Wealth & Estate Planning

Article Dean Dorton

The Institute of Internal Auditors (IIA) recently released a report which examines outsourcing of internal audit activity.

Over 50% of North American companies participating in the survey use third parties to support their internal audit functions. The demands of internal audit have increased the prevalence of using third parties. Key aspects of using third parties include:

  • Supplementing staff to address staff shortage or help meet tight deadlines
  • Adding specialized skills including certified fraud examiners, IT specialists and data extraction experts
  • Handling special projects
  • Covering remote locations

IIA clearly states that best practices promote having at least one internal employee handle the oversight of the internal audit function and serve as the liaison with the third party service provider.

At Dean Dorton, we have seen the benefits of working with both private and public companies in a co-sourcing arrangement. Our expertise in a broad range of industries, coupled with our internal audit tools, allows a company to maximize the benefits of an internal audit function. We concur with the IIA’s recommendations to:

  • Think of the stakeholders and how third parties add value to meet stakeholder interests
  • Formalize the arrangement with the third party to establish expectations
  • Establish protocol for remediation and follow up steps
  • Allow third parties to share best practices including risk assessments

For more information, please contact:
Bill Kohm: bkohm@deandorton.com, 859.425.7625
Jim Tencza: jtencza@deandorton.com, 502.566.1071

View Bill Kohm’s Bio
View Jim Tencza’s Bio

Article Dean Dorton

…But Should They?

Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended 50% bonus depreciation through 2017.

The break had expired December 31, 2014, for most assets. So the PATH Act may give you a tax-saving opportunity for 2015 you wouldn’t otherwise have had. Many businesses will benefit from claiming this break on their 2015 returns. But you might save more tax in the long run if you forgo it.

What assets are eligible

For 2015, new tangible property with a recovery period of 20 years or less (such as office furniture and equipment) qualifies for bonus depreciation. So does off-the-shelf computer software, water utility property and qualified leasehold-improvement property.

Acquiring the property in 2015 isn’t enough, however. You must also have placed the property in service in 2015.

Should you or shouldn’t you?

If you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation (to the extent you’ve exhausted any Section 179 expensing available to you) is likely a good tax strategy. It will defer tax, which generally is beneficial.

But if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax for 2015, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re in a higher bracket.

We can help

If you’re unsure whether you should take bonus depreciation on your 2015 return — or if you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.

Article Dean Dorton

The U.S. and international economies are becoming more competitive every day. Many of us are competing for the same workforce; for others it may be the same customer, but we have to ensure that we continue to respond to the rapidly changing environment in which we operate. Ten years ago, did you ever worry about cybersecurity?

These are a few of the reasons – it is critical to analyze your business risks at least annually. We recommend formally documenting your key risks along with how you are responding to those risks. This can be a very helpful exercise when strategizing how you should be spending your most valuable resources (your people). Below are a few of the key risks that you may want to monitor in 2016.

5 Key Risks Companies Should Monitor in 2016
Plan now to address employment, inflation, currency, cybersecurity and vendor risks

By: Joe Brusuelas and Rob Kastenschmidt of RSM US LLP

The U.S. economy continues its slow but steady improvement. While growth slowed to 0.6 percent in the first quarter of 2015, it rebounded to 3.9 percent in the second quarter, and we expect growth for the year of about 2.2 percent. Unemployment dropped to 5.4 percent by the second quarter and was down to 5 percent by November. Consumer demand, especially for services and autos, is strong; the housing market continues to improve; and energy and commodity costs remain low.

But the international picture is less sunny. While we expect global growth of about 3 percent in 2015, with a slight uptick next year, a variety of issues are affecting international economies. Growth in China continues to slow as it seeks to rebalance its economy from an export-oriented model to a growth model driven by internal consumption. While the long-term outlook for China is positive, its current slowing growth and the related reduction in demand for resources is adversely affecting many emerging economies. The already uncertain economic picture in Europe is being further stressed by the massive influx of refugees from the Middle East. All of this means lower international demand for U.S. goods and services. It also is leading to a divergence in monetary policy between the U.S. and other economies. In the U.S., the Federal Reserve will likely increase the federal funds rate by 25 basis points in December 2015 followed by another 50 to 70 basis points by mid-2016, while central banks in Europe, Japan and possibly even China are pushing rates toward zero.

