Everyone at Davidson Pargman & Co, LLC are wishing you and your family a safe and Happy 4th of July!
Davidson Pargman
Consider stress testing to lower risks
The pandemic and the ensuing economic turmoil have put tremendous stress on businesses. Many companies that appeared healthy on the surface, on their financial statements, quickly realized that they weren’t prepared for the unexpected. A so-called “stress test” of your company’s financial position and its ability to withstand a crisis can help prevent this situation from recurring in the future.
In general, stress tests evaluate a company’s ability to handle an economic crisis. A stress test includes the following three steps:
1. Determine the types of risks the business faces
Identify the operational, financial, compliance, reputational and strategic risks your company might face. For example, operational risks cover the inner workings of the company and can include dealing with the impact of a natural disaster. Financial risks involve how the company manages its finances, including the threat of fraud. Compliance risks relate to issues that might attract the attention of government regulators. Strategic risk refers to the company’s market focus and its ability to respond to changes in consumer preferences.
2. Develop a risk-management plan
Once you’ve identified these risks, it’s time to meet with your management team to improve your collective understanding of the threats facing the business, including their financial impact and the ability of your business to absorb that impact. In addition to asking for feedback about the risks you identified, encourage them to share any additional risks and projections regarding the potential financial impact.
From there, your management team can develop a game plan to mitigate risk. For example, if your company operates in an area prone to natural disasters, such as earthquakes or wildfires, you should have a disaster recovery plan in place. If your company relies heavily on a key person, you should develop a viable succession plan and consider purchasing insurance in case that person unexpectedly dies or becomes disabled.
3. Review the plan
Risk management is a continuous improvement process. New risks may emerge, old risks may fade away and the best-laid plans may become outdated over time. Meet with your management team at least annually to review copies of your current plan and consider updating it. If the risk management plan has been recently activated, ask for an assessment of its effectiveness and the changes that may need to be adopted in the aftermath.
We can help
A stress test can reveal blind spots that can affect your company’s future financial performance. This exercise is increasingly important in today’s unpredictable marketplace. While risk is part of operating any business, some companies are more prepared to handle the unexpected than others. Contact us for help conducting a stress test to assess your business’s risk preparedness and to identify and reinforce any vulnerabilities.
© 2022
Checkpoint Marketing for Firms
THOMSON REUTERS
A quick refresher on employment taxes
What are the requirements for employers regarding federal employment taxes? This might seem like a silly question to ask of employers, many of which have been grappling with this obligation for years or even decades.
But, just as a coat of paint sometimes needs freshening up, it’s not a bad idea to occasionally review the basics of employment taxes to see whether your organization’s processes are at risk of missing any key steps, which could lead to costly penalties.
Form 941
Employers must report and deposit certain employment taxes regularly. These include:
- Federal income tax withholding (FITW),
- Social Security tax (both the employer and employee portion),
- Medicare tax,
- Additional Medicare tax, and
- Federal unemployment tax (FUTA).
Typically, an organization reports FITW, Social Security, Medicare and Additional Medicare taxes on Form 941, “Employer’s Quarterly Federal Tax Return.” FUTA is reported on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
True to its name, Form 941 is filed quarterly and due by the last day of the month following the end of each quarter. Typically, the due dates for filing this form are:
- April 30 (first quarter),
- July 31 (second quarter),
- October 31 (third quarter), and
- January 31 (fourth quarter).
If any deposit due date falls on a Saturday, Sunday or legal holiday, you may deposit on the next business day.
For smaller employers with a low employment tax liability, the IRS will allow for the annual deposit and filing of these taxes. Such employers use Form 944, “Employer’s Annual Federal Tax Return.”
Employment tax deposits
While Form 941 is filed quarterly, employment tax deposits are typically submitted more frequently unless the employer is a Form 944 filer. This frequency can either be semiweekly or monthly. Which one is determined through a “lookback period.” This is the total tax liability for an employer for the previous four quarters — July 1 of the second preceding calendar year through June 30 of the preceding calendar year.
