP, Senior Director; and featuring Tyler M. Gargano, CFE, Director, Risk Compliance and Controls

Watch On Demand.

How to better understand risk in operations and how to be more efficient in addressing risk.

How risk is viewed across organizations:

Ultimately managing risk comes down to have a strategy for identifying and dealing with risk.

Six main types of risk:

Financial risk: the likelihood of losing money on a business or sometimes an investment decision.

Operational risk: looking at flawed or failed process, procedures, systems, and events that could disrupt operations.

Regulatory risk: focuses on a change in laws or regulations that could hurt a business or an investment by affecting the business, the sector, or the market.

Reputational risk: damage that can occur to a business when it fails to meet expectations.

Inherent risk: posed by an error or omission in a financial statement due to a factor other than a failure of internal controls.

Cyber risk: related to loss of integrity of information, available information, data, or controls in an operational system.

Approach to dealing with risk:

Develop a strategy: like updating policies and procedures.

Create an audit plan: What you should be doing by testing; your risk assessment will drive your audit schedule and scope.

Select tools and protocols, and manage, train, and assign auditors:

Conduct audits and produce findings and reports from the audits that will show leadership what is going on and whether expectations are being met or not.

Functional view of an organization:

How risk is viewed:

Not all risk is bad. There are risks you’re willing to take, such as older machinery; and risk you are able to take.

Growth can be created through risk assessments. They help you identify where you need tighter controls and understand what the future state of your organization can look like.

Understand your company’s appetite for risk, from minimal to high levels.

How to evaluate and identify risk:

Ongoing testing

Perform annual risk assessments of the organization’s functions/departments:

Viewing risk and the operational strategy is extremely crucial for success and will set your business apart. If you don’t know where your risks are, you’re setting yourself up for not achieving your organization’s objectives.

Companies applying for cyber insurance are asked if they do an annual risk assessment; not likely to get insurance without a yes answer.

Highlights of the January 18 HBK Manufacturing Solutions webinar hosted by Nicholas Demetrios, CPA, MBA, Principal, HBK Tax Advisory Group

Watch On Demand.

R&D credits for Manufacturers was first instituted in 1984, It was not an easily obtainable credit; you had to jump through hoops. But it has been liberalized over the years to encourage research & development to improve products and processes, to the point of being a great tool to reduce your tax bill as well as improve your products and processes.

R&D credit is governed under Section 41 of the IRS Revenue Code and expenses governed under Section 174. All Section 41 expenses are 174 expenses, but not all 174 expenses are Section 41 expenses.

Manufacturing has benefited greatly from credits and expenses. The old rules allowed taxpayers to take all Section 174 deductions currently, but that has changed.

Anyone claiming R&D credits for costs incurred in taxable years as of calendar year 2022 and fiscal years beginning in 2022 has to capitalize and amortize Section 174 research expenses under a half-year convention using a five-year amortization timeline, which because of half-year convention turns out to be a six-year timeline. Foreign research has to be capitalized and amortized over 15 years. This represents a major change to previous ability to take expenses currently.

All costs paid or incurred in connection with software development are now considered Section 174 R&D expenses, and have to be amortized over five years.

There is bipartisan support to changes these rules, but no traction yet on getting something passed. So we’re stuck with these rules for the 2022 tax year.

How to adapt:

Revenue Procedure 2023-11 is guidance on how to institute the changes (though there are still unanswered questions).

If you take the credit the only thing to reduce capitalized expenses under 174 is if credit exceeds the amortization you’re taking on those expenses.

It is imperative to get an R&D tax credit study to substantiate the credit. You have to do an analysis to see which expenses qualify. All 41 expenses are included, plus 174 expenses, such as gross wages and other payroll costs, overhead, supplies, occupancy costs, patent costs, licenses, utilities, and more. Have to ensure that these 174 expenses are amortized over five years. The scope is broad.

Spreading expenses out over five years can substantially increase your tax liability in initial years.

Software developers typically expense costs in the year paid or incurred, but the requirement to amortize over five years could result in creating taxable income before generating meaningful income from the product. This seems to go against the spirit of the R&D credit, to encourage development.

Half-year convention: No matter when you incur expenses, it’s treated as incurred in the middle of the year, cutting your amortized expense deduction in half for the first year and leaving that half for year six. For the initial years of R&D spending, you would accelerate hundreds of thousands of dollars of taxes on a million dollar research expense.

We used to advise in most cases to take the reduced credit. But now you’re better off not taking the reduced credit, because your only add-back if you don’t take it is the excess of the credit over the amortization.

Procedural guidance: Normally would file 3115 to indicate a method change, which includes multiple changes and schedules. But starting with 2022, you must attach a statement with tax return that includes a declaration of the change to current amortization for 174 expenses. Statement will be manual because it is not yet included in tax software.

