More than three decades have elapsed since the Immigration Reform and Control Act (IRCA) began requiring employers to complete I-9 forms when hiring to verify a new employee’s identity and authorization to work in the United States. Given the recent focus on illegal immigration, there’s a good chance that immigration enforcement efforts at the employer  level might be stepped up.

As with the IRS in the tax arena, the prospect of an audit by the Immigration and Customs Enforcement (ICE) agency is intended to ensure that employers toe the line. That’s why the financial cost of violating the IRCA can be severe, depending on the nature of the infraction.

Determination of Penalties

The steepest penalties — up to $16,000 per violation — are levied against employers that knowingly hire and keep undocumented workers on the payroll.

More typical are penalties of up to $1,100 per violation for failing to satisfy the law’s administrative requirements. Chances are that if you have I-9 recordkeeping issues with one employee, you’ll have them with many, which means that the $1,100 per violation maximum penalty can quickly add up.

When deciding how big of a penalty to assess, ICE will take into consideration the following factors:

• The size of the organization,
• ICE’s assessment of its “good faith effort to comply” with the law,
• The seriousness of the violation,
• Whether the violation involves unauthorized workers, and
• Any history of previous violations.

Remember that IRCA requires you to keep I-9s on file for not only current employees, but also former employees — for at least three years from the date of hire, or one year after the employee has left you, whichever is longer.

Proactive Steps

If you receive a notice of inspection from ICE, you will have three days to produce all your I-9s on file (extensions are sometimes granted, but you shouldn’t count on it). Be sure to make copies of forms before you provide the originals to ICE. Typically ICE will also ask for supporting documentation, such as a copy of your payroll and employee roster, business permits and articles of incorporation.

There are steps you can take immediately after being informed that you will be inspected (that is, you’re presented with a notice of inspection) that might nip any issues in the bud. As soon as a notice is received, check your I-9 files for any potential problems. You can try to fill in any missing data items on those forms. It’s up to ICE whether to absolve you based on any post-notice corrections.

However, if you failed to obtain I-9s at the time of hiring, what you can’t do is round up documentation from employees and fill out the forms after you have received the notice. ICE can use forensics experts to determine whether you have done so, and such a discovery would compound your problems.

Possible ICE Responses

Following an audit (which could take months or even years), you will receive a response from ICE, which typically will fall into one of the following categories:

Notice of inspection results. Also known as a “compliance letter,” this is used to notify you that your company was found to be in compliance.

Notice of suspect documents. This tells you that, based on a review of the I-9s and documentation submitted by the employee, ICE has determined that an employee is not authorized to work and advises you of the possible criminal and civil penalties for continuing to employ that individual. ICE will give you and the employee an opportunity to present additional documentation to rebut this conclusion.

Notice of discrepancies. A discrepancy notice tells you that, based on its review of the I-9s and documentation submitted by an employee, ICE has been unable to determine that individual’s work eligibility. You will need to give the employee a copy of the notice and explain that this is an opportunity to provide ICE with more evidence of his or her legal status.

Notice of technical or procedural failures. This notice lists technical violations identified during the inspection and gives your company 10 business days to correct them. After those 10 days, uncorrected technical and procedural failures will become substantive violations.

Warning notice. This is issued when ICE has found substantive verification violations, but circumstances don’t warrant a monetary penalty and ICE is confident you will comply going forward.

Notice of intent to fine (NIF). This is the worst-case scenario. It means ICE has found what it considers to be “substantive, uncorrected technical, knowingly hire and continuing to employ violations.”

In the unlikely event that your company does receive an NIF, it’s not a done deal. You can either negotiate a settlement with ICE or, according to the agency, ask for a hearing before the Office of the Chief Administrative Hearing Officer within 30 days.

High Stakes

What happens after you hear back from ICE will, of course, depend on what they find. As noted, you might need to ask some employees to account for any problems ICE uncovers, such as a lack of evidence that an employee has legal authority to work in the U.S. If such an employee fails to respond, you will be obliged to terminate that person.

Given the high stakes, if you receive a notice of inspection, it’s advisable to consult with legal counsel having expertise in ICE matters.

It’s standard operating procedure for marketers to segment customers according to their value to the organization, to ensure that those who are most vital to the growth and profitability of a company are well-cared-for and don’t disappear. The same needs to be done with regard to employees. Appearances can be deceiving.