If an employer reports $50,000 or less of Form 941 taxes for the lookback period, it’s a monthly schedule depositor. On the other hand, if an employer reports more than $50,000, it’s a semiweekly schedule depositor.
A notable exception
An exception applies to these deposit schedules if an employer accumulates tax liability of $100,000 or more on any day during a deposit period. This often happens around bonus time for some employers or when pay increases kick in.
When this happens, the employer must deposit the tax by the close of the next business day, regardless of whether the employer is a monthly or semiweekly depositor. And if the employer is a monthly depositor, it becomes a semiweekly depositor.
Maintain your processes
If all of this sounds completely obvious, that’s a good thing! Your organization is likely on top of its employment tax obligations. Nonetheless, keep a close eye on these processes to ensure they don’t fall into disrepair. Contact us for more information on either the basics or more complex matters related to payroll or employment taxes.
© 2022
Checkpoint Marketing for Firms
THOMSON REUTERS
Five tax implications of divorce
Are you in the early stages of divorce? In addition to the tough personal issues that you’re dealing with, several tax concerns need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are five issues to consider if you’re in the process of getting a divorce.
- Alimony or support payments. For alimony under divorce or separation agreements that are executed after 2018, there’s no deduction for alimony and separation support payments for the spouse making them. And the alimony payments aren’t included in the gross income of the spouse receiving them. (The rules are different for divorce or separation agreements executed before 2019.)
- Child support. No matter when the divorce or separation instrument is executed, child support payments aren’t deductible by the paying spouse (or taxable to the recipient).
- Personal residence. In general, if a married couple sells their home in connection with a divorce or legal separation, they should be able to avoid tax on up to $500,000 of gain (as long as they’ve owned and used the residence as their principal residence for two of the previous five years). If one spouse continues to live in the home and the other moves out (but they both remain owners of the home), they may still be able to avoid gain on the future sale of the home (up to $250,000 each), but special language may have to be included in the divorce decree or separation agreement to protect this tax exclusion for the spouse who moves out.
If the couple doesn’t meet the two-year ownership and use tests, any gain from the sale may qualify for a reduced exclusion due to unforeseen circumstances. - Pension benefits. A spouse’s pension benefits are often part of a divorce property settlement. In these cases, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order” (QDRO). This gives one spouse the right to share in the pension benefits of the other and taxes the spouse who receives the benefits. Without a QDRO the spouse who earned the benefits will still be taxed on them even though they’re paid out to the other spouse.
- Business interests. If certain types of business interests are transferred in connection with divorce, care should be taken to make sure “tax attributes” aren’t forfeited. For example, interests in S corporations may result in “suspended” losses (losses that are carried into future years instead of being deducted in the year they’re incurred). When these interests change hands in a divorce, the suspended losses may be forfeited. If a partnership interest is transferred, a variety of more complex issues may arise involving partners’ shares of partnership debt, capital accounts, built-in gains on contributed property, and other complex issues.
A variety of other issues
These are just some of the issues you may have to deal with if you’re getting a divorce. In addition, you must decide how to file your tax return (single, married filing jointly, married filing separately or head of household). You may need to adjust your income tax withholding and you should notify the IRS of any new address or name change. There are also estate planning considerations. We can help you work through all of the financial issues involved in divorce.
© 2022
Checkpoint Marketing for Firms
THOMSON REUTERS
Businesses will soon be able to deduct more under the standard mileage rate
Business owners are aware that the price of gas is historically high, which has made their vehicle costs soar. The average nationwide price of a gallon of unleaded regular gas on June 17 was $5, compared with $3.08 a year earlier, according to the AAA Gas Prices website. A gallon of diesel averaged $5.78 a gallon, compared with $3.21 a year earlier.
Fortunately, the IRS is providing some relief. The tax agency announced an increase in the optional standard mileage rate for the last six months of 2022. Taxpayers may use the optional cents-per-mile rate to calculate the deductible costs of operating a vehicle for business.
For the second half of 2022 (July 1–December 31), the standard mileage rate for business travel will be 62.5 cents per mile, up from 58.5 cents per mile for the first half of the year (January 1–June 30). There are different standard mileage rates for charitable and medical driving.
