We are all aware that it is common for a business to have employees and independent contractors performing their work. But there is a big question to ask yourself as a business executive – are we classifying our employees and independent contractors correctly? It is critical that businesses correctly determine this classification due to the following:

• The shifting of Social Security and Medicare payments as an established employee and employer
• The unemployment tax and benefit implications for both the employee and employer
• Legal obligations as an employer
• Costly penalties and fees for worker misclassification

Following the release of the 2021 Independent Contractor Rule, in which the Department of Labor (DOL) provided guidance on the classification of independent contractors versus employees under the Fair Labor Standards Act (FLSA), misconceptions and room for inconsistencies with the law arose.

Effective March 11^th, 2024, a new final rule regulation (RIN 1235-AA43) was released. This new rule revises the “economic reality test” that determines workers’ status under the FLSA. The main goal is to make sure workers are protected, classified properly, and that they receive the wages earned.

The new rule consists of a new economic reality test for employers to use to determine whether a worker should be treated as an employee or independent contractor. The test includes six factors, which increased from the five factors included in the previously released 2021 rule.

The following are the six factors to consider under current law.

1. Any opportunity for profit or loss a worker might have.
2. The financial stake and nature of ANY resources a worker has invested in the work.
3. The degree of permanence of the work relationship.
4. The degree of CONTROL an employer has over the person`s work.
5. Whether the work the person does is ESSENTIAL to the employer`s business.
6. The worker’s skill and initiative.

With the newly updated final rule for independent contractors, it’s a good time to review your vendor relationships for proper reporting. Beyond compliance with the FLSA, employers should be certain the determination of an employee or independent contractor is consistent with IRS guidance.

We hope this information is helpful. If you’d like to discuss the new Act and its effect on your situation, please contact the experts at Cray Kaiser at (630) 953-4900. For more information on Tax Guidelines for Independent contractors, please visit our blog.

In the following videos, Damian Contreras, an in-charge tax accountant, who was formerly an intern at Cray Kaiser, gives an inside perspective about what it is like to be an intern at CK. If you are an aspiring professional seeking insights into the inner workings of CK, these videos offer a glimpse into the realm of an accounting internship.

What It’s Like to be an Intern at CK

My name is Damian Contreras and I’m an in-charge tax accountant. I was looking around and I already had a job lined up for a big four internship and I wanted to see what smaller firms had to offer as well. And I found Cray Kaiser and after interviewing and meeting with the people I thought it would be a great fit to try out a very hands-on tax season internship.

I noticed that the bigger firms you’re more stuck in, one area versus at Cray Kaiser, you can work in all departments in any given day and that’s one of the factors on why I chose working here. It started out heavy in hands-on training and then we started preparing simple tax forms 1099s. I gravitated more towards business returns my initial year here so I worked heavily in preparing business returns for some of our smaller family-owned businesses that we have. And then like everyone else I moved into the individual 1040 land which is also a very heavy season here. Preparing business returns initially was my favorite because they balance in the end and as an accountant that was very, it was gratifying.

Just how much you can learn if you’re willing to and that small amount of time I remember during my interviews they told me everything I’d learned in three months span and I got off the phone and laughed. I was like there’s no way that’s going to happen and then after the internship I walked away saying wow I’ve learned a lot and you know they invited me back and I was like just think about how much more I can learn in another three month span there. I worked into the summer and through the next fall and tax season and they’re very big on putting you in even on their firm CPE trainings as an intern. While you don’t need it they want you to be there to hear the new standards that are coming out and to partake in all the extra education opportunities beyond just basic intern training.

I’ve found that recently it’s a very energetic culture, especially when we’re here during tax season until ten or eleven o ‘clock at night. We have a lot of fun and we play games or talk over the cubicle walls. You know when we’re working our Saturday weekends we have Saturday games in the cafeteria that turn into competitions audit versus tax.

I’ve always liked the open-door policy that everyone has to ask questions and come in and talk and work on your own development with them.

