We live in an age of convenience —a time when just about anything can be ordered online and delivered straight to your doorstep. As more consumers choose the convenience of online outlets over in-store retailers, manufacturers are flocking toward selling their products on an easy-to-use online platform. Aside from ditching the storefront, there are some important things to consider when moving your distribution channels to the internet. As reported by Statista, it is projected that worldwide e-commerce annual revenue will climb to $6.5 trillion.

While distribution channels have not largely changed over time, consumers’ demand for fast and convenient delivery has become the norm. Amazon.com and other online shopping outlets have become the choice for shoppers and therefore the necessity for companies to adapt to. Even the fresh food industry has been shaken by Amazon Fresh and meal distribution companies like Blue Apron.

There are two types of distribution channels: direct and indirect. As the names would imply, direct distribution is a direct sale between the manufacturer and the consumer, and indirect distribution is when a manufacturer utilizes a wholesaler or retailer to sell their products. There are pros and cons associated with either method, and deciding the right choice for a business heavily depends on the trends and preferences of the consumers.

This relationship-driven model gives companies complete control of the overall consumer process. They control the consumer experience, the brand image as well as have the added benefit of direct interaction and relationship building with the consumer. This control also eliminates intermediaries, thus reducing outside fees like commissions, broker fees, and reduces allowances such as advertising and promotional expenses.

On the downside, with great control comes great responsibility — and risk. In a direct distribution setting, the company bears 100 percent of the financial risks. Selling directly to consumers requires impeccable documentation and tax records due to the increased likelihood of an audit. The startup cost for direct distribution will also be much higher depending on the necessity to purchase delivery trucks, equipment, warehouses, etc. This cost generally pays off down the road, but requires significant capital upfront.

When it comes to selling products online, it’s important that the customer’s shopping cart show instant, accurate sales tax calculations — which need to be monitored for current rates and taxation rules. Final prices must also consider individual state taxes and exemptions. For this reason, many direct distributors purchase technology to automate their operational and financial processes to reduce error and labor costs.

With indirect distribution, companies gain a significant competitive advantage. They gain access to an increased consumer base without the challenge of getting the customer through the door. This grants them more time to focus on their product, their customer base and increasing the range of their target consumer. The startup cost will be lower, and the relationship generally makes the process much simpler for the distributor.

Additionally, since sales tax is only required to be paid once, selling to third-party distributors will likely lead to an exemption of sales tax under the resale exemption.

While having access to a third-party’s logistics and system planning has its benefits, utilizing a retailer or wholesaler has its price. Outside costs like commissions, broker fees and allowances can greatly affect the bottom line. There is also a constraint on the company’s freedom to set prices. Companies need to factor in these costs and ultimately weigh them with the benefits.

Ultimately it relies on the wants and needs of the target consumer. As a whole, people currently favor online shopping over retail shopping. However, specialty items or luxury brands generally require a more interactive experience with hands-on assistance.

On the other hand, online shopping allows for increased transparency, which is a huge factor for consumers looking to compare reviews or search for the lowest price. Even if the product is ultimately purchased through direct distribution, the chances of the consumer reading online reviews before purchase is not something to ignore.

Want to learn more about selecting the right distribution channel for your business? Visit our Manufacturing page where you can get more information on how we can help your business or read any of our related blog articles. If you still have questions about distribution channels contact us!

The IRS warns employers to be careful when engaging with companies claiming to help secure Employee Retention Credits (ERC).

Companies the IRS deems “ERC mills” are advising employers to make claims based on extremely questionable qualifications. These bad actors often inform employers they qualify for the credit with little or no information regarding the individual circumstances.

Many of these “ERC mills” charge a large fee upfront contingent on the employers’ refund amount. They often fail to discuss the cash flow impact on the business as well. Due to delayed processing times at the IRS, refunds can take six months to process.

An employer receives a flyer in the mail claiming they are missing out on $33,000 per employee. Based on employee records, the employer is told they qualify for a credit amount of $1,000,000. The fee is then based on the amount calculated.

In these cases, the company may engage the “ERC mill” to do the project, pay the project fee, and then wait months and months for the refund checks. The IRS will likely also review ERC refunds after the credit claim is initially paid. If the claim is invalid, the company must pay the ERC back, plus penalty and interest.

Another key disclosure often left out of the ERC sales pitches is the need to deduct the credit amount from qualified wages claimed on a federal income tax return. They will structure their fees as a portion of the credit amount without deducting this key portion, so clients are left with significantly less value.

For example, if an employer is taxed at the standard 21% corporate rate, they only effectively keep $790,000 of the credit $1,000,000 mentioned above, losing $210,000 of the benefit while paying fees on the amount paid in taxes.

Some companies offer these services at up to a third of the (potentially) inaccurately identified credit amount. Between the fees and tax increases, the net benefit might only be half as much as the initial letter promises.

Even though many ERC mills also provide guarantees about the quality of their services, there is no guarantee the company will be around for several years if the claim is audited. So, in the end, you might end up on the hook for their fee even if you do not get your ERC or need to pay it back based on the results of an audit.

Taxpayers might receive solicitations from these bad actors in several ways. Most commonly, they have been emailed solicitations claiming huge potential credit amounts. They are also coming through the phone, voicemail, or text messages. Mailers that look like official IRS notices are becoming more common, in addition to web ads, TV commercials, and radio advertisements.

Keep an eye out for red flags like refund numbers higher than your total payroll, claims you are eligible before any information on your business has been provided, and fees that are a portion of the total refund amount.

Be aware of any tax savings that seem too good to be true. The IRS plans to review these claims closely and, as of summer 2022, was working to develop efficient ways to identify fraudulent or non-compliant claims. Taxpayers are responsible for the information reported on their tax returns, and falling prey to an ERC scam could leave you with the bill. If you have improperly claimed the ERC, you may be required to repay the credit along with penalties and interest. You’ll also need to re-amend your tax return.

The Employee Retention Credit (ERC) rewards employers that kept employees on their payroll during the COVID-19 impacted months in 2020 & 2021. This is a fully refundable payroll tax credit for eligible wages paid to employees during a qualifying period.