Special situation
Raising the standard mileage rate in the middle of the year is unusual. Normally, the IRS updates the mileage rates once a year at the end of the year for the next calendar year. However, the tax agency explained that “in recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022.” But while the move is uncommon, it’s not without precedent. The standard mileage rate was increased for the last six months of 2011 and 2008 after gas prices rose significantly.
While fuel costs are a significant factor in the mileage figure, the IRS notes that “other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.”
Two options
The optional standard mileage rate is one of two methods a business can use to compute the deductible costs of operating an automobile for business puroses. Taxpayers also have the option of calculating the actual costs of using their vehicles rather than using the standard mileage rate. This may include expenses such as gas, oil, tires, insurance, repairs, licenses, vehicle registration fees and a depreciation allowance for the vehicle.
From a tax standpoint, you may get a larger deduction by tracking the actual expense method than you would with the standard mileage rate. But many taxpayers don’t want to spend time tracking actual costs. Be aware that there are rules that may prevent you from using one method or the other. For example, if a business wants to use the standard mileage rate for a car it leases, the business must use this rate for the entire lease period. Consult with us about your particular circumstances to determine the best course of action.
© 2022
Checkpoint Marketing for Firms
THOMSON REUTERS
What are the typical steps in a DOL audit?
Many popular retirement and health care plans must comply with the Employee Retirement Income Security Act (ERISA). Employers that sponsor one could one day receive a request from the U.S. Department of Labor (DOL) for plan-related documents. Such a request usually initiates a DOL civil investigation, often referred to as an “audit.”
If this happens to your organization, address the inquiry immediately. Failure to provide requested documents to the DOL can lead to a penalty assessment, and a prompt and cordial response can establish a positive rapport with the investigator. DOL audits generally follow a predictable path:
Initial document request. Generally, a plan sponsor learns of an audit when it receives a letter or phone call from the DOL’s Employee Benefits Security Administration (EBSA) advising “plan officials” of the investigation and requesting a detailed list of documents. The investigation may be general in nature or target a specific issue.
On-site review and interviews. The investigator may arrange to visit the plan sponsor’s offices and could request additional documents for review during the visit, such as payroll and claims processing records. Often, the investigator will gather relevant information by interviewing one or more individuals responsible for the plan. (Note: During the COVID-19 pandemic, some investigations have been conducted virtually.)
Investigation findings. If the investigator finds no ERISA violations, EBSA will send a closing letter stating that the investigation is complete, and no further action is contemplated. If the investigator does find violations, EBSA will issue a voluntary compliance notice letter identifying the violations and inviting plan officials to voluntarily make corrections.
Correction and settlement. Whenever possible, EBSA seeks voluntary compliance through full correction of identified violations and restoration of plan losses. After negotiating a corrective action with plan officials, the agency will issue a detailed settlement agreement.
A typical agreement requires evidence of the correction and provides that, if EBSA determines that the agreement’s terms have been fulfilled, no further enforcement action will be taken regarding the specified violations. When voluntary compliance isn’t achieved, EBSA may refer a case to DOL attorneys for litigation. Some situations are inappropriate for voluntary correction, such as those involving fraud, criminal misconduct, or severe or repeated fiduciary violations.
Fiduciary violations. ERISA imposes a mandatory 20% penalty on any amounts recovered from a fiduciary or other person for a fiduciary breach, including amounts recovered under a settlement agreement. Generally, EBSA assesses the penalty in a separate letter, though the penalty may be addressed in the settlement agreement.
Closing letter following correction. After EBSA confirms that corrective action has been completed and any penalties have been paid, it will send a closing letter indicating that compliance was achieved.
These steps could be completed in a matter of weeks or take a year or more, depending on the:
- Complexity of the plan design,
- Issues identified in the investigation,
- Availability of documents and individuals for interviews,
- Degree of cooperation between plan officials and EBSA, and
- Number of potential violations.
In the event of a DOL audit, we strongly advise obtaining the assistance of experienced legal counsel. Our firm can provide support throughout the process.
© 2022
Checkpoint Marketing for Firms
THOMSON REUTERS