Category: Business Services

Posted on May 6, 2018

The Tax Cuts and Jobs Act (TCJA) expands the first-year depreciation deductions for vehicles used more than 50% for business purposes. Here’s what small business owners need to know to take advantage.

Depreciation Allowances for Passenger Vehicles

For new and used passenger vehicles (including trucks, vans and electric automobiles) that are acquired and placed in service in 2018 and used more than 50% for business purposes, the TCJA dramatically and permanently increases the so-called “luxury auto” depreciation allowances.

The maximum allowances for passenger vehicles placed in service in 2018 are:

  • $10,000 for the first year (or $18,000 if first-year bonus deprecation is claimed),
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for the fourth year and beyond until the vehicle is fully depreciated.

If the vehicle is used less than 100% for business, these allowances are cut back proportionately. For 2019 and beyond, the allowances will be indexed for inflation.

Bad News for Employees with Unreimbursed Vehicle Expenses

The new tax law isn’t all good news. Under prior law, employees who used their personal vehicles for business-related travel could claim an itemized deduction for unreimbursed business-usage vehicle expenses. This deduction was subject to a 2%-of-adjusted-gross-income (AGI) threshold.

Unfortunately, for 2018 through 2025, the new tax law temporarily suspends write-offs for miscellaneous itemized expenses. So, an employee can no longer claim deductions for unreimbursed business-usage vehicle expenses incurred from 2018 through 2025.

There’s a possible work-around, however: Employers can provide tax-free reimbursements for the business percentage of employees’ vehicle expenses under a so-called “accountable plan” expense reimbursement arrangement. Contact your tax advisor to find out if an accountable plan could work for you.

First-Year Bonus Depreciation for Passenger Vehicles

If first-year bonus depreciation is claimed for a new or used passenger vehicle that’s acquired and placed in service between September 28, 2017, and December 31, 2026, the TCJA increases the maximum first-year luxury auto depreciation allowance by $8,000. So, for 2018, you can claim a total deduction of up to $18,000 for each qualifying vehicle that’s placed in service. Allowances for later years are unaffected by claiming first-year bonus depreciation.

There’s an important caveat, however: For a used vehicle to be eligible for first-year bonus deprecation, it must be new to the taxpayer (you or your business entity).

The $8,000 bump for first-year bonus depreciation is scheduled to disappear after 2026, unless Congress takes further action.

Prior-Law Allowances for Passenger Vehicles

These expanded deductions represent a major improvement over the prior-law deductions. Under prior law, used vehicles were ineligible for first-year bonus depreciation. In addition, the depreciation allowances for passenger vehicles were much skimpier in the past.

For 2017, the prior-law allowances for passenger vehicles were:

  • $3,160 for the first year (or $11,160 for a new car with additional first-year bonus depreciation),
  • $5,100 for the second year,
  • $3,050 for the third year, and
  • $1,875 for the fourth year and beyond until the vehicle is fully depreciated.

Under prior law, slightly higher limits applied to light trucks and light vans for 2017.

Good News for Heavy SUVs, Pickups and Vans

Here’s where it gets interesting: The TCJA allows unlimited 100% first-year bonus depreciation for qualifying new and used assets that are acquired and placed in service between September 28, 2017, and December 31, 2022. However, as explained earlier, for a used asset to be eligible for 100% first-year bonus deprecation, it must be new to the taxpayer (you or your business entity).

Under prior law, the first-year bonus depreciation rate for 2017 was only 50%, and bonus depreciation wasn’t allowed for used assets.

Heavy SUVs, pickups and vans are treated for tax purposes as transportation equipment — so they qualify for 100% first-year bonus depreciation. This can provide a huge tax break for buying new and used heavy vehicles that will be used over 50% in your business.

However, if a heavy vehicle is used 50% or less for nonbusiness purposes, you must depreciate the business-use percentage of the vehicle’s cost over a six-year period.

Definition of a “Heavy Vehicle”

100% first-year bonus depreciation is only available when an SUV, pickup or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. Examples of suitably heavy vehicles include the Audi Q7, Buick Enclave, Chevy Tahoe, Ford Explorer, Jeep Grand Cherokee, Toyota Sequoia and lots of full-size pickups.

You can usually verify the GVWR of a vehicle by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame.

Case in Point

To illustrate the potential savings from the new 100% first-year bonus depreciation break, suppose you buy a new $65,000 heavy SUV and use it 100% in your business in 2018. You can deduct the entire $65,000 in 2018.

What if you use the vehicle only 60% for business? Then your first-year deduction would be $39,000 (60% x $65,000).

Now, let’s assume you purchase a used heavy van for $45,000 in 2018. You can still deduct the entire cost in 2018, thanks to the 100% first-year bonus depreciation break. If you use the vehicle 75% for business, your first-year deduction is reduced to $33,750 (75% x $45,000).

Buy, Use, Save

The TCJA provides sweeping changes to the tax law. Many changes are complex and may take months for practitioners and the IRS to interpret. But the provisions that expand the first-year depreciation deductions for business vehicles are as easy as 1-2-3: 1) buy a vehicle, 2) use it for business, and 3) save on taxes.

If you have questions about depreciation deductions on vehicles or want more information about other issues related to the new law, contact your tax advisor.

