May 29, 2018

Why Businesses Need an Accounting Expert

The most successful entrepreneurs rely on advisors and experts to provide insight in areas of their business they don’t have the time or expertise to fully devote. Yet, we still see so many business owners doing their own accounting, or trusting employees with limited accounting backgrounds to manage their company’s financials. Using an outside resource to manage the financial end of your business can provide peace of mind and allow you to focus on what you do best.

Debunking Common Setbacks

Why wouldn’t a business owner outsource accounting to the experts? Below are a few of the common reasons I’ve heard over the past couple of years, along with more insight into the situation and how we can help.

“Our processes and procedures work for us.”

They say, if it’s not broken, don’t fix it. But if you see errors in your financial data, gaps in reporting and timing delays in receiving information about your business, consider outsourcing.

“We like to work from paper.”

While businesses in certain industries might need to maintain paper records for regulatory or compliance requirements, most do not. Having a virtual accounting solution can eliminate practically all paper. Wouldn’t it be nice to eliminate those beige file cabinets around your office?

 “I really don’t need to receive financials any sooner than I’m already receiving them.”

You might close your books months after the end of the period, or may not even close them at all. You might use the bank balance as your guide. Having an expert provide financials on an accrual basis can provide insight into the funds coming in and going out of your company. They can tell you why certain things are happening in your business and foresee events to come. A massive 82% of failed businesses are attributable to cash flow problems, according to a study by U.S. Bank.

“The systems we have in place are fine. We don’t really have a need for the technology.”

While we don’t understand it, some businesses are OK with pen and paper, or going as far as excel spreadsheets. Outsourcing accounting solutions utilize a lot of technology, which can provide missing processes, procedures and efficiencies.

“Having an outside accountant is going to cost me too much money.”

You might be doing the books yourself without having to pay anyone, but imagine how your business could grow if you had that time to focus on revenue generation? Or you may be considering hiring a bookkeeper. Outsourcing typically saves a business money by eliminating the need for internal accounting staff. A good outsourced provider has a variety of experiences from which a business can draw, sometimes decades or even centuries of experience. They catch errors and provide foresight into potential implications down the road.

Can you afford not to have financial experts assisting you with your business? Contact an Anders advisor to learn how we can benefit your business, or learn more about Anders Outsourced Accounting Services.

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May 24, 2018

How South Dakota v. Wayfair Could Impact State Tax for Internet Sales

Bob Dylan wrote a song back in the 1960’s, “The times, they are a changin”.  The title of that song can apply to the current times in the matter of sales and use tax and the seemingly increasing reaches of the states to encourage or require companies to collect their tax.  The word “encourage” is used loosely here as states are implementing laws and regulations that establish nexus for companies they previously were not able to reach.  In essence, states are making it so difficult on taxpayers to comply with the new laws that they choose to register voluntarily to collect the tax, as it can be less cumbersome than complying with the new law the state has established.  This brings up the constitutional question whether these state laws violate the constitution as it relates to the Commerce Clause, thereby placing an unconstitutional burden on interstate commerce.

Background on the Commerce Clause

Let’s establish some groundwork before diving into the case before the Court in South Dakota v. Wayfair.  In 1967, the US Supreme Court determined that under the Commerce Clause, States cannot require an out of state seller to collect its use tax (the equivalent of the sales tax for an out of state purchaser) if the business does not have a physical presence in that State[1].  It is incumbent upon the purchaser to pay the proper use tax to their own state.

In 1992, the US Supreme Court was confronted with the nexus question once again in Quill v. North Dakota[2], the Court held that the Commerce Clause barred enforcement of a use tax collection on an out of state mail order business whose only contacts with the state were by mail or common carrier.  In essence, the Court ruled this activity lacks the “substantial nexus” required by the Commerce Clause of the Constitution, so the State’s enforcement of the use tax against Quill placed an unconstitutional burden on interstate commerce.  The Court relied on stare decisis to rule that the physical presence requirement still stands.

