All posts by Gary Stockton

At a recent lunch outing, I was taken aback when an employee of the Ike’s Love & Sandwiches shop asked me if I would like to add $.75 to my order so that they could get health benefits. I left a message on the company’s website because I thought that was an unusual question and moments later one of the company’s owners, Sam, called to explain. Sam described the difficulties in trying to attract employees to his small business. Health benefits are attractive to job seekers but often too expensive for small business owners. With minimum wage hikes of recent years, businesses with more than 26 employees are finding it tough to be competitive. But that’s not stopping them from finding clever ways to still offer health benefits - just make it part of the transaction by asking customers if they would like to add a surcharge. This enables Sam to avoid raising the prices of the sandwiches. Those who don’t mind the charge are helping Sam’s employees get health benefits they would not ordinarily receive. Small Business Hiring Trends A recent report from NFIB revealed that Small Business Optimism continues to trend positive. Small businesses are breaking a 45-year-old record in job openings, job creation and plans to hire. The report also reveals that nearly a quarter of small business owners are struggling to find qualified workers. With the continued rise in small business growth, 24% of those looking to hire report it’s even harder to find talent than just 5 years ago. Competition means that business owners have to be even more innovative to attract talent and afford candidate demands. Attracting Top Talent from Big Names Indeed’s 2018 Small Business Survey showed that 37% of small to medium businesses compete with big-name companies by offering higher salaries. Higher salaries can be challenging to business cash flow, so small businesses are being creative with offerings such as: The ability to grow with an advance quickly within the organization Telecommuting or working from anywhere Flextime Generous vacation policies Open or unlimited paid time off Younger job seekers and Millennials are also searching for meaningful work and authentic connections with co-workers. Small businesses have the edge when it comes to candidates looking for career potential instead of simply blending in with a large corporate structure. Employees want to feel like they’ll have an impact and a bright future with an employer that cares about them as individuals. Inventive, Low-Cost Perks While it was interesting to see how Ike’s sandwich shop paid for employee benefits, startups and entrepreneurs have discovered unique perks to attract job seekers at a low cost. These benefits provide employees with positive and happier feelings about their place of work as well as attracting new candidates. Pet-friendly - A 2018 study revealed that workplaces that allowed pets and/or offered pet insurance retained employees longer, employees took fewer sick days and they felt more engaged in their jobs. Summer hours - Four day work weeks during the summer allow employees to take advantage of vacation and travel plans. Fitness/Wellness - Offering to pay for part of a fitness program, gym membership or healthy choices in the break room, these perks can keep employees healthy and motivated. Telehealth options - Without the hefty cost of health insurance, telehealth offers healthcare services via a mobile device, typically through apps. Free food & drinks - Some businesses not only have a fully stocked kitchen, but they may also even provide beer for those post-work happy hours. Commuter benefits - A small monthly stipend to pay for public transportation or gas can also be attractive to help pay for the cost of getting to work. Online Career Training - Spotlighting career development dramatically improves employee retention and attracts job seekers. 401K plan - There are plenty of 401K plans for small business to offer as an employee benefit, with or without matching. Casual dress code - As simple as it seems, allowing employees to dress as they would like is almost expected from younger job candidates. Litzky PR, a small firm in New Jersey, offers extra time off for wedding planning. Columbus, OH marketing agency, Postali, give a monthly Starbucks allowance. The Catch Co, whose mission is to encourage more time outdoors, allows their employees more outdoor time with company outings and unlimited vacation. Successful entrepreneurs are competing for talent by re-imagining work/life balance and what coming to work should feel like in 2018. With a little creativity and a lot of heart, fostering an employee-friendly work environment can be the thing that sets your business apart from others who are competing for the same talent.

Failing to seek IP protection may put your small business at a competitive disadvantage, so in this guest post we include some basic IP tips.