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Posted on Apr 3, 2018

In the life cycle of any auto dealership, there will be times when cash flow is tight. Buy here pay here dealers in particular face complexity to ensure enough inventory is on hand to attract buyers — and offset that investment with a healthy flow through collections and debt management. This balance is never perfect. Dealers need strong banking and/or equity relationships that will extend credit to fill in the cash flow gaps.

Debt Management is Proactive

Even if their balance sheet is healthy, dealers on the shy side of $1 million in receivables will likely get a less favorable interest rate on credit than more established or larger dealers. This does not mean that smaller dealers should accept rates of 10 to 15 percent. It pays to shop around and to understand how the bank or private equity firm will consider the characteristics explained above to justify their terms.

By working with your CPA, you can provide the lender with financial statements and accounting that aligns with their expectations. As part of the terms of the loan, dealers may be required to provide reviewed or audited financial statements. Because of this additional expense and also to get more favorable terms, it’s important for dealers to actively seek lower interest rates. It is perfectly acceptable to shop around. Contact competing banks as well as your existing lender and ask about new credit options. Talk to colleagues about the banks they are using. Request multiple offers.

Strong accounting, tax and compliance practices help with this process. On the accounting side, owners need regular financial statement preparation to view trends and forecast cash flow — helping them prepare for lending conversations and extensions of credit at the right time each year. On the tax side, the number one tax planning technique for buy here pay here dealers is the discount (or loss) on the sale of notes from the dealership to the RFC, which requires cash. Dealers may also qualify for opportunities such as bonus depreciation and deductions with regard to employee perks and compensation.

Management may also consider a review of operational efficiencies or gaps in controls that can affect cash flow. Keep in mind that every dealership is different when it comes to managing cash flow, so best practices must occur within your own dealership.

As buy here pay here dealerships grow to portfolios of $4 million and above, more favorable financing opens up. But it’s not a guaranteed scenario. Dealers should weigh the benefits of obtaining more financing against the extra administrative costs of public accounting services.

Once you have the credit you need, there are various ways to reinvest in your business. Some dealers may decide to purchase their location — adding real estate holdings that support the extension of credit in the future. If the dealership also has a service department, cash flow can be set aside to cover repairs and maintenance on recently sold cars. Some dealers choose to cover repairs on cars shortly after purchase in order to support the customer’s ability and willingness to keep making monthly payments. For example, a repair may cost $800, but it leads to another six to 12 months of customer payments.

Compensation is another area that cash flow can support. Attracting and keeping good back office personnel supports collections, which in turn supports the business. Dealers may also consider additional compensation for good salespeople.

Let’s say you’ve done as much proactive management that you can. At certain points in the life of a dealership, you will still experience challenges. Some of these challenges can’t be handled alone. Whether you’re with a big bank and have secured a favorable interest rate or your dealership is still considered high risk for lenders, don’t ignore cash flow problems. Your CPA can help you formulate a plan to show numbers and communicate effectively with lenders in a way that is focused on solutions rather than the immediate problem. Lenders don’t like to call a loan for a short-term issue, and there is usually room for negotiation on loan modifications that will support cash flow as well as repayment.

However, year-over-year problems make lenders less willing to keep taking a risk on default. As soon as an issue comes to light, prepare your strategy to keep a strong lender relationship. Work through it like you and your lender are on the same side.  It’s in the best interests of you and the lender to find a solution.

Debt Management Supports Valuation

It is also in the best interests of the dealership long-term to show a consistent history of loan financing, healthy cash flow and debt management. Owners want to show a return on investment and consistent profitability, tied to valuation of the business.

There are different approaches to valuation. A key component, however, is determining equity value, which is the market value of the dealership assets minus the market value of its liabilities.

Assets include such things as the dealership’s auto inventory and fixed assets including real estate. They can include intangible assets such as the goodwill value of the dealership’s name and location, sales and service agreements, and also synergies such as multiple locations and strong management.

Liabilities will include debt, any excess compensation, tax and rent issues, inventories and contingent liabilities such as environmental issues related to the storage and disposal of fuel, oil or batteries.

The bottom line is that a well-performing portfolio, a good location and healthy foot traffic — combined with properly managed debt — will be attractive to a potential buyer. A dealership that is attractive to lenders is also attractive to buyers or outside investors, even with debt factored in.

If your dealership struggles with debt management or cash flow either intermittently or throughout the year, don’t let it hinder opportunities to grow. Talk to the team in Cornwell Jackson’s auto dealership practice group. They will help you understand the proper structure of financial statements to support proactive lender conversations.

Download the Whitepaper: Use Debt to Increase Cash Flow

Scott Bates is an assurance and business services partner for Cornwell Jackson and supports the firms auto dealership practice. His clients include small business owners for whom he directs a team that provides outsourced accounting solutions, assurance, tax compliance services, and strategic advice. If you would like to learn more about how this topic might affect your business, please email or call Scott Bates.

Originally published on February 29, 2016. Updated on April 3, 2018. 

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Posted on Mar 30, 2018

Every company or organization will have different needs for payroll administration based on business and compensation structures, benefit offerings, the specific industry and the state and local tax laws. While determining a good fit for outsourced payroll, anticipate how much time the set-up of such services could take. A long set-up time and possible mistakes could have a significant impact on business management and employee morale. Rather than having our clients input all of their data, we walk them through the data collection process. We also provide consultation on areas where the company has had questions or problems, such as garnishment deductions or shareholder compensation. We alert them to any changes in wage and hour laws or multi-state laws that could affect them.