For example, your largest customer measured by dollars generated could also be among your least profitable, if that customer consumes an inordinate amount of your time and other resources. In the same way, some employees at the high end of your compensation scale might not be nearly as valuable to you as some on the lower end. Higher-paying positions might have more to do with labor market traditions and preconceived assumptions about certain roles within a company than the actual value added to a company’s operations. In some businesses, the greatest draw for customers might be a friendly and knowledgeable receptionist, though he or she is likely to be among the lowest paid on staff.

Suppose, in your labor market, network IT professionals command a good salary. Your business needs an IT professional, so you pay the market price to recruit and keep one on board. But if you’re assuming that that employee is more vital to your success than an exceptional customer service representative simply because the former earns twice as much as the latter, you could be wrong.

Skills Quadrant Model

One insightful framework for taking a fresh look at your workforce, known as the Lepak & Snell model, is a four-quadrant, skills-based paradigm dividing employees by value of particular skills to your organization and the skills’ uniqueness in the labor market. The visual result is a box with the following four quadrants.

You’ll probably assess your employees’ skills on the value spectrum based on criteria such as the ability to lower costs, increase revenue, strengthen customer relationships, foster team collaboration, offer creative ideas and solve problems.

The uniqueness-of-skills spectrum depicts the degree to which employees’ skills are narrowly applicable to your organization, and, thus, harder to find in the labor market. Let’s say you produce a unique, expensive and complex product. It takes years for employees involved in the production to develop the necessary talent. Those employees will be rated highly on the skill spectrum. The same principle is applicable to specialized services.

The purpose of the framework isn’t solely to categorize your current employees, but also to help you organize your workforce structure by job function. You can create a generic organizational chart by department or by division and assign job titles and functions to the four quadrants. For example, a sales manager position might require an employee who qualifies as a critical employee. Chances are you’ll need employees representing all four quadrants in most if not all departments.

After you’ve completed your generic organization chart, compare it to your actual one and analyze the inconsistencies: Are some departments understaffed in terms of skill? Overstaffed? If so, why? Is any action warranted, either in the short-term or over a longer period of time? What would be the operational consequence of having to fill vacancies in any of those positions?

Identify the Criticals

As previously noted, employees whose skills combine high value and uniqueness are known as the “criticals,” that is, critical to your success. Putting those criticals at the top of your retention priority list makes sense, though there are no guarantees that you can keep them on board in spite of your best efforts. Even if a competitor doesn’t lure these employees away, today’s society is increasingly mobile and people move away or seek new challenges or retire.

That’s why you need to think carefully about your talent pipeline and succession planning, so that when critical employees leave, you don’t want to be left in the lurch.

Employees who don’t fall into the “critical” quadrant, assuming they satisfy your performance criteria, can’t be taken for granted. Just because an employee isn’t critical doesn’t mean you would welcome the burden of finding a replacement. But by using this talent quadrant lens, you have a clearer view of how to prioritize your efforts to keep employees engaged and content with their jobs.

Finally, keep in mind that maximizing employee engagement and satisfaction — whether it be that of a critical employee, professional, specialist, or other — often requires a tailored approach, as opposed to one-size-fits-all. For example, emphasizing tangible forms of compensation could cause you to lose some of your criticals who find motivation in other ways.

The Lepak & Snell model isn’t the “be all and end all” of understanding your workforce. If it doesn’t seem applicable to your organization, find one that will allow you to consider other ways of looking at how effectively you’re leveraging your organization’s substantial investment in “human capital.” Expect to find a few surprises if you do.

Does your small business engage in qualified research activities? If so, you may be eligible for a research tax credit that can now be used to offset your federal payroll tax bill.

Which Research Activities Qualify?

To be eligible for the research credit, a business must have engaged in “qualified” research activities. To be considered “qualified,” activities must meet the following four-factor test:

1. The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business.
2. There must be an intention to eliminate uncertainty.
3. There must be a process of experimentation. In other words, there must be a trial-and-error process.
4. The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science.

Expenses that qualify for the credit include wages for time spent engaging in supporting, supervising or performing qualified research, supplies consumed in the process of experimentation, and 65% of any contracted outside research expenses.

This relatively new privilege allows research credits to benefit small businesses that may not generate enough taxable income to use the credits to offset their federal income tax bills. The IRS recently issued guidance that explains how to take advantage of this election. Here are the details.

Eligibility

Under the Protecting Americans from Tax Hikes Act of 2015, a qualified small business (QSB) can elect to use up to $250,000 of its research credits to reduce the Social Security tax portion of its federal payroll tax bills. Under the old rules, QSBs could use the credit to offset only their federal income tax bills. However, many small businesses owe little or no federal income tax, especially small start-ups that tend to incur significant research expenses.

