Small Business Planning Articles
By: Greg Cargin, CPA, Partner| email
One question I receive from clients is “how long we should keep or old records?” The issue of how long to keep business records is an important one, but the policy for the destruction of these records is just as important. The retention of these accounting and other records should be part of a larger overall record management plan. A good records management plan defines the practice of maintaining the organization’s records from the time they are created to the ultimate disposal, including the classification, storage, securing and destruction of our records. A record not only includes paper documents, but also includes e-mails, databases, spreadsheets and any other electronic data form. Information and examples of record management plans and record retention can be found on the internet, but should always be tailored to meet the needs of your company. In addition, please feel free to contact your GT professional for more information.
At a recent board meeting, the question was raised of whether the Cooperative was “understaffed?” Not an easy question to answer, and it is only half of the question. The other half is: “How productive is the personnel group we employ?”
When considering whether or not your cooperaitve is understaffed, take a look at the coop’s profitability. As we discussed last quarter, if you are generating adequate local savings, you probably have the right number of employees and those employees are being productive. But we can dig a little deeper by examining a ratio I often discuss at board meetings – the labor income ratio.
The labor income ratio is an efficiency ratio that measures how well things are done, in this case personnel performance. It is computed by dividing personnel costs (salaries and benefits) into gross revenue generated. The lower the ratio, the better. It’s a simple concept, but difficult to manage.
There are several factors that can affect your ratio compared to other cooperatives. One is sale mix – grain and supply. Cooperatives with a higher percentage of grain business are less labor intensive and usually report a lower ratio than a cooperative with a higher mix of agronomy business and services. Petroleum businesses usually report the highest ratio. Smaller companies usually have higher ratios than larger ones because they have less volume to spread the cost over. Other factors can also affect this ratio. The drought this past year played a significant part in the ratio results for recent year-end closes. Fewer bushels to sell meant less margins generated. Overtime hours may have been reduced, however you can’t just reduce and rehire staff as you need people, so a majority of the personnel cost remained. The key to a cooperative’s success is the people you employ.
Generally, the rule is that it takes a ratio of 42% to break even locally. As that percentage decreases, local savings increases. Again, the concept is simple – more revenue generated with less personnel cost means higher profitability. Achieving that result is a challenge. A general guideline range is 30% – 40%, with grain cooperatives at the lower end and cooperatives with a bigger supply mix at the higher end. The following table shows the percentage of personnel cost to revenue that our clients have averaged over the past three years:
•Sales up to $50 million = 43.86%
•Sales $50-$150 million = 33.44%
•Sales $150-$300 million = 29.59%
•Sales over $300 million = 34.18%
Personnel costs are a big investment every cooperative makes annually. Getting the most from that investment is a great challenge. If you would like assistance in analyzing the labor income ratio for your cooperative and discussing ways to make improvement please let us know.
By: Mark Gardiner, CPA, CFE, Partner| email
Occupational fraud is a scheme in which an employee abuses the trust placed in him or her by an employer for personal gain. Its formal definition is: The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.
Asset misappropriation schemes were the most common type of occupational fraud, comprising 87% of the cases reported to the Association of Certified Fraud Examiners in their 2012 Report to the Nations on Occupational Fraud and Abuse. Financial statement fraud schemes made up 8% of these cases but caused the greatest amount of losses. Corruption schemes occurred in approximately one-third of the cases.
Nearly half of the organizations reporting to the Association of Certified Fraud Examiners did not recover any losses that they suffered due to the fraud. The very nature of fraud involves efforts at concealment, with many of the frauds never being detected, and of those that are, the full amount of losses might never be determined or reported.
External audits should not be relied upon as an organization’s primary fraud detection method. Such audits were most commonly implemented control in their study; however they detected approximately 3% of the frauds reported and ranked poorly in limiting fraud losses. Providing individuals a means to report suspicious activity is a crucial part of an anti-fraud program. Fraud reporting tools for an organization, such as hotlines, should be set up to receive tips from both internal and external sources and should allow anonymity and confidentiality. Occupational fraud is more likely to be detected by a tip than by any other method. The majority of tips reporting fraud come from employees within the victim organization.