Our goal is to limit client exposure to penalties as we manage payroll. Common questions include:

  • Structure of the payroll
  • How often employees are paid
  • Direct deposit or by check (or both!)
  • Structure of the company and number of offices and employees
  • Location of offices (multi-state?)
  • Types of benefits
  • Unusual deductions
  • Unusual compensation

Collecting this information up front allows us to help clients design an outsourced model that makes sense for them, and doesn’t leave them trying to figure it out for themselves. We find that some clients like to manage parts of the payroll and benefits process themselves, while other parts are best handled through outsourcing.

The Outsourced Payroll Onboarding Process

As a CPA firm dedicated to payroll administration and consulting, Cornwell Jackson has onboarded new clients in less than a month depending on the level of payroll complexity. Our goal is always onboarding within 30 to 45 days. We typically recommend that companies convert at the beginning of a new quarter or pay period — or at year-end — to make the transition align with financial reporting deadlines. A typical onboarding process with our firm looks like this:

  • Client consultation to design the outsourced model
  • Client data gathering
  • Buildout of the payroll account
  • Payroll set-up checklist to cover all items

Once your company has an efficient model for payroll administration, it is much easier to adjust items as needed through the year. For example, we run across a lot of questions regarding personal use of a company-owned vehicle as a benefit. The ratio of personal use must be calculated for the employees’ W-2s and the benefit run properly through payroll. New hires and promotions also bring with them a wealth of payroll questions, but are more easily handled with an efficient system.

When your CPA is in touch with daily business realities through payroll administration, the long-term value extends beyond payroll accuracy. A dedicated team can consult with you on decisions such as when to hire more employees, when to adjust tax planning and cash flow strategies and timing of bonuses. Payroll efficiency even ties into business valuations as a consideration of overall processes and systems in place to run the business.

Payroll is the most up-to-date KPI in a business — and the most expensive.  Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Download the Whitepaper: With Payroll Outsourcing, Don’t Go it Alone

Scott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published May 13, 2016. Updated on March 30, 2018. 

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Posted on Mar 20, 2018

Payroll Outsourcing

For many small businesses, payroll may be handled in-house. And yet, the laws and regulations surrounding employee compensation and benefits can challenge owners and back office staff to stay efficient and compliant. Payroll ties directly into individual and company tax reporting as well as employee benefit compliance. If and when companies choose payroll outsourcing, they must weigh the potential benefits against the ability of the payroll provider to deliver a high level of customer service and communication. Companies and industries differ on how they structure payroll and benefits. Laws and regulations also vary state by state. Consulting on payroll structure, schedules, regulatory changes and reporting, therefore, should be part of the relationship while still being cost effective for the company. It’s helpful to start this discussion with your CPA.

What to Ask your CPA about Payroll Outsourcing

Some CPA firms offer payroll administration as part of basic or strategic Payroll Outsourcing WP Downloadaccounting services. The level of administration and services vary widely. The potential benefit of having your CPA firm handle payroll administration, however, is that the team understands the world of taxes and accounting. They can streamline payroll reporting, deposits and filing schedules into the audit or tax deadlines they already handle for the business.

However, not every CPA firm offers payroll administration. Due to its complexity, it’s also important that the firm has a staff of professionals dedicated to this area of your business. If, in fact, the firm offers a focused niche in payroll administration and consulting, there are several benefits to the arrangement:

  • Expanded resources to monitor new compliance issues
  • Reduced overhead costs (assuming a packaged engagement with other services)
  • Multi-state payroll experience
  • Corrected instances of overpayment or underpayment
  • Managed filing and payment schedules with IRS, state and local tax authorities
  • Limited client exposure to potential penalties
  • Consulting on software options and efficient payroll structures
  • Streamlined communication with other tax, audit and business needs

At Cornwell Jackson, we offer payroll administration and consulting services to our clients. We have invested in software and training for a team dedicated to this service, including certification as a CPP through the American Payroll Association.

The need was evident after too many instances of misclassification 1099 errors as well as W2 mistakes at tax time. We also noted mistakes in HSA and life insurance reporting and general improper reporting of cash and non-cash benefits. Our clients were paying for payroll administration, and then paying our firm to fix mistakes. We realized that our experience could help reduce or prevent problems before they even happen — and reduce our clients’ expenses.

After investigating the value our firm could provide in this area, we learned about many differences between payroll providers. When discussing payroll administration with your CPA firm or an outsourced service, there are several questions you should ask:

  • How much experience does the provider have in payroll administration — and is there a dedicated team?
  • Will the team walk you through data collection and set-up or are you on your own?
  • Who is your go-to contact to ask questions about liabilities or deadlines?
  • Is the provider NACHA compliant for ACH direct deposits?
  • Can you arrange for payroll tax payments on a schedule that supports cash flow along with compliance?

This last question is an important business consideration that most companies don’t know about. Some payroll services withdraw all funds from the business account for payroll transfers and taxes all at once, even if taxes aren’t due for a few weeks. If your receivables come in the first week of the month and payroll taxes are due on the 15th of the month, you can schedule payments in a way that supports cash flow while still being compliant. In addition, payroll services may not provide guidance on industry-specific issues like auto dealer comps or law firm shareholder bonuses, for example. Business owners must carefully consider the level of expertise a provider has in your industry.

Payroll is the most up-to-date KPI in a business — and the most expensive.  Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Continue Reading: Outsourced Payroll Onboarding: Build in time for transition and results

SB HeadshotScott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published April  18, 2016. Updated on March 20, 2018. 