  The Qualified Business Income Deduction is part of the recently revised business tax code. In this guest post,  leading author and tax expert, Barbara Weltman how business owners with multiple businesses can approach the QBI deduction. You can find more blogs by Barbara on her blog Big Ideas for Small Business.  The qualified business income (QBI) deduction provides a significant opportunity for business owners to slash their federal income tax bill. Designed to lower the effective tax rate on owners of pass-through entities, the write-off can be as much as 20% of QBI. But various limitations come into play that can reduce or bar the deduction.  For a basic primer on QBI, read my earlier post "Understanding The New Qualified Business Income Deduction."  If you are a business owner with an interest in multiple businesses,  you should read on. The good news is, you may be able to aggregate them to optimize their deduction. The bad news: certain businesses may not be able to break up in order to use the deduction, more on that part later. So here are some of the points to note in putting businesses together or taking them apart in order to get the biggest QBI deduction possible.   Aggregating businesses Usually, if you own businesses directly (a sole proprietorship or single-member limited liability company, or LLC) or have interests in S corporations, partnerships, or limited liability companies (LLCs), you figure the deduction for each business and then combine them for a single entry on your tax return. But you may be able to lump your business numbers together in figuring your QBI deduction. This may allow you to take a larger deduction than if you didn’t aggregate your business interests. If eligible, you can aggregate your interests, regardless of what your co-owners do with their interests. To qualify for aggregation, you must meet all 5 conditions: The same person or group of persons own (directly or indirectly) 50% or more of each business being aggregated. The 50% or more ownership exists for more than half the year. All tax items attributable to each business are reported on tax returns with the same tax year end (e.g., all businesses use a calendar year). None of the businesses are a specified service trade or business, or SSTB (any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners). The businesses being aggregated satisfy at least 2 of these 3 requirements: (a) the businesses provide products and services that are the same (e.g., a restaurant and a food truck) or customarily provided together (e.g. a gas station and a car wash), (b) the businesses share facilities or significant centralized elements (e.g., personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology services), and (c) the businesses operate in coordination with or reliance on each other (e.g., they have supply chain interdependencies). Other key points: Assuming eligibility, you can choose to aggregate some of your businesses and not others. The aggregation of businesses for purposes of the passive activity loss rules has no impact on aggregation for the QBI deduction. If one of the businesses being aggregated produces a negative QBI, each business with a positive QBI must be offset by a portion of the negative QBI. But W-2 wages and the unadjusted basis immediately after acquisition (UBIA) of qualified property from a business that has a negative QBI aren’t taken into account in figuring the QBI limitation. If there’s an overall negative QBI for the year, it is treated as a loss from a qualified business in the following year (the loss continues to haunt you). An election to aggregate businesses means they must continue to be aggregated in the future. New businesses can be added to the aggregated group. But if things change for businesses within the group (e.g., ownership drops below 50%), they may no longer qualify for aggregation. Each year you must attach to your return a statement identifying each business being aggregated. If you don’t, the IRS can “disaggregate” the businesses. Chopping up businesses Specified Service Trade Businesses's (SSTB's) with owners having high taxable income that would otherwise bar them from taking a QBI deduction may have thought they could separate out some functions in an attempt to qualify those separate parts as non-SSTBs. For example, it had been suggested to remove administrative functions or building ownership into a separate business to at least get the QBI deduction for this business. While having separate businesses is certainly allowed, the IRS has effectively killed the idea of chopping up businesses in certain situations in order to get the QBI deduction. An SSTB includes any trade or business with 50% or more common ownership that provides 80% or more of its property or services to an SSTB. If a trade or business has a 50% or more common ownership with an SSTB, to the extent it provides property or services to the commonly-owned SSTB, the portion of the property or services is treated as income from an SSTB. Even if a business would not otherwise be an SSTB but has 50% or more common ownership with an SSTB and shared expenses (e.g., wages, overhead expenses), it is treated as incidental to an SSTB if its gross receipts are modest. More specifically, the trade or business will be treated as an SSTB if its gross receipts represent no more than 5% of the gross receipts of the combined businesses. Bottom line The QBI deduction is a wonderful way to reduce your tax bill because it doesn’t cost you anything to get it (you don’t need to expend any money); it’s yours if you qualify. For the vast majority of business owners, the deduction is rather straightforward. But qualifying for the deduction becomes a complicated matter for anyone with taxable income over $315,000 on a joint return or $157,500 on any other return. Check with your tax advisor to learn more about how you can qualify for this write-off. Learn more about the QBI Deduction at our upcoming webinar with Barbara Weltman October 2nd. hbspt.cta.load(464374, 'dceba17b-53ae-4aa2-b7d8-b763a673eafb', {});