Talk to your audit team to discuss ways to implement anti-fraud measures.
Reprinted with permission – The Association of Certified Fraud Examiners
By: Dennis Gardiner, CPA, Partner| email
Many factors contribute to a cooperative’s efficiency, not the least of which is the use of technology. The agriculture industry has invested significantly in technology over the years. It is weaved throughout so much of a cooperative’s organization, operations and facility already, where else might it be useful in improving the bottom line?
Emerging technology is helping cooperatives to reduce the cost of shrink, and over a short period of time, lead to a net reduced cost to the bottom line. This technology, known as AGM (Advanced Grain Management), has recently been accepted by some cooperatives that have chosen to automate their grain management decisions. We encourage our clients to invest in agriculture technology where it is appropriate, and while Gardiner Thomsen doesn’t endorse any particular product or brand, we think that this new technology is worth taking a look at.
We were recently introduced to Scott Haugan, President of HOWGAN SCC, the developer of the HOWGAN AMP (Asset Management Plan) and largest US dealer of OPI/Integris Advanced Grain Management system. This AGM system allows cooperatives to proactively monitor and control temperature, airflow and moisture content; prevent lost grain and lost profits due to spoilage, hot spots and over-drying; and help to measure, monitor and manage grain to reduce the impact of shrink while driving down energy costs.
As Scott explained to us, this technology has fully automated monitoring, alarms, and automated aeration controls. His systems are designed to maximize storage profitability by optimizing grain quality, minimizing shrink and spoilage, reducing energy costs and increasing grain dryer throughput. In addition, Scott said that target grain temperature and moisture can be achieved in less time because the system identifies the most effective time to automatically run your fans. The HOWGAN AGM system also detects insects, monitors weather conditions, and monitors grain inventory levels to within a 3% margin of error. Scott also said that cooperatives are able to add this technology to existing bins or to new projects to manage fans and electrical usage.
Since the inherent purpose of purchasing new technology and equipment is to drive improved results and have a positive impact on the bottom line, we wanted to talk with some current users of this technology. We recently spoke with Mark Kistenmacher of Mid-Iowa Coop, a customer of HOWGAN SCC who has invested in Integris AGM. Mark said that he views the purchase of the system as an investment in his facility, and offered his perspective that being on the cutting edge of technology in the agriculture industry is more of a business philosophy for his cooperative. Mark believes in being responsible with his investments and that AGM aligns with his cooperative’s goals.
Randy Dunn, Grain Department Manager at First Coop, said that they began installing the HOWGAN AGM system 5 years ago and now have it at 7 of their locations, built into new projects as well as retrofitted into old ones. First Coop uses the HOWGAN AGM system primarily for temperature and moisture control, but it has also had a great impact on reducing their electrical bill.
He said, “Our electrical usage is on a demand meter, so we pay a higher rate during peak usage. With (AGM) we don’t have to run our fans at those peak times, and that’s been a pretty big savings for us.”
We asked Scott Haugan how people are accepting this new technology, which can change the paradigm from simply accepting shrink to proactively managing it. He said that early adopters, like Mark Kistenmacher, are present. Out of the top 20 cooperatives, who have over 400 locations, HOWGAN has 12% of the facilities now measuring and managing their temperature and moisture to drive improved results. These early adopters have equipment paid for with savings, before others are willing to change their status quo.
When asked about status quo, Mark Kistenmacher said, “Status quo is unacceptable once you realize that your investment will drive a significant ROI. Avoiding change is no longer acceptable when you realize that investing today drives improved results today”.
But is “today” the right time for your coop to invest in technology improvements? Cooperatives should also consider the time investment necessary for training staff on how to use such advanced technology.
Dave Holm, Executive Director of the Iowa Institute for Cooperatives, described his introduction to the HOWGAN AGM system; “I met with Scott Haugan in January to learn more about it. Once we got talking about what this thing can do, I thought… Oh my goodness! We’re going from riding bicycles to flying jet airplanes! This is truly a loaded up system.”
