Taking a Long-Term Approach to Certain Insurance Documentation

After insurance policies expire, many businesses just throw away the paper copies and delete the digital files. But you may need to produce evidence of certain kinds of insurance even after the coverage period has expired. For this reason, it’s best to take a long-term approach to certain types of policies.

Occurrence-based insurance

Generally, the policy types in question are called “occurrence-based.” They include:

  • General liability,
  • Umbrella liability,
  • Commercial auto, and
  • Commercial crime and theft.

You should retain documentation of occurrence-based policies permanently (or as long as your business is operating). A good example of why is in cases of embezzlement. Employee fraud of this kind may be covered under a commercial crime and theft policy. However, embezzlement sometimes isn’t uncovered until years after the crime has taken place.

Retaining insurance documentation long-term isn’t necessary for every type of policy. Under “claims-made” insurance, such as directors and officers liability and professional liability, claims can be made against the insured business only during the policy period and during a “tail period” following the policy’s expiration. A commonly used retention period for claims-made policies is about six years after the tail period expires.

Additional protection

Along with permanently retaining proof of occurrence-based policies, it’s a good idea to at least consider employment practices liability insurance (EPLI). These policies protect businesses from employee claims of legal rights violations at the hands of their employers. Sexual harassment is one type of violation that’s covered under most EPLI policies — and such claims can arise years after the alleged crime occurred.

For instance, suppose that, during an audit, you learn an employee was embezzling funds three years ago. But the policy that covered this type of theft has since expired. To receive an insurance payout, you’d need to produce the policy documents to prove that coverage was in effect when the crime occurred.

As is the case with occurrence-based coverage, if an employee complaint of sexual harassment arises after an EPLI policy has expired — but the alleged incident occurred while coverage was in effect — you may have to produce proof of coverage to receive a payout. So, you should retain EPLI documentation permanently as well.

Better safe than sorry

You can’t necessarily rely on your insurer to retain expired policies or readily locate them. It’s better to be safe than sorry by keeping some insurance policies in either paper or digital format for the long term. This is the best way to ensure that you’ll receive insurance payouts for events that happened while coverage was still in effect. Our firm can help you assess the proper retention periods of your insurance policies, as well as whether they’re providing optimal value for your company.

The “Kiddie Tax” Hurts Families More Than Ever

Years ago, Congress enacted the “kiddie tax” rules to prevent parents and grandparents in high tax brackets from shifting income (especially from investments) to children in lower tax brackets. And while the tax caused some families pain in the past, it’s worse today. That’s because the Tax Cuts and Jobs Act (TCJA) made changes to the kiddie tax by revising the tax rate structure.

History of the tax

The kiddie tax used to apply only to children under age 14 — which provided families with plenty of opportunity to enjoy significant tax savings from income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).

What about the kiddie tax rate? Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount was taxed at their parents’ marginal rate (assuming it was higher), rather than their own rate, which was likely lower.

What about the kiddie tax rate? Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount was taxed at their parents’ marginal rate (assuming it was higher), rather than their own rate, which was likely lower.

Rate is increased

The TCJA doesn’t further expand who’s subject to the kiddie tax. But it has effectively increased the kiddie tax rate in many cases.

For 2018–2025, a child’s unearned income beyond the threshold ($2,200 for 2019) will be taxed according to the tax brackets used for trusts and estates. For ordinary income (such as interest and short-term capital gains), trusts and estates are taxed at the highest marginal rate of 37% once 2019 taxable income exceeds $12,750. In contrast, for a married couple filing jointly, the highest rate doesn’t kick in until their 2019 taxable income tops $612,350.

Similarly, the 15% long-term capital gains rate begins to take effect at $78,750 for joint filers in 2019 but at only $2,650 for trusts and estates. And the 20% rate kicks in at $488,850 and $12,950, respectively.

That means that, in many cases, children’s unearned income will be taxed at higher rates than their parents’ income. As a result, income shifting to children subject to the kiddie tax won’t save tax, but it could actually increase a family’s overall tax liability.

Note: For purposes of the kiddie tax, the term “unearned income” refers to income other than wages, salaries and similar amounts. Examples of unearned income include capital gains, dividends and interest. Earned income from a job or self-employment isn’t subject to kiddie tax.

