Small Business

Will your business have a net operating loss? Make the most of it

When the deductible expenses of a business exceed its income, a net operating loss (NOL) generally occurs. If you’re planning ahead or filing your income tax return after an extension request and you find that your business has a qualifying NOL, there’s some good news: The loss may generate some tax benefits.

Carrying back or forward

The specific rules and exact computations to figure an NOL can be complex. But when a business incurs a qualifying NOL, the loss can be carried back up to two years, and any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow during a time when you need it.

However, there’s an alternative: The business can elect instead to carry the entire loss forward. If cash flow is fairly strong, carrying the loss forward may be more beneficial, such as if the business’s income increases substantially, pushing it into a higher tax bracket — or if tax rates increase. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.

Your situation is unique

Your business may want to opt for a carryforward if its alternative minimum tax liability in previous years makes the carryback less beneficial. In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL. Also note that there are different NOL rules for farming businesses.

Please contact us if you’d like more information on the NOL rules and how you can maximize the tax benefits of an NOL.

© 2016

Fraud Awareness and the Small Business 2016

By Frank Stover, CPA/CFF/CGMA, CFE

Audit Manager at Atchley & Associates, LLP

The Association of Certified Fraud Examiners has released the biennial Report To The Nations on Occupational Fraud and Abuse, a 2016 Global Fraud Study.

For small business the fraud that owners will most often see committed against them or their company is “occupational fraud”.  The Association of Certified Fraud Examiners defines occupational fraud “as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”  Occupational fraud can manifest itself in many ways.  Nor is it limited by gender.

Based upon the statistics and information contained in the “Report to the Nations on Occupational Fraud and Abuse”, 2016 Global Fraud Study, approximately two thirds of the reported cases targeted privately and publicly held companies.  Private companies suffered median losses of $180,000. The median losses suffered by small organizations (those with less than 100 employees) was the same as those of the largest organizations, but the impact upon smaller organizations would be much greater.  The total losses caused by the cases studied exceeded $6.3 billion. It is estimated that fraud costs organizations 5% of revenues each year, applying this percentage to the Gross World Product of $74.16 trillion results in a potential total fraud loss worldwide of $3.7 trillion.  Constant vigilance to prevent fraudulent activity is something that small business owners must practice every day.

Generally, occupational fraud categorized as financial statement fraud, misappropriation of assets, or corruption.  Asset misappropriation was the most common form of fraud reported in more than 83% of the cases studied.  Financial statement fraud will typically involve falsification of an organization’s financial statements or some form of regulatory or financial report. Examples include overstating assets and revenues, or understating liabilities or expenses to achieve personal gain.  Misappropriation of assets is the theft or misuse of an organization’s assets, such as skimming revenues, stealing inventory or committing payroll fraud.  Corruption involves fraudsters wrongfully use their influence in a business transaction to procure some benefit for themselves or another person(s), contradicting their duty to their employer or the rights of another, for instance by accepting kickbacks or engaging in conflicts of interest.

94.5% of the cases studied involved the perpetrator making efforts to conceal their fraud by creating or altering physical documentation.

For Small businesses cash, inventory, payroll and misuse of organization assets are the most common areas of fraud occurrence.  Cash is the most often pilfered from small business but because of its nature and importance to small businesses it is usually discovered within one month.  Inventory fraud is usually not discovered until later because small organizations will be more focused on operation measures (for example, revenues run rates, billing cycle  and accounts receivable information) in the short term and inventory will not be counted or reconciled against purchases and jobs in progress until quarter or year end.  Payroll fraud is usually committed by persons who have some form of operational control and authorization such that they can add phantom employees to the payroll or in collusion with others falsified time records submitted to the payroll department, this type of fraud is most usually discovered when there is turnover in personnel, a “falling out” between conspirators, or some form of periodic management review and reconciliation of historical project costs against approved budgets.  Misuse of organization assets many times occurs when a service company employee uses their employer’s assets on the weekend and holidays to run another business on the side, discovery of this type of fraud will usually occur when a disgruntled customer of the employee’s side business complains regarding defective work or makes a warranty claim, control of physical access to company operating assets during no business hours and mileage logs reconciliations are several ways to prevent or detect such abuse.

