Insights Magazine Volume VI

CONTENTS 4 Cost vs. strategy How to deal with health care reform to mitigate costs and retain a good imageWelcome to Insights 5 Privacy rules How to comply with new HIPAABrown Smith Wallace LLC is one of the Midwest region’s most regulations for business associates prominent locally-owned public accounting firms. We make “A Measurable DifferenceTM” for our core clients, family-owned private 6 Cybersecuritycompanies, many of St. Louis’ largest public companies and a variety of How to protect your companyindustries, such as broker-dealers, captive insurance companies, financial from cybercriminalsinstitutions, government entities, insurance companies, NPOs, real estateand retail. One of our key difference makers is the valuable information 7 Disasterwe provide regularly to clients and friends of the firm. Our website, preparednesswww.bswllc.com, is our general library of key business content and containsan ever-growing database of information on a wide range of business topics. How to develop a business recovery and continuity planIn this collection of Insights, our experts discuss real-life business issues and 8 Captive insuranceprovide guidance on how your organization can address those issues and come How a new Missouri law providesout stronger and positioned for greater success. incentives to self-insure with captivesThis collection has a significant focus on health care reform, cyber security and 9 The taxman comethtax reform as we continue to concentrate our thought leadership on the areas of How states are aggressivelygreatest concern to you. pursuing sales and use tax collectionsAs you read these articles, I hope the insights provided by our experts help bring 10 Internal controlsyour organization continued success. Please feel free to contact me or the article How to prepare for implementationauthors with your questions or comments. of the 2013 COSO internal framework 11 Exit strategy Best regards, 2014 may be a good year to sell your business 12 Personal property How to reduce your company’s property tax burdenHarvey N. Wallace, CPA/ABV, CVA 13 Cost SegregationManaging Member How businesses can accelerate depreciation for tax purposes 14 Social Security How Social Security fits into overall retirement planning Connect with us on: 15 Year-end tax planning How the ACA and the end ofReprinted from Smart Business St. Louis Bush-era cuts affect tax strategy

Cost vs. strategyHow to deal with health care reform tomitigate costs and retain a good imageinterviewed By ADaM Burroughs William M. Goddard Ron PresentThe financial impact of the Patient CPCU Principal in Protection and Affordable Care Act (PPACA) may seem to be its Principal, charge, Health Caremost challenging aspect. Mitigating thatimpact may seem like the most practical Insurance Advisory Services Advisory Servicessolution. However, Ron Present, healthcare industry group leader at Brown Brown Smith Wallace Brown Smith Wallace WEBSITE: For more on this topic, visitSmith Wallace, says, “There are a lot of http://bswllc.com/industries/health-care.strategic implications to what you do and (314) 983-1253 (314) 406-5105how you do it. Management should avoidjust calculating the math and saying, [email protected] [email protected]‘This saves us money so it’s what we’redoing.’” Insights Accounting is brought to you by Brown Smith Wallace To that point, Bill Goddard, principal, time employees. In some industries, many lessening their productivity and loyaltyinsurance consulting at Brown Smith employees have not historically taken while raising turnover, which is aWallace, says, “You should consider health insurance, sometimes as much as significant expense.many potential solutions before making 66 percent of a company’s workforce.a decision that could drastically diminish These employees will need to be offered Counsel employees. Let them knowyour ability to retain and acquire talent, coverage, potentially tripling costs. that they can refuse insurance coverageand keep your workforce engaged.” from the employer and either purchase How might that impact employers? insurance through a public exchange/ Smart Business spoke with Present and Companies are calculating their potential marketplace or instead pay an annualGoddard about dealing with health care risk to cost. However, that’s only one penalty. Employees may prefer to pay theinsurance after the PPACA from a cost aspect. The other is the strategic impact. penalty instead of paying far more eachand strategic perspective. month for coverage. Some companies have consideredHow has the PPACA affected private limiting their variable hour, or part time, How can employers that provide employees, to less than 30 hours perinsurance? week to reduce the number of employees insurance cope with rising premiums?Starting Jan. 1, 2014, employers with 50 considered full time. To maintain an Large employers offering healthor more full time or full-time equivalent adequate workforce, such changes can insurance to a population of purely full-employees, considered large employers, require hiring additional employees, or time employees can potentially controlmust offer health insurance that fits changing existing employees’ workloads premium costs by forming a captivecertain affordability and coverage criteria and job descriptions to keep up insurance company. This is an insuranceor face a penalty. This could have an production and prepare for 2014. company that non-insurance companiesimmediate impact on an employer’s cost with 50 or more full-time employeesto provide health insurance because a Should employers not provide coverage? can start. It is generally owned by thegroup of employees that had not had Let’s say a large employer decides not to company that forms it and insures ainsurance may enroll in the plan and offer health insurance and instead pay the limited population, typically just its ownbecause of pre-existing conditions or $2,000 per employee (minus 30) penalty, employees.high use of care, will cost the employer a which may seem cheaper. However, thesignificant amount of money. law requires individuals to have insurance Another potential solution is to form regardless of employer coverage, so a private exchange, which may be Also, the health care law changes the employees may leave for a competitor complementary to forming a captivestatus of some who had been considered that provides it. Those who stay out insurance company, in that the entitypart timers for insurance purposes to full- of necessity may always be looking for forming it creates its own marketplace, another employer that provides coverage, which means it may qualify as providing insurance with a defined contribution that may help control costs. ●4 Insights: Accounting Reprinted from Smart Business St. Louis