Dave commented that this is a very sophisticated grain management system. He thinks the industry will move toward it over time, but he’s not certain that every cooperative is prepared to do this today. A great deal of training is necessary to fully utilize all the functions this system can perform.
“The ironic thing is, a lot of times, once you incorporate that technology and learn how to run it, it’s actually easier than the way we were doing it. But it’s just the idea of learning how to run it that might be the issue.” Dave said. He still suggests that every coop should at least learn about what the Integris AGM system can do, but make their own decisions about whether it’s right for their coop, and if it’s the right time.
Moving beyond time constraints, another obstacle HOWGAN SCC has encountered is that some grain elevators are concerned about not having “money in the budget” as they spec out a project. With a supposed 18 month ROI potential, the decision to invest in this new technology could be more of a cash flow concern rather than an “expense vs. investment” concern. It also could depend on the cooperative’s business philosophy regarding emerging technology.
So, we’d like to ask our clients– do you consider technology improvement to be a budgeted expense, or long-term investment? What other factors do you take into consideration when making improvements to your facilities? As I mentioned before, while we don’t endorse any particular product or brand regarding AGM, we are very curious about it and encourage our clients to take a closer look to see if it would be a benefit to them. We would also be happy to talk with you about AGM and to see how it might potentially impact your bottom line.
By: Chuck Telk, CPA, Partner| email
The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. This new law modifies or extends many business tax breaks, and also contains many changes to individual income tax. There are substantial additional changes in this act, but the following are most likely to impact you and/or your business.
- Bonus Depreciation: The new law extends the 50% first year bonus depreciation for additional years to cover qualifying new assets that are placed in service in calendar year 2013 (December 31, 2014 for certain assets). Bonus depreciation has been a useful tool for many of our cooperative and business clients, and the new law enables us to utilize this benefit for all tax years beginning in 2013– provided the qualifying asset is placed in service by December 31, 2013.
- Section 179: The new law restores the maximum Section 179 deduction to $500,000 for tax years beginning in both 2012 and 2013, and restores the Section 179 deduction phase out threshold to $2,000,000 for those years as well. While many of our clients place too many assets in service in a tax year to qualify for this deduction, for those clients that qualify, this presents another tool to help manage and reduce your federal tax bill.
- Work Opportunity Credit: This credit has been extended to cover qualifying hiring that occurs in 2012 and 2013.
- Research Credit: This credit has also been extended to cover qualifying expenses paid in 2012 and 2013.
- Alternative Fuel Vehicle Refueling Equipment: This credit has been extended to cover qualifying property placed in service in 2012 and 2013. The per-location cap of $30,000 has been retained.
- Railroad Track Maintenance Credit: This credit has also been extended for qualifying expenditures to maintain railroad tracks for years beginning in 2012 and 2013.
- Employer Educational Assistance Plans made permanent: Section 127 of the Internal Revenue Code allows employers to set up plans that provide up to $5,250 in annual federal income tax free educational assistance to each eligible employee. This new act makes this provision permanent.
- Standard Business Mileage Rate: The Standard Business Mileage Rate for 2013 has been increased to 56.5 cents per mile effective January 1, 2013.
- 1099 and W-2 Reporting: Remember that 2012 1099’s and W-2’s are generally due to the recipient by January 31, 2013. Even if you have a fiscal year end, these forms are based on calendar year 2012 amounts. Also, these forms are not due to the government until the end of February (March in some cases). Be sure to wait until the due date to file the forms with the government– that will give the recipient a chance to review the forms and get any errors fixed. It is far easier to fix the mistake prior to the forms being sent to the government.
I know that the temptation is there to get the forms sent in to the government as soon as the recipient copies are mailed. However, you should wait to file the forms with the government until the due date.
- Tax increases for higher-income individuals: The maximum federal income tax rate has been increased to 39.6% for those that have taxable incomes above $400,000 (single) and $450,000 (married filing joint), $425,000 (Head of household) and $225,000 (married filing separate). These income levels will also cause your tax rate on long term capital gains and qualifying dividends to increase from 15% to 20%. And finally, these income levels may subject a taxpayer to the new 3.8% Medicare surtax on investment income and the new 0.9% Medicare tax on wages and self-employment income. These 2 new taxes were previously imposed to help pay for the Patient Protection and Affordable Care Act (PPACA), commonly called Obamacare.