The most common detection methods in the cases studied were tips (39.1%).  Organizations that had reporting hotlines were much more likely to detect fraud through tips.

There are fraud policies and controls which can assist small businesses in deterring bad behavior.  Some of these include having a clearly written and communicated fraud policy which describes how and who handles fraud matters and investigations within the organization, what actions the organization considers to constitute fraud, reporting procedures (anonymous tip lines, a designated official, etc.), and what consequences the organization will take for such activity and the dedication to follow through with those stated consequences.

Atchley & Associates, LLP is a group of dedicated professionals, which include Certified Fraud Examiners, who can review, assess and make recommendations regarding small business systems of internal controls to decrease the likelihood of fraud being committed.

Affordable Care Act Compliance for Small Business: Two Pitfalls to Avoid

by John Bolyard, CPA

Tax Senior at Atchley & Associates, LLP

Many small business owners may not be aware that effective June 30, 2015, small businesses, defined as having 50 or fewer full-time equivalent employees (FTEs), can face severe penalties for continuing to have stand-alone health reimbursement arrangements (HRA) or Employer Payment Plans (EPP).  The penalty for having these types of plans in place after June 30th can be up to $100 per day, per employee.  That calculates to a penalty of $36,500 per year, per employee!  Although, under the Affordable Care Act (ACA), small businesses are not required to offer group health plans to their employees, if they do offer health plans, they must be compliant with the ACAs market reforms.  I will briefly describe these types of plans and conclude with some suggestions as to what can be done if your business currently has one of these plans in place.

Stand-Alone HRAs have been used by small businesses for decades because they have been both tax deductible to the employer and are not included in the employee’s gross income.  It is labeled “Stand-Alone” to distinguish it from other HRAs which are accompanied by qualified group plans.  The HRA is funded entirely by the employer and not through employee salary deductions.  The funds can be used to reimburse employees for qualifying medical expenses such as out-of-pocket medical costs or for individual medical insurance premiums.  The employer has more control over the cost because they can determine the amount to fund the HRA.  Because there is a cap on the amount which can be paid, it is regarded as being out of compliance with the ACA market reforms and is subject to the punitive tax.

EPPs are another alternative which small business owners have commonly used in the past.  Under an EPP, the employer will reimburse the employee for the amount they paid for insurance premiums.  Similar to the HRA, the payments would be tax deductible to the employer and excluded from gross income for the employee.   Because the reimbursement amount is limited to a specific sum determined by the employer, it is also considered to not be ACA compliant.

An exception to the excise fees imposed for these two plans exists when the plan has fewer than two participants who are current employees on the first day of the year (IRS Notice 2015-17).  This also applies to more than 2% owners of S Corporations as long as there is only one current employee enrolled in the plan.  Furthermore, as is commonly the case, if both a husband and wife are owners of the S Corporation, the plan is considered to cover only one employee even if they are being reimbursed for a medical plan that covers the entire family.  So if you are a small business owner and you are the only one covered in your plan, then you would not face the $100 per day penalty.

For small business owners that do have a stand-alone HRA or an EPP as described above which covers two or more employees, then there are some options to consider.  Form 8929 allows for the reporting of the excise tax and the amount which attributable to a reasonable cause.  To qualify for a reasonable cause exception, the non compliant plan should be terminated within 30 days of the date you became aware that it was in violation of the ACA.  In the event that you are audited by the IRS, it is strongly recommended that documentation be maintained to substantiate the date which you learned that the plan was not allowed.

Once action has been taken to terminate the plan, then there are three other important decisions to make. The small business can replace the plan with one that is ACA compliant, discontinue offering any health plan at all, or discontinue offering a health plan and increase employee’s wages.  If you decide to increase the employees’ wages, then it is important that restrictions not be placed on how the employee spends the money (i.e. the employee cannot be required to use the money to buy health insurance).