Recommendations:

Highlights from the November 16, 2022, HBK Manufacturing Solutions webinar hosted by James Dascenzo, CPA, Principal, National Director of HBK Manufacturing Solutions; Nicholas Demetrios, CPA, MBA, Principal, HBK Tax Advisory Group; and Amy Reynallt, MBA, Senior Manager, Regional Director of HBK Manufacturing Solutions

The webinar is broadcast in November to give manufacturers time to react to tax planning. Key tax planning considerations include:

Inflation Reduction Act provision don’t go into effect until 2023. The new funding for the IRS and additional employees will result in a heightened awareness and intent to close the tax gap by reviewing more taxpayer returns. The Act provides for more auditors, more people behind the scenes, improved technology. Funding extends for 10 years.

Cash Method of Accounting: One of two methods, cash and accrual. Accrual moe applicable to GAAP principles and financial statements; cash method can be used by taxpayers with grow receipts under $27 million over a three-year average. Cash method can better match deductions and income. Can put the company in better position to accelerate deductions and defer income.

Major planning issues relative to deductions:

Tax Credits:

R&D Tax Credit: A government incentive to complete research and development activities.

Work Opportunity Tax Credit: An incentive to hire people who have historically had difficult obtaining employment, including veterans, individuals on work release programs.

Energy Investment Credit: Big focus of Inflation Reduction Act. Available for investments in certain alternative and renewable energy property and renewable electricity production facilities.

Business Deductions:

Business Interest Expense: limited to sum of business interest income, 30 percent of the business’s adjusted taxable income, and floor plan financing interest.

Excess Business Loss: From an individual perspective.

Equipment Purchases and Bonus Depreciation: Section 179 allows expense of otherwise depreciable business property, including assets not eligible for bonus depreciation, like certain improvements to real property of off-the-shelf computer software, to a maximum of $1,080,000.

Vehicles weighing over 6,000 pounds are not subject to same deprecation rules as passenger vehicles; can qualify for much greater deductions.

Inventories for Subnormal Goods: goods unsellable at normal prices or unusable in the normal way.

Other Tax Planning Options:

Cost Segregation Studies help owners of commercial and residential buildings increase cash flow by accelerating federal tax depreciation of construction-related assets.

Interest Charge Domestic International Sales Corporation (IC-DISC): Operating company pays commission to IC-DISC, then IC-DISC issues dividend to its shareholders which are taxed at capital gains rates.

LIFO Accounting for Inventory. More accurately reflects income by matching current costs against current revenues.

State Considerations: States have gotten more aggressive in terms of taxation, so need to consider available credits and incentives for states where you reside and others where you do business.

International Considerations: Multiple different reporting requirements accompanying ownership of businesses overseas.

Payroll Tax Credits:

Highlights of the October 26 HBK Risk Advisory Services webinar hosted by William J. Heaven, CPA/CITP. CISA, CSCP, Senior Director; and featuring Joseph E. Brunsman, MSL, President, Brunsman Advisory Group

Watch On Demand.

Understanding cybersecurity insurance policies:

Insurance companies have not done a good job simplifying understanding of their policies for people.

There are hundreds of different policies, all different and complex. The best policy for you depends on your business, your internal controls, your cybersecurity controls.

Insurance salespeople have no legal responsibility to explain their policy to you or even understand it themselves– the onus is on the business owner to get the right policy.

Two sides of coverage for consideration:

-3rd party coverage: your clients, vendors, other parties, someone getting money from your business

-1st party coverage: coverage for you, the money your business has to pay, needs to pay, wants to pay after a cyber event

What might actually be covered: four buckets of types of coverage or coverage inclusions. First bucket is 3rd party coverage; all others are 1st party coverage:

-Data breach: access and acquisition of covered information (social security numbers, drivers license numbers, etc.). What you need:

-Ransomware

-Loss of funds – have to be specific on what you’re buying

-Miscellaneous and often missing: ask stakeholders and what is most concerning

Important changes occurring in cyber policies: work with CFO and plan expenditures ahead to avoid a gap in your policy

Critical vulnerability exclusions:

Cyber coverage is increasingly being required; increasingly seen in contractual agreements; best to get insurance now before your industry requires it.

Office of Foreign Assets Control (OFAC) guidance: If you pay a ransom you might risk violating OFAC regulations by providing ransoms to sanctioned persons in sanctioned countries, therefore a national security issue. Even though you have coverage for ransomware. OFAC can impose uninsurable civil penalties. And because of the war in Ukraine, more sanctions are being applied every day.

Moving forward:

Why insurance will force an increased budget:

Security is a journey not a destination.