Gold Star families hurt

One unfortunate consequence of the TCJA kiddie tax change is that some children in Gold Star military families, whose parents were killed in the line of duty, are being assessed the kiddie tax on certain survivor benefits from the Defense Department. In some cases, this has more than tripled their tax bills because the law treats their benefits as unearned income. The U.S. Senate has passed a bill that would treat survivor benefits as earned income but a companion bill in the U.S. House of Representatives is currently stalled.

Plan ahead

To avoid inadvertently increasing your family’s taxes, be sure to consider the kiddie tax before transferring income-producing or highly appreciated assets to a child or grandchild who’s a minor or college student. If you’d like to shift income and you have adult children or grandchildren no longer subject to the kiddie tax but in a lower tax bracket, consider transferring assets to them. If your child or grandchild has significant unearned income, contact us to identify possible strategies that will help reduce the kiddie tax for 2019 and later years

Run Your Strategic-Planning Meetings Like They Really Matter

Many businesses struggle to turn abstract strategic-planning ideas into concrete, actionable plans. One reason why is simple: ineffective meetings. The ideas are there, lurking in the minds of management and key employees, but the process for hashing them out just doesn’t work. Here are a few ways to run your strategic-planning meetings like they really matter — because, of course, they do.

Build buy-in

Meetings often fail because attendees feel more like spectators than participants. They are less likely to zone out if they have some say in the direction and content of the gathering. So, before the session, touch base with those involved and establish a clear agenda of the strategic-planning initiatives you’ll be discussing.

Another common problem with meetings occurs when someone leads the meeting, but no one owns it. As the meeting leader, be sure to speak with conviction and express positivity (if not passion) for the subject matter. (If others are delivering presentations during the proceedings, encourage them to do the same.)

Fight fatigue

To the extent possible, keep meetings short. Cover what needs to be covered, but ensure you’re concentrating only on what’s important. Go in armed with easy-to-follow notes so you’ll stay on track and won’t forget anything. The latter point is particularly important, because overlooked subjects often lead to hasty follow-up meetings that can frustrate employees.

In addition, if the contingent of attendees is large enough, consider having employees break out into smaller groups to focus on specific points. Then call the meeting back to order to discuss each group’s ideas. By mixing it up in such creative ways, you’ll keep employees more engaged.

Tell a story

There’s so much to distract employees in a meeting. If it’s held in the morning, the busy day ahead may preoccupy their thoughts. If it’s an afternoon meeting, they might grow anxious about their commutes home. If the meeting is a Web conference, there are a variety of distractions that may affect them. And there’s no getting around the ease with which participants can sneak peeks at their smartphones (or smart watches) to check emails, texts and the Internet.

How do you break through? People appreciate storytellers. So, think about how you can use this technique to find a more relaxed and engaging way to speak to everyone in the room. Devise a narrative that will grab attendees’ attention and keep them in suspense for a little bit. Then deliver a conclusion that will inspire them to work toward identifying fully realized, feasible strategic goals.

Make ’em great

Grumbling about meetings can be as much a part of working life as burnt coffee in the bottom of the break room pot. But don’t let this occasional negativity sway you from doing the critical strategic planning that every business needs to do. Your meetings can be great ones. We can’t help you run them, but we can assist you in assessing the financial feasibility and ramifications of your strategic plans.

The “Nanny Tax” Must Be Paid for More than Just Nannies

You may have heard of the “nanny tax.” But even if you don’t employ a nanny, it may apply to you. Hiring a housekeeper, gardener or other household employee (who isn’t an independent contractor) may make you liable for federal income and other taxes. You may also have state tax obligations.

If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you may choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.

FICA and FUTA tax

In 2019, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,100 or more (excluding the value of food and lodging). If you reach the threshold, all the wages (not just the excess) are subject to FICA.

However, if a nanny is under age 18 and child care isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time babysitter who is a student, there’s no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9% total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Reporting and paying

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As a household worker employer, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, you include your employer identification number (not the same as your Social Security number). You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that you file for your business. And you use your sole proprietorship EIN to report the taxes.

Keep careful records

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, dates and amount of wages paid and taxes withheld, and copies of forms filed.

Contact us for assistance or questions about how to comply with these employment tax requirements.

The 1-2-3 of B2B Marketing

Does your business market its products or services to other companies? Or might it start doing so in the future? If so, it’s critical to recognize the key differences between marketing to the public — or even certain segments of the public — and business-to-business (B2B) marketing.