What does all this mean for U.S. companies? For 2016, this means you should monitor and be prepared to respond to three key economic risks: a tightening domestic labor market, inflation and the challenges presented by a strengthening dollar. In addition, cybersecurity risks continue to increase and diversify, requiring heightened attention, and the increasing reliance of many companies on third parties raises new risk management issues.

1. Plan for a tighter labor market

An unemployment rate of 5 percent doesn’t tell the whole story. The number of unemployed persons per job opening is down to 1.44 from a peak of almost 7 in 2010. Not only is the overall unemployment rate down, we are also finally seeing stronger growth in higher-wage jobs. Since January 2014, the U.S. has added 2.4 million high-wage jobs compared to 2.3 million lower-wage jobs. While this is helping boost consumer confidence and demand, it also means U.S. employers need to plan for a tighter labor market. The risks of a tighter labor market? Increased labor costs, higher attrition and stronger competition for top talent. To offset these risks, employers should consider the following strategies:

  • Explore automation strategies. Now may be the time to investigate whether the expense of improved automation might be offset by savings in labor costs.
  • Consider offshoring, outsourcing and contractor services. With the U.S. economy outperforming its global peers, offshoring certain functions may offer improved returns given continued low labor costs overseas. Outsourcing non-core functions or increasing reliance on contractors is another way to manage labor costs and can have the added benefit of reducing administrative demands and benefit expenses.
  • Re-evaluate compensation programs. Competition for top performers is heating up. Take a look at your compensation practices to ensure that you are effectively rewarding and motivating your best people. This will also make you more attractive to the candidates you wish to hire.
  • Improve your recruiting practices. LinkedIn and other social media platforms are far more important now than they were prior to the economic crisis, but can’t be relied upon as the sole way of identifying potential candidates. Are your talent identification and recruiting practices keeping up?

2. Manage inflation

  • Inflation is still near historic lows and deflation continues for energy and commodities. But energy and commodity costs are likely at or near their floors, and the Fed is almost certain to start raising rates soon. According to RSM’s Middle Market Leadership Council survey, 67 percent of executives expect increases in their costs over the next six months, compared to just 54 percent in the second quarter. What to do?
  • Focus on efficiency and cost-cutting programs. Decreased costs during the crisis and recession diverted attention from these efforts at many companies. Now is the time to increase discipline.
  • Explore hedging strategies.
  • Shift your purchasing patterns and explore supply chain changes. Global economic conditions are uneven. Weaker economic conditions in other markets may present purchasing opportunities.
  • Audit vendors and monitor margin compression at key customers. Now is the time to reevaluate your vendor relationships to ensure they are delivering real value. And keep an eye on how inflation is affecting margins with your key customers so you can make appropriate pricing and relationship management decisions.

3. Minimize the risks and maximize the benefits of a stronger dollar

  • The U.S. economy is outperforming its global peers. Higher U.S. Treasury rates are spurring an influx of foreign capital and strengthening the dollar. For middle-market companies, this is a double-edged sword. It makes U.S. exports more expensive and diminishes the value of foreign earnings denominated in U.S. dollars. But it also drives down the cost of off-shore sourcing options and can create international acquisition opportunities.
  • Look for global supply chain opportunities. Take advantage of the strong dollar by finding offshore sourcing options.
  • Consider global hedging options to control risks and costs.
  • Consider international expansion opportunities. If expanding through acquisition in new global markets is part of your corporate strategy, the strong dollar could mean a better deal.

4. Increase attention to cybersecurity

No organization can afford lax cybersecurity controls. Many companies think they aren’t large enough to attract the attention of cyber criminals, but the NetDiligence® 2015 Cyber Claims Study shows nano organizations and small organizations actually experienced the most incidents, with 29 percent coming from each of those groups. Your best defense? Make sure you have three layers of cybersecurity controls—preventative controls that make you a hard target, detective controls to timely identify any breach and corrective controls that let you respond quickly and appropriately to intrusions.

  • Preventative controls. Your preventative controls should include a vulnerability assessment, patch management, strong access and authentication controls, a solid intrusion prevention system (IPS), configuration management, and up-to-date anti-virus protection.
  • Detective controls. Most companies choose either to outsource detection controls to a Managed Security Service Provider (MSSP) or to purchase a Security Information and Event Management (SIEM) product. Weigh that choice carefully and be sure the solution you choose is appropriate to your threat environment and internal capabilities. A strong intrusion detection system is also vital, along with compliance and operational monitoring, and anti-virus and network alerts.
  • Corrective controls. Effective corrective controls start with a robust incident response plan. You will also want strong forensic capabilities; anti-virus quarantine and isolation protocols; disaster recovery and business continuity plans; and administrative, legal and insurance protections.