What You Learn

My name is Damian Contreras and I’m an in-charge tax accountant. Bring a willingness to learn. It’s one of our values as education. And I’ve seen other interns here and I assisted in running the internship program. You need the willingness to learn and try to research on your own. A lot of things you can at least come into the meeting with understanding because if you don’t and they’re explaining it to you, you’re going to be lost. So it’s definitely that education and wanting to learn, especially in our industry, it’s ever changing every year with new regulations.

My second internship, they actually let me assist in running some of the trainings and kind of taking charge of the intern group. And we start out normally on Martin Luther King Day because everyone has the day off and we hit the ground running with 1099 trainings and then, we work into our business trainings and then eventually individuals in certain complex areas will have separate trainings, Then we’re giving you hands -on work. You’re in there preparing the returns, asking questions, you will get some contact with the clients. We’re going to put you out on audit engagements. One of my colleagues and I were talking about that this morning trying to schedule everything out because we want the internship experience to give you well-rounded as a whole. We don’t want you to only see tax. We want you to see audit because that’s the big question you get audit or tax. So without seeing both, how do you know to make that decision?

As a business owner, the first quarter of each year can be a blur. You work to finalize the prior year’s operating results and complete tax reporting in a timely manner so you can focus on the current year’s operations. As changes occur in tax legislation, this becomes increasingly difficult as different information is being requested from the outside accounting firm and more time is needed to comply. You feel the impact of staff shortages in your company, and you hear murmurs of this occurring at your accounting firm too. Before you know it, you are having a conversation about tax extensions. Which only means more uncertainty in the weeks ahead as you continue to wind down operating results from the prior year and continue to stay afloat in the current year. If this sounds familiar to you, read on. We will offer some considerations to make year-end more manageable and simultaneously allow you to have control of your financial reporting all year long.

Implementing the following tips throughout 2024 will help streamline your financial reporting, plan for tax obligations and bring a sense of “certainty” in uncertain times.

• Keep track of tax-significant items in a separate chart of accounts in your accounting software to minimize additional account analysis and reclassifications at year-end. A few accounts to consider:
  • Meals (employee reimbursed and company paid such as sales promotions)
  • Meals billed to customers (associated with travel billed to customers and recognized in income)
  • Entertainment
  • Small equipment purchases (individual purchases less than $2,500)
  • Officer compensation or guaranteed payments (separate from salaries and wages)
  • Salary and wages (separate from 1099 contractor payments)
• Maintain sales by state report in your accounting software. This is generally available in most accounting packages or can be easily tracked by adding a custom field. This report should be reviewed with your accountant during the year to determine whether you may have tax obligations outside of your home state. 
• Develop a capitalization policy for new purchases of property, plant and equipment (asset accounts). This policy will allow you to directly expense new purchases up to the threshold you select. Once you select the threshold, you need to monitor the postings in your chart of accounts, meaning you would only post items above the threshold into your property, plant and equipment accounts. We recommend you use the IRS safe harbor amounts in selecting your capitalization policy which would be $2,500 for unaudited financial statements.
• Attach key agreements, bank statements and invoices to the transactions if using QuickBooks Online. This feature will allow you, as well as your accountant, to quicky review the supporting documentation without having to pull documentation from other electronic or hard copy means. Please keep in mind if the documentation is confidential, you will need to decide who has access to the accounting software to determine whether that information should be attached and uploaded into the software.
• Consider a recurring accounting engagement (monthly, quarterly or semiannually) with your accountant. The purpose of this engagement is to review your accounting transactions, key reconciliations and provide a cursory computation for tax obligations. You can consider earmarking funds for tax obligations throughout the year so there are no surprises at the time of tax filing.
• Develop and document a monthly closing procedure and time schedule and then follow it.
  

As we embark on the second quarter of 2024, we have plenty of time to make some tweaks so that the year-end scramble is more manageable and will allow you to be confident as you approach 2025. Contact Cray Kaiser at 630-953-4900 to help you understand how you can implement some of these tips today.

In this second audio blog in a series about business valuations, Micah Vant Hoff, a principal at CK, explores the three primary approaches to business valuation and gives insights into each method.

