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Davidson Pargman

5 ways to strengthen the bridge between leadership and staff

team work for success

Every employer, no matter its purpose, needs to establish a strong connection between leadership and staff. Any gulf between the two, even if it’s a small one, can inhibit productivity, diminish morale and make it harder to retain good employees. Here are five ways to strengthen the bridge between your organization’s leaders and the workers carrying out your strategic vision:

1. Give employees a voice. Set up an old-fashioned suggestion box or perhaps a more contemporary email address or software solution for employees to vent concerns and ask questions. Ownership or executive management can reply to queries with the broadest implications, while other managers could handle questions specific to a given department or position. Consider publishing selected answers in company-wide emails or feature them in an internal newsletter or blog.

2. Hold meetings with leadership. At regular intervals, hold “town hall” meetings with staff members to announce organizational changes, discuss issues and answer questions. Be careful not to overdo it; too many meetings can be disruptive and frustrating. However, just the right amount can allow employees to get to know and trust those in top leadership positions.

You might even want to start holding an organizational retreat — or get back to holding one if you’ve curtailed this practice during the pandemic. These events also allow you to answer questions directly, as well as challenge employees to come up with their own strategic ideas.

3. Get back to socialization. Leaders can look dull and distant if they never share personal details or socialize with staff. Again, many organizations have understandably cut back on social events during the COVID-19 crisis but will likely be easing back into them soon. Consider holding a picnic outdoors (as weather allows) or hosting an outing to a sporting event so members of leadership can mingle socially with staff.

4. Pop in for a visit. If your organization maintains offices or other physical facilities, leaders should occasionally stop in for impromptu visits or formal meetings. Give managers and employees a chance to converse candidly. Many staff members will get a morale boost from seeing someone in charge take an active interest in their departments or locations.

5. Share a job for a day. Establish a program under which a leader sets aside a day to learn about a specific position in the organization. He or she can shadow an employee who performs that job and let the staff member explain what really occurs day-to-day. The leader should observe closely and ask questions but generally stay out of the way. Under the program, clarify upfront that you’re not playing “gotcha” but rather trying to better understand how things get done and what improvements you might make.

By maintaining a positive visibility and interacting regularly with employees, your staff will likely feel more recognized, appreciated and, therefore, be more productive. You also may gather ideas for eliminating costly redundancies and inefficiencies. You could even discover your next big strategic move.

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Going concern disclosures today

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With the COVID-19 pandemic well into its second year and the start of planning for the upcoming audit season, you may have questions about how to evaluate your company’s going concern status. While some industries appear to have rebounded from the worst of the economic downturn, others continue to struggle with pandemic-related issues, such as rising inflation, along with labor and supply shortages. For some businesses, pre-pandemic conditions may never return, which can make it exceptionally difficult to project future performance.

How auditing standards have changed

Financial statements are generally prepared under the assumption that the entity will remain a going concern. That is, it’s expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business.

Under Accounting Standards Codification Topic 205, Presentation of Financial Statements — Going Concern, the continuation of an entity as a going concern is presumed as the basis for reporting unless liquidation becomes imminent. Even if liquidation isn’t imminent, conditions and events may exist that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern. Today, the responsibility for the going concern assessment falls on management, not the company’s external auditors.

In addition, the time period that the assessment must cover has been extended. Previously, the determination of an entity’s ability to continue as a going concern was based on expectations about its performance for a one-year period from the date of the balance sheet. Now, under Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, the assessment is based upon whether it’s probable that the entity won’t be able to meet its obligations as they become due within one year after the date the financial statements are issued — or available to be issued — not the balance sheet date. (The alternate date prevents financial statements from being held for several months after year end to see if the company survives.)

When disclosures are required

In situations where substantial doubt exists, management then must evaluate whether its plans will alleviate substantial doubt. That is, is it probable that the plans will be implemented, and if so, will they be effective at turning around the company’s financial distress?

Disclosures are required indicating that either:

  • The plans will mitigate relevant conditions and events that have caused substantial doubt, or
  • The plans won’t alleviate substantial doubt about the entity’s ability to continue as a going concern.

Though management is responsible for making this assessment, auditors will request appropriate evidence to support the going concern disclosure. For example, detailed financial statement projections or a written commitment from a lender or affiliated entity to fully cover the entity’s cash flow requirements might help substantiate management’s assessment. If management doesn’t perform a sufficient evaluation, the auditing standards may require the auditor to report a significant deficiency or a material weakness.