Tax on Internet Sales

Over the years, the internet has grown tremendously, leading to more and more sales made via the internet.  The internet companies, along with other mail order businesses, may only have nexus with the state in which they reside and are not obligated to collect other state’s use taxes based on the decisions in National Bellas Hess and Quill.  Since it is incumbent upon the purchaser to pay the use tax on their purchase, many either choose not to, or do not know how to do so.  They don’t realize the use tax return that used to arrive in the mail with our annual state income tax return should be filled out for all those transactions on which no tax was charged from an out of state company.  The states have no avenue to collect that tax outside of auditing individuals and companies.  Auditing is an expensive endeavor for many states and there has to be some cost-benefit analysis.  This leads to a loss of tax revenue for the states.  It would be very costly to audit individuals or small businesses to collect the tax owed by them via their purchases from out of state vendors.  The revenue may be hundreds of dollars on average.  Hardly, worth the state’s time.  It would be more beneficial for the states if they could enforce a collection obligation on the Sellers.  So, the states are trying to challenge Quill and National Bellas Hess by establishing laws that are contrary to those decisions.

In Direct Marketing Association v. Brohl, the Court addressed Colorado’s attempt to do just that by enacting legislation imposing a notice and reporting requirement on out of state sellers whom have no nexus with Colorado, but have gross sales in excess of $100,000[3].  The case was remanded to the United States Court of Appeals, where the Court ruled that this law did not violate the commerce clause as it does not unconstitutionally discriminate against and unduly burden interstate commerce[4].  Therefore, the Colorado notice and reporting requirements on out of state retailers is constitutional and thereby enforceable.  This was partially due to the fact Colorado was enforcing a “reporting” requirement, not a “collection” requirement.

However, in his concurrence to the US Supreme Court’s opinion in Direct Marketing Association, Justice Kennedy made the following statement, “Given [the] changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill….The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess”[5].  Therefore, the states have been trying to bring such a case.  That case is South Dakota v. Wayfair[6], which was heard by the US Supreme Court on April 17, 2018.

Specifics on South Dakota v. Wayfair

South Dakota is one of the states that enacted legislation that forces a collection requirement on a seller if their sales into South Dakota exceed $100,000 OR consist of 200 or more transactions.  In the hearing, Justice Sotomayor suggested it was the state’s inability to find a mechanism to collect from consumers that is the real problem.  It was also discussed whether it is the Court’s role to find the solution to this problem or if it is Congress’ duty to determine a solution and they have chosen not to do so.  We all know that may be a bit too ambitious to expect of Congress as we can see how difficult it is to get anything passed in Congress, and many times what starts out as a good law and idea morphs into something altogether different by the time it is passed.

Another concern of the Court is the retroactivity that could be applied.  When the Supreme Court decides a case such as this and overrules their prior decision, they are, in essence, saying that the prior case was wrongly decided and the correction today is what the law actually is.  This means the Court’s decision today is what the law is today, was yesterday, and will be tomorrow, or in this case, 1992 when Quill was decided.  Then, the question is “will the states apply the decision retroactively?”  This is a valid concern for the Justices in this case.

The State’s counsel stated that 38 states cannot apply an overruling of Quill retroactively and that South Dakota does not wish to do so, while Wayfair’s counsel pointed out that one particular state had already notified retailers without a physical presence that they intend to pursue them for back taxes.  This is a significant issue that the Court appears very concerned about and no real answer has been provided.  Should Congress address the issue, they can do so prospectively.

Should the Court overrule Quill, as many expect they may, we can be sure many, if not all, states will enact similar laws as South Dakota.  As a result, out of state sellers who have no physical presence in other states, may now have nexus in those jurisdictions.

The Anders State and Local Tax Services Group is happy to discuss the ramifications of this decision and help you remain compliant in all jurisdictions in which you have nexus. Contact an Anders advisor with questions specific to your business.

Read how the Supreme Court’s decision on South Dakota v. Wayfair will impact online and multi-state businesses.

Court Case References:

[1] National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967).
[2] Quill v. North Dakota, 504 U.S. 298; 112 S Ct 1904; 119 L Ed 2d 91 (1992).
[3] Direct Marketing Association v. Brohl, 575 U.S. ___; 135 S. Ct. 1124; Docket No. 13-1032 (2015).
[4] Direct Marketing Association v. Brohl, No. 12-1175, US Court of Appeals, 10th Circuit (2016).
[5] Direct Marketing Association v. Brohl, 575 U.S. ___; 135 S. Ct. 1124; Docket No. 13-1032 (2015).
[6] South Dakota v. Wayfair, No. 17-494, case heard 4/17/18, yet to be decided.