Eligible employers can claim a 70% credit on up to $10,000 in qualified wages per employee in eligible quarters in 2021 and a 50% credit on up to $10,000 in 2020. The legislation makes this credit available even if you received a PPP loan. While not everyone will qualify, those who do will feel a significant impact from this valuable payroll tax credit.

To claim the ERC, the process is as follows:

If you believe you may have improperly filed your ERC, we highly recommend you speak to a qualified professional to learn more about your options. If you know that your ERC was filed without deducting qualified wages, you will likely need to file an amended income tax return to correct overstated wage deductions.

Most businesses report financial performance using U.S. Generally Accepted Accounting Principles (GAAP). However, the income-tax-basis format can save time and money for some private companies. Comparing GAAP vs. tax-basis is essential for a company’s success. Here’s information to help you choose the financial reporting framework that will suit your situation.

GAAP is the most common financial reporting standard in the United States. The Securities and Exchange Commission (SEC) requires public companies to follow it — they don’t have a choice. Many lenders expect large private borrowers to follow suit because GAAP is familiar and consistent.

However, compliance with GAAP can be time-consuming and costly, depending on the level of assurance provided in the financial statements. So, some private companies report financial statements using an “other comprehensive basis of accounting” (OCBOA) method. The most common OCBOA method is the tax-basis format.

Departing from GAAP can result in significant differences in financial results. Why? GAAP is based on conservatism, which prevents companies from overstating profits and asset values. This runs contrary to what the IRS expects from for-profit businesses. Tax laws generally favor accelerated gross income recognition and won’t allow taxpayers to deduct expenses until the amounts are known, and other deductibility requirements have been met. So, reported profits tend to be higher under tax-basis methods than GAAP.

There are also differences in terminology. Under GAAP, companies report revenues, expenses, and net income. Conversely, tax-basis entities report gross income, deductions, and taxable income. Their nontaxable items typically appear as separate line items or are disclosed in a footnote.

Capitalization and depreciation of fixed assets is another noteworthy difference. Under GAAP, the cost of a fixed asset (less its salvage value) is capitalized and systematically depreciated over its useful life. For tax purposes, fixed assets are depreciated under the Modified Accelerated Cost Recovery System (MACRS), which generally results in shorter lives than under GAAP. Salvage value isn’t subtracted for tax purposes, but Section 179 and bonus depreciation are subtracted before computing MACRS deductions.

Other reporting differences exist for inventory, pensions, leases, start-up costs, and accounting for changes and errors. In addition, companies record allowances for bad debts, sales returns, inventory obsolescence, and asset impairment under GAAP. But these allowances generally aren’t permitted under tax law.

GAAP has become increasingly complex in recent years. So, some companies would prefer tax-basis reporting if it’s appropriate for financial statement users. For example, tax-basis financials might work for a business owned, operated, and financed by individuals closely involved in day-to-day operations who understand its financial position.

However, GAAP statements typically work better if the company has unsecured debt or numerous shareholders who own minority interests. Likewise, prospective buyers may prefer to perform due diligence on GAAP financial statements — or they may be public companies that are required to follow GAAP.

Tax-basis reporting makes sense for certain types of businesses. But for other businesses, tax-basis financial statements may result in missing or misleading information. We can help you evaluate GAAP vs. tax-basis and choose the appropriate reporting framework for your situation. Contact us with questions.

© 2023

Creating internal controls over financial reporting (ICFR) is mandated under the Sarbanes-Oxley Act (SOX). SOX internal controls provide important insights into the accuracy and presentation of a company’s financial position while serving as a valuable risk management tool.

Section 404 of the Sarbanes-Oxley Act requires publicly traded companies to establish, assess, and report on the design and operational effectiveness of its internal controls over financial reporting.

The objective of SOX is to protect investors by improving the accuracy and reliability of an organization’s financial position and disclosures. Accuracy and reliability are vital to protect investors and other stakeholders from the risk of loss due to reporting errors or fraud. Errors and fraud may occur if a company does not have adequate policies and procedures over how financial data is recorded, processed, generated, and reported.

Although mandatory for companies publicly traded in the United States, SOX requirements are often followed by private companies that plan to become public (or to be acquired) in the near future, as well as private companies interested in demonstrating strong governance practices to external stakeholders.

It’s important for companies to distinguish their SOX internal controls from other control procedures, including those designed to improve operational efficiency. These controls typically fall outside the scope of an ICFR review under SOX Section 404. The focus of SOX internal controls is on the risk of financial misstatement.

In order to properly manage the risk of financial misstatement, management teams need to adequately identify risks faced by the organization. This is accomplished through a review of the company’s financial statements and significant transactional flows, while considering the people, processes, and systems involved in each. As management and auditors understand the company’s processes, the identification of financial misstatement risks will be defined.

With an understanding of risk, management will perform procedures to identify and assess the risks of material misstatement to the financial statements, whether due to fraud or error. Risks defined as being more significant will be the drivers for where SOX internal control activities are required.

When management and their external auditors have a common understanding of the company’s processes and financial misstatement risks, the next step is to use an agreed-upon system or framework to define control objectives and organize control activities. Together with its external auditors, management will design a risk-based approach to its internal controls, SOX compliance, and the scope of its financial statement audit.

The best approach for developing an organization’s SOX compliance program is the COSO Framework. The COSO Framework provides organizations with principles-based guidance for designing and implementing effective internal controls. While the COSO Framework is generally accepted, there are other control frameworks a company may adopt. However, the COSO framework provides components, principles, and points of focus that are commonly accepted by auditors.

The COSO framework is built around interconnected components that include:

Beyond the COSO Framework, external auditors will likely use the top-down approach recommended by the Public Company Accounting Oversight Board (PCAOB) to select controls for testing. This approach starts at the financial statement level and the auditor’s understanding of the organization’s overall ICFR risks.

The auditor then focuses on entity-level controls and works down to significant accounts and disclosures and relevant assertions, before selecting controls for testing that address the more significant risks of financial misstatement.