Privacy rulesHow to comply with new HIPAAregulations for business associates interviewed By Roger Vozar Tony Munns Website: We can help you with HIPAA compliance. Visit FBCS, CITP, CIRM, CISA http://bswllc.com/HIPAA to learn more.Companies are being challenged to Member, Risk Advisory Services protect vast amounts of proprietary Brown Smith Wallace and confidential information. And (314) 983-1297now, many are being held to an even higher [email protected] when it comes to protected healthinformation (PHI). Insights Accounting is brought to you by Brown Smith Wallace “The Health Insurance Portability and have an agreement, there needs to be are not required to provide a notice ofAccountability Act (HIPAA) has existed satisfactory assurance that the business privacy practices or designate a privacysince 1996. It’s well established that associate can and does follow proper official; they only need to comply with thecovered entities — health care providers, procedure. Entities covered by HIPAA have general privacy requirements and all securitybenefit plans and clearinghouses — have until Sept. 23, 2013, to update their business measures, much like covered entities.a responsibility to ensure the privacy and associate agreements. Current agreementssecurity of PHI. Recently, the rules have do not have to be changed until they’re up The definition of a breach was alsobeen tightened to also cover business for renewal, but in any case all agreements changed from ‘a significant risk of financial,associates — organizations with which a have to be updated by Sept. 22, 2014. reputational or other harm to an individual’covered entity shares PHI. These changes to ‘an acquisition, use or disclosure ofmean that business associates now have to What steps should companies take to PHI in a manner not permitted.’ Underfully comply and be accountable under the comply with the legislation? the old rule, companies that didn’t believeHIPAA security rule,” says Tony Munns, ■ Understand the new requirements and information was compromised didn’t needFBCS, CITP, CIRM, CISA member, Risk to classify it as a breach. Now they have toAdvisory Services, at Brown Smith Wallace. the impact on the business. report the breach, but can apply mitigation ■ Update business associate agreements. to demonstrate there was a low probability Smart Business spoke with Munns about ■ Apply the satisfactory assurance mandate. of harm.the final omnibus rule and what actionsbusinesses should take. Review existing agreements and perform What are the penalties? due diligence to get comfortable with the There are four categories:What prompted the new rule? practices of your business associates. This ■ Ordinary breaches, such as an error orA significant number of data breaches were might involve requesting that audits befrom business associates who were not performed, such as Statement on Standards lost equipment — $100 to $50,000 peras diligent as they should have been, and for Attestation Engagements No. 16 reports. violation.covered entities were not selecting business In the insurance company example, no one ■ If reasonable due diligence would haveassociates with the appropriate rigor. A examined whether the person contracted revealed the violation — $1,000 tonotable example involved an insurance to provide off-site storage was capable of $50,000 per violation.company that had a business associate providing it to the level expected. ■ Conscious, intentional failure or recklesswho was responsible for off-site storage of indifference, but the breach was correctedsensitive data. The business associate was What are other requirements of the final — $10,000 to $50,000 per violation.using a garage, which was left unlocked and omnibus rule? ■ Conscious, intentional failure or recklesswasn’t climate-controlled. That contracting The new rule requires that individuals be indifference and the breach was notchoice has led to separate investigations by informed that their information has been corrected — $50,000 per violation.both California and federal regulators. breached. Managing breaches is no longer For all violations, the cap is $1.5 million. sufficient. Meanwhile, business associates And there will be more enforcement. ●What action should companies be taking?The Department of Health and HumanServices said that it’s not sufficient to justReprinted from Smart Business St. Louis Insights: Accounting 5