 

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Posted on Mar 15, 2018

restaurant employee embezzlementIn regards to restaurant theft of food or supplies, at your POS, in accounting processes, or of intellectual property, mitigating the risk of loss through theft is an ongoing challenge. Automation has improved security in transactions as well as back-office functions. But with top concerns in the restaurant industry being wholesale food costs and building and maintaining sales volume, the reduction of theft can improve those concerns for restauranteurs.

Restaurant Theft of Food/Beverages/SuppliesRestaurant Embezzlement WP Download

Stealing food, beverages and supplies from restaurants can be coordinated by employees or in combination with vendors. There is outright stealing of food from the inventory, but there are also instances where vendors will agree to short shipments or deliver lower quality food while providing kick-backs to staff involved in ordering or inventory.

Free meals and drinks given to friends and family outside of alotted comps are another form of food theft. Employees also may walk away with supplies and quality equipment. At a minimum, employees may graze too much while on duty.

To protect against food and beverage theft, there are several precautions restaurant owners and management can take:

  • Regular stock checks, performed at unpredictable times or right before deliveries
  • Comparison of purchase orders against deliveries at the time of delivery
  • Monitoring of bartender habits when pouring drinks for consistency in volume
  • Review of comp practices against alottment
  • Policies enforced on employee meals and break habits
  • Security camera monitoring

There is a big difference between babysitting staff and developing a workplace environment in which employees are engaged in loss prevention. Restaurant owners and managers need to communicate with all employees about the costs of food loss, including costs passed on to patrons in the form of increased prices or even removing popular but pricier menu items. Increased menu prices or menu changes may reduce customer volume as well as tips. Another consequence of theft? Management can reduce hours per employee.

Theft at POS

There are many ways that employee theft can occur at the point of sale. Automated systems can reduce some loss, but not all. Common forms of theft at POS include cash taken from the register, voiding ordered items, dropping sales or improperly ringing up items and inflating tips.

At the bar, patrons may be charged for premium drinks and served well drinks with the bartender/server pocketing the difference.

Noticing lower profit margins even with the same number of meals and drinks can be a red flag that receipts are not matching sales. More subtle signs of theft can be a change in employee morale as honest staffers witness others taking advantage of the system.

More restaurants are transitioning to automated point of sale software programs, including programs that can be run from tablets as servers circulate. This eliminates data inputs to a central POS kiosk. The advantages of automation for loss prevention include the ease of tracking orders by employee ID (no more badge swiping), more transparent payment tracking against orders, and even integration with accounting and inventory systems. Tracking tip records can also uncover theft if percentages are higher than the industry average of 5-15 percent, or higher than historically at the establishment.

As employees learn systems, there are ways to get around safeguards. For example, many employee thefts occur through discount or loyalty programs, in which the employee inputs a discount for the customer but the customer pays full price.  Delaget, an expert in loss prevention, found that four in 10 discount codes are fraudulent. The most common discount theft was manager code theft.

Some solutions offered for this type of theft included monitoring discount codes through the POS system as well as instituting a manager discount policy and including a fingerprint (biometric) security feature.

Watch for changes in employee behavior such as defensiveness or acting secretive. Also, if your prices haven’t changed, but customers seem to be complaining about price hikes, this could signal fraudulent price inflation at the POS.

Restaurant Theft in Accounting

When most business owners think of theft, they think about the back office functions. In this area, the thefts are likely more elaborate and damaging to the operation. Restaurant closures due to employee theft are most often caused through extensive management or ownership fraud.

The person responsible for end-of-day reconciliations has one of the greatest opportunities to manipulate voids, cancel checks and perform other register manipulation — leading to thousands and sometimes millions of dollars in loss over time. More elaborate accounting fraud schemes occur through underreporting earnings on the balance sheet or setting up fake accounts payable. Small and infrequent deposit losses also add up.

Cash transactions are also a big source of loss when not monitored regularly against petty cash reconciliations. Cash is the most coveted form of theft, particularly for employees who suddenly experience an outside issue or concern that requires quick payment. Bleeding the till should include certain safeguards, such as sealing cash in an envelope with the manager’s name written across the back or moving cash when there are few employees around.

A strong loss prevention program should include a combination of proven automated technology, regular reports and analysis and good supervision by trusted staff. Incorporating a third-party review of the books adds another layer of control and analysis that can discover discrepancies in inventory, receipts, margins and general accounting methods that require a second look.

Sometimes, it’s the accounting system or analytics that are hiding opportunities for lower costs and higher profits. Managers may not be tracking the right KPIs or comparing A to B in a way that indicates losses. Incorporating better processes to leverage information from the restaurant’s POS and bookkeeping systems can identify operational improvements that support cost and theft reduction. For example, review of franchise and sales tax rates as well as permit and licensing fees can reveal overpayments.

Theft of Intellectual Property

 One area of theft not always talked about is a loss of intellectual property. Again, in close-knit restaurant communities, owners and staff want to protect proprietary processes, recipes and even certain aspects of branding that make the overall restaurant experience unique. Analyze the areas of the business that add the most value or profit, and look for ways to protect those assets.

There is a fine line, however, between encouraging creative development in the kitchen and limiting ownership of that creativity by staff such as head chefs. Each situation is unique and can’t be covered by generic nondisclosure or confidentiality agreements. But it is worth the conversation to maintain a competitive position in your market.

