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Matchmaker, matchmaker: Choosing the right lender

It’s easy to think of lenders as doing your company a favor. But business financing relationships are just that: relationships. Yes, a lender has the working capital you need to grow. But a stable, successful business represents an enormously beneficial opportunity for the lender as well. So you should be just as picky with your lender as it is with your financials.

Where to start

If you indeed have a long-standing relationship with a local bank, make that your first call. There’s no understating the importance of familiarity, good communication and an amicable rapport when negotiating terms, making payments and dealing with whatever business complications may come up.

But should your local bank not offer the size or scope of financing needed, or if you’d just like to get an idea of what else is out there, don’t hesitate to shop around. Look for a lender with multiple loan products, so you have a better chance at structuring one to your liking. And get some referrals regarding the strength of service and support.

Other alternatives

If yours is a small business, check into the availability of Small Business Administration or other government-backed loan programs. These are often designed to boost local economies, so you may be able to get favorable terms and rates.

Last, but not least, don’t limit yourself to traditional lenders. Today’s lending environment is competitive and technology driven. So businesses have a wide variety of alternatives, many of which are just a few clicks away. These include angel investors, online peer-to-peer lending networks and crowdsourcing.

Best results

Many, if not most, companies can’t grow without taking on some debt. But precisely how you go about using debt to your advantage depends largely on the lenders with which you choose to do business. Let us play matchmaker and help you find the ideal partner. We can also offer assistance in structuring and presenting your financial statements for best results.

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Tangible property safe harbors help maximize deductions

If last year your business made repairs to tangible property, such as buildings, machinery, equipment or vehicles, you may be eligible for a valuable deduction on your 2016 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”

Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted.

What’s an “improvement”?

In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must capitalize amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

2 safe harbors

Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.

2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. Contact us for details on these safe harbors and exemptions and other ways to maximize your tangible property deductions.

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Offer plan loans? Be sure to set a reasonable interest rate

Like many businesses, yours may allow retirement plan participants to take out loans from their accounts. Such loans are governed by many IRS and Department of Labor (DOL) rules and regulations. So if your company offers plan loans, your plan document must comply with current laws — including setting a “reasonable” interest rate.

Agency perspectives

Neither the IRS nor DOL provides a set percentage for plan sponsors to use. Yet both require the rate to be “reasonable.” The IRS asks if the interest rate is similar to local interest rates and to what local banks charge individuals for similar loans with similar credit and collateral. Meanwhile, DOL regulations say that an interest rate is reasonable if it’s equal to commercial lending interest rates under similar circumstances.

The DOL provides several examples of how to determine the interest rate. For example, suppose the plan loan interest rate is set at 8%, but local banks offer between 10% and 12% for similar circumstances. In this example, the loan will fail to meet the reasonable standard.

Keep in mind that the plan participant pays the interest to his or her own retirement plan account. That’s one reason why charging an interest rate that’s lower than what local banks are charging isn’t considered reasonable. The purpose of charging interest on retirement plan loans is to help prevent long-term harm to the participant’s retirement nest egg.

Ill consequences

If your plan fails to assess a reasonable interest rate, participant loans may result in a prohibited transaction. What does this mean? Prohibited transactions are certain transactions between a retirement plan and a disqualified person. Disqualified persons taking part in a prohibited transaction must pay a tax.

A prohibited transaction includes the lending of money or other extension of credit between a plan and a disqualified person. However, the laws specifically exempt plan loans from the prohibited transaction list as long as they comply with applicable rules. If your interest rate isn’t reasonable, the plan loan may lose its exempt status and become subject to the prohibited transaction tax.

Ongoing task

Ensuring you’re offering a reasonable plan loan interest rate is an ongoing task. Review your plan document and loan policy statement to determine whether the plan sets an interest rate. You may need to update the document to comply with the more recent regulations and interest rates. We can help you with this review, as well as in calculating a reasonable rate.

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The Section 1031 exchange: Why it’s such a great tax planning tool

Like many business owners, you might also own highly appreciated business or investment real estate. Fortunately, there’s an effective tax planning strategy at your disposal: the Section 1031 “like kind” exchange. It can help you defer capital gains tax on appreciated property indefinitely.