Whereas wide-scale marketing campaigns generally need to be simple, concise and catchy, effective B2B campaigns are typically more detailed, complex and substantive. Here are three critical points to keep in mind.

1. Solve their problems.

You’re not selling a product or service; you’re selling a solution. For example, a company selling aspirin is offering to solve the problem of anyone with a headache. But in B2B marketing, you want to show how your product or service can help a company cure the cause of that headache, not just the symptom.

Think of it from your own perspective. When other companies try to sell to you, you’re not going to pay for anything without an acceptable return on investment. Tell the businesses you’re marketing to precisely how your product or service will solve problems in areas such as productivity, quality, time, and costs. Better yet, show them with real-world examples and testimonials.

2. Provide plenty of specifics.

When marketing to the public, an abundance of detail can confuse or bore buyers. In B2B marketing, specifics are often what close the deal. Every industry faces myriad challenges that encompass a wide array of technical, technological, and regulatory details. Speak their language. Make it clear you understand what they’re up against.

And give yourself plenty of room to do so. Whereas a traditional sales letter or pamphlet sent to an individual is usually best kept short and colorful, B2B marketing materials can be longer and more detailed. Apply the same principle to social media: Posts directed at other companies can go to greater lengths as long as they include current and cogent points.

3. Get to know the people involved.

If you tried to get to know every person included in a mass marketing campaign, you’d never get anywhere and probably go out of business. In B2B campaigns, however, specific people — that is, those who make the buying decisions at your targeted accounts — mean everything.

In fact, under an approach called account-based marketing, a company directs its B2B marketing efforts directly at the individual or set of individuals at each targeted account (or certain high-valued accounts). It’s the “personal approach” writ large, with your sales and marketing staff working together to get to know and appeal to the sensibilities and personalities of the people representing the companies that buy from you.

Obviously, any B2B marketing effort will need to go beyond these three points. Nonetheless, they should form a solid foundation in this often-tricky area. Our firm can help you assess the financial impact of your marketing efforts, B2B and otherwise, and come up with strategies for the future.

It’s a Good Time to Buy Business Equipment and Other Depreciable Property

There’s good news about the Section 179 depreciation deduction for business property. The election has long provided a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time. And it was increased and expanded by the Tax Cuts and Jobs Act (TCJA).

Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for qualified assets. Under the 100% bonus depreciation tax break provided by the TCJA, the entire cost of eligible assets placed in service in 2019 can be written off this year.

Sec. 179 basics

The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.

The annual deduction limit is $1.02 million for tax years beginning in 2019, subject to a phase-out rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The amount is $2.55 million for tax years beginning in 2019. (Note: Different rules apply to heavy SUVs.)

There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phase-out rule, and the taxable income limit).

In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.

The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.

Bonus depreciation basics

With bonus depreciation, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before the TCJA, you could deduct only 50% of the cost of qualified new property.)

This break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets described above).

Bonus depreciation is now allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate.

Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on it.

Maximize eligible purchases

These favorable depreciation deductions will deliver tax-saving benefits to many businesses on their 2019 returns. You need to place qualifying assets in service by December 31. Contact us if you have questions, or you want more information about how your business can get the most out of the deductions.

Is Your Accounting Software Living Up to the Hype?

Accounting software typically sells itself as much more than simple spreadsheet or ledger. The products tend to pride themselves on being comprehensive accounting information systems — depending on the price point, of course.

So, is your accounting software living up to the hype? If not, there are a couple of relatively simple steps you can take to improve matters.

Train and retrain

Many businesses grow frustrated with their accounting software packages because they haven’t invested enough time to learn their full functionality. When your personnel are truly up to speed, it’s much easier for them to standardize reports to meet your company’s needs without modification. Doing so not only reduces input errors, but also provides helpful financial information at any point during the year — not just at month end.

Along the same lines, your company should be able to perform standard journal entries and payroll allocations automatically within your accounting software. Many systems can recall transactions and automate, for example, payroll allocations to various programs or vacation accrual reports. If you’re struggling to extract and use these types of financial information, you might be underusing your accounting software (or it might be time for an upgrade).

Ideally, a champion on your staff may be able to step up and share his or her knowledge with others to get them up to speed. Otherwise, you could explore the cost of engaging an external consultant to review your software’s functionality and retrain staff on its basic features, as well as the many shortcuts and advanced features available.