- Phase-out rules reinstated: This means that higher-income taxpayers will lose a portion of their itemized deductions and personal exemptions at adjusted gross incomes above $250,000 (single), $300,000 (married filing joint), $275,000 (head of household) and $150,000 (married filing separate). The specifics of these rules are too complex to cover here in detail, but if your AGI exceeds these limits, then this is a method of increasing your federal income tax without increasing tax rates.
- Alternative Minimum Tax: The exemption has been increased and made permanent. This change, which used to be fixed on an annual basis, will keep an estimated 30 million filers from paying the Federal Alternative Minimum Tax.
As with the business tax changes, there are many additional items effecting your personal taxes– far too many to discuss here. If you have any questions regarding the American Taxpayer Relief Act of 2012 and how it affects your business or personal taxes, or if you have questions regarding 1099 forms and W-2 reporting, please contact me at our Des Moines, Iowa office.
By: Mark Rodruck, CPA, Partner| email
A multiemployer pension plan is used by an employer to provide a benefit to their employees in a plan that is shared with multiple employers, usually in similar industries. Under previous accounting principles, employers were only required to disclose their contributions to the plan without disclosing the funded status of the plan.
With ASC No. 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan, the Financial Accounting Standards Board (FASB) will ensure that financial statement users will have more information regarding the employer’s pension commitments and the financial health of the plans.
The new disclosure requirements are effective for annual reporting periods for fiscal years ending after December 15, 2012 for non-public entities. Pursuant to the FASB’s decisions, the new disclosures will include:
- Legal name, plan number, and employer identification number (EIN)
- The amount of employer contributions made to the plan
- An indication of whether the employer’s contributions represent more than 5% of the total contributions to the plan
- An indication if the plan is subject to a funding improvement plan
- The expiration dates of collective bargaining agreements and any minimum funding arrangements
- The most recent certified funded status of the plan, as determined by the plan’s zone status, required by the Pension Protection Act of 2006 (PPA). If the zone status isn’t available, an employer will be required to disclose whether the plan is (a) <65% funded (red zone), (b) 65 to 80% funded (yellow zone) or (c) >80% funded (green zone)
- A description of the nature and effect of any changes that affect comparability for each period in which an income statement is presented
As of the end of the most recent annual period presented, you’ll also need to disclose:
- If a funding improvement plan or rehabilitation plan had been implemented or was pending
- Whether or not a surcharge was paid to the plan
- A description of any minimum contributions required for future periods by the collective bargaining agreements, statutory obligations, or other contractual obligations, if applicable
The current recognition and measurement guidance for employers that participate in multiemployer plans is unchanged. If you have any questions about these new disclosure requirements, please contact your Gardiner Thomsen Auditor.
By: Charles L. Telk Jr., CPA, Partner | email
The issue of whether a worker is an employee of your company or an independent contractor is very complicated, and it can be confusing to make the correct determination. Properly classifying a worker as an independent contractor can save a company payroll tax dollars, but an improper classification can subject the company to back payroll taxes, penalties and interest.
Recently the IRS launched a new program with the goal of allowing many employers to resolve worker classification issues. This program gives employers the opportunity to come into compliance by agreeing to classify workers as employees and making a reduced payment to cover past payroll tax liabilities.
This new program is referred to as the “Fresh Start” initiative and it coincides with a new Department of Labor program that will crack down on employers who incorrectly classify employees as independent contractors. The two organizations have signed a memorandum of understanding and have agreed to share information and coordinate enforcement efforts.
The intent here is fairly obvious: offer a reduced back payroll tax burden free from audit, penalties or interest as the incentive while providing for increased audit and enforcement actions as the consequence.
Under this program, eligible employers can reduce their past payroll tax obligations by prospectively treating workers as employees. To be eligible a company must:
- Consistently have treated workers in the past as non-employees.
- Have filed required forms 1099 for these workers for the previous 3 years.