Cornwell Jackson has worked with retail businesses, including restaurants for decades, and provides direction on compliance as well as business advisory services. We help restaurant owners and franchisors determine policies and procedures, investments in technology and the viability and timing of additional locations. If you have questions around employee theft and how our team can support your accounting processes and daily POS or reconciliation methods, contact us for a consultation.

Download the Whitepaper: Protect Your Restaurant from Employee Embezzlement

Scott Bates, CPA, is a partner in Cornwell Jackson’s audit practice and leads the business services practice, including outsourced accounting, bookkeeping, and payroll services. He is an expert for clients in restaurants, healthcare, real estate, auto and transportation, technology, service, construction, retail, and manufacturing and distribution industries.

 

Article originally published on March 7th, 2016. Updated in 2018.

 

 

 

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Posted on Mar 8, 2018

Payroll Outsourcing and Payroll Administration

There is a common story we see across small businesses of all sizes. Owners and operators of the company are focused on top line growth, hitting the pavement to bring in new business. They add employees to support the new business growth. They add benefits to keep those great employees. Before realizing it, the owners and small bookkeeping staff are overwhelmed with benefit and payroll administration. Is the company doing it right? Do owners and employees know what they don’t know?

At this point, the owners seek advice from other business owners and their CPA. Would outsourcing payroll make sense or should they add in-house staff to manage it better? After reviewing a few payroll services, the company is understandably faced with more questions about which service provides the best options — not to mention price.

Once decided on a payroll service, the real education begins. The company is still providing a lot of information to the payroll service to set up the structure and system, such as personnel information, their employment status, types of benefits and how each employee wants those wages and benefits managed through payroll. Later, staff also must reach out when there are new hires, promotions and changes to benefits. Depending on the payroll service, owners and operators might not get a lot of help understanding everything. They are also on their own to figure out internal processes that make information gathering and sharing simpler.

Let’s say the business expands even more to another state. Then the owner is faced with multi-state payroll complications. Although the solution to a well-managed payroll and benefits system takes time and strategy, the opportunity to address payroll complexity first lies with your CPA. This relationship can either simplify or increase complexity, so let’s look at some of the payroll pitfalls and questions every business owner should consider.

Pitfalls of Poorly Managed Payroll Administration

Businesses can face serious fines and penalties from the Internal Revenue Payroll Outsourcing WP DownloadService and other tax authorities for failing to comply with timely payments and reporting. At a minimum, employers must account for federal income tax, federal and state unemployment tax, Social Security and Medicare. Many companies have run into trouble in the areas of paying unemployment taxes, making late payroll deposits, incorrectly classifying employees as independent contractors on 1099s and assuming that depositing payroll is the same as reporting.

Penalties can be classified and pursued as “failure to deposit,” “failure to pay” or “failure to file.” Worst-case scenarios if payroll issues aren’t resolved could include losing the business and/or being charged with a federal crime. Individual shareholders and even corporate officers can be pursued and assessed penalties under certain circumstances.

The Department of Labor’s impending changes to overtime exemption rules are creating even more angst in the area of wage and hour compliance. Employees previously exempt from overtime rules may now be considered non-exempt, leading to the need to track overtime hours and communicate possible changes in benefits. It may even require employers to dictate how employees can take time off or how they work outside of normal business hours. These changes tie directly into payroll administration and tax planning.

On the benefits side, employers can offer a variety of things to compete for talent as well as help employees work efficiently. Properly classifying these benefits and properly withholding for pre-tax or taxable benefits simply adds to the complexity. Handle something wrong, and you will have compliance problems as well as upset employees.

It is fair to say that payroll administration and compliance is a big deal, and the decision on whether or not to outsource should not be taken lightly.

Payroll is the most up-to-date KPI in a business — and the most expensive.  Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Continue Reading: Things to Ask your CPA about Payroll Outsourcing

SB HeadshotScott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published April 6, 2016. Updated on March 8, 2018. 

 

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Posted on Mar 1, 2018

restaurant employee embezzlementMitigating the risk of loss in restaurants through theft is an ongoing challenge. Automation has improved security in transactions as well as back-office functions. But with top concerns in the restaurant industry being wholesale food costs and building and maintaining sales volume, the reduction of theft can improve those concerns for restaurateurs. We review the key areas for employee embezzlement and provide guidance on limiting loss with proper checks and balances.

In 2015, Texas reported a 4.8 percent growth rate in restaurant sales, one of the highest in the nation. Restaurant employment grew by 22 percent.

Texas is experiencing one of the highest growth rates in the country for restaurant sales, according to a 2016 survey by the National Restaurant Association. However, members cited the cost of food and the ability to build and maintain sales volumes among their top concerns.

Employee embezzlement could be a hidden contributor.

Restaurant owners and managers are always looking for ways to reduce overhead costs while keeping their prices competitive for the market. A hidden contributor to overhead costs and lost margins is embezzlement. If food or money walks out the door consistently because of employee theft, it needs immediate attention.

Anyone who has worked in a restaurant has probably witnessed questionable behavior — not just from the patrons. History has shown that some employees — from the line cooks to servers and management — can demonstrate unethical and even criminal behavior when presented with an opportunity to put a little extra in their pockets. It is up to management to put safeguards in place to reduce those employee embezzlement opportunities.