Transcript:

My name is Micah Vant Hoff. I’m a principal at Craig Kaiser. There’s three broad approaches to business valuation. There’s the market approach, which would be comparable to thinking about the real estate market, where you have quite often value determined based on looking at comparable properties, right? In the same area, trying to get as close to your subject property, your house, for example, as possible, and then deriving the value of your property based on those comparable properties around you. So that would be real estate, but the same is true for business valuation. Under the market approach, you would be looking for comparable property, not properties, but businesses that have sold recently and using the parameters to try to pull in the most comparable ones, and then using various metrics to compare to your business and deriving a value off of that. So that’s approach one is the market approach.

Approach two is the cost approach, which for most businesses, I would say is generally not applicable. The cost approach is looking at what is the value of your assets minus the value of your liabilities, and that’s really the value of your business. Most businesses that we deal with generate income or have some other value to them to where a cost approach would be understating the value of that company, the value of that business, because most businesses generally speaking, if they’re profitable and if they’re in growing industries, their value would be greater than the difference between assets and liabilities.

And then the third approach that’s used is the income approach. This is the one that we use most frequently. We consider all approaches, but the one that we come to most frequently and weigh most heavily is the income approach. That is looking at the expected future cash flows from operations, the expected future income that the business is anticipated to generate, and then capitalizing or discounting those future cash flows into a model, an income-based model that then backs into and derives what the value of the business is under that approach.

As we observe International Women’s Day, we want to recognize and celebrate the strong women of Cray Kaiser. These women make invaluable contributions to the accounting profession and are blazing a bold path forward for women’s equality in the world.

At Cray Kaiser, we are proud that 50% of our team is made up of women, with the firm being 66% women-owned. These talented women provide expert accounting, tax and advisory services to our clients.

As we work towards a more equitable future, International Women’s Day reminds us to continue to champion women’s empowerment and equal opportunities across all sectors and roles. Our world is better when diverse perspectives and backgrounds are represented and valued.

Please join us in celebrating the remarkable achievements of women in accounting and financial services this International Women’s Day!

In this first audio blog in a series about business valuations, Micah Vant Hoff will delve into the critical distinction between fair market value and fair value in business appraisal. Understanding the nuances between these two standards of value is crucial as they can impact assessments due to their differing definitions.

Transcript:

Fair market value versus fair value. We need to be able to determine whether it’s going to be under one or the other because fair value will generally not include discounting, where it’ll just be the business value, absent any form of discounting, generally speaking. And fair value is defined differently depending on what jurisdiction you’re in. Whereas fair market value will generally be using the IRS’s definition of fair market value, and will incorporate potentially discounting or premiums for lack of marketability and lack of control, or conversely premiums for control, potentially even marketability.

So that’s going to be the big difference there where we’re looking at what standard of value. Determining the standard of value is important. It’s an important first step in defining the engagement and whether you’re going to be operating under fair market value or fair value or even something else is going to drive the consideration of discounts or even premiums inherent in the business value and whether you’re considering those things or not. And even within a term like fair value, that can be differently defined based on what jurisdiction you’re operating in. So for example, fair value in Illinois is defined in the Illinois Business Corporation Act. Fair value in Indiana may be defined slightly differently. That’s going to be more jurisdictional as opposed to fair market value which is going to be more universal.

In this video, Maria Gordon, Tax Supervisor of State and Local Taxation, delves into the intricacies of sales tax nexus, taxable items and customer exemptions. She also talks about the invaluable lifeline offered by the voluntary disclosure programs offered by some states.

Transcript:

My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation. Each of the states really wants to get a piece of their pie from taxpayers.

There’s lots of different types of taxes that businesses need to be concerned about. Income tax is an obvious one, but also requirements for sales taxes are continually changing with the states. And then we have local income taxes, we have personal property taxes and even gross receipts taxes based upon total receipts collected in a state and franchise taxes.

 So, a business needs to determine whether or not they’re required to collect sales tax in the various states where they ship product or they do services and determining whether that business has nexus for sales tax is different from determining nexus for income tax.