This will typically be achieved by reviewing samples of transactions to verify amounts are being recorded accurately. If, for example, the auditor’s testing provides reasonable assurance that revenue transactions are reported reliably, the company can assume its controls are performing as designed and, in turn, the risk is low that its financial statements are materially inaccurate.

These procedures help companies and auditors provide investors with assurance that the company’s financial statements have been reviewed, the reported amounts are correct, and the statement provides an accurate report on the company’s financial performance and balance sheet at the close of the reporting period.

If your company needs assistance with implementing effective SOX internal controls, reach out to our team of audit professionals who can support you throughout the process.

The past three to four years have wreaked havoc on supply chains. First came the imposition of stiff tariffs on foreign imports, then COVID-19 global supply bottlenecks, followed by labor and shipping container shortages, and the invasion of Ukraine. Does anyone remember that the Suez Canal was blocked for a hot minute? Input price volatility and supply-chain issues will only worsen before stabilizing, leaving companies using standard costing in the lurch.

Now, extreme heatwaves around the world are causing additional supply chain disruptions. Fortune Magazine reports that the Chinese regional manufacturing powerhouse, Sichuan, is experiencing a record heat wave that has exacerbated an ongoing drought and cut water levels in half in the month of August.

“As a result, officials announced on August 15 that factories in 19 cities and prefectures would be forced to close their doors for five days to reserve electricity for ‘use by the people.’” This shutdown is expected to create additional pressure on the already stressed global supply-chain.

All of these disruptions have led to unprecedented inflation. The annual inflation rate in the United States accelerated to 8.5% in July 2022, down from the 40-year high of 9.1% in June. Now more than ever, companies must evaluate their pricing to maintain profitability.

For manufacturers utilizing standard costing, the current volatility in commodity prices calls into question the traditional practice of annually reviewing and updating standard costs. The question is, how often should management be reviewing their standard costs to properly evaluate product and customer profitability?

Lagging standard costs in an inflationary market allow sales orders to be written and fulfilled with marginal to no profit when analyzed on an actual cost basis. Companies that lock in prices without proper inflationary adjusters will find their cash flow dwindles and may even dry up.

In an actual cost system, the value of the item, whether bought or fabricated, is the sum of the actual cost of the inputs (actual cost of materials, labor, and overhead). Inventory cost is often recorded in “layers;” each layer contains the costing information for that transaction.

While one of the simplest methods available, the actual cost method can also be the most time-consuming since actual cost must be compiled and allocated. In times of input price and production volume volatility, current cost information may not be readily available for management to make timely pricing decisions.

In a standard cost system, the value of the item, whether bought or fabricated, is the stated standard cost of the item as determined by management. Any difference between the actual and standard cost is recorded in a variance account and reflected as income or expense.

While more time-consuming to set up, management can gain greater cost control by setting standards for each type of cost incurred and then highlighting exceptions or variances. This analysis can result in quicker adjustments to pricing during periods of input price and production volume volatility, but only if management analyzes the variances periodically.

There are many types of standard cost variances, including the following:

The process of reviewing and updating standard costs can be time-consuming. Management needs to ensure that before they consider updating standard cost their monthly review of positive and negative variances is timely and accurate. Properly identifying efficiency versus price variances allows for a more accurate monthly valuation of inventory and cost of goods sold. The next step is to evaluate your options:

As a leading practice, management should consider volatility and recent variances– in addition to forecasted changes. From there, a threshold to trigger an adjustment of standard costs can be set or management can define an update frequency – and when to change the frequency to either have access to more current costing information or mitigate unnecessary efforts when costs stabilize. This evaluation should include input from other departments (e.g., operations, manufacturing/production, sales, and purchasing).

The process could be done bi-annually, quarterly, or even monthly to ensure access to accurate information and thus better decision-making on pricing. However, this process is time-consuming and may not be necessary to complete monthly. In addition, changing standard costs too frequently might cause management to inadvertently reflect temporary variations in their costing, leading to unnecessary variances in analysis.

Analyze and update the 20% of items that make up 80% of your costs on a semi-annual, quarterly, or monthly basis. This reduces your analysis time, as most items may only require analysis annually. This will also reduce the time spent on your monthly cost variance analysis.

Determine a specific threshold of change that triggers an analysis of cost-variance. For example, management will analyze and update any cost that fluctuates by 25% or more of the budgeted cost or any cost that comes in over a defined dollar threshold. This process requires judgment and additional consideration of temporary circumstances.

For instance, your company’s primary vendor might be out of stock causing purchases with additional shipping costs and no volume discounts available from another vendor. This may trigger an adjustment to the standard cost, despite the fluctuation being due to a temporary circumstance.

An alternative approach would be to create a watch list for items that were triggered as a result of the monthly analysis. Management can track the watch-listed items for a period of time to determine whether the fluctuation was indeed temporary or if a standard cost adjustment is necessary.

Selectively adjusting standard costs frequently and setting triggering events are the most cost effective and least time-consuming options to maintain accurate reporting while using standard costing. Try combining elements of each to optimize a solution for your business.

There is no perfect option in an imperfect world, so work with your advisors to choose a solution that works best for your business and capabilities. Get in touch with our team today with any questions on how to maximize results with a standard costing method.

Reviewed by: Elizabeth Houseman

Outsourced accounting, or the practice of transferring accounting functions to a third-party provider, has increased in popularity due to world-shifting events like the pandemic and the Great Resignation. The reason for the change? As available resources diminish, more and more companies are moving to the cloud. Outsourced accounting is a cost-effective, flexible solution that provides access to the tools and expertise needed to meet the growing demands of businesses.

Outsourcing accounting and financial analysis functions to an established CPA firm offers a cost-effective way for growing companies or firms with specialized needs to obtain financial management expertise when needed — without incurring additional overhead and ongoing expenses.

Depending on the complexity of the business and the level of support required, outsourced accounting services may include:

Hiring an outsourced accounting firm instead of having a full-fledged in-house team provides several potential benefits that can help you grow your business.