CybersecurityHow to protect your companyfrom cybercriminals interviewed By Roger Vozar William M. Goddard Tony munnsData breaches are becoming more CPCU FBCS, CITP, CIRM, CISA, commonplace, causing millions of dollars in damages for companies Principal, Member, Risk Advisory that have personally identifiable information (PII) hacked by cybercriminals. Insurance Advisory Services Services “Think about all of the losses you can Brown Smith Wallace Brown Smith Wallace Website: We can help you with cybersecurity. incur. Not only do you have to hire a Visit www.bswllc.com/riskinsights to learn more. security expert to find what happened, (314) 983-1253 (314) 983-1297 you may be assessed fines or penalties by the merchant’s acquiring bank or payment [email protected] [email protected] card brand. In addition, you could be responsible for credit card charges made Insights Accounting is brought to you by Brown Smith Wallace by the criminals and lose business because no one trusts you anymore,” says William How can you reduce cyberattack risk? access to information are not sharing M. Goddard, CPCU, principal, Insurance anything that is confidential or private. Advisory Services at Brown Smith Wallace. The first thing to do is develop an ■ Develop an incident response plan to information security policy, document it and react to a breach and quarantine activity Smart Business spoke with Goddard and disseminate it throughout the organization. before it spreads throughout the network. Tony Munns, CISA, CISM, QSA, CBRM, Companies think they’re protected because security and privacy manager, about Other protective measures are: they are compliant with some standard such protecting companies from cybercrime. ■ Conduct an inventory of authorized as PCI, but that’s no guarantee their systems will not be compromised. Your security How do cybercriminals access networks? devices on your network. Guests can program needs to go beyond PCI and focus One typical method is spear phishing. come into your place of business with a on more than credit card information. Unlike traditional phishing attempts, laptop and leave a device on your network Cybercriminals go after the easiest target which are fraudulent emails sent at that goes undetected. That device could along with whatever PII is available that random claiming to be from a reputable have Trojan horses or viruses that, when has value. For instance, not-for-profit organization like a bank or eBay, spear executed, plant a program on your organizations may have names, addresses phishing emails are sent to targeted network. and checks with banking information; all of employees or customers of a company. ■ List an inventory of software allowed to that information is valuable to somebody. The email appears to be coming from run on workstations or servers. That helps For similar reasons, credit cards are often the company and requests that the when looking for rogue programs or targeted because they’re so widespread and recipient click on a link, which then goes software installations. it’s the easiest information to sell. to a fraudulent website. They may ask for ■ Install an anti-virus program to detect personal information or they may launch a malware. Anti-virus protection also needs What can companies do to protect against virus they’ll use to get into your network. to be maintained and updated for the latest definitions. losses if they are hacked? If you click on the link, it launches a ■ Run vulnerability and penetration tests A variety of insurance policies cover things program in the background that goes onto on servers and networking equipment to like the cost of fines, notification that PII has your workstation and canvasses the network make sure you don’t have unnecessary been compromised, liability and business for other vulnerabilities. The program services running that could lead to a interruption. All cyber policies are slightly collects data, whether that’s credit card vulnerability and potential unauthorized different, and you have to be careful to buy information or other PII, and uploads it to access. the right coverage. the cybercriminal. ■ Prevent data loss by running programs to detect outbound calls or connectivity Businesses are smart enough to buy fire to remote sites that are not authorized to insurance in case a building burns down. receive data output. Cyberattacks can be just as damaging, ■ Create security awareness within your depending upon what happens and what company to ensure that people who have information has been compromised. ●6 Insights: Accounting Reprinted from Smart Business St. Louis

Disaster preparednessHow to develop a business recoveryand continuity plan interviewed By Roger Vozar William M. Goddard Tony munnsRecovering from a flood or fire is CPCU FBCS, CITP, CIRM, CISA, hard for a business. But dealing with problems caused by a lack of business Principal, Member, Risk Advisory continuity plans or inadequate insurance can make it worse. Insurance Advisory Services Services “The better you can plan for how to Brown Smith Wallace Brown Smith Wallace Website: We can help you prepare for disasters deal with an incident, the better off you’ll and get better insurance coverage. Learn more at be,” says Tony Munns, FBCS, CITP, (314) 983-1253 (314) 983-1297 http://bswllc.com/category/services/risk. CIRM, CISA, Member, Risk Advisory Services at Brown Smith Wallace. “I say [email protected] [email protected] ‘incident’ because it could be something not always thought about in typical disaster Insights Accounting is brought to you by Brown Smith Wallace terms, such as a breach of credit card information.” to customers and business affiliates. Part million. A co-insurance clause is typically of the communication plan is identifying 90 percent, meaning that the building Smart Business spoke with Munns and the impact, whether it’s a simple outage should be insured to 90 percent of its value William M. Goddard, CPCU, Principal, or a more widespread incident such as a — so you’ve bought $900,000 insurance Insurance Advisory Services, about tornado, flood or hurricane. coverage on a $1 million building. If it developing business recovery plans and the burned to the ground, you would be paid insurance options available to reduce risk. What options are available to manage risk? $900,000. But if you only bought $800,000 In the example of a credit card breach, insurance coverage and were supposed What goes into a business continuity/ there are risk reduction processes such as to buy $900,000, all recovery is based applying security standards developed by on having 88.8 percent of the coverage recovery plan? the credit card industry. There’s also cyber you should have. If a small warehouse One component is a business impact risk insurance, which insures costs to