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May 22, 2018

Tax Reform for Manufacturers: Medical Device Excise Tax

Medical device manufacturers are once again safe from an industry-wide tax on medical devices manufactured or imported. While tax reform legislation did not originally extend the suspension of the medical device excise tax, Congress later retroactively suspended the tax through the end of 2019.

What is the medical device excise tax?

Enacted in January 2013 to assist in funding the healthcare premiums stemming from the Affordable Care Act, the medical device excise tax levied a 2.3% tax on the sale price of taxable medical devices manufactured or imported. The tax imposed a significant impact on the medical industry’s profitability starting in 2013 with its introduction and running through 2015 until relief was enacted.  With the signing of a bill in December 2015, the medical device excise tax entered a temporary two-year suspension starting January 1, 2016 and ending December 31, 2017.

What qualifies as a taxable medical device?

A taxable medical device is defined using a variety of criteria, but is generally defined as an instrument, apparatus, machine, implant or another similar article that falls within at least one of the following groups:

  1. Recognized medical equipment in the official National Formulary or U.S. Pharmacopeia
  2. Is intended to diagnosis, cure, mitigate, treat or prevent disease
  3. Affects the body’s structure or function in a nonchemical manner

While the true definition and designation as taxable medical devices is open to some interpretation and analysis, the IRS clearly states eyeglasses, contact lenses, and hearing aids are not qualified medical devices subject to taxation.  These items fall underneath what the IRS calls the “retail exemption”, which disqualifies the sale of medical devices from the tax burden if they fit both descriptions below:

  1. Individual consumers who do not have a medical background are able to purchase the item, such as over-the-counter goods
  2. The item’s design and purpose is not sophisticated enough that its use is restricted to only medical professionals

What criteria determines a taxable sale of a medical device?

Even if the medical device sold qualifies as a taxable item, the sale could ultimately prove nontaxable depending on certain circumstances. Two situations that will not subject the seller/importer to medical device excise taxes are as follows:

  1. If the medical device is sold by the manufacturer or importer to a party who will use the product in further manufacturing.
  2. If the medical device is sold by the manufacturer or importer as an export or to a party who will then export the product to a second purchaser overseas.

Additionally, tax-exempt status for income tax purposes does not qualify the seller of taxable medical devices from excise tax exemptions. Manufacturers and importers conducting their trade or business around taxable medical devices will be subject to the excise tax on each sale unless they fall into one of the two exemption cases above.

Are medical devices taxable under tax reform?

The Tax Cuts and Jobs Act passed in December 2017, originally failed to extend the suspension of the medical device excise tax that had spanned over the last two years, so the healthcare manufacturing industry once again faced the 2.3% taxation on qualified sales as of January 1, 2018.

On January 22, 2018, Congress passed legislation to not only temporarily re-open government operations, but also to retroactively extend the medical device excise tax moratorium through December 31, 2019.  With the extension’s retroactive provision, Congress confirmed that no tax would be assessed to medical device sales occurring between January 1, 2018 and January 22, 2018.  Even though medical device sales could once again be subject to taxation following 2019, the healthcare and medical manufacturing industries can now continue to operate without excise tax payments hindering their research and development efforts.

Contact an Anders advisor with questions on how tax reform will impact you or your business, or learn more about how we help manufacturers and distributors.

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May 18, 2018

Dan Mudd Honored as The Child Center’s Supporter of the Year

Anders tax partner Daniel W. Mudd and his wife, Lisa Valenti, were honored as Supporters of the Year at the 2018 One with Courage Gala hosted by The Child Center, Inc.

About Dan and Lisa’s Involvement

Dan joined the Board of Directors for The Child Center, Inc. in October of 2013, and has since served as secretary, treasurer and head of the finance committee. Dan has been instrumental in assisting donors with leveraging their gifts through the use of tax credits, and has brought numerous new donors to the agency. His wife, Lisa, has become a gentle force for The Child Center, Inc., working alongside Dan attending events, inviting guests, spreading awareness and personally providing resources for the agency. Dan and Lisa have also opened their home for the annual staff day away and the 2017 Turkey Trot, which raised $1,200.

Learn more about The Child Center, Inc.