5. Control your third-party risks

Corporate boundaries are getting fuzzier as businesses of all kinds explore a wide range of third-party relationships that allow them to focus on their core business while leveraging outside expertise in areas like logistics, technology and a variety of other specialized functions. That creates efficiencies that drive growth, but it also gives rise to a wide range of new risk issues. Your ability to execute your strategy now hinges partly on the performance of third parties. You could face liabilities stemming from non-performance by your vendors. Connections between your systems and those of your vendors create new security risks. And the web of social media and other connections between you and your vendors can expose your organization to reputational risk due to the failings of third parties. Here are six third-party risk questions to consider in 2016:

  • Do you know where all your contracts are located? Are they stored electronically?
  • Do you understand and are you fulfilling all of your contractual responsibilities?
  • Have your contracts been updated to reflect new regulations for privacy and data security?
  • Are you adequately monitoring the IT risks associated with your third parties?
  • Is the insurance coverage maintained by your third parties sufficient to cover losses in the event of a data breach?
  • Are your audits of the contract performance and related invoices sufficient to ensure alignment with acceptable risk levels directed by your senior management and board of directors?

If you have any questions about the key risks above or how to perform your own formal risk assessment, please contact:
Lance Mann: lmann@deandorton.com or 502.566.1005
Jim Tencza: jtencza@deandorton.com or 502.5661071

View Lance Mann’s Bio

View Jim Tencza’s Bio

Article Dean Dorton

If you’re like many Americans, you may not start thinking about filing your tax return until the April 15 deadline (this year, April 18) is just a few weeks — or perhaps even just a few days — away. But there’s another date you should keep in mind: January 19. That’s the date the IRS began accepting 2015 returns, and filing as close to that date as possible could protect you from tax identity theft.

How filing early helps

In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who is filing the duplicate return, not you.

Another key date

Of course you need to have your W-2s and 1099s to file. So another key date to be aware of is February 1 — the deadline for employers to issue 2015 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2015 interest, dividend or reportable miscellaneous income payments.

An added bonus

Let us know if you have questions about tax identity theft or would like help filing your 2015 return early. An added bonus of filing early, if you’ll be getting a refund, is enjoying that refund sooner.

Article Dean Dorton

The Energy Policy Act of 2005 was enacted to provide immediate tax savings opportunities for energy efficient improvements. For commercial buildings, the Energy Policy Act of 2005 allows for a tax deduction of up to $1.80 per square foot for energy-efficient features of the building’s construction or retrofit under IRC §179D. Commercial buildings also include multi-family residential buildings with more than three stories. For instances where a non-taxpaying entity, such as the government or a municipality owns the building, the Energy Policy Act of 2005 allows for the primary designer, typically the architects and engineers, to claim the deductions. If the market downturn is a factor in current year profitability, this may still be beneficial due to the ability for certain small businesses to carry back net operating losses up to five years, thus, creating immediate cash benefits.

To claim a tax deduction under the Energy Policy Act of 2005, there are three different areas that qualify for a tax deduction of up to $.60 per square foot for each area:

  • Interior lighting systems
  • HVAC
  • Building envelope, e.g. the perimeter of the building including the roof, walls, windows, doors and floor/foundation

The deductions apply to buildings or systems placed in service or remodeled during calendar years 2006-2016. To qualify for those deductions, a project – whether an entire building or one of the three subsystems – must cut energy use compared to the limits specified in ASHRAE 90.1-2001.

Of the three areas available for these tax incentives, the one that is drawing the most attention is interior lighting systems. With substantial improvements in recent lighting product efficiency, most products currently available meet the requirements of the Energy Policy Act of 2005. The incentive for lighting systems can also be taken advantage of without energy modeling, which is required by the two other areas. Owners of commercial buildings have the opportunity to take advantage of the combination of savings from the energy efficient lighting and the savings from the tax incentives available. To demonstrate the economic benefit of a commercial building that qualifies for the maximum deduction for lighting systems, a 100,000 square foot building will generate an immediate federal tax deduction of $60,000 and in most states an additional $60,000 state deduction.

In order to qualify for these deductions for commercial buildings, a certification must be obtained by an engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located. Dean Dorton has the resources available to provide you with this certification and walk you through the cost/benefit analysis of taking advantage of these tax incentives.