How it works

Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” In fact, these arrangements are often referred to as “like-kind exchanges.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

Personal property must be of the same asset or product class. But virtually any type of real estate will qualify as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.

Executing the deal

Although an exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. Be sure to contact us when exploring a Sec. 1031 exchange.

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Look at your employees with cybersecurity in mind

 

Today’s businesses operate in an era of hyper-connectedness and, unfortunately, a burgeoning global cybercrime industry. You can’t afford to hope you’ll luck out and avoid a cyberattack. It’s essential to establish policies and procedures to minimize risk. One specific area on which to focus is your employees.

Know the threats

There are a variety of cybercrimes you need to guard against. For instance, thieves may steal proprietary or sensitive business data with the intention of selling that information to competitors or other hackers. Or they may be more interested in your employees’ or customers’ personal information for the same reason.

Some cybercriminals may not be necessarily looking to steal anything but rather disable or damage your business systems. For example, they may install “ransomware” that locks you out of your own data until you pay their demands. Or they might launch a “denial-of-service attack,” under which hackers overwhelm your site with millions of data requests until it can no longer function.

Be mindful

Naturally, crimes may be committed by shadowy outsiders. But, all too often, it’s a company employee who either leaves the door open for a cybercriminal or perpetrates the crime him- or herself.

For this reason, it’s essential for your hiring managers to be mindful of cybersecurity when reviewing employment applications — particularly those for positions that involve open access to sensitive company data. If an applicant has an unusual or spotty job history, be sure to find out why before hiring. Check references and conduct background checks as well.

For both new and existing employees, make sure your cybersecurity policies are crystal clear. Include a statement in your employment handbook informing employees that their communications are stored in a backup system, and that you reserve the right to monitor and examine company computers and emails (sent and received) on your system. When such monitoring systems are in place, prudence or suspicious activity will dictate when they should be ramped up.

Don’t compromise

These are just a few points to bear in mind in relation to your employees and cybercrime. Although most workers are honest and not looking to do harm, all it takes is one mistake or one bad apple to compromise your company’s cybersecurity. We can provide you with more ideas for protecting your data and your business systems.

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It may be time for your company to create a strategic IT plan

Many companies take an ad hoc approach to technology. If you’re among them, it’s understandable; you probably had to automate some tasks before others, your tech needs have likely evolved over time, and technology itself is always changing.

Unfortunately, all of your different hardware and software may not communicate so well. What’s worse, lack of integration can leave you more vulnerable to security risks. For these reasons, some businesses reach a point where they decide to implement a strategic IT plan.

Setting objectives

The objective of a strategic IT plan is to — over a stated period — roll out consistent, integrated, and secure hardware and software. In doing so, you’ll likely eliminate many of the security dangers wrought by lack of integration, while streamlining data-processing efficiency.

To get started, define your IT objectives. Identify not only the weaknesses of your current infrastructure, but also opportunities to improve it. Employee feedback is key: Find out who’s using what and why it works for them.

From a financial perspective, estimate a reasonable return on investment that includes a payback timetable for technology expenditures. Be sure your projections factor in both:

• Hard savings, such as eliminating redundant software or outdated processes, and
• Soft benefits, such as being able to more quickly and accurately share data within the office as well as externally (for example, from sales calls).

Also calculate the price of doing nothing. Describe the risks and potential costs of falling behind or failing to get ahead of competitors technologically.

Working in phases

When you’re ready to implement your strategic IT plan, devise a reasonable and patient time line. Ideally, there should be no need to rush. You can take a phased approach, perhaps laying the foundation with a new server and then installing consistent, integrated applications on top of it.

A phased implementation can also help you stay within budget. You’ll need to have a good idea of how much the total project will cost. But you can still allow flexibility for making measured progress without putting your cash flow at risk.

Bringing it all together

There’s nothing wrong or unusual about wandering the vast landscape of today’s business technology. But, at some point, every company should at least consider bringing all their bits and bytes under one roof. Please contact our firm for help managing your IT spending in a measured, strategic way.