A QSB is generally defined as a business with:

• Gross receipts of less than $5 million for the current tax year, and
• No gross receipts for at least one tax year in the five-year period preceding the current tax year.

So the payroll tax reduction election is available to only newer small businesses that may still be in the unprofitable start-up phase.

Timing Issues

The payroll tax reduction election must be made on or before the due date (including extensions) of the QSB’s federal income tax return for the tax year for which the election is to apply. The research credit for that tax year can then be used to reduce the QSB’s federal payroll tax bills, starting with the bill for the first calendar quarter that begins after the date that the QSB files its federal income tax return for the tax year for which the election is to apply.

To illustrate, suppose your business is a calendar-year C corporation that filed its 2016 federal income tax return on April 18, 2017. The company can use its 2016 research credit to reduce its federal payroll tax bills, starting with the third quarter of 2017.

The allowable payroll tax reduction credit can’t exceed the employer’s portion of the Social Security tax liability imposed for any calendar quarter. Any excess credit can be carried forward to the next calendar quarter, subject to the Social Security tax limitation for that quarter.

For QSBs that file only an annual federal payroll tax return (for example, certain agricultural employers), IRS guidance specifies that the payroll tax reduction credit is claimed on the annual payroll tax return that includes the first quarter beginning after the date on which the business files its federal income tax return with which the payroll tax reduction credit election is made.

Tax Return Filing Requirements

QSBs must file specific forms to elect the payroll tax reduction credit for a tax year for which the election is to apply. There are separate forms to attach to your federal income tax return and payroll tax return. In addition, members of a controlled group of corporations must attach a statement showing how each member’s share of the research credit was determined and providing the names and employer ID numbers (EINs) of the other group members.

Many QSBs have already filed their 2016 federal income tax returns without making the payroll tax reduction election. If you need to file an amended return for 2016, IRS guidance suggests that you file it by no later than December 31, 2017.

Need Help?

The new payroll tax reduction credit deal is a welcome change for eligible small businesses that generate research credits. Your tax advisor can help you make the election for your business (or amend your business’s 2016 federal income tax return, if necessary) and help you file payroll tax returns that take advantage of the new privilege. Your advisor can also answer any additional questions you may have about claiming the research credit.

In recent years, the IRS has offered “green” tax credits to individuals who purchase qualifying residential energy-efficient equipment and certain electric vehicles. Some of these breaks expired at the end of 2016. But others are still ripe for the taking in 2017 and beyond. Here’s what you need to know to take advantage.

Expanded Green Tax Breaks for 2016

For 2016, individual taxpayers could claim a 30% federal tax credit for the following expenditures for a U.S. residence, including a vacation home:

• Qualified solar electricity generating equipment,
• Qualified solar heating equipment,
• Qualified wind energy equipment,
• Qualified geothermal heat pump equipment, and
• Qualified fuel cell electricity generating equipment. (The maximum credit is limited to $500 for each half-kilowatt of fuel cell capacity.)

For 2017, only the first two items are still eligible for the 30% credit.

Additionally, a more modest residential energy credit also expired at the end of 2016. It had a lifetime maximum of $500 and covered qualified expenditures for:

• Advanced main air circulating fans,
• Natural gas, propane, and oil furnaces and hot water boilers,
• Electric heat pumps,
• Electric heat pump water heaters,
• Biomass fuel stoves,
• High-efficiency central air conditioners,
• Natural gas, propane and oil water heaters,
• Energy-efficient windows, skylights and doors,
• Energy-efficient roofing products, and
• Energy-efficient insulation.

You can claim these now-expired credits on your 2016 federal tax return if you completed installation of the qualified equipment last year. If you already filed your 2016 return without claiming your rightful credits, your tax pro can help you file an amended return to collect the tax savings.

Residential Solar Energy Credit

You can claim a federal income tax credit equal to 30% of expenditures to buy and install qualifying energy-saving solar equipment for your home. Because this gear is expensive, it can generate big credits. And there are no income limits — even billionaires are eligible for this tax break. The 30% credit is available through 2019. In 2020, the credit rate drops to 26% and then to 22% in 2021. After that, the credit is scheduled to expire.

The credit can be used to reduce both your regular federal income tax bill and your alternative minimum tax (AMT) bill, if applicable.

The credit equals 30% of qualified expenditures (including costs for site preparation, assembly, installation, piping and wiring) for the following:

Qualified solar electricity generating equipment. This must be installed in a U.S. residence, including your vacation home. You must use the residence personally; so, the credit can’t be claimed for a property that is used exclusively as a rental.