Commit to continuous improvement

Accounting systems that aren’t monitored can become inefficient over time. Encourage employees to be on the lookout for labor-intensive steps that could be better automated, along with processes that don’t add value and might be eliminated. Also, note any unusual activity and look for transactions being improperly reported — remember the old technological adage, “garbage in, garbage out.”

Leadership plays an important role, too. Ownership and management are ultimately responsible for your company’s overall financial oversight. Periodically review critical documents such as monthly bank statements, financial statements and accounting entries. Look for vague items, errors or anomalies and then determine whether misuse of your accounting system may be to blame.

Take the time

Many businesses don’t even realize they have a problem with their accounting software until they take the time to evaluate and improve it. And only then does the system finally deliver on the hype — sometimes. Our firm can help you review your accounting software and ensure it’s delivering the information you need to make good business decisions.

You May Have to Pay Tax on Social Security Benefits

During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. And when you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed.

If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If you are taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.)

Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates.

Calculate provisional income

To determine how much of your benefits are taxed, you must calculate your provisional income. It starts with your adjusted gross income on your tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your provisional income. Now apply the following rules:

  • If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed.
  • If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50% of your Social Security benefits as income. For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income.
  • If your provisional income is more than $44,000, and you file jointly, you must report up to 85% of your Social Security benefits as income on Form 1040. For single taxpayers, if your provisional income is more than $34,000, the general rule is that you must report up to 85% of your Social Security benefits as income.

Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.

For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result.

Avoid a large tax bill

If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax withheld from the payments by filing a Form W-4V with the IRS. Otherwise, you may have to make estimated tax payments.

Contact us to help you with the exact calculations on whether your Social Security will be taxed. We can also help you with tax planning to keep your taxes as low as possible during retirement.

Grading the Performance of Your Company’s Retirement Plan

Imagine giving your company’s retirement plan a report card. Would it earn straight A’s in preparing your participants for their golden years? Or is it more of a C student who could really use some extra help after school? Benchmarking can tell you.

Mind the basics

More than likely, you already use certain criteria to benchmark your plan’s performance using traditional measures such as:

  • Fund investment performance relative to a peer group,
  • Breadth of fund options,
  • Benchmarked fees, and
  • Participation rates and average deferral rates (including matching contributions).

These measures are all critical, but they’re only the beginning of the story. Add to that list helpful administrative features and functionality — including auto-enrollment and auto-escalation provisions, investment education, retirement planning, and forecasting tools. In general, the more, the better.

Don’t overlook useful data

A sometimes-overlooked plan metric is average account balance size. This matters for two reasons. First, it provides a first-pass look at whether participants are accumulating meaningful sums in their accounts. Naturally, you’ll need to look at that number in light of the age of your workforce and how long your plan has been in existence. Second, it affects recordkeeping fees — higher average account values generally translate into lower per-participant fees.

Knowing your plan asset growth rate is also helpful. Unless you have an older workforce and participants are retiring and rolling their fund balances into IRAs, look for a healthy overall asset growth rate, which incorporates both contribution rates and investment returns.

What’s a healthy rate? That’s a subjective assessment. You’ll need to examine it within the context of current financial markets. A plan with assets that shrank during the financial crisis about a decade ago could hardly be blamed for that pattern. Overall, however, you might hope to see annual asset growth of roughly 10%.

Keep participants on track

Ultimately, however, the success of a retirement plan isn’t measured by any one element, but by aggregating multiple data points to derive an “on track to retire” score. That is, how many of your plan participants have account values whose size and growth rate are sufficient to result in a realistic pre-retirement income replacement ratio, such as 85% or more?

It might not be possible to determine that number with precision. Such calculations at the participant level, sometimes performed by record keepers, involve sophisticated guesswork with respect to participants’ retirement ages and savings outside the retirement plan, as well as their income growth rates and the long-term rates of return on their investment accounts.

Ask for help

Given the importance of strong retirement benefits in hiring and retaining the best employees, it’s worth your while to regularly benchmark your plan’s performance. For better or worse, doing so isn’t as simple as 2+2. Our firm can help you choose the relevant measures, gather the data, perform the calculations and, most important, determine whether your retirement plan is really making the grade.