The Association of Certified Fraud Examiners has released their 2018 Report to the Nations: Global Study on Occupational Fraud and Abuse and small businesses should take heed. The annual report, which began in 1996, was implemented to identify cases of fraud in order to best address the problem. The Report to the Nations identifies: how fraud is committed, how it is detected, who commits it and how organizations can protect themselves. One of the key findings is that small businesses lose almost twice as much per fraud incident as larger businesses. Other key findings will be addressed in this article. Experian spoke with Andi McNeal, co-author of the report and ACFE’s Director of Research, to dive deeper into the reports’ findings. How is Occupational Fraud Harmful to Small Businesses? Occupational fraud is when someone steals from their own company. For small businesses, fraud can be more impactful than in large businesses. In the Report to the Nations, small businesses are identified as those with less than 100 employees as compared to larger businesses with 100 or more. According to the report, the median loss for small businesses is $200,000 versus $104,000 for large businesses. With the average amount of each incident nearly double, and with revenues likely much less than in larger businesses, this loss can be quite devastating to the business. ACFE’s Director of Research, Andi McNeal, points out that the report doesn’t necessarily cover all industries, only 23 industry categories are included, so the average amount per industry can vary. However, considering the average size of small businesses, one single employee stealing $200,000 could wipe out the whole company. How is Fraud Committed and Detected? According to McNeal, the report was built on a survey of ACFE fraud examiners sharing case information from the prior 2 years. The current report looked at 2,690 cases of occupational fraud from all over the world, including 28% that were perpetrated in small businesses. The report revealed that fraud is typically found because there are few if any, internal controls to prevent and detect it. In a small business, fraud can be perpetuated by: a co-owner one owner running personal purchases through the company or to family members the person controlling the bank account With the average median duration of a fraud scheme lasting 16 months, corruption is the most common with 70% of cases perpetrated by a business leader. McNeal stated that the lack of internal controls contributed to almost half of all frauds. Most organizations, including those without reporting hotlines, are more than twice as likely to detect fraud only by accident. The unfortunate truth for small businesses is the “risk of fraud can be easily overlooked and quite devastating”. In small businesses, owners are less likely to detect and report fraud. Owners and leaders operate on trust, even when formal policies are in place. Small business leaders are focused on operations and not necessarily concerned that someone is stealing from them.  The Report to the Nations states that only 2% of owners will detect and report occupational fraud compared to 53% of employees. So having these conscientious whistleblowers among your ranks is your best line of defense. How Can Small Businesses Protect Themselves from Fraud? McNeal recommended internal controls to prevent and detect fraud.  Small businesses have half the implementation rate of internal controls than larger businesses if they have any at all. Some of the internal controls that can help include: A Code of conduct Anti-fraud training Data analytics to control fraud 3rd party audits of financial statements The best way to prevent fraud is to emphasize that fraud will be reported right away. McNeal recommended sitting down with staff to look over the company’s anti-fraud policy. This management procedure sends a strong message to staff to let them know that fraud will be taken seriously. In other cases, employees did have suspicions of fraud but didn’t know what to do about it. Setting up a formal procedure of transparency, including a hotline program, allows employees to know there’s someone they can talk to. Empowered staff will speak up if given a directive of reporting concerning behaviors, including pressure or frustration. Some employees need an outlet instead of resorting to fraud. Build a layer of management review. McNeal stated that if the small business owner opened the monthly bank statements, it could stop most small business fraud. Surprise accounting audits can also ensure the accounting procedures are truthful and accurate. Final Thoughts on Detecting Small Business Fraud Andi McNeal shared that there are many third-party businesses available to help detect fraud. ACFE Membership is made up of anti-fraud professionals, including many boutique firms. Some consultancies specialize in helping small business implement scaled anti-fraud programs. Business owners can decide which firms fit their need or make sense for the number of resources they have available. There are also resources online to help detect fraud and build internal controls. Business owners need a clearer understanding of where their risk is, and which parts of their company are most vulnerable to fraud. Small business needs to pay special attention to their accounting department, including implementing processes and procedures. For instance, McNeal recommends that staff is cross-trained when someone is going on vacation or that more than one person is reviewing the accounting. Surprise audits are most effective. “Also,” said McNeal, “Management behaving in an ethical manner. If employees are watching management making ethical decisions in a grey area, then they may do the same. The tone is set from the top.” Running background checks is also helpful, so small business owners do not hire those who have stolen before. According to McNeal, only 4% of fraudsters have been convicted of fraud prior to the cases in the report. 89% had no criminal background. Unfortunately, after the fraud is detected, fewer organizations are actually prosecuting the fraudsters. So businesses could be hiring first-time offenders or those who simply weren’t prosecuted because of cost if the previous victim was afraid of bad publicity or they believed the internal justice was sufficient. There should be appropriate consequences to help stop the propagation of fraud. You can download this fascinating report from the Association of Certified Fraud Examiners website.