locate fire causes $100,000 in damages, you analysis, placing a value on what the the problem, including hiring experts to wouldn’t be paid $100,000, but $88,800. business needs to operate. Layered do that, notification of cardholders, and This concept of co-insurance is frequently underneath are the business processes, business interruption loss. in policies and can be punitive for loss which include the business continuity recovery. plan and its identifying process flows. For What do businesses need to know about example, length of shutdown is part of the disaster coverage in insurance policies? How can insurance costs be reduced? business continuity plan, which contains Generally, what we think of as disasters Insurance companies will inspect timelines. — earthquakes, hurricanes — are covered your property and following their under property insurance. But business recommendations can make you a Then there is the disaster recovery insurance policies also contain sublimits. better risk, reducing premiums. It’s also plan, which covers anything the business For instance, you can have $100 million important to figure out exactly what depends on that is IT related. Information insurance coverage, but the sublimit coverage you need — it’s best to get an has more value than just the data because might be $25 million for a flood. Policies independent adviser. There have been of the intelligence built around it. So carry different sublimits, and a company many court cases involving inadequate you need to identify where that data is planning to use insurance to cover these insurance; they’re expensive to bring and processed, stored or transmitted. disasters needs to be aware of them. hard to win. It’s better to get it right when you buy the policy, so you should have There is also a communication plan, What is co-insurance, and how does that someone other than the person who’s making sure an incident is communicated impact claim payments? selling you the insurance answer your upward, downward and outward — upward After a loss, the insurance company will questions and conduct an analysis of your to the executive management team, judge the value of a building, say it’s $1 needs. ● downward to the enterprise and outwardReprinted from Smart Business St. Louis Insights: Accounting 7

Captive insuranceHow a new Missouri law providesincentives to self-insure with captives Interviewed by Roger Vozar Alan J. Fine, CPA, JD William M. Goddard video: To learn about the benefits of starting Member in charge, CPCU a captive insurance company, watch our videoMissouri Senate Bill 287, which Captive Insurance Principal, Captive Insurance at www.bswllc.com/captivevideo. becomes effective Aug. 28, puts the Advisory Services Advisory Services state on equal footing with others Brown Smith Wallace Brown Smith Wallace that have been popular domiciles for captive (314) 983-1292 (314) 983-1253 insurance companies. [email protected] [email protected] “It changes certain capital requirements Insights Accounting is brought to you by Brown Smith Wallace for pre-existing types of captives, as well as provides additional flexibility by allowing types of coverage that are not available in out that this can be a good alternative to the segregated cells, also known as shared the commercial marketplace. If structured traditional insurance market. You can save captives or rent-a-captives,” says Alan J. properly, there also are potential tax benefits. money on insurance, obtain coverage that’s Fine, CPA, JD, member in charge, Captive not available elsewhere and formalize your Insurance Advisory Services practice at What does the new law change? self-insurance program. Brown Smith Wallace. It allows for new types of captives. Prior law allowed companies to start a captive Health care had not been a big subject Smart Business spoke with Fine and for their own company, known as a single- for captives; however, companies looking William M. Goddard, CPCU, principal, parent captive. You put up the capital, you to save money on health insurance are Captive Insurance Advisory Services practice are responsible for the audit and you reap now throwing captives into the mix of at Brown Smith Wallace, about the new law all of the benefits. things they are considering. Companies and why companies should consider captive have been insuring workers’ compensation programs to address insurance needs. The new law adds the option of going with in captives for years, but with medical the concept known as shared captive, rent- insurance it takes some innovative thinking Is a captive program the same as self- a-captive or sponsored captive. Generally to figure the best advantage to you in insurance? speaking, someone else puts the captive forming a captive. You need someone that It’s a formalized program for self-insurance. together and you own a piece. There are understands health care, as well as a tax Captives generally provide incentive to the certain efficiencies created with sponsored expert to understand regulations from the insured — the captive owner — to pay more captives. For example, you have regulatory tax perspective because health care reform attention to safety and other matters that filings due quarterly and annually. With is really a tax law. improve the results. 