Common types of theft in restaurants include:

  • Food theft from deliveries or freezersRestaurant Embezzlement WP Download
  • Prepared food and beverages given to patrons (unticketed)
  • Theft of equipment and supplies
  • Pocketed cash for undocumented orders
  • Patrons overcharged and the difference pocketed
  • Misuse of discounts, reward programs or coupons
  • Fake accounts payables
  • Underreporting daily receipts
  • Underreporting of earnings to franchisor and investors
  • Theft of recipes, processes or intellectual property

As an owner or franchisor expands to more than one location and relies on management, the risks of theft can increase. The impact of theft over time can be exponential, including a lower return on profits, an inability to reinvest in the business or provide employee benefits as well as difficulty recruiting and retaining staff. Restaurant communities tend to be small, close-knit groups who can quickly identify red flags with regard to a restaurant’s ownership or management. Reputation is critical to keep top talent and attract patrons.

In the next restaurant blog article, we will address each of these risks with solutions that incorporate a combination of automation and sound operational controls.

Continue Reading: The Most Common Types of Restaurant Theft

Cornwell Jackson has worked with retail businesses, including restaurants for decades, and provides direction on compliance as well as business advisory services. We help restaurant owners and franchisors determine policies and procedures, investments in technology and the viability and timing of additional locations. If you have questions around employee theft and how our team can support your accounting processes and daily POS or reconciliation methods, contact us for a consultation.


Scott Bates, CPA, is a partner in Cornwell Jackson’s audit practice and leads the business services practice, including outsourced accounting, bookkeeping, and payroll services. He is an expert for clients in restaurants, healthcare, real estate, auto and transportation, technology, service, construction, retail, and manufacturing and distribution industries.

Originally published on March 1, 2016. Updated in 2018. 

 

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Posted on Jan 10, 2018

Often, bad hiring decisions don’t become apparent for weeks or months. Then, it might take much longer to rectify hiring mistakes, whether that means a termination or resolving the performance issues. Here are some of the most commonly reported hiring mistakes, and some tips for avoiding them.

Consider the Consequences

Perhaps the biggest error is moving too quickly. A rushed hiring process usually means cutting corners — not searching broadly enough for the best candidate and short-circuiting the candidate assessment process. If you need to move quickly, just devote more time to the process (and enlist support) instead of trying to streamline it.

One way to motivate yourself not to rush a hiring decision is to think about the impact that a poor hire can have. Depending on the individual’s shortcomings, the effects of a poor performer can ripple throughout your whole organization.

For example, a new employee’s bad attitude can spread like a virus. Also, when a worker isn’t carrying his or her own weight, for whatever reason, those left to pick up the slack can become resentful. Finally, consider how much of your time or a supervisor’s time can be sapped trying to rehabilitate an underperforming employee or to bring an underqualified hire up to speed.

Getting in a hurry to fill a vacancy may lead you to only interview job candidates who respond to help-wanted ads. Often, however, the best fit for the job is someone who isn’t looking for work and, therefore, won’t see your ad. If finding qualified applicants is a problem, consider turning your employees into recruiters by asking them to recommend good candidates they may know. You might motivate them to do so by offering a reward if the recommendation leads to a new hire.

Cast a Wide Net

Once you have applications that look promising, conduct reference checks — don’t waste this opportunity by taking this step too lightly! It’s true that, when asked to give job references, many companies aren’t willing to give more than basic employment information, such as when the person in question worked for them. This isn’t surprising, given the litigious culture we live in. Former employees who are given negative references sometimes head to court claiming unfair treatment. Likewise, a company that fails to provide critical information (such as a history of violence in the workplace) could also end up in the hot seat.

With this reluctance in mind, you’ll have to be more persistent to get real information. If the references provided to you are skimpy or you can’t get a return call, tell the applicant you need more contacts, possibly including personal references. Also, if the applicant was a supervisor, try to talk to people that he or she supervised.

Grill References Thoroughly

When you talk to references, in addition to verifying basic facts, use open-ended questions rather than inquiries that can be answered with a simple yes or no. For example, you can ask:

  • How would you describe the candidate’s job performance?
  • How did the candidate deal with high-pressure situations?
  • How did he or she solve problems?
  • How did the candidate work in terms of cooperation with coworkers?

Also, characterize the responsibilities and qualifications that the candidate listed on his or her resume, and ask the reference if they accurately describe the applicant. Resume-padding is rampant.

Finally, listen for the silence that can speak volumes. As noted earlier, fear of litigation often prevents people from giving useful information, such as “the former employee had a poor work attendance record.” Within reason, you should take note if the reference neglects to say something flattering when given the opportunity, or seems to dodge a question. Consider whether he or she is masking a negative response.

Suppose, for instance, you say, “Tell me about John’s leadership skills.” If the answer you get is something along the lines of, “Here at Acme Co., we encourage all of our employees to develop leadership skills,” you might reasonably surmise that John’s leadership skills aren’t exemplary.

Look for Flaws

Many books have been written on how to interview job candidates. Here are just three tips for rooting out characteristics you’d want to avoid in an employee:

  • Poor attitude. A negative, cynical complainer might hide those traits when talking to you. However, the more of your people the job candidate encounters, the greater the chances that you’ll get a hint of that personality type. Give candidates a chance to meet separately with some people they would work with. That’s a helpful opportunity for the applicants to learn more about your organization. It also gives you additional lenses through which to view them, as other employees provide feedback. It’s a good idea to also ask for feedback from others who weren’t part of the interview, for example, the receptionist. Often applicants are less guarded around people they see as uninvolved in the hiring process.
  • Over-the-top ambition. Although you probably want to hire employees who hope to climb the ranks, watch for signs that the candidate is only interested in finding a job as a short-term stepping stone. Insights can be gleaned from such standard questions as, “Where do you see yourself in three (or five or ten) years?”
  • Dependency. Some employees are needy and require more support and direction from supervisors than you’d hope or expect. How can you spot such people before hiring them? You may be able to gauge a person’s ability to confront a challenge independently by asking him or her to describe a previous work situation. For instance, you might say: “Tell me about a time when you had to solve a problem with your job by yourself, and how you did it.”