- Not currently be under audit by the IRS, DOL or a state agency.
Once accepted, employers will pay only 10% of the amount of payroll taxes that would have been due from the most recent tax year. No interest or penalties will be due. Audit protection will be afforded in regards to payroll tax issues for prior years. But, for the first 3 years of the program, employers will be subjected to a 6-year statute of limitations instead of the usual 3-year rule.
Depending on your situation, this program may be worth checking into. Please call me at the Des Moines office should you have any questions regarding the “Fresh Start” initiative.
By: Dave Thomsen, Partner | email
Over the past few years or so, issues have arisen in our world of accounting for cooperatives that have brought the way we historically looked at property, plant and equipment, and the depreciation of those assets, under question. The first issue came about a few years ago when the loan commitments required to finance cooperative operations became so large that your lender saw it necessary to share some of the risk involved in certain loan packages. Thus, fixed asset appraisals became the norm in many cases. A second issue has occurred with new accounting standards related to mergers and the requirement to recognize business combinations at fair value.
Textbook Depreciation: Most accountants were taught in school to compute depreciation in the following manner: “Asset Cost” less “Salvage Value” divided by the “Useful Life of the Asset.” For example, a steel grain bin built for a cost of $500,000 with a scrap value of $25,000 that will be used for 25 years would have an annual depreciation expense of $19,000 and would have at least some book value for 25 years. However, in most cases today, salvage value is routinely ignored and the estimated useful life is based more on acceptable IRS tables than on the actual life the asset is used to produce income.
Actual Practice: Most of our cooperative audit clients take a “conservative” approach to depreciating their fixed assets. In the example above, the salvage value would be ignored and the $500,000 bin would depreciated over 10 years based on the IRS class life tables amounting to annual depreciation of $50,000. The asset is fully depreciated after 10 years and for book purposes has no value for more than half of its actual useful life.
Why do we do this? The accelerated depreciation expense lowers the bottom line thereby reducing income and income available for patronage dividend allocations, saving the cooperative cash. However, this conservative approach may be distorting the real value of the balance sheet by recognizing no or less than actual value of assets the company owns. Depending on the circumstances, appraisals may be necessary to give companies credit for the unrecognized value of those assets, or major adjustments will be required under the new fair value requirements in accounting for future mergers.
Maybe its time to re-think this process as we look at ways to further strengthen balance sheets and search for the right mix of allocated and unallocated members’ equity. We can still use these conservative ideas for tax purposes, but we must also consider alternatives to bring book balance sheets more in line with actual values. We are available if you would like to discuss this issue further and will be encouraging this debate as we begin our upcoming audit engagements.
By: Chris Coldiron, CPA, Tax Manager | email
Recent surveys indicate that individuals and businesses purchasing goods over the internet are not properly remitting sales or use tax, many times in violation of state law (the estimated non-compliance rate in California was greater than 98%). With states becoming more desperate for revenue sources to offset record deficits, this area becomes an easy target for state auditors. If you are unsure of your state’s laws regarding the payment of sales or use tax for internet purchases, please contact us so that we may research the matter and advise you accordingly.
State auditors are also on the lookout for businesses that might have a filing requirement in their state that is not being met. If your business engages in transactions outside your home state and you are unsure if this activity generates additional filing requirements, please contact us so that we may help you make that determination.
By: Chris Coldiron, CPA, Tax Manager | email
As you may have heard, H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” repealed all new 1099 reporting requirements that were set to take effect January 1, 2012. The Act was signed into law by President Obama on April 15th. Basically, 1099 reporting requirements will continue to be the same as they’ve always been. This change will significantly decrease the compliance burden small businesses were anticipating. However, this recent change does not do away with the requirement that payers obtain and retain a form W-9, Request for Taxpayer Identification Number and Certification, for all payees. This requirement applies even to governmental agencies and corporations, although these entities are typically exempt from the 1099 reporting requirement. Absent obtaining a W-9 that either documents an exemption to the 1099 reporting requirement or provides the necessary information for that reporting, backup withholding at a rate of 28% is mandatory.