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May 17, 2018

Facilitated a Beneficial Restructure of a Building Renewal Lease Agreement

Our client needed to structure and draft a new lease agreement to renew their building lease. We were able to obtain current lease rates in their market and introduce them to a commercial real estate broker to draft the most beneficial lease agreement for them.

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May 15, 2018

Five Steps to a More Valuable Business: Identifying and Protecting Value

The primary long-term goal of a business shouldn’t be income, but value. It might be a subtle play on words, but it’s a major paradigm shift for business owners to focus more on transferable marketable value than income. This shift in thinking needs to permeate the entire organization. Teaching employees about the importance of value versus income will bring a different perspective to the day-to-day business decisions.

In this two-part blog series, we’ll cover the five stages to creating a more valuable business: identify, protect, build, harvest and manage wealth. As you progress through each of these stages, your value grows.

Step 1: Identify Value

Identifying value is always the first step and should never be skipped. It’s completed through a professional business valuation. Understanding your business’s range of value can benchmark your business against others and sets the baseline for everything going forward. This is important for several reasons:

  • 80-90% of your net worth is likely locked up in your business
  • You need a system to continuously focus your team on maximizing this value
  • The ability to unlock that value at some point in the future will make a significant difference in your lifestyle and future plans
  • Knowing the value range is vital for business planning, personal planning and estate and tax planning purposes

Step 2: Protect Value

Once you have identified your baseline value, the next priority is to protect that value by mitigating personal, financial and business risks. Protecting value is accomplished by creating and implementing prioritized de-risking action plans.

Actions to reduce risk are common sense and the easiest to implement. If you were to do nothing else, mitigating risk alone would improve the business value because business valuations are based in part on the real and perceived risks from a buyer’s point of view.

Understanding risk tolerance and willingness to complete actions that protect value is imperative before you start building value through strategic growth initiatives. Consider what we call the Five D’s:  Death, Disability, Divorce, Distress and Disagreement.  Most of us don’t think these events will ever happen to us. In reality, there is a 50% probability that you will be impacted by one of the 5 D’s, so it’s important to be prepared with a strategic business transition plan.

Part two of this blog series will discuss Building, Harvesting and Managing Wealth as part of your journey to build value in your business. Contact an Anders advisor to learn how to implement a successful transition strategy for you and your business, or read more about our Business Transition Planning Services.

For additional reading, check out Chris Snider’s book, Walking to Destiny – 11 Actions an Owner Must Take to Rapidly Grow Value and Unlock Wealth.

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May 10, 2018

Tax Reform Corporate AMT Repeal Saved Client $50,000 in R&D Tax Credits

Under the old tax code, our client was subject to alternative minimum tax (AMT) and could not receive a benefit of research and development (R&D) credits. Once that rule was lifted, we suggested that the client take advantage of R&D credits. We have been able to claim Federal tax credits of nearly $50,000 for the company so far in years one and two.

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May 8, 2018

Not-for-Profit Board Governance Best Practices to Implement

No matter the size of the organization, if you’re serving on the board you want to feel confident that the organization has the right governance policies and practices in place. Those pesky Form 990 questions actually offer a fantastic checklist for making sure your organization has the right policies.

Checklist of Must-Have Governance Policies and Practices

1) Maintain minutes of all board meetings and committee meetings for committees that are authorized to act on behalf of the board, such as an executive committee

This may seem obvious, but we still see organizations that fail to keep minutes. Minutes are crucial to maintaining transparency within the organization. Written agendas can also help keep board meetings on-track.

2) Provide a copy of the Form 990 to the board before it is filed

Require the board to acknowledge receiving and reviewing it. Tax forms can be difficult to understand, but it’s important the board recognizes their responsibility for this important document.

3) Adopt a written conflict of interest policy, and

4) Adopt a process for board members to disclose conflicts of interests annually and document in minutes of board meetings when the policy is invoked so that the nonprofit can demonstrate that compliance with the policy is regularly and consistently monitored and enforced

Unrecognized and unreported COIs can disrupt and even destroy a not-for-profit organization.

5) Adopt a written whistleblower protection policy

Employees and volunteers need to have a channel of communication to the board without fear of retribution

6) Adopt a written document retention/destruction policy

Most not-for-profit organizations, and even for-profit businesses, have a tough time keeping up with this. Technology is changing by the second and yesterday’s document retention policy is likely out-of-date or completely irrelevant. Coordinate with your IT consultant and attorney on the latest trends in cloud document storage and related issues.