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How can you take customer service to the next level?

Just about every business intends to provide world-class customer service. And though many claim their customer service is exceptional, very few can back up that assertion. After all, once a company has established a baseline level of success in interacting with customers, it’s not easy to get to that next level of truly great service. But, fear not, there are ways to elevate your game and, ultimately, strengthen your bottom line in the process.

Start at the top

As is the case for many things in business, success starts at the top. Encourage your fellow owners (if any) and management team to regularly serve customers. Doing so cements customer relationships and communicates to employees that serving others is important and rewarding. Your involvement shows that customer service is the source of your company’s ultimate triumph.

Moving down the organizational chart, cultivate customer-service heroes. Publish articles about your customer service achievements in your company’s newsletter or post them on your website. Champion these heroes in meetings. Public praise turns ordinary employees into stars and encourages future service excellence.

Just make sure to empower all employees to make customer-service decisions. Don’t talk of catering to customers unless your staff can really take the initiative to meet your customers’ needs.

Create a system

Like everyone in today’s data-driven world, customers want information. So strive to provide immediate feedback to customers with a highly visible response system. This will let customers know that their input matters and you’ll reward them for speaking up.

The size and shape of this system will depend on the size, shape and specialty of the company itself. But it should likely encompass the right combination of instant, electronic responses to customer inquires along with phone calls and, where appropriate, face-to-face interactions that reinforce how much you value their business.

Give them a thrill

Consistently great customer service can be an elusive goal. You may succeed for months at a time only to suffer setbacks. Don’t get discouraged. Our firm can help you build a profitable company that excels at thrilling your customers.

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THE ABCs OF P3s – An Introduction to Public-Private Partnership




The United States is facing consequences from decades of deferred maintenance and underinvestment in infrastructure. At the same time, available public fund levels for such projects are low and resistance to increased taxation is high.  

 

One approach government agencies are exploring to help meet the needs for new infrastructure projects is developing public-private partnerships (P3s) . These arrangements could provide profitable opportunities for contractors in the near future, so its important to know how they work.

 
The concept, defined

Under the P3 model, a public entity (federal, state or local) engages a private partner, which in turn hires, supervises and pays the contractor. The private partner may participate in the design, financing, operation and maintenance of the project, as well as in the construction. The specific role of the private partner varies considerably from one project to another. Ideally, everyone’s role is clearly spelled out in the contract.

 

The types of projects that have been handled as P3s include water and sewer systems, parking facilities, toll bridges, roads, highways and prisons. In some cases, the P3 is formed to develop a new infrastructure project; in others, an existing asset is transferred to a private partner that assumes responsibility for needed upgrades, repairs and ongoing maintenance work.

 

Pros and cons

The chief advantage proponents see in P3s is that both the public and private entities involved do what they do best. The public entity is better able to serve its constituency by targeting and completing the necessary projects. The private partner is motivated to work effectively and efficiently, because its contractually specified compensation depends on good performance.

 

In addition, by working together, P3 partners often are able to develop better infrastructure solutions than either could have come up with on their own. Projects may be built faster when time-to-completion is included as a measure of performance and, thus, profit. Risks are appraised fully before a project moves forward, with the private partner often serving as a check against unrealistic government promises or expectations. Taking advantage of the private partner’s experience in containing costs can mean more efficient use of government funds and resources, too.

 

P3s also present some potential disadvantagesespecially where the size, nature or complexity of the project limits the number of potential private partners. When only a few private entities have the necessary scope and skills to handle the job, there may not be enough competition to ensure cost-effective partnering.


Furthermore, if the
expertise in the partnership is weighted heavily on the private side, it puts the government at an inherent disadvantage. Under those circumstances, it can be difficult for the public partner to accurately assess the proposed costs.

The contractor’s perspective
As mentioned, P3s represent potentially profitable opportunities for contractors with the requisite experience and resources to perform the work. If you want to consider going after one of these projects, it’s important to be aware of the ways they differ from traditional public works construction.


At the
state and local level, laws governing P3s vary widely from state to state and municipality to municipality. They don’t always offer contractors the same protections typically provided in publicly funded projects.