As an employer, you hope that your employees are not only able to work through problems on their own, but also capable of applying what they learn to future issues. This same step should apply to how you fine-tune your hiring process. Take note of what works well and use that to create a hiring procedures checklist that will help as you continue to build your organization. Consistently adhering to an experience-tested process helps prevent costly hiring mistakes.

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Posted on Dec 6, 2017

The federal overtime law can lend itself to differing interpretations. In those cases, workers may challenge how an employer applies the rules.

Under the Fair Labor Standards Act (FLSA), eligible employees must be paid time-and-a-half their regular pay rate when they work more than 40 hours a week, unless there’s an exemption. Here are three examples of when employees challenged their employer’s application of the law.

1. Bonuses and shift differentials. The Wage and Hour Division (WHD) of the Department of Labor (DOL) reached a settlement with a Midwest health care management company regarding overtime violations at 23 skilled nursing and assisted living facilities. The company agreed to pay $165,379 to 594 workers in back wages and damages.

The WHD found that the company violated the FLSA when it failed to include non-discretionary bonuses and shift differentials in calculating overtime rates. The omissions also triggered violations of the recordkeeping provisions of the FLSA.

In addition to paying the back wages and damages, the company agreed to use a new payroll service and software.

Failing to accommodate bonuses and shift differentials in overtime pay is a common FLSA violation, particularly in the health care industry.

2. Employees working multiple jobs. In another case, the U.S. Third Circuit Court of Appeals ruled that a Pennsylvania county didn’t willfully violate the FLSA when it calculated overtime.

Two employees worked two separate part-time jobs. The county tracked and paid these employees for each of their two individual jobs, but later discovered that it had failed to aggregate the hours for both jobs, resulting in a failure to pay the overtime rate.

The county didn’t dispute that it violated the FLSA’s overtime provisions. The issue at hand was whether the violations were willful. This issue matters because a finding of willfulness expands the limitations period for claims under the FLSA.

The court ruled that although there was evidence the county made bureaucratic errors that perhaps could be attributed to “government morass,” its failure to pay correctly didn’t rise to a level of “recklessness or ill will” that might have demonstrated willfulness. (Souryavong v. Lackawanna County, CA-3, Dkt. No. 15-3895, 9/20/17)

Top Court Definition of “Willfulness”

Under the U.S. Supreme Court’s long-standing definition, willfulness includes situations when the employer, at the time of its FLSA violation, either knew its conduct was prohibited by the law or “showed reckless disregard” for the matter. Simply acting unreasonably is insufficient. In other words, there must be an element of actual awareness. (McLaughlin v. Richland Shoe Co., U.S. Sup. Ct., 486 U.S. 128, 5/16/88)

The county employees argued that the violations were willful in this case because:

    • The county made the same mistake with another employee who held two separate jobs,
    • The county’s Human Resources director sent out an email to county officials raising the concern that employees working multiple jobs might file labor grievances, and
  • County officials testified that they were generally aware of the FLSA and its requirements.

The court, however, found no evidence that the county was “specifically aware” of the multiple-job FLSA overtime problems. The court also noted that the problem was addressed within a year of the email raising concerns — much sooner than another case where the court did find willful violation.

3. Requests for overtime pay. In yet a third case, the Seventh Circuit Court of Appeals upheld a lower court’s decision that a city wasn’t liable for paying overtime wages to off-duty police officers working on mobile devices. (Allen v. City of Chicago, CA-7, Dkt. No. 16-1029, 8/3/17)

The officers were members of an organized crime bureau. Although the officers had scheduled shifts, they were sometimes required to work hours when they would ordinarily be considered off-duty. To assist its officers, the police department issued mobile devices that could be used during off-duty work.

Under the police department’s procedure, officers were required to submit time slips to obtain overtime pay. The officers regularly used this system, but during the period covered by the lawsuit, many officers didn’t submit slips for work done on the mobile devices.

Was Unwritten Policy the Problem?

The main issue was whether the unwritten policy prevented or discouraged the officers from submitting overtime slips. Although an employer’s duty to pay overtime arises even when it doesn’t request the work or the work hasn’t been reported, the FLSA stops short of requiring employers to pay for work they didn’t know about and had no reason to know about.

Some plaintiffs testified that the culture of the organized crime bureau would frown on submitting slips for work using the mobile devices, but others, including some plaintiffs, had submitted slips for such work and were never denied compensation. Some supervisors knowingly approved slips submitted for such work; others probably did so without knowing it since the slips didn’t indicate whether the work was done on a mobile device.

No one ever told plaintiffs not to submit slips for that work, and no one was ever reprimanded or disciplined for submitting such slips. All told, the court concluded, the evidence didn’t bear out the common culture plaintiffs alleged and there was no FLSA violation.