Qualified solar water heating equipment. This also must be installed in a U.S. residence, including your vacation home. To qualify for the credit, at least half of the energy used to heat water for the property must be generated by the solar equipment. The credit can’t be claimed for a property that is used only as a rental. Also, you can’t claim the credit for equipment used to heat a swimming pool or hot tub. No credit is allowed unless the equipment is certified for performance by the nonprofit Solar Rating & Certification Corporation or a comparable entity endorsed by the state where your residence is located. Keep the certification with your tax records.

You can only claim the credit for expenditures on a “home,” which can include a house, condo, co-op apartment, houseboat, or mobile home, or a manufactured home that conforms to federal manufactured home construction and safety standards.

Keep track of how much you spend, including any extra amounts for site preparation, assembly, and installation. Also record when the installation is completed, because you can claim the credit only in the year when the installation is complete. In addition, ask your tax advisor whether you’re eligible for state and local tax benefits, subsidized state and local financing deals, and utility company rebates.

Credit for New Plug-In Electric Vehicles

Another green tax break that’s still available for 2017 and beyond is the federal income tax credit for qualifying new plug-in electric vehicles. The credit can be worth up to $7,500.

To be eligible for the credit, a vehicle must:

• Be new (not used or rebuilt),
• Draw propulsion from a battery with at least four kilowatt hours of capacity,
• Use an external source of energy to recharge the battery (thus the term “plug-in”),
• Be used primarily on public streets, roads, and highways,
• Have four wheels,
• Meet applicable federal emission and clean air standards, and
• Be used primarily in the United States.

It can be either fully electric or a plug-in electric/gasoline hybrid. Finally, the vehicle must be purchased rather than leased. If you lease an eligible vehicle, the credit belongs to the manufacturer, and that may be factored into a lower lease payment.

The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each additional kilowatt hour of battery capacity. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the certification of the allowable credit amount provided by the manufacturer or distributor.

The credit begins phasing out over four calendar quarters once the total number of qualifying vehicles sold by a particular manufacturer for use in the United States reaches 200,000. So far, no manufacturers have crossed that line, although General Motors might reach this threshold in 2018 or 2019 if sales of the Chevy Bolt and Volt continue at their current pace.

The credit can be used to offset your regular federal income tax and any alternative minimum tax (AMT) liability. And there are no income restrictions.

Not all eligible vehicles qualify for the maximum $7,500 credit. Some plug-in electric/gas hybrids are eligible only for lower amounts. According to Edmunds.com, the current list of eligible vehicles and credit amounts is as follows:

Fully Electric Vehicles

Plug-In Electric/Gas Hybrids

In addition, residents of some states may be eligible for state income tax credits, rebates, or reduced vehicle taxes and registration fees for buying or leasing electric vehicles.

Need Help?

These green tax breaks are available for a limited time only. Contact your tax advisor for help claiming and maintaining adequate records to support these eco-friendly purchases.

What do pumpkin patches, ski resorts, ice cream shops and accounting firms have in common? They’re all seasonal businesses that experience a surge in revenues during their busy seasons that tapers off in the slow season. Seasonal peaks and troughs present challenges that require creative planning and fiscal prudence.

Consider a Fiscal Year End

Most businesses operate on a calendar year basis that begins on January 1 and ends on December 31. It’s straightforward, matches the owner’s personal record keeping, and may be required by the IRS under certain circumstances.

But seasonal businesses may have good reasons to elect to use a fiscal year. (A fiscal year is 12 consecutive months ending on the last day of any month except December.) For example, reporting income by calendar year could split up the peak season between two years and give a distorted view of income and expenses. This also happens when a seasonal business reports most of its expenses in one calendar year and income in another.

A company that wants to adopt a fiscal year for a seasonal business will need to consistently maintain its books and records and report income and expenses using the time period adopted. But first and foremost, it’s important to consult a tax advisor to determine if the business is allowed to switch its year end under the tax rules and whether doing so is worth the extra effort.

Understand the Cash Flow Cycle

Every business has some degree of ups and downs during the year. But cash flow fluctuations are much more intense for seasonal businesses. So, it’s important to understand a seasonal business’s operating cycle to anticipate and minimize shortfalls.

To illustrate, consider a manufacturer and distributor of lawn-and-garden products like topsoil, potting soil and ground cover. Its customers are lawn-and-garden retailers, hardware stores and mass merchants.

The company’s operating cycle starts when customers place orders in the fall — nine months ahead of its peak selling season. The company begins amassing product in the fall but curtails operations in the winter. In late February, when the thaw begins for most of the country, product accumulation continues, with most shipments going out in April.