A significant benefit of outsourcing accounting functions is accessing qualified accounting staff, which may be challenging in today’s labor market. As remote work gained momentum, companies realized the benefit of outsourced services. Now, businesses can access accounting and financial management professionals without making expensive investments in full-time hires.

Having a certain level of flexibility is especially valuable for growing small businesses that may not need a full finance team but can benefit from specialized expertise at specific times during the financial cycle or to help them manage organizational milestones. For example, a growing mid-sized company may choose a staffing schedule that calls for the following:

This staffing schedule would provide the company with the right level of staff to perform various functions and financial oversight without overburdening the company’s budget with extra resources during downtime.

Outsourcing accounting and financial services can also help companies meet specific accounting and financial needs for situations as they arise. For instance, pursuing latter-stage funding rounds or debt will require more robust financial statements and a stronger degree of oversight than the company can produce on its own. Bringing in specialized expertise can help the company prepare reports for investors or lenders while preparing the company for further growth.

Turning to outsourced accounting services also helps an organization maintain consistent staffing levels because the outside provider is responsible for ensuring the proper headcount for the company’s needs. Outsourcing can ebb and flow with your needs. The outside firm handles vacation or sickness outages, eliminating the concern that the client organization will be short-handed during important periods.

Enlisting support from an outside provider can also help a growing company access the latest accounting systems and financial management tools without having to purchase expensive software and provide ongoing training on its own. The outsourced provider will likely use sophisticated financial data tools to perform work on its clients’ behalf, giving those clients the benefits of a more robust system, increased efficiency, and lower costs.

For businesses looking for expertise on everything from their day-to-day transaction processing to forecasting cash needs and future insights, outsourced accounting and finance services can offer a flexible solution to meet various business needs.

If you’re considering outsourced accounting and financial services and want to understand your options, contact us for an expectation-free consultation.

In today’s business landscape, more companies are opting for remote workers. While this can be a great way to save on office space and other overhead costs, there can be significant state income tax implications from having remote workers.

As remote work thrives, consider creating policies around employee movement out of state. Some policy options are to:

Registering for payroll tax withholding is different in every state. Your current payroll personnel or third-party payroll provider may not be aware of other state registrations required at the time of registration. This is often the case regarding sales tax, income taxes, and business licenses, which differ from state to state and could inadvertently be missed or incorrectly registered with the payroll registration.

As such, it is important to consult with a State and Local Tax professional for advice before having an employee in a new state or registering for payroll tax withholding in a new state.

California first assumes everyone wants to live in CA and be a CA resident. As such, CA’s rules and case law on what it means to be a CA resident or a CA non-resident heavily rely on each taxpayer’s specific facts and circumstances. Unfortunately, CA has historically been aggressive in asserting CA residency when the facts or documentation are unclear.

Between the pandemic and the growth in remote working, CA is positioned to pursue the numerous CA residents who now live elsewhere. Therefore, it is expected that CA residency audits will increase significantly in the next 6-12 months and may continue to be a focus of CA audits for several years.

It should be noted that even if CA residency is terminated, the taxpayer may still be required to file a CA non-resident return in current and future years due to having “CA sourced income” if receiving income from sales or services sourced to CA. This may include:

Business Activity Taxes (“BAT”) are taxes on the entity, such as income, franchise, gross receipt, net worth, and minimum taxes. Just one remote employee in a state can trigger a nexus and create a BAT filing responsibility. Even states without income taxes may have a BAT filing regardless of entity structure. For example, Texas has a franchise tax similar to a gross receipts tax with limited deductions and applies to all entity types, including disregarded entities.

Many states also require no nexus for 1-2 years before you can “exit” the state and file a final BAT return. So, if you hire an employee who works in a state for only a year or so, you might be stuck with an additional tax compliance burden for longer than the employee was employed.

States are moving away from cost-performance to market-based sales sourcing and from 3-factor apportionment to single-sales factor apportionment. These changes shift the income tax burden from in-state to out-of-state taxpayers and have been a continual theme for the states in recent years.

Additionally, states continue to enact economic nexus thresholds for income tax purposes in response to Wayfair. It continues to be a key issue for taxpayers electronically providing goods and or services (i.e., SaaS).

Gross receipts taxes have started to find favor again with state legislators as they look to replace lost income tax revenues from the economic downturn. However, gross receipt taxes are generally seen by taxpayers as unfavorable to businesses, especially businesses with small gross margins or in the start-up phase.

Many major cities also have city-level gross receipts taxes often disguised as “business licenses”. Cities like San Francisco, Los Angeles, and Portland all have city-level gross receipts taxes where the revenues collected are generally used to address local issues like homelessness and provide local health services.

As you can see, there are several things to consider regarding remote workers. If you’re thinking of hiring remote employees or already have a team of remote workers, be sure to set policies and procedures in place regarding payroll tax withholding, changing residency, and business activity and gross receipts taxes. If you need help navigating these issues, contact our team.

President Biden signed the Inflation Reduction Act (IRA) into law on August 16, 2022. This bill includes provisions related to taxes, health care, and climate change. The act will impact many taxpayers in several ways. Here’s an overview of how this new legislation may impact you and your business.

The $430 billion IRA is a wide-reaching legislation that will not raise taxes on businesses and individuals earning less than $400,000 annually. Rather, the bill has other means of generating revenue, which we will dive into below.

A new corporate alternative minimum tax of 15% will be imposed on corporations other than S Corporations with more than $1 billion in annual earnings over the previous three years. The current corporate tax rate is 21%, but many companies in this earning range pay little to no federal income tax because of credits and deductions.

The 15% minimum corporate tax will be imposed on financial statement income, or book income, reduced by tax basis depreciation and net operating losses (NOL). This new minimum tax will be effective for tax years beginning after December 31, 2022.

Private equity firms and hedge funds are exempted from the minimum tax.

The IRA imposes a 1% excise tax on the fair market value of any stock repurchased by a publicly traded corporation during the tax year. Nonpublic companies will not need to pay this tax.