For example, some state P3 laws don’t address bonding requirements at all, while others allow alternative forms of security, such as guarantees from a parent company or equity partner. ( For more information, see “P3s and bonding” above.) Sometimes the security required makes it difficult or even impossible for a subcontractor or supplier to pursue payment claims, which can increase your risk of nonpayment on a P3 project.

Even more onerous, state and local governments own the land on which most P3s are built. Thus, subcontractors can’ t rely on mechanics’ liens for compensation if the general contractor defaults.

Your best interests
Analysts expect P3s to become more prevalent for infrastructure projects in years to come. So you may want to keep an eye out for such work and be prepared to pursue it, assuming the project suits your construction company’s strengths.


If
you do get the chance to participate in a P3, consult your CPA attorney and surety rep before starting work. Youve got to ensure that the contract into which you’re entering will reasonably serve your best interests.


Enhance benefits’ perceived value with strong communication

 

Providing a strong package of benefits is a competitive imperative in today’s business world. Like many employers, you’ve probably worked hard to put together a solid menu of offerings to your staff. Unfortunately, many employees don’t perceive the full value of the benefits they receive.

Why is this important? An underwhelming perception of value could cause good employees to move on to “greener” pastures. It could also inhibit better job candidates from seeking employment at your company. Perhaps worst of all, if employees don’t fully value their benefits, they might not fully use them — which means you’re wasting dollars and effort on procuring and maintaining a strong package.

Targeting life stage

Among the most successful communication strategies for promoting benefits’ value is often the least commonly used. That is, target the life stage of your employees.

For example, an employee who’s just entering the workforce in his or her twenties will have a much different view of a 401(k) plan than someone nearing retirement. A younger employee will also likely view health care benefits differently. Employers who tailor their communications to the recipient’s generation can improve their success rate at getting workers to understand their benefits.

Covering all bases

There are many other strategies to consider as well. For starters, create a year-round benefits communication program that features clear, concise language and graphics. Many employers discuss benefits with their workforces only during open enrollment periods.

Also, gather feedback to determine employees’ informational needs. You may learn that you have to start communicating in multiple languages, for instance. You might also be able to identify staff members who are particularly knowledgeable about benefits. These employees could serve as word-of-mouth champions of your package who can effectively explain things to others.

Identifying sound strategies

Given the cost and effort you put into choosing, developing and offering benefits to your employees, the payoff could be much better. We can help you ensure you’re getting the most bang for your benefits buck.

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Consider key person insurance as a succession plan safeguard

 

In business, and in life, among the most important ways to manage risk is through insurance. For certain types of companies — particularly start-ups and small businesses — one major threat is the sudden loss of an owner or hard-to-replace employee. To safeguard against this risk, insurers offer key person insurance.

Under a key person policy, a business buys life insurance covering the owner or employee, pays the premiums and names itself beneficiary. Should the key person die while the policy is in effect, the business receives the payout. As you formulate and adjust your succession plan, one of these policies can serve as a critical safeguard.

Costs and coverage

Key person insurance can take a variety of forms. Term policies last for a specified number of years, typically five to 20. Whole life (or permanent) policies, which are generally more expensive, provide coverage as long as premiums are paid, and they gradually build up cash surrender value. This value appears on a business’s balance sheet and may be drawn on, if the business needs working capital.

The cost of key person insurance also depends on the covered individual’s health, age and medical history, as well as the desired death benefit. When budgeting for premiums, bear in mind that premiums generally aren’t tax deductible. On the flip side, death benefits typically aren’t included in the business’s taxable income when received.

In terms of coverage limits, insurers may quote a rule of thumb of eight to 10 times the key person’s annual salary. But every business will have different cash flow needs when a key person unexpectedly dies. A more accurate estimate typically comes from evaluating lost income (or value), as well as the costs of finding and training a suitable replacement.

An important decision

If you’ve already chosen a successor, you can buy a policy that covers both of you. And if you haven’t, it may be even more critical to buy coverage on your life to protect the solvency of your business. Please contact our firm for help deciding whether key person insurance is for you.

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