Summer CPE Day: Tax Shelters, Cyber Security, Tax Reform & Enhancing Profitability – June 26, 2017 by Tracy Monroe

Cohen & Company’s Private Company Services Division was happy to host yet another summer CPE day in Ohio for our clients’ CFOs and financial staff. This year we were honored to have Congressman Jim Renacci address the crowd on tax reform, and we heard from other experts in areas such as tips to protect your brand against a cyber security attack and tips to enhance profitability and reduce costs. Below is a look at some of the highlights.
 
Marc Mazzella and Adam Fink of Cohen & Company helped the audience understand tax shelters, as the IRS continues spending time and resources on shutting them down. The presenters pointed out that almost everyone has a legal tax shelter, in the form of a 401(k) or IRA, but there are ways to spot when a particular tax strategy may be need disclosure. If you are skeptical, ask yourself the following basic questions: 

  • Is there any economic purpose other than to reduce your tax?
  • Do the tax benefits far outweigh economic benefits?
  • Is this a transaction you would seriously consider apart from tax benefits?
  • Is there a nontax justification for the way profits and losses are allocated to partners?
  • Is your debt a real debt or are you assured by the promoter that you will never have to pay it? 

If it seems too good to be true, it probably is. The presenters also pointed out if you are involved in a tax shelter of any kind, there are important disclosure requirements to comply with, particularly in the first year. Failure to disclose won’t make the requirement go away; in fact, inaction will only extend the statute of limitations for the tax return year, further extending your chance for an IRS audit later. Search the IRS website for additional guidance on tax shelters, and if a transaction seems suspect, check it out further.
 
Matt Barkett of Dix & Eaton and Mike Stovsky of Benesch discussed protecting your brand and your reputation against threats, which these days often go hand in hand. One of the main takeaways was that any company is open to a cyberattack. In fact, they stated that over 95% of breaches are not the big mega companies but are in fact smaller, privately held companies. That’s because it’s not only hackers looking to exploit medical or financial information; many breaches are caused by unintended negligence on the part of employees and contractors.
 
Advanced preparation is key. In the event of a breach, action must be swift. Communication vehicles and a plan should be ready for mainstream and social media, expert resources lined up, internal spokespeople trained, insurance up to date, and web tools loaded (such as a “dark page” or informational web page that can go live immediately if hit by a cyber crisis). Another tip was to create a dedicated internal team of senior officers to manage key components of the strategy, or a “data security task force.” This group should include legal, HR, communications professionals, IT, risk management, the CEO, board members (who are experiencing rising law suits from breaches) and also outside resources, such as a security consultant, forensic accountant, lawyer and a PR representative.
 
Beyond reputational harm and your moral duty to take care of your customers, there are additional penalties if your company doesn’t follow data security policies. While there is not a comprehensive body of law for the entire U.S., states, and of course industries, have their own strict rules for compliance. And don’t think of creating a data security policy just to have on the shelf and then not follow it. That can land you in big trouble with the FTC. If doing business outside of the U.S., know the country’s data privacy and security laws. The presenters remarked that the European Union has the strictest privacy regime in the world. If you do any business at all in Europe, even online, you could have European customers and be held to their security standards. And the EU standards are enough to put most middle market companies in the U.S. out of business, with a penalty for noncompliance up to 4% of worldwide gross sales.
 
Overall, it’s significantly less expensive to do the work upfront and be ready for a potential crisis than it is to try to mend your company’s reputation if a breach isn’t handled properly.
 
Congressman Jim Renacci (R-OH 16th District) shared his thoughts on tax reform, focusing on where we are and where he thinks we need to be. His main messages were the need to simplify the tax code and find a way to make the U.S. truly competitive in the global economy.
 
The Congressman discussed a tax plan he came up with that would help grow the economy and make the U.S. competitive in a way that’s fair to everyone. Key components include: 

  • Eliminating business income tax rates by replacing the revenue with a 7% business activity tax (which is consumption-based in nature).
  • Consolidating individual rates into three brackets, while raising the standard deduction and keeping itemized deductions for mortgage interest and charitable giving. 

The Congressman also discussed the Ways and Means plan that came out last June (“A Better Way Blueprint”), focusing on border adjustability and rate reductions. Other key components include: 

  • Reducing the corporate income tax rate to 20% to spur economic growth and increase U.S. competitiveness.
  • Eliminating business interest deductions, instead offering full expensing which provides a complete write off on buildings and fixed assets.
  • Consolidating the individual rates into three brackets, while raising the standard deduction and keeping itemized deductions for mortgage interest and charitable giving. 

Right now, the hot topics in Washington tax circles are border adjustability, full expensing and elimination of the business interest deduction. Whether any of these controversial approaches gain real traction remains to be seen. Regardless, both sides of the aisle seem to agree that we must reduce business income tax rates to make the U.S. competitive, and that we have to do it now. There is also bi-partisan support for shifting to a territorial system and repatriating trillions in business income parked overseas.
 
His takeaway was that it’s important to understand the situation we are facing. Things are dire in Washington. Tax reform is desperately needed. To accomplish it, taxpayers may have to give up some deductions and credits for overall reform to move forward.
 
Our final presentation of the day, given by Andy Fauver of Insight2Profit and Jeff Moore of Value Based Solutions, offered practical tips on enhancing profitability and reducing costs. Pricing is an extremely strong lever with which to change your business, and one of the least used. Small changes in price can be transformational to your business. The most common areas of pricing opportunity are: 

  1. The significant variation between buyers, addressing your outliers;
  2. Margin and revenue leaks, creating processes and policies to close them;
  3. Price realization, measuring to ensure your actions deliver impact;
  4. Price frameworks that differentiate pricing and margins based on product, customers and order attributes. 

Andy also spoke on the benefit of developing a pricing culture, a day-to-day business environment that allows for adjusting your pricing to unlock the value already in the business. Success relies heavily on the sales team and their confidence in your pricing process. Instead of having an uncomfortable conversation with clients about a price increase, communicate with them about the value your products and/or services deliver and why you are worth more. This approach will sustain significant margin improvement.
 
Jeff focused on that fact that when it comes to enhancing profitability, there are many opportunities to reduce your indirect spend, on items such as offices supplies, technology, transportation, etc. The challenge is that nobody owns this area of expenses; they generally get spread across departments. But every dollar taken out of indirect spend goes straight to the company’s bottom line, so here are a few opportunities the team highlighted: 

  • Make it someone’s job to review indirect spend expenses annually.
  • Centralize contract administration. This will make it easier to have common, consistent, and beneficial terms and conditions in place.
  • Analyze check register data to get a picture of potential opportunities (on the consumable spend side).
  • Put processes in place around your larger one-time purchases. Consider using a third party to audit the process and incrementally drive savings. 

Other areas where negotiating opportunities are available to potentially lower your price include real estate leases, utilities such as natural gas and electricity, payroll processor rates, teleconferencing services, business cellular bills and credit card fees. But be careful about putting indirect spend items, such as conferencing fees, on credit cards. You will likely pay more and no one may analyze the bill in this form. Conversely, it can be beneficial to pay vendors via credit card to help with cash flow and even receive money back on certain cards.
 
As always, thank you to all of our speakers and clients for their participation in our CPE event. If you would like more information regarding any of these topics, please reach out to the speakers directly or contact us at coheninfo@cohencpa.com to request a copy of the presentation materials.
 
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Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.