Moral of the Examples

It isn’t unusual for situations to fall between the cracks of the usual overtime applications. Hire a reputable payroll provider you can trust and look to your Human Resources department for guidance.

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Posted on Sep 22, 2017

The IRS is strict about collecting payroll taxes and tough on “responsible persons” who don’t pay them.

Withheld federal income, Social Security, and Medicare taxes are known as “trust fund” taxes because they are held in trust until they’re paid. If they aren’t paid, the IRS can assess liability for 100% of the unpaid amount on responsible individuals. Once that move is taken, the tax agency can start collection action against an individual’s personal assets. It can file a federal tax lien or take levy or seizure action.

A recent court case shows that a person may not be able to escape the penalty even if someone else is primarily responsible for handling payroll taxes.

The case involved a 50% owner and CEO of a tool and die company. He signed the paychecks. The other 50% owner served as the COO and prepared the payroll tax deposit checks. Both men had authority to handle money for the company, to open and close bank accounts in its name and to sign checks.

Payroll Service Bails

The company used a third-party payroll service provider to process its paychecks. But in December 2003, the service ended the contract after the tool and die company wasn’t able to remit the full amount of its gross payroll, including taxes.

At the COO’s urging, the company began using an in-house software system to handle payroll. Both the CEO and the COO expected to be able to fix the tax shortfall early in 2004.

The CEO maintained that the COO was the sole person entrusted to ensure that the payroll taxes were paid. He says that he didn’t learn that the COO was routinely failing to do so until July 2004. At that time, the CEO arranged a meeting with IRS to discuss the shortfalls.

At some point, the CEO was going through the COO’s desk and discovered that although the man was regularly cutting payroll tax checks, he wasn’t paying the taxes. Up until that point, the CEO claimed that the regular cutting of the checks led him to believe the taxes were being paid.

“Just Signing Papers”

The company tried, but couldn’t stay current with the taxes, so the CEO met with the IRS again in October 2004. At that meeting, the CEO stated that he discovered that the COO hadn’t been keeping up with the taxes. The CEO acknowledged that he signed tax returns but claimed he was “just signing papers that had to be signed,” and that he didn’t review the returns or understand them.

In 2005, several significant incidents occurred:

  • In January, the company filed for Chapter 11 bankruptcy protection and reorganization.
  • In May, an IRS Revenue Officer interviewed the CEO, who admitted that he first became aware of the delinquent taxes in December 2003 and that while the delinquent taxes were increasing, he authorized the payment of certain of the company’s other financial obligations, including payroll, utilities, rent, supplies, operating expenses, loan payments and equipment leases.
  • In August, the CEO laid off the COO but continued to use him to handle payroll taxes.

Following an investigation, the IRS assessed the trust fund recovery penalty against the CEO. He filed suit in U.S. District Court for the Eastern District of Michigan.

The tax code allows the IRS to seek a trust fund recovery penalty from any person who is:

  1. A “responsible person” — that is any person, or group of people, who has the duty to perform and the power to direct the collecting, accounting and paying of trust fund taxes, and
  2. Willfully fails to collect or pay those taxes.

Broad Interpretations

The IRS has broad interpretations of these two requirements. For example, a responsible person could be an officer or employee of a corporation, a member of a partnership or a shareholder, among others on a long list of individuals who can be held liable for unpaid payroll taxes.

And a willful failure needn’t be intentional. The penalty can be applied in situations where a person knew, or should have known, that the payroll taxes weren’t paid. Having a bad motive isn’t necessarily required.

In the case described above, the court found the CEO met both requirements. He had the authority to pay the taxes (even though he had no responsibilities related to calculating or paying them). The district court cited Kinnie v. U.S., where the court found that a responsible person can be responsible for a corporation’s failure to pay its taxes, or more explicitly, can direct payment of creditors.

“Obvious Risk”

The CEO also disregarded an “obvious risk that the taxes weren’t being paid,” the court said. While he had become fully aware of the COO’s deception in July 2004, he tried to show that until the fourth quarter of that year he had no idea that the books were being cooked — and that he had no reason to exercise oversight of the COO.

The court noted that the CEO also had continued to rely on the COO for paying the payroll taxes even after he laid him off. The court cited Calderone v. U.S., where it was ruled that a reckless disregard of the facts and known risks that taxes weren’t being paid is sufficient to hold a party liable.

By repeatedly disregarding these red flags that the COO wasn’t paying the taxes, the CEO acted recklessly and willfully, the district court found. As a result, he failed to convince the district court that he shouldn’t be held liable. (Hartman, DC MI 7/26/2017, 120 AFTR 2d-5091)

Do Not Ignore

The issue of trust fund taxes is far too serious to ignore. It’s critical that a person who meets any of the financial responsibilities that can lead to a trust fund penalty be certain that the taxes are paid (see box below: Critical Questions). It’s extremely difficult to get the courts to show any mercy if the IRS assesses the penalty.

Critical Questions

The IRS interviews individuals it suspects of being responsible parties. Some of the common questions asked are:

  • Do you determine the financial policy for the business?
  • Do you direct or authorize payment of bills?
  • Did you open or close bank accounts for the business?
  • Did you guarantee or cosign any loans?
  • Do you sign or countersign checks?
  • Do you authorize or sign payroll checks?
  • Did you authorize or make federal payroll tax deposits?
  • Do you prepare, review, sign or transmit payroll tax returns?

The more “yes” answers to these questions, the greater the likelihood the trust fund recovery penalty will be imposed.

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