We can help

If your business is continuing to struggle during the pandemic, contact us to discuss your going concern assessment for 2021. Our auditors can help you understand how the evaluation will affect your balance sheet and disclosures.

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Vacation home: How is your tax bill affected if you rent it out?

If you’re fortunate enough to own a vacation home, you may want to rent it out for part of the year. What are the tax consequences?

The tax treatment can be complex. It depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by you, your relatives (even if you charge them market rent) and use by nonrelatives if a market rent isn’t charged.

Less than 15 days

If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce revenue and significant tax benefits. Any rent you receive isn’t included in your income for tax purposes. On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs or depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you rent the property out for more than 14 days, you must include the rent received in income. However, you can deduct part of your operating expenses and depreciation, subject to certain rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, 75% of the use is rental (90 out of 120 total use days). You’d allocate 75% of your costs such as maintenance, utilities and insurance to rental. You’d also allocate 75% of your depreciation allowance, interest and taxes for the property to rental. The personal use portion of taxes is separately deductible. The personal use part of interest on a second home is also deductible (if eligible) where the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.

Claiming a loss

If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house for personal purposes.

Here’s the test: if you use it personally for more than the greater of a) 14 days, or b) 10% of the rental days, you’re using it “too much” and can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t create a loss. Deductions you can’t use are carried forward and may be usable in future years. If you’re limited to using deductions only up to the rental income amount, you must use the deductions allocated to the rental portion in this order: 1) interest and taxes, 2) operating costs and 3) depreciation.

If you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under passive loss rules.)

Planning ahead

These are only the basic rules. There may be other rules if you’re considered a small landlord or real estate professional. Contact us if you have questions. We can help plan your vacation home use to achieve optimal tax results.

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New per diem business travel rates became effective on October 1

Are employees at your business traveling again after months of virtual meetings? In Notice 2021-52, the IRS announced the fiscal 2022 “per diem” rates that became effective October 1, 2021. Taxpayers can use these rates to substantiate the amount of expenses for lodging, meals and incidental expenses when traveling away from home. (Taxpayers in the transportation industry can use a special transportation industry rate.)

Background information

A simplified alternative to tracking actual business travel expenses is to use the high-low per diem method. This method provides fixed travel per diems. The amounts are based on rates set by the IRS that vary from locality to locality.

Under the high-low method, the IRS establishes an annual flat rate for certain areas with higher costs of living. All locations within the continental United States that aren’t listed as “high-cost” are automatically considered “low-cost.” The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include Boston, San Francisco and Seattle.

Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There’s also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.

Less recordkeeping

If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by the IRS. Receipts of expenses generally aren’t required under the per diem method. But employees still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on an employee’s Form W-2.

The FY2022 rates

For travel after September 30, 2021, the per diem rate for all high-cost areas within the continental United States is $296. This consists of $222 for lodging and $74 for meals and incidental expenses. For all other areas within the continental United States, the per diem rate is $202 for travel after September 30, 2021 ($138 for lodging and $64 for meals and incidental expenses). Compared to the FY2021 per diems, both the high and low-cost area per diems increased $4.

Important: This method is subject to various rules and restrictions. For example, companies that use the high-low method for an employee must continue using it for all reimbursement of business travel expenses within the continental United States during the calendar year. However, the company may use any permissible method to reimburse that employee for any travel outside the continental United States.

For travel during the last three months of a calendar year, employers must continue to use the same method (per diem or high-low method) for an employee as they used during the first nine months of the calendar year. Also, note that per diem rates can’t be paid to individuals who own 10% or more of the business.

If your employees are traveling, it may be a good time to review the rates and consider switching to the high-low method. It can reduce the time and frustration associated with traditional travel reimbursement. Contact us for more information.

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Employers may “designate” certain payroll tax payments

PAYROLL CONCEPT

As an employer, you’re no doubt aware of your obligation to submit payroll tax payments to the federal government. However, you may have more control of those payments than you’re aware. In recent guidance, Chief Counsel Advice 202129007, the IRS clarified when an employer may tell the tax agency how to apply — that is, “designate” — a payroll tax payment.

Trust-fund vs. non–trust-fund taxes

The U.S. tax code requires employers to withhold from wages paid to employees:

  • Income taxes,
  • Social Security taxes, and
  • Medicare taxes.