10 standalone captives, they would each file separately with the Department of When it comes to captives, it’s not always Captives can be used with health insurance Insurance and be audited independently. readily apparent how they can be utilized. as well as property and casualty. Companies The sponsored captive concept allows those Answers are not easy to determine, and should consider captives if their risk profile 10 to band together for efficiency, while no two situations are alike. You have to is such that they’re a better risk than others still providing the same asset protection of examine your individual case and analyze in their industry. When you’re in the having your own captive. how a captive could benefit you. Fortune commercial marketplace, companies with 500 companies have studied captives; good risk profiles are used to fund risks of The bill’s passage also affirms Missouri’s companies that fall below that — middle those that are not so good. There’s also a continued commitment to the captive market to small companies — have few built-in profit for the insurance company, so industry. advisers out there spending time to educate self-insuring through a captive allows you to them about potential benefits. keep those profits. Will more companies form captives? There are more than 6,000 captives If you have a good risk profile, are What are the benefits of captives? worldwide, so those companies have figured profitable and have good cash flow, it is In addition to savings, which can be worth exploring the available options. ● $200,000 to $400,000 annually for most midsize captives, you may be able to get8 Insights: Accounting Reprinted from Smart Business St. Louis

The taxman comethHow states are aggressively pursuingsales and use tax collections interviewed By Roger Vozar Susan Nunez, J.D., LL.M. Website: Visit http://bswllc.com/salesusetax to Principal, Tax Services request “How to Navigate Sales & Use Tax Compliance.”States looking to add revenue to tight Brown Smith Wallace budgets are upping efforts to collect sales and use taxes from businesses (314) 983-1215that may not know they owe money. [email protected] “Sales tax is one of the largest revenue Insights Accounting is brought to you by Brown Smith Wallaceproducers for many states, second only topersonal income tax. Since there are so also obtain federal records of imported a decision. If a business has a nexus in amany transactions involving the exchange of products to determine if they were shipped state and its tax liability is $30, the amountproperty and services, the states are getting into a state and, regardless of whether the is most likely immaterial to the company.more creative in their attempts to collect the company paid tax on that asset, send a notice But if the company is making $10 milliontax due on these transactions,” says Susan that says tax is owed. in sales in a state, it should want to takeNunez, J.D., LL.M., a principal in Tax action and ensure it’s in compliance.Services at Brown Smith Wallace. These documents are basically fishing expeditions; you may not owe tax. But it can Many states are conducting amnesty Smart Business spoke with Nunez about be threatening to get a letter saying you owe programs to bring in more money.who owes the taxes and what to do to ensure $100,000. Amnesty periods are attractive to taxpayersyou’re complying with state laws. not only because they often abate Is not remitting taxes owed common? penalties, but they also limit the numberHow are sales and use taxes different? Usually we see it in reverse — clients of years the state can assess tax.Sales tax is a transaction tax imposed on sales overpay taxes because of the complexity ofof tangible property and certain services. the tax laws. Taxpayers err on the side of The most important steps forUse tax is a compensating tax to sales tax. If a being conservative and pay tax on items that businesses to take is to get a handletransaction isn’t subject to sales tax, it will be may very well be exempt. on how tax decisions are made, and tosubject to use tax. develop efficient processes to manage It is difficult to determine what state has and streamline their sales and use tax Typically the sales or use tax is due the right to the tax and who is responsible compliance burden. People makingwhen the final consumer purchases and for remitting it. For example, drop decisions are usually not operations peopleuses the asset. A company that buys shipments are particularly problematic. and don’t understand how items beingcomponents or machinery and equipment Say a Missouri company has a customer purchased will be used, so they can’t applyto manufacture a product may be able and a supplier in Illinois. An order is laws to see if those items fall within anto purchase them exempt from tax, but shipped directly from that supplier’s Ill. exemption.ultimately someone will pay the tax when facility. It’s taxable in Ill., but the questionthe product is made, sold and consumed. is, who is liable for that tax? It varies on You can increase tax compliance, whether the Mo. company is registered and ensure you’re not overpaying, byHow are states trying to collect these taxes? in the destination state, whether the developing a customized sales tax decisionOne way is by sending out nexus supplier has a valid resale certificate from tool. This enables the person whoquestionnaires to out-of-state sellers. This its customer and other factors. procures items or prepares the invoicesnotice is used to determine whether an out- to have the knowledge necessary toof-state company has a filing responsibility. Should companies determine if they owe tax determine what is taxable and what mayFor example, if a manufacturing company or wait until they receive notification? be exempt. It also provides your companyfrom another state is selling product to It’s best to calculate your liability and make the control needed to make good taxcustomers in Missouri, the state may send decisions. ●that manufacturer a letter to determinewhether it has sufficient presence in thestate to require a tax filing. The state canReprinted from Smart Business St. Louis Insights: Accounting 9

Internal controlsHow to prepare for implementation ofthe 2013 COSO internal frameworkinterviewed By Roger Vozar Amy M. Ribick, CFE, CRMA Manager, Risk Advisory ServicesThe Committee of Sponsoring Brown Smith Wallace Organizations of the Treadway Commission (COSO) recently (314) 983-1347 Website: Visit bswllc.com/coso for a copy of“5 Steps to COSOupdated the Internal Control-Integrated [email protected] Transition Success”and get started on your COSO transition plan.Framework. The goal is to provide greaterclarity and guidance related to the design Insights Accounting is brought to you by Brown Smith Wallaceand implementation of an effective system ofinternal control. In order to implement the which contain specific areas of focus. These that may allow for the identificationCOSO Framework by the December 2014 changes provide greater guidance and an of opportunities to improve existingdeadline, companies need to get the process opportunity to enhance internal control by practices. When assembling a team, it’sstarted now, says Amy M. Ribick, CFE, bringing focus to the specific principles. important to include people from all areasCRMA, manager in Risk Advisory Services of the organization so that all aspects areat Brown Smith Wallace. The most significant changes in the considered. Particular attention needs to be update are the 17 principles that have been directed to the principles and points of focus “By starting the process now, organizations articulated to help in assessing the internal attached to each portion of the COSO cube.can have a structure and plan in place control environment. Within the principles,by next spring and make the transition there are 79 points of focus to provide What might be most difficult to implement?seamlessly ahead of the Dec. 15, 2014, due further guidance on what organizations Because there has been so much focusdate,” says Ribick. should consider when evaluating the in recent years on internal control over environment. Another key part of the financial reporting, many people assume Smart Business spoke with Ribick about new COSO Framework is the focus on that’s where controls are needed. Of course,the COSO Framework, what will change corporate governance, technology and fraud if numbers are reported erroneously orwith the 2013 update and the process of awareness. The focus for several years has fraudulently, that affects the business. Buttransitioning to the new standards. been on financial reporting controls, but the COSO Framework points out that bad internal controls are broader and intended to business decisions and fraudulent activityWho uses the COSO Framework? address other important business objectives can occur in any aspect of an organization,Most organizations use the COSO such as fraud or internal reporting used by not just those related to financial reporting.Framework to provide a structure for management to make key decisions. Education on the importance of soundtheir internal control environment. While internal controls throughout an organizationpublicly traded companies typically use it to Can companies handle the transition alone? will be very important.assist in the evaluation of internal control Many companies have the necessary skills toover financial reporting, all companies are handle the transition internally. However, Companies also will need to provideable to leverage COSO for their overall others will struggle with finding the evidence, documentation and support ofinternal control framework. COSO provides resources and time to be able to focus on their internal control methodology, riskan approach to designing, implementing the transition. There can be advantages to assessment processes, etc., and show howand evaluating effective internal controls to utilizing an external resource — for example, these principles have been addressed.help ensure the achievement of a company’s it helps facilitate the transition process sostrategic, financial, operational and that management and key members of This is a big undertaking and companiescompliance objectives. the team can focus on their day-to-day that start earlier will be able to take responsibilities. It also provides companies advantage of the opportunity to improve theWhat are the significant changes? with an independent, outsider’s perspective efficiency and effectiveness of their internalThe essences of the COSO cube, as it’s control environment. ●referred to, have not changed. The originalFramework has been streamlined andunderlying principles have been added,10 Insights: Accounting Reprinted from Smart Business St. Louis

Exit strategy2014 may be a good yearto sell your businessinterviewed By ROGER VOZAR Bryan Graiff, CPA, CGMA FOLLOW UP: To request a free copy of”The 5 Principal, Financial Advisory Services Key Steps for a Successful Ownership Exit”, visitWhen the recession set in a few Brown Smith Wallace bswllc.com/exitstrategy. years ago, companies saw their valuations decline as the money (314) 983-1390supply tightened and the acquisition market [email protected] up. Business owners who put exitstrategies on hold might find that now is a Insights Accounting is brought to you by Brown Smith Wallacegood time to revisit that option. look at what can be improved in the next is in considering an exit strategy. If your goal “Having worked in the private equity few years. is to exit for a certain amount of money andspace, I’ve noticed that deal making has retire on a beach, that’s one thing. If it’s topicked up. Owners should be looking at the What if a company is in need of sell a portion of your business, but still bevalues of their companies because they could restructuring or on the verge of bankruptcy? involved in some capacity, that’s another.be back at or even above previous levels,” Some companies used resources to weather Regardless, if an exit strategy of some sort issays Bryan Graiff, CPA, CGMA, principal, the storm, adding debt to survive, and desired, have a quality of earnings analysisFinancial Advisory Services at Brown Smith could be headed toward restructuring or performed on the historical financialWallace and a specialist in transactions and bankruptcy if sales continue to lag. It’s time statements that covers the last three years.business advisory services. to make improvements and bring in an Although a buyer will conduct its own expert adviser to develop a new growth or due diligence, having a reputable firm “The expectation from many experts cost reduction strategy before it’s too late. do a quality of earnings analysis will addis that 2014 should be a busy year for The right strategy and execution plan will credibility and provide more substantiationacquisitions, which makes it a good time to not only add value and increase investment to the valuation report, which will helpplan an exit strategy,” says Graiff. options, but will comfort creditors and support the basis for the asking price. It also banks, showing that the company is serious might uncover issues that can be addressed Smart Business spoke with Graiff about exit about making improvements. before a buyer comes in. If a buyer discoversstrategies and the first step toward selling a issues with financial information, it couldbusiness — a professional valuation. Will some owners sell now because values kill the entire deal. Quality financial are back to pre-recession levels? statements may not necessarily increase theWhat is the first thing a business owner The future is always uncertain and every sale price, but poor quality or inadequateshould do to ensure a successful exit? owner has different goals, but if an owner’s information is almost sure to have a negativeThe first step would be to have a business is back to its pre-recession value or impact.professional valuation report done to at a valuation level he or she is comfortableprovide a measuring stick of what the exiting at now, they should certainly Once your financials are in order, find abusiness is worth. For an owner looking to consider the next steps. reputable broker to market the business —exit in a few years, the valuation analysis is they’ll promote a more competitive biddingstill worth doing since it can help identify What are the next steps if you decide to sell? process, which will drive up the sale price.value drivers you can focus on to improve Plan and prepare before moving tothe business and increase its future value. market. Sit down with tax and estate The next year will be pivotal. Business planning professionals to discuss the effect owners will better position themselvesDoes that mean owners should have already a sale could have on the estate, and most for whatever occurs by understanding thedone this if they want to sell now? importantly, fully understand what your goal value of their company, conducting soundIt’s not too late to start the process, have a strategic planning and making businessvaluation done and see if you want to sell improvements. ●your company. If the valuation is a numberyou’re willing to exit for, then you can takethe next steps. But you may also find 2014 isa good year to reassess where you’re at andReprinted from Smart Business St. Louis Insights: Accounting 11

Personal propertyHow to reduce your company’sproperty tax burden interviewed By Roger Vozar Jenna R. Kerwood, CMI Website: For more on this and other tax topics, visit Principal, Tax Services www.bswllc.com/taxinsights.Computing personal property taxes Brown Smith Wallace can be a chore for businesses, particularly if the company’s (314) 983-1360locations cross various state and local [email protected] boundary lines. Eachstate has its own statutes, due dates, Insights Accounting is brought to you by Brown Smith Wallaceassessment ratios and instructions thatmust be adhered to for a company to be especially with manufacturing facilities, that can be placed on a shorter life with aconsidered “compliant.” These property and each state has different rules and more reasonable depreciation schedule.tax requirements vary greatly and most instructions.often have late penalties for missing How can businesses lower their taxdeadlines. However, digging into these Most states have a three-prong test: burden?very statutes and instructions can also ■ Can the item be moved without Start with fixed asset accounting records.provide an opportunity to minimize your When filing personal property tax returns,company’s tax burden. destroying the real estate? you report the original cost of the asset ■ What is the primary purpose the item by year of acquisition. Companies might “Many will run the fixed asset ledger have a retirement policy by which theyright out of the system and that’s what serves? The more special its use, the dispose of, melt down or cannibalize anthey’ll report,” says Jenna R. Kerwood, more likely that it will be considered asset, but that’s not reflected on the books.CMI, a principal in Tax Services at Brown personal property.Smith Wallace. ■ What was the owner’s intent? It’s best to address problems on the front The key is whether it would destroy or end. Review the asset ledger for listings However, that usually results in paying cause permanent damage to the building that don’t look right — focus on the highmore taxes than what is owed because if you were to remove the item. dollar items or assets with ‘miscellaneous’not all assets are taxable. Often, fixed as the description. Scrutinize assetassets are capitalized at a project level, What is the basis of property tax invoices and review them with the peoplewhich results in inaccurate reporting for who know them; it might be the plantproperty tax purposes. There may be assessments? manager for the manufacturing facility,costs that are not taxable or components The basis of value for real estate and facilities person for the furniture and ITof the cost that should be removed. personal property is fair market value people for the computer asset listing.The taxability of these assets can be — the amount a willing buyer would Another area to consider is depreciation.determined by examining the state and pay in a market when there’s no duress, The county will tell you the rate, but thatcounty websites, statutes, assessor manuals such as a bankruptcy or foreclosure. Fair may not be accurate and is negotiable.and return instructions. market value is subjective, which gives you an opportunity to analyze all of the How much can be saved? Smart Business spoke to Kerwood about capitalized cost to determine how best to Conservatively, businesses can lowerwhat constitutes personal property and reflect the ‘fair market value’ of the asset. personal property taxes by 20 percent.why it’s worth the effort to keep an Most state rates are at 2 percent. Whenaccurate track of assets. When reporting assets for property tax you tell a company that cleaning up asset purposes, you need to understand their lists can save $30,000 or more, it getsWhat is the difference between real estate physical life, use, maintenance schedules, their attention. ● etc., in order to depreciate correctly.and personal property? Items with a short life have fasterReal estate refers to land and buildings. depreciation. Manufacturing equipmentPersonal property is defined as tangible might have computerized componentsproperty that’s movable. It can bedifficult to distinguish between the two,12 Insights: Accounting Reprinted from Smart Business St. Louis

Cost segregationHow businesses can acceleratedepreciation for tax purposesinterviewed By Roger Vozar ROBERT W. HAGGERTY, CPA WEBSITE: To request a copy of “Tax Savings Member, Tax Services Opportunities for Ownership of Real Estate,” visitThe Internal Revenue Service Brown Smith Wallace bswllc.com/costsegoffer. defines the depreciable life of a building as 27.5 to 39 years. But (314) 983-1311that doesn’t mean that all assets grouped [email protected] the building have to be on the samedepreciation schedule. Insights Accounting is brought to you by Brown Smith Wallace A cost segregation study can identify What types of assets typically qualify for to $10,000. Studies for larger projectspersonal property assets that can can be much more costly, but the benefitbe reclassified to allow for a shorter shorter depreciation? usually increases with the cost of thedepreciable life. project. Generally, property that is unique to a “By accelerating depreciation particular trade or business qualifies for a Any new developments of interest todeductions, you’re deferring taxes, which shorter life. An example I often use is thecreates a cash flow benefit.” says Robert lights used to showcase merchandise in a businesses?W. Haggerty, CPA, Member, Tax Services retail store. Those lights are consideredat Brown Smith Wallace. fiveyear property even though, by Yes, businesses can also take advantage definition, lighting is part of the building. of new final ‘Repair Regulations’ Smart Business spoke with Haggerty Not only do the light fixtures qualify, but and proposed ‘Partial Dispositionabout what assets might qualify and the so does the wiring and the portion of the Regulations,’ which were issued inpotential benefit to businesses. electrical system supporting the fixtures. September 2013.How does a cost segregation study work? Manufacturing facilities benefit the most Under the old rules, you could not retire from cost segregation studies because they a portion of a building, so taxpayers whoTypically, blueprints or architectural typically have a lot of specialty systems had a roof replaced, for example, coulddrawings are used to identify what went or design inherent in the building that have two layers of roofs depreciating oninto the building. Engineers analyze function as part of the manufacturing their books. The new rules allow you tothe drawings and perform site visits to process. A large portion of the plumbing, write-off the old roof.identify qualifying property. Information electrical and HVAC systems qualify for afrom the general contractor or estimating shorter life. Even the concrete floors can In situations where it may be difficultmanuals is used to determine the cost. A qualify. Hospitals and medical facilities are to quantify the portion of the buildingtax analysis is performed, which involves another industry with big benefits from that relates to the old roof — therereviewing court cases and rulings that cost segregation. Think about all of the might be only one asset on the booksaddress which particular assets qualify for specialty systems in a medical setting. called ‘building’ — we are helpinga shorter life. clients quantify the amount of the partial What are the tax benefits? disposition. Cost segregation studies can beperformed anytime you build, acquire or The benefit is the deferral of income taxes Windows, interior build-outs andexpand. If the cost is $1 million or more, by accelerating depreciation expense. elevator replacements are other examplesit is worth looking at. Moving costs from a 39 year building life of items that may be eligible for partial to a five or seven year life can significantly disposition. The IRS also allows you to do a ‘catch- increase depreciation expense for theup adjustment.’ For example, if you building. Cost segregation studies can The Repair Regulations offer some safebought or built a building five years ago provide a permanent, time-value-of harbors for small businesses and includeand didn’t do a cost segregation study, money benefit of 10 to 50 times the cost de minimis rules that can apply to allyou could still do one today and take the of the study, which typically runs $5,000 taxpayers. So, there are even opportunitiesbenefit on your current tax return. for businesses to take some tax deductions with very little effort. ● With certain income tax rates rising,it’s a nice time to consider a catch-upadjustment.Reprinted from Smart Business St. Louis Insights: Accounting 13

Social SecurityHow Social Security fits into overallretirement planninginterviewed By Roger Vozar Roy H. Kramer, CPA, CDFA, CDS, NSSA WEBSITE: For more on this and other tax topics, visit Member, Tax Services bswllc.com/taxinsights.With more than 3 million Brown Smith Wallace people set to retire this year, one significant component of (314) 983-1265retirees’ cash flow is top of mind: Social [email protected]. Yet the staggering options ofhow and when to claim benefits can be Insights Accounting is brought to you by Brown Smith Wallaceoverwhelming. What’s the first step to figuring out when to Security earlier while increasing the benefit “That creates a need in