At this point, a lot of cash has flowed out of the company to pay operating expenses, such as utilities, salaries, raw materials costs and shipping expenses. But cash doesn’t start flowing into the company’s checking account until customers pay their bills around June. Then, the company counts inventory, pays all remaining expenses and starts preparing for the next year. Its strategic selling window — which will determine whether the business succeeds or fails — lasts a mere eight weeks.

Maximize the Selling Window

Seasonal businesses put substantial pressure on their marketing and sales teams. They have a limited amount of time to attract customers and little opportunity to take corrective actions. Successful seasonal businesses use targeted, tailored marketing programs that address these questions:

• Who’s the company’s typical customer?
• What’s the best way to reach that customer base?
• When are customers making their buying decisions?

In the example of the lawn-and-garden distributor, customers place orders in the fall. So, an end-of-summer “early bird” discount program, communicated via an email campaign in September and paper inserts with customer invoices in May, might entice customers to place orders early — and choose that company over its competitors.

Seasonal businesses that market to consumers increasingly turn to social media to generate sales. Customers who follow a business on Facebook or LinkedIn provide a narrow target audience, and social media posts can be cheap and relatively simple to generate. For example, a summer camp sent personalized “Happy Birthday” messages to last year’s campers throughout the year. These posts were viewed by all of the campers’ Facebook friends, many of whom could be potential new campers next summer.

Ramp Up for Busy Season

Ideally, a seasonal business should stockpile cash received at the end of its operating cycle, and then use those cash reserves to finance the next operating cycle. But cash reserves may not be enough, especially for a high-growth company.

Many seasonal businesses apply for a line of credit to avert potential shortfalls. However, banks tend to be leery of such enterprises, particularly those with limited history. To increase the chances that a loan application will be approved, business owners should compile a comprehensive loan package, including historic financial statements and tax returns, as well as marketing materials and supplier affidavits (if available).

More important, the company’s owner should draft a formal business plan that includes financial projections for the next year. Some companies even project financial results for three to five years into the future. Seasonal business owners can’t rely on gut instinct. They need to develop budgets, systems, processes and procedures ahead of the peak season.

Without a line of credit, a business that has severe fluctuations might not have enough working capital to make it through the operating cycle. If there’s insufficient money to pay suppliers, they could stop delivering materials. If the employees aren’t paid, they’re unlikely to report for work. If the weather doesn’t cooperate, revenues might fall short of the business plan. The line of credit is a solid backup plan. If one lender turns down an application for a line of credit, a smart business owner will find out why, remedy any shortcomings and try again.

Plan for the Off-Season

Some companies, such as a local ice cream or golf pro shop, may decide to close during the off-season. Others, such as a hotel or accounting firm, are open year-round, offer promotional discounts or cut operating hours to weather the slow times.

Creative seasonal businesses try to find ways to operate two (or more) seasonal businesses with opposite busy cycles using the same resources. Examples include a midwestern landscaping company that plows snow in the winter, a ski resort that offers hiking and rafting packages in the summer, and costume stores that sell outdoor furniture in the spring.

Another off-season survival strategy is hiring part-time seasonal workers. Salaries and employee benefits quickly drain savings. Using part-timers converts a fixed expense (full-time salaries) into a variable expense that ebbs and flows with the operating cycle. But recruiting reliable, skilled part-timers — who are available to work on demand — is often harder than it seems.

So it’s a good strategy for an employer to build a pool of part-time workers that it can draw on year after year, such as an ice cream shop or a day camp that hires teachers to work during the summer. Also, part-timers should be treated with the same respect as full-timers. A positive work environment will lower turnover, improve morale and increase the likelihood that people will come back to work for the business again. Employers may want to consider offering financial incentives to employees who refer friends and family members for part-time positions.

Remember, most of the same labor laws regarding such issues as harassment, discrimination, child labor, minimum wages, and workplace health and safety apply to all workers, both seasonal and full-time. It’s still necessary to withhold taxes just as for regular employees and pay overtime for nonexempt employees.

Seasonal workers also may affect a company’s headcount under the Affordable Care Act. And, if a seasonal worker exceeds an average of 30 hours per week, large businesses may be required to provide health insurance coverage for them and their children during the months they’re employed. Typically, full-time employment is measured month-to-month. But some large companies avoid providing health insurance benefits for part-timers by electing a measurement period longer than one month or adopting a 90-day waiting period for eligibility.

Need Help?

Many seasonal businesses struggle during the operating cycle, and some owners can’t resist the urge to spend their windfall, rather than saving it for the next operating cycle. Financial advisors can help manage seasonal fluctuations and the unique challenges they present.