The legislation enhances the benefit for start-up companies by expanding the amount of the Research and Experimentation tax credit – often called the R&E or R&D Credit, which can be used to offset payroll tax. Read more about how the R&D tax credit has changed in our article.

The IRA is set to generate revenue through the corporate minimum tax, improved funding for IRS tax enforcement, and superfund fees. Plus, the act is set to reduce healthcare expenditures. This funding will be allocated to the IRS, Energy & Climate, and healthcare.

The IRA provides $80 billion in funding to the IRS to improve tax enforcement and technology. In 2020, the IRS’s budget was slashed by 20% compared to 2010. It is anticipated that this increased budget will allow the IRS to collect $203 billion from corporations and wealthy individuals.

Source: https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf

$370 billion will be dedicated to climate change and domestic energy production. The legislation aims to reduce carbon emissions by 40% by 2030. Various tax credits will be extended and increased by the IRA to incentivize the use of renewable energy. The IRA credits private companies and public utilities to produce renewable energy or manufacture parts for renewable projects.

The plug-in vehicle credit has been renamed the clean vehicle credit under the IRA. The revised credit removes manufacturer limitations on the number of vehicles eligible, creates mineral and battery component requirements, and sets the price and taxpayer income limitations. This credit applies to vehicles placed in service after January 1, 2023.

Income Requirements

The credit will not be allowed for single filers whose modified adjusted gross income (MAGI) exceeds $150,000, $300,000 for married couples filing jointly, and $225,000 for heads of household.

Price Requirements

The credit is also not allowed for vans, sport utility vehicles, and pickups priced over $80,000 or for other vehicles priced above $55,000.

Used Electric Vehicles Tax Credit

The IRA also creates a tax credit for used electric vehicles purchased after 2022. The credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. Used EVs must cost no more than $25,000 and be at least two years old to be eligible for the credit.

Taxpayers can receive tax breaks for improving the energy efficiency of their homes. Installing solar panels, heat pumps, energy-efficient water heaters, and HVAC systems are among the listed improvements.

The Energy Efficient Home Improvement Credit

This credit is the renamed and enhanced Nonbusiness Energy Property Credit that expired at the end of 2021. The new credit will be extended through 2032 and cover 30% of all eligible home improvement costs made during the year up to $1,200. Annual limits on specific improvements have also been updated.

The Residential Clean Energy Credit

The Residential Energy Efficient Property Credit has been renamed the Residential Clean Energy Credit under the Inflation Reduction Act. The credit was set to expire in 2024 but has been extended until 2032. In 2022, it will cover 30% of the cost to install qualifying systems that use solar, wind, geothermal, biomass, or fuel cell power to produce electricity, heat water, or regulate the temperature in your home. The credit limits fuel cell equipment to $500 per one-half kilowatt of capacity.

The 30% credit will apply from 2022 until 2032. In 2033, the credit will be reduced to 26% and then to 22% in 2034, after which it is set to expire.

Alternative Fuel Refueling Property Credit

This credit expired at the end of 2021 but has now been extended through 2032. This credit will cover 30% of the costs of qualified alternative vehicle refueling property up to $1,000.

The Inflation Reduction Act is a sprawling piece of legislation, and more information is still forthcoming. As our teams work through the changes, we will inform you in our newsletter of the critical changes taxpayers need to know.

BlackLine Smart Close is a module that enables a standardized and automated financial close and is embedded directly within SAP. BlackLine close management tools provide clear, real-time visibility into the finance team’s progress, improves controls and documentation, enhances overall accountability, often leading to shortened close cycles for organizations and greater efficiencies in resource allocation.

BlackLine Smart Close is an SAP-specific module. However, mid-market organizations using other ERPs and financial management systems can still benefit by leveraging BlackLine’s financial close suite to improve efficiency and allocate personnel resources more effectively by centralizing and automating close processes.

BlackLine’s task management tools help organizations improve the speed and accuracy of their financial close by streamlining processes, ensuring required tasks are completed timely, and reducing potential bottlenecks.

For many organizations, using an automated close tool will replace spreadsheets maintained by individual finance team members, which only list specific responsibilities within the overall process. This decentralized approach to close management hinders visibility into the whole process, leading to tasks being distributed inefficiently among team members, less-important tasks being completed ahead of more important ones, and even tasks slipping through the cracks as the process is underway.

One of the most compelling advantages of implementing the BlackLine financial close suite is improving the transparency of your workflow by helping you identify every task that needs to be completed, as well as the associated dependent tasks. For instance, closing the general ledger may depend on closing the fixed asset subledger, which in turn involves completing a number of related tasks.

BlackLine allows you to define the specific steps that must be completed every month, quarter, or year-end, including due dates and supporting documentation that can be accessed directly with each task.

BlackLine also helps organizations improve the consistency among their period closes by providing a holistic view of the process and ensuring the same steps are performed every time — and in sequence. By understanding who is completing which tasks within the close process (and when), financial leaders can identify potential bottlenecks and inefficiencies within the process.

For instance, the team may have problems on the first or second day of close completing tasks that can safely be shifted to later on or perhaps performed in advance of the period close. Similarly, one team member may be struggling to finish work that can be allocated more efficiently to a colleague, automated, or performed by an outsourced professional.

By identifying these bottlenecks, management can address them and improve the efficiency of the process while potentially reducing administrative costs. For most organizations, understanding how the process works and how it can be improved allows them to, over time, perform their financial closes in less time and with fewer mistakes.

So, while BlackLine’s Smart Close is an excellent solution for businesses using SAP, mid-size companies can get comparable advantages by utilizing BlackLine’s other modules, regardless of ERP. Interested in learning more? Reach out for a demo and see how BlackLine can help automate and centralize tasks within your organization’s close process.

Today, the combination of innovative flavors and unique branding has led to the success of the craft beer industry. With an ever-growing demand for more and more unique varieties, it’s no mystery why breweries are popping up nationwide. Whether breweries are established or just getting off the ground, brewers need to know what options there are regarding brewery tax benefits.