7) Adopt a policy for the board’s review of the executive director/CEO’s compensation and benefits

Be sure to keep up-to-date with market trends and salary benchmarks for your organization’s size and structure. Guidestar publishes salary information to help with this process.

8) Adopt a written gift acceptance policy to govern the receipt of “non-cash” gifts, such as gifts-in-kind, and unusual gifts including land, vehicles, artwork, etc.

We’ve seen gifts of old/abandoned houses, land in remote parts of other states, even livestock!

9) If the organization has participated in a joint venture, adopt a policy to regularly review participation in partnerships and joint ventures to avoid any prohibited private benefit

More and more organizations are collaborating with other not-for-profits, and joint ventures can be a great way to share resources. Be sure to consult with your attorney and accountant/business advisor if you are entering into a joint venture.

These policies provide a good framework to ensure the organization’s board runs smoothly and ethically. If you have questions about implementing board governance policies in your not-for-profit organization, contact an Anders advisor, or learn more about Anders Not-for-Profit Services.

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May 8, 2018

How to Determine if Your Startup is Hiring an Employee or Contractor

As startup companies grow, at some point it’s necessary to start hiring staff to provide new expertise or take over certain responsibilities of the business owner. Once you hire someone, it’s important to know if they classify as an employee or an independent contractor for tax purposes.

To determine whether the staff member is an employee or independent contractor, it depends on the amount of control the company has over its workers and the relationship with those workers. The control tests fall into three broad categories:

1) Behavioral Control

A worker is an employee when the business has the right to direct and control the work performed, even if that right is not exercised. Behavioral control categories are:

  • Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving these type of instructions may indicate a worker is an employee
  • Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflect less control, indicating that the worker is more likely an independent contractor
  • Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee
  • Training a worker on how to do the job, or periodic or on-going training about procedures and methods, is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods

2) Financial Control

Does the business have a right to direct or control the financial and business aspects of the
worker’s job? Consider:

  • Significant investment in the equipment the worker uses in working for someone else
  • Independent contractors are more likely to incur unreimbursed expenses than employees
  • Opportunity for profit or loss is often an indicator of an independent contractor
  • Independent contractors are generally free to seek out other business opportunities
  • An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. Independent contractors are most often paid for the job by a flat fee

3) Relationship

The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:

  • Written contracts which describe the relationship the parties intend to create. Although, a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status
  • Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors
  • An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship
  • The extent to which services performed by the worker are seen as a key aspect of the regular business of the company

Tax Treatment

After using the criteria to decide whether your staff member is an employee or independent contractor, it’s important to know the business’s tax responsibility.

If they are an employee, as an employer you are responsible for:

  • Withholding income tax (Federal, State, and some cities), social security and Medicare taxes
  • Paying social security, Medicare, unemployment taxes (FUTA and SUTA), and local taxes (depending on the city) on the employee’s wages (various payment frequencies on these taxes)
  • Filing payroll tax returns (various filing frequencies for these)
  • Providing a year-end Form W-2 showing the amount of wages paid, taxes withheld, and other informational reporting

If they are an independent contractor, the business is responsible for:

  • Providing a year-end Form 1099-MISC to report the total amount paid to the contractor for the year

Please note these are the tax implications of the employee versus contractor classification.  There are also legal implications of the worker classification; please consult your business attorney for those considerations.

Section 530 Relief

While the correct classification is important, the IRS provides a safe harbor for employers if the IRS disagrees with their worker classification. Section 530 of the Revenue Act of 1978 applies if the business treated workers as independent contractors, but the IRS later says they are employees. To qualify for Section 530 relief, a company must three statutory requirements.  If these requirements are met, the company may be relieved of the back due payroll taxes, fines and penalties.

If you have any questions about whether someone classifies as an independent contractor or employee of your startup, contact an Anders advisor.

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May 4, 2018

Tax Reform: Impact on Health Care Organizations

The Tax Cuts and Jobs Act is changing the way organizations do business, including health care organizations. To help you prepare for the changes and take advantage of new benefits, the Anders Health Care Group has compiled a chart on the most important provisions for the industry.

Complete the form below to download the Tax Reform: Impact on Health Care Organizations chart.

Learn more about tax reform’s impact on individuals and other industries in the tax reform resource center.

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