If you would like to do further reading on this topic, I have listed some helpful links below to the IRS and US Department of Labor websites which address this subject.

www.irs.gov/irb/2015-14_IRB/ar07.html

www.dol.gov/ebsa/newsroom/tr13-03.html

www.irs.gov/Affordable-Care-Act/Employers/Affordable-Care-Act-Tax-Provisions-for-Small-Employers

If you have questions or concerns that the type of plan you have is one of those described above, please feel free to give us a call to discuss.  While we are not ACA compliance experts, we do have a strong network of insurance specialists and we would be more than happy to direct you to someone who can answer your specific insurance questions.  Also, if you have other tax or business questions please feel free to reach out to us.  It is our privilege to be your trusted advisors.

Fraud Awareness and the Small Business

by Frank Stover, CPA/CFF/CGMA CFE

Audit Manager at Atchley & Associates, LLP

Fraud – a word we hear that many times is different than what our preconceptions may be. Someone may be a fraud or someone may commit a fraud or at times something physical may be a fraud.

For small business the fraud that owners will most often see committed against them or their company is “occupational fraud.” The Association of Certified Fraud Examiners defines occupational fraud “as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” Occupational fraud can manifest itself in many ways. Nor is it limited by gender.

Based upon the statistics and information contained in the “Report to the Nations on Occupational Fraud and Abuse”, 2012 Global Fraud Study, published every two years by the Association of Certified Public Examiners, fraudulent activity cost United States organizations 5% of their annual revenues (based upon 2012 US GNP of $16.13 trillion this would be $806.5 billion in fraud losses).

Generally, occupational fraud categorized as financial statement fraud, misappropriation of assets, or corruption. Financial statement fraud will typically involve falsification of an organization’s financial statements or some form of regulatory or financial report. Examples include overstating assets and revenues, or understating liabilities or expenses to achieve personal gain. Misappropriation of assets is the theft or misuse of an organization’s assets, such as skimming revenues, stealing inventory or committing payroll fraud. Corruption involves fraudsters wrongfully use their influence in a business transaction to procure some benefit for themselves or another person(s), contradicting their duty to their employer or the rights of another, for instance by accepting kickbacks or engaging in conflicts of interest.

For Small businesses cash, inventory, payroll and misuse of organization assets are the most common areas of fraud occurrence. Cash is the most often pilfered from small business but because of its nature and importance to small businesses it is usually discovered within one month. Inventory fraud is usually not discovered until later because small organizations will be more focused on operation measures (for example, revenues run rates, billing cycle and accounts receivable information) in the short term and inventory will not be counted or reconciled against purchases and jobs in progress until quarter or year end. Payroll fraud is usually committed by persons who have some form of operational control and authorization such that they can add phantom employees to the payroll or in collusion with others falsified time records submitted to the payroll department, this type of fraud is most usually discovered when there is turnover in personnel, a “falling out” between conspirators, or some form of periodic management review and reconciliation of historical project costs against approved budgets. Misuse of organization assets many times occurs when a service company employee uses their employer’s assets on the weekend and holidays to run another business on the side, discovery of this type of fraud will usually occur when a disgruntled customer of the employee’s side business complains regarding defective work or makes a warranty claim, control of physical access to company operating assets during no business hours and mileage logs reconciliations are several ways to prevent or detect such abuse.

Generally, fraud will happen because someone has a perceived (i) financial problem that cannot be shared or discussed with another (such as an inability to pay debts, a personal financial failure, perceived mistreatment by their employer), an (ii) opportunity (the person believes that their problem can be solved in secret) to fix their problem without being caught, and (iii) a rationalization that allows them to view the situation as non-criminal and justified as part of a situation that they cannot control.

There are fraud policies and controls which can assist small businesses in deterring bad behavior. Some of these include having a clearly written and communicated fraud policy which described how and who handles fraud matters and investigations within the organization, what actions the organization considers to constitute fraud, reporting procedures (anonymous tip lines, a designated official, etc.), and what consequences the organization will take for such activity and the dedication to follow through with those stated consequences.

Atchley & Associates, LLP is a group of dedicated professionals, which include Certified Fraud Examiners, who can review, assess and make recommendations regarding small business systems of internal controls to decrease the likelihood of fraud being committed.