Like any business, producing and retaining enough of your profit is critical to sustainability, and beer is no different. Here is a list of 5 brewery tax tips to help you maximize your wealth and keep those taps flowing.

Do you think that research and development only happen at tech companies? Think again. Breweries are constantly innovating the brewing process, developing new or improved product formulas, and testing new procedures — all qualifying R&D activities. The tax credit can be applied to expenses associated with any R&D activities, including wages, supplies, and services used during the process.

In addition, small businesses may apply their R&D credit to offset payroll taxes. Like many start-ups, breweries often struggle to make and sustain a profit in their first few years in business. While not profitable, the odds are they still have payroll to maintain. This legislation allows small businesses and breweries to put those R&D credits toward payroll taxes rather than income taxes to realize an immediate cash benefit.

The R&D qualification process is tricky and requires a four-part eligibility test. For this reason, it’s recommended that you have extremely organized and accurate documentation of the costs associated with your R&D activities. Qualifying activities include anything developed or improved, such as bottling processes, preservative chemicals, filtration methods, flavor or aroma profiles, or other advances in methodology or procedure.

Our Research & Development Tax Credit Team is available to support you through this process, and more information is available on our R&D service page.

Charitable giving is an exceptional way to save some cash throughout the year. Contrary to popular belief, charitable giving can mean donating physical items rather than straight cash. Like other businesses with an inventory supply, breweries often have an excess of inventory or out-of-season beer throughout the year.

Let’s say your brewery makes a delightful winter ale, but come springtime, consumers no longer crave those comforting notes of nutmeg and cinnamon. By donating this excess beer to a qualified charitable non-profit for a fundraising event, you could receive a brewery tax deduction. The beer must be in consumable condition and must be donated to a registered 501(c)(3) to qualify.

Note: Be sure to keep documentation of the donation and a signed form from the charity to receive the tax benefit.

For brewpubs, customer tips are a critical part of employee compensation. The FICA tip credit allows brewpubs to claim a credit on their federal taxes, including social security and Medicare. Note that this credit only applies to tips that put the employee above the national minimum wage ($7.25 per hour). Employers are responsible for 7.65% of FICA payroll taxes, making this credit a huge asset when properly utilized. A simple year-end payroll report will showcase all the necessary information to qualify for this credit.

Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. To encourage business growth and investing, this deduction is one of the few that helps small businesses grow their operation.

While businesses used to write off a portion of the purchase each year as a part of depreciation, this deduction allows businesses to write off the entire purchase price for the year they buy it (up to $1,080,000 in 2022). This covers everything from software, corporate vehicles, and machinery.

Bonus depreciation is also a great way to quickly recover the cost of capital assets. Essentially, bonus depreciation allows breweries to purchase equipment and expense the asset immediately in return. Bonus depreciation allows for an immediate deduction of 100% of the cost of the assets, for assets placed in service by December 31, 2022.

Since brewing naturally requires a large amount of production equipment, most brewing equipment will qualify for manufacturing sales tax exemption. The exemption allows a 4.1875% sales tax rate reduction on qualified production purchases. Claiming the reduced rate is simple and well worth the benefit. When making a qualified purchase or lease, simply provide a Partial Exemption Certificate for Manufacturing Equipment to the seller. 

Although the exemption began in July 2014, it’s not too late to get a refund for the sales tax exemption that could have been applied to prior qualifying purchases. Consult with your tax advisor to see about getting a refund for any past overpaid sales tax.

Whether it’s a bold new flavor, a more economic bottling procedure, or a new facility to expand your operation capacity, take advantage of the many brewery tax incentives offered. If you want to learn more about how your brewery can start saving cash, contact us.

So, you love your job. But did you know that combining business and pleasure could affect your tax deductions? While there are no laws against enjoying your profession, it is important to distinguish between business and recreation regarding your taxes. If your operation runs at a loss and you claim losses on your taxes, it is critical to understand the hobby loss rule and how separating business and pleasure is essential to complying with tax rules.

The hobby loss rule was adopted in 1969 as an attempt to deter farmers from deducting losses from not-for-profit activity. The historical phrase “gentleman farming,” refers to a person utilizing his estate or land for farming pleasure rather than profit.

Essentially, the wealthier landowners would claim agricultural losses on their land to offset their regular income — thus stretching the rules to maximize wealth. Still in effect today, hobby loss rules seek to strictly distinguish between for-profit and not-for-profit activities.

Like farming, wineries are eligible to receive tax deductions in the case of a rough year with heavy losses. While this is particularly beneficial in the case of drought or extreme weather, certain rules limit the extent to which you can use vineyard and winery losses as a tax deduction.

Traditional business expenses are generally tax deductible so long as the expenses were a result of trade or business activity — basically expenses relating to the production of income or activities relating to investments. Perhaps most notably, a trade or business loss deduction may be offset against unrelated income, depending on the circumstances.

A “hobby loss” on the other hand, is a non-deductible loss incurred because of doing an activity for pleasure rather than profit. Covered under Internal Revenue Code 183, hobby loss limits deducting losses not directly associated with profit. Therefore, an individual, trust or estate may deduct hobby loss expenses only to the extent that the individual has gross income from the activity.

So how do you decipher between hobby and for-profit activities? Deciding whether someone engages in a for-profit activity depends on whether they have an honest profit goal — which often becomes a test of facts and circumstances. In some cases, the fact that an individual spends personal time cultivating an activity indicates their intent to make a profit.

This is especially true when the activity lacks substantial personal or recreational aspects. Someone choosing to leave a former occupation to devote more time to another activity may also indicate a profit motive. In addition, profit motive may be presumed if the activity in question was profitable for three of the past five years.

Example: 

If profit intent is ever questioned, the courts will generally put more weight on objective facts than the individual’s claims. For this reason, it is important to have your activities separated from the beginning in case the IRS ever questions your motive. The Internal Revenue Code regulations identify nine factors (none of which are individually determinative) to help decipher whether an activity was engaged in for profit:

There are a few steps that individuals can take to avoid the hobby loss rules. First, the individual should strive to conduct the activity professionally and in a businesslike manner. You should:

It’s also important to note that conducting an activity via a pass-through entity, such as a partnership, Limited Liability Company or an S Corporation will not protect against hobby loss rules. These entities are all subject to the same stipulations and should adhere to the same cautions listed above.