These withheld taxes are referred to as “trust-fund taxes” because the employer holds them “in trust for the United States.” Employers are also required to pay their share of Social Security and Medicare taxes for employees. These employer taxes are called “non–trust-fund taxes” because the employer doesn’t hold these taxes in trust for the United States.

Both trust-fund and non–trust-fund taxes are commonly referred to as “payroll” or “employment” taxes.

Question and answer(s)

The IRS Chief Counsel’s guidance was prompted by the following question: Can a taxpayer designate a payroll tax payment to a specific liability, or must the payment be applied in the best interests of the government?

According to the guidance, an employer can designate a payment if:

  1. The payment is voluntary and not in response to an enforced collection, under which an employer has no right to designate payments, and
  2. At the time the payment is made, the employer provides the IRS with specific written instructions on how to apply it.

If the employer doesn’t designate a payment, the payment will be applied to serve the best interests of the government. In this situation, the best interests of the government require the IRS to apply the payment first to the taxpayer’s non–trust-fund tax liabilities for successive periods in descending order of priority.

If the payment exceeds the employer’s non–trust-fund liabilities, any excess is applied against the employer’s trust-fund tax liabilities. Examples of these include withheld income taxes and employees’ share of Social Security and Medicare taxes.

Once the trust-fund and non–trust-fund taxes are paid, any amount remaining will be applied to assessed fees and collection costs, assessed penalty and interest, and accrued penalty and interest to the date of payment.

Your best interests

There may indeed be instances when designating a payroll tax payment is in your best interests as an employer. We’d be happy to answer any questions you may have about payroll taxes, including whether and when to designate a payment.

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10 financial statement areas to watch for COVID-related effects

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The COVID-19 pandemic is still adversely affecting many businesses and not-for-profit organizations, but the effects vary, depending on the nature of operations and geographic location. Has your organization factored the effects of the pandemic into its financial statements? You might not have considered this question since last year if your organization prepares statements that comply with U.S. Generally Accepted Accounting Principles only at year end.

As we head into audit season for 2021, it’s time to evaluate whether your financial situation has gotten better — or worse — this year. Here are 10 financial statement areas to home in on:

1. Revenue recognition. Assess how changes in customer preferences, contract modifications, discounts, refund concessions, and changes in credit policies or payment terms impact the top line of the income statement. Also consider related collectability of accounts receivable.

2. Government grants. You may account for these grants as revenue or donor-restricted contributions. Government funding programs may have eligibility, documentation, expense tracking and other requirements (such as government audits) that you may need to address.

3. Estimates and fair values. These items are typically based on budgeting and forecasting of revenue, costs and cash flows. Uncertainty may increase the discount rates used in making estimates and decrease the fair values of certain balance sheet items.

4. Investments. Market changes caused by the pandemic may negatively affect the fair values of investments and financial instruments that qualify for hedge accounting.

5. Inventory. It’s possible that certain market conditions — including inflation, reductions in production and supply chain disruptions — may affect the value of raw materials, work-in-progress and finished goods inventory. Consider the need for write-offs due to obsolescence.

In addition, travel and work restrictions may delay, restrict or prevent year-end physical inventory counts. Your external auditors may have to observe counts remotely, which, in turn, may require additional testing procedures during audit fieldwork.

6. Property, plant and equipment. Evaluate changes in useful lives and related deprecation due to changes in business plans. There may also be potential impairment of long-lived assets and leased assets.

7. Goodwill and other intangible assets. Because of COVID-19 triggering events, these items may require impairment testing and write-offs may be needed.

8. Deferred tax assets. Consider the realizability of these assets in light of current year losses and uncertainty about future events, including the impact of possible federal tax law changes.

9. Accrued liabilities. You may need to book additional liabilities this year for employee terminations, changes in benefits and payroll tax payment deferrals. Also consider whether existing contingency accruals are still adequate.

10. Long-term debt. You may have debt classification issues for existing loans if your organization fails to meet its debt covenants. Financial difficulties may result in debt modification or extinguishment. Also evaluate the compliance requirements of the Paycheck Protection Program (PPP) loans and the probability of forgiveness.

This list is a useful starting point for discussions about how the pandemic has affected financial results in 2021. If you have questions about how to report the effects, contact us for guidance. Your preparedness will help facilitate audit fieldwork and minimize adjustments to your in-house financial reports.

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