 In the past, if the business didn’t have any physical presence in the state, they really didn’t have to worry about sales tax, but that all changed in 2018 when the Supreme Court ruled on South Dakota versus Wayfair.

And now the states, all of the states, have enacted economic thresholds, whereby if you have sales into that state over a certain threshold, even if you don’t have any physical presence there, you are required to begin collecting sales tax from your customers in that state. And this has been an area over the past few years that businesses have really had to keep a close eye on. So, this is something that each year, you know, we’re taking a look at that to see where our clients have exceeded those nexus thresholds.

Once a business decides that they are subject to collecting sales tax in a state, then the next step is to really determine what of their products or services are taxable. And this varies again from state to state. So, in some states, services across the board, you know, pretty much are not taxable and other states only specific services might be taxable. And then in this day and age, we have additional considerations like computer software. You know, when is that software considered a taxable product? Or when is it considered a non-taxable service?

So, there’s a lot to consider there just in determining what items are taxable. Once that’s determined, you also need to take a look at your customers and find out who of your customers are taxable because you may have resellers who you don’t have to charge tax to because they’re taxing the end customer that they sell to and so another really big aspect of protecting your business is to collect those exemption certificates, make sure that you have those on hand, and also make sure that they’re current. You know, if it’s been a few years since you’ve collected one, it’s always a good idea to go back to your customers and request an updated certificate from them.

But a business discovers that they have nexus in a state for income tax or for sales tax and that that nexus has existed for the last several years. There is a way that they can go to the states and get some protection and this is called voluntary disclosure. So many of the states offer a voluntary disclosure program where the taxpayers are coming forward and saying, you know, we recognize that we should have been filing income tax or collecting sales tax in your state. We’d like to make it right and the states in response to that coming forward place a limit on the look back period, so they may only go back three or four years to collect tax and then also they often will waive penalties. So it is it’s a great program to protect the business from back audit exposure because it limits those years and the states are very willing to work with taxpayers to get them into compliance.

The tax bill put forth a few weeks ago, the Smith-Wyden Tax Act, has the potential to bring about significant changes for both individual and business taxpayers in 2024 and possibly even retroactively to 2022 and 2023. Although the bill passed the House, it is currently stalled in the Senate. Here’s a highlight of the tax provisions that we believe will be most impactful to our clients:

R&D Expense Correction:

• Restores full and immediate expensing for businesses’ research and development expenditures.
• Reverses the five-year amortization requirement implemented in 2022.
• Retroactively applies R&D expensing to investments made from 2022 through 2025.
• Incentivizes business investments, enhancing productivity and economic growth.

Child Tax Credit Expansions:

• Enhances refundability of the Child Tax Credit (CTC) to support low-income families.
• Ensures parents receive a portion of the credit even without federal tax liability.
• Retains work incentives, such as the earned-income phase-in.

Bonus Depreciation Reinstatement:

• Reinstates 100% bonus depreciation from January 1, 2023.
• Reverses phased reduction under TCJA to 80% in 2023 and 60% in 2024.

Business Interest Expense Limitation:

• Reinstates allowance for depreciation and amortization for the 30% limitation on interest deductions.
• Makes allowance retroactive from January 1, 2023, or January 1, 2022 if elected by the taxpayer.

Section 179 Small Business Expensing Cap:

• Increases small business write-off limit to $1.29 million, surpassing the 2017 cap of $1 million, for property placed in service after December 31, 2023.
• Makes additional adjustments for inflation after 2024.

We will continue to monitor the Act – whether it continues to move through Senate or stalls. Given the proximity to the tax filing due date for calendar year entities, we are advising our affected clients to extend their 2023 tax returns to avoid possible amendments to their returns should the Act pass on a retroactive basis. If you have any questions on how the Act may impact your tax situation, please call us at 630-953-4900.

In this video, Maria Gordon, Tax Supervisor of State and Local Taxation, sheds light on the crucial topic of tax incentives offered by states and localities to businesses. From empowerment and edge credits to research and development incentives, she underscores the vast array of opportunities available.

Transcript:

My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation. Businesses should really be thinking about tax incentives that many states and localities offer to them.

The states really want to see economic development in their state and even certain areas, and so often they will offer empowerment, credits, edge credits where your business is employing people there, investing in capital. And these credits are very specific. You apply for it with the state. And then it helps businesses to really expand and get some credit, some benefits there. And some states offer, you know, research and development credits. You can get that at the federal level, but if you are also doing research and experimentation in a state, you may be able to receive a state -level credit as well.

And then there’s even states that have credits that have to do with your activities such as the Wisconsin Manufacturing Tax Credit, that’s a credit against income tax. So, there is an awful lot out there with respect to state incentives and if a business isn’t thinking about these things, they really could be missing out on some benefits.

One benefit that business owners have had had for the last couple years is taking advantage of the pass-through entity tax, which is a tax whereby the business can pay state income tax at the entity level rather than having it paid at the individual level for partnerships and s-corporations where the income would generally flow through to the owners.

Now as a workaround to the state and local tax deduction cap, businesses can pay those at the entity level and get a state tax deduction against the business income. For most states, this is set to expire after 2025. So, we’re doing all we can to take advantage of those deductions right now.

I think the hope is that some of these states will extend that provision, but as of now for most of them it’s expiring 2025 and this is just an issue that we’re going keep up on and make sure we know all the changes that are happening over the next couple of years.

What is outsourced accounting? It is generally defined as an option for a business to hire an outside third party to complete accounting and finance functions for the organization. This can include but is not limited to bookkeeping, accounting and compliance work. It typically can encompass accounts payable and receivable and payroll as well as month-end closing tasks such as reconciliations and bookkeeping and tax and compliance preparation. Increasingly common are other engagements such as financial reporting, budgeting, financial planning as well as ad hoc projects, advisory and consulting services. Business owners seeking more time to focus on their core business are increasingly turning to firms such as Cray Kaiser that can do everything from performing the bookkeeping and accounting tasks to providing CFO-level financial analysis and advice.

In the past, accounting and finance was a function that was required to be in-house for access to records and other company resources and employees. Outsourcing is losing its stigma. The negative connotations associated with hiring out tasks are fading as the pace of life accelerates, work-life balance priorities shift, entrepreneurship expands, and business challenges grow increasingly complex. With the availability of cloud-based software and advances in technology, outsourced accounting has become easy to implement and is a proven time and cost savings for many businesses. Our firm can be on the same system and remotely share files and documents, allowing for real-time conversations. Owners of small businesses gain valuable time to focus on growing their business instead of managing and running the accounting functions. Businesses benefit from cost savings and efficiency by considering outsourcing many of the accounting functions to a team of specialists that offer expertise and flexibility to meet business needs as they change.

Some thoughts about the positive impact of outsourced accounting so you can grow your business not your management of accounting functions:

• Advertising, recruiting, hiring and training of competent accounting department personnel is reduced or no longer needed.
• Greater access to specialized expertise and seamless coordination with other areas of our firm. 
• Access to proven processes and streamlining of responsibilities and expertise.
• Flexibility to meet your business needs as they change from month to month and year to year allowing personalized service.
• Seamless and timely integration between bookkeeping tasks to accounting and financial reporting and tax preparation.
• Agreed upon division of responsibilities between owner, employees and outsourced firm can improve internal controls.
• Access to a dedicated team of specialists with current knowledge, experience and training in software, processes, technology.
• Option to start small – services and additional responsibilities and advisory or consulting projects can be added after a relationship, familiarity and trust is built.

Important considerations when reviewing outsourcing options and engaging a firm:

• Costs
• Expertise and niche area of accounting firm
• Create a plan of which tasks and roles need to be outsourced
• Create a service level agreement – maintaining an element of flexibility
• Open communication about the needs and responsibilities of all parties involved
• Technology and resources available

Cray Kaiser can help – let’s start a conversation as to how best to help your business grow and gain efficiencies in order for you to reach the ultimate goal of focusing on your core business and areas of growth. If you feel now is the best time to learn more about outsourcing your accounting department give us a call at (630) 953-4900 to discuss options and opportunities offered in our Accounting Services Division.