Especially in industries like wine, a taxpayer may both seek profit for their craft and enjoy the process along the way. While the taxpayer may hope to generate a profit, they may also enjoy the activity for recreation or leisure. Receiving gratification from an activity does not make the activity “not for profit.” It is perfectly acceptable to find pleasure in one’s business endeavors, but make sure that the activities are separate and well documented in the case of an audit.

While the hobby loss rules were originally adopted to curtail the deduction of farm hobby losses, the rules are applied to various activities and industries. While enjoying your job should not affect your taxes, it is important to understand where the lines are drawn and how to avoid a scuffle with the IRS down the road. If you have any questions about hobby loss rules or how your business may be affected, feel free to contact one of our winery and agriculture specialists.

Outlining your goals, setting a budget, and choosing the best technology are keys to establishing and running an effective family office.

A family office is an organization that’s created to serve a variety of administration and management needs in a structured way for families. These responsibilities vary because each family’s situation and needs are unique, but most family offices tend to have one of the following broad categories as a central focus:

Another decision the family will need to consider is how involved they want to be in the office’s daily operations. Some principals may wish to be active managers, while others may prefer a hands-off role as they devote more attention to philanthropic or personal pursuits. Other questions: How many generations will be involved in the office? What is their background? How can they best contribute to the success of the family?

These factors may help dictate the types of professionals or outsourced services required to support the family office effectively.

After you’ve outlined the family office’s structure and responsibilities, it’s important to create a budget for staffing and services. A bottom-up approach to budgeting, for instance, will involve totaling the cost for your desired staff. These team members can include a bookkeeper, an administrative assistant, an office manager, a controller, and other professionals.

An alternative approach is deciding how much you want to spend annually and identifying the people or services you can afford within that budget. Most likely, a bottom-up and top-down process will be used to generate a reasonable annual cost.

The next step in setting up a family office will be deciding where your staff will work. Some family offices are completely virtual. Others operate out of dedicated office space or within the principal’s business, separate family office, or home. In a recent article published by TheStreet, it was noted that companies can save up to $11,000 per employee in terms of overhead costs if they switch to remote work. This decision can influence hiring, overhead costs, and the family’s sense of privacy, so it’s important to consider this factor carefully.

Another important consideration is choosing the right family office software to support your financial management and administrative needs. An investment-oriented family office will need a more sophisticated system to integrate data from several custodians and generate performance reports. In contrast, an office focused on paying bills will need a fairly basic accounting platform.

Regardless of your approach, it’s vital to outline job qualifications carefully to reduce the risk of placing staff in the wrong roles. A common mistake, for instance, is hiring a bookkeeper and expecting that individual to perform the role of a controller or a chief financial officer. Or, similarly, paying for a CFO when you need someone to perform basic bookkeeping and accounting.

For some roles, hiring someone on an outsourced basis may make more sense for your family office than retaining a professional whose services you may not need full-time. In creating a new family office, using consulting services that help you determine the most effective approach for your family situation and preferences may be a good investment.

If you would like assistance reviewing your situation and implementing a roadmap to meet your family office’s goals, schedule an introductory call with our team.

In a virtual family office, most professionals serving the family are not in a physical office, which means the family office team can be situated almost anywhere. Additionally, these virtual family offices can comprise employees, individual professionals, a remotely-based multi-family office, or any combination thereof.

Depending on the complexity of its principals’ needs, a virtual family office can offer a cost-effective alternative to a fully staffed and officed employee structure.

The best family office structure for your situation will consider elements such as the type of family’s assets, net worth, origin, the frequency with which the principals intend to communicate with their experts, the family office budget, and how much specialized knowledge is required.

As a general guideline, the following ranges serve as a practical framework for a family office structure:

If you believe a virtual family office is appropriate, you have considerable flexibility in choosing your structure. For instance, some families are well-served by multi-family offices staffed with experts providing administrative, financial management, accounting and reporting, and other services for many similar families.

A potential advantage of a multi-family office is that specialized expertise or investment ideas can be shared among several families. While the family office team will respect each client’s privacy, they can discuss situations in general terms and exchange ideas in a way that’s not possible within a single-family office structure.

Additionally, the multi-family office structure offers added protection because the family is not relying heavily on just one professional for its administrative needs. Sharing these responsibilities among several people can provide continuity when the family’s primary provider takes a vacation or is otherwise unavailable.

In other situations, a family will combine employing a full-time professional to provide essential services, such as bookkeeping and bill payment, while outsourcing specialized expertise in accounting and reporting, investment management, and real-estate management. This approach allows the family office to manage its administrative, investment, and accounting needs, often for significantly less than the cost of a dedicated professional team.

Perhaps the most significant challenge a virtual family office presents is coordinating the various professionals and ensuring required services, such as paying bills, preparing financial reports, and the more strategic investment and family issues are being performed and addressed on a timely basis.

In most situations, families rely on an experienced and trusted professional to coordinate and oversee the family office’s team, including their investment, legal, tax, accounting, and administrative professionals. This can be a family member, a full-time employee, or a contracted professional providing services on a virtual or outsourced basis.

Our recent article, Why the Right Quarterback is Critical to Your Family Office, covers this in-depth, but to summarize, this role is critical in ensuring a family office’s operations and responsibilities fit together and are communicated appropriately.

Need help determining if a virtual family office is right for you? Contact our team for assistance reviewing your situation and implementing a roadmap to meet your family office’s goals.

One of the most important factors in determining the success and effectiveness of a family office is creating a structure that supports the family and its objectives. This is typically a personalized decision that addresses several factors, such as the family’s situation, goals, and relationships.

It’s important for the family to decide what its office will do, who will have the authority for various decisions, and how the office will be staffed.

Common problems that can hinder not only the performance of the family office but also relationships within a family include:

It’s important for family office principals to identify which activities are best aligned with their skills, interests, and goals for the family office. These may include, for instance, investing, managing real estate, philanthropic activities, or travel. The family office principals should identify which activities they want to perform on a hands-on basis, and who will perform others.

Routine tasks often outsourced include paying the family bills, investment management, accounting and reporting, tax planning, and managing the technology that helps the principals and advisers manage the family office. Many principals prefer to outsource routine functions and allow professionals to create and manage budgets so they can focus more on living their lives than managing day-to-day tasks.

Another critical consideration is discussing what the family office structure will be and how the family office will be governed. After outlining what needs to be done, you must identify who has the appropriate authority and accountability for those functions continuously.

Most family offices have a variety of operating frameworks that may include:

Regardless of the operating structure, the family office needs internal controls that place limits on the authority of your professional advisors. Typical measures include requiring two signatures on checks above a certain amount, outlining who can approve major purchases, and other measures to help protect the family against fraud and financial misconduct.

Beyond the monthly and quarterly reports, it’s important to consider the appropriate types and levels of information that will be shared with the family’s heirs. Some families promote early involvement and training in financial management, stewardship, and philanthropic practices to help the younger generation understand the sources and management of the family’s wealth. This involvement and preparation can help ensure a smooth transfer of wealth and other assets at the appropriate time.

Addressing these considerations as a family office is established and revisiting your assumptions annually can help ensure the family office is meeting its desired goals and serving the family effectively. For more information or assistance with establishing the structure, internal controls, and reporting of your family office, reach out to arrange an introduction with our team.

You’ve heard the words in business circles —COSO, ERM, SOX, and COBIT. Looks like alphabet soup. But what do they mean? If you think these all relate to risk management, you are on the right track. The difference lies in their primary focus/objective and the methodology. Before we dig deeper into the different frameworks, let’s first define what risk management is.

Risk management is the process of identifying, assessing and controlling financial, legal, strategic, and security risks to an organization’s financial reporting, capital, and earnings. Risks originate from many sources, including financial reporting errors, fraud, legal, statutory, strategic management errors, cyber threats, and/or natural disasters.

A successful risk management program will enable management teams to consider a broad range of risks an organization faces. Risk management also considers the relationship between risks – and the cascading impact they could have on an organization’s strategic goals.

To reduce risk, management teams need to effectively implement internal controls to minimize, monitor, and control the impact of threats.

If you are curious about the unusual name, here is the explanation. The COSO internal control framework was introduced in 1992 and then overhauled to a more modern, comprehensive version in 2013. The framework was sponsored and funded by five accounting and auditing associations:

The commission was led by James Treadway, the former SEC commissioner.

COSO is recognized as the leading framework for designing, implementing, and assessing the effectiveness of internal controls. Its objective was to provide reasonable assurance regarding achieving organizational objectives in the following categories: operational effectiveness and efficiency, financial reporting reliability, compliance with applicable laws and regulations, and asset safeguarding.

SOX is a legislation passed by the U.S. Congress in 2002 and was sponsored in Congress by Senator Sarbanes and Representative Oxley. One of the features of this law was the addition of a requirement for management to certify and the independent auditor to attest to the effectiveness of a company’s internal control system. The goal was to protect shareholders and the public from fraudulent financial reporting practices. Among the COSO objectives, SOX’s focus was on the financial objective.

The ERM framework, issued in 2004, added a focus on the strategic objective (i.e., high-level goals that support the organization’s mission) to COSO’s operational, financial, and compliance objectives.

ERM expanded on COSO’s risk management focus to seize opportunities for achieving organizational objectives such as enhancing profits. ERM considers both positive risks (i.e., business opportunities) and negative risks (i.e., business threats).

COBIT is the IT equivalent of COSO. It is a framework created by ISACA (Information Systems Audit and Control Association) for information technology management and governance. It aimed to link business risks, control requirements, and the technical infrastructure. It is used for the governance of both IT implementations and ongoing operations.

While there are many frameworks to choose from, it is important to find the right one for your company and ensure compliance. Our Internal Audit team has extensive knowledge of risk management frameworks and can work with you to select the best option for your business and guide you through compliance. Reach out to speak to our team and get started.

Over the past decade, business owners have become quite privy to the dangers and signs of fraud schemes. While credit card alerts and vendor screenings have become almost second nature, business owners often overlook one of the most common sources of fraudulent activity — their employees.

From high mortgage debts, climbing costs of living, budget cuts, and increasing costs of health care, there’s a clear (potential) motive for employees to turn to fraudulent behavior. A 2022 study by the Association of Certified Fraud Examiners (ACFE) revealed more than $4.7 trillion is lost annually to occupational fraud worldwide.

So what can you do to protect your company? Having a strong set of internal controls is the most effective and efficient way of protecting yourself against those looking to skim money off your bottom line. This does not need to be a complete internal control evaluation and implementation, but evaluating critical transaction cycles and putting controls in specific key steps can go a long way to mitigating the risk of employee theft.

Here are ten signs that there may be an issue with financial fraud in your company – stay vigilant and watch out for these warning signals.

Even if your company has a squeaky-clean fraud history, it’s a good idea to have the right controls in place to prevent attacks from happening in the future. There are two categories of controls: passive and active. Passive controls exist to prevent someone from having the opportunity to commit fraud, while active controls prevent the possibility of fraud from occurring.

It’s important to remember that internal controls are a process, not a means to an end. They must be properly communicated, remain consistent and always stay enforced. To work effectively, internal controls must be persistently followed by every employee, manager, and even owners. If your employees believe that someone is paying attention, then the chances of them attempting fraud will be moderated.

Protecting your business from financial fraud is crucial for its growth and stability. By implementing these ten best practices, you can reduce the risk of fraudulent activities within your organization.

While these best practices are a great start to building a strong safeguard, it’s a good idea to leverage a third-party to review your business and uncover potential problems. If you’d like to learn more about how an internal audit can help strengthen your company’s infrastructure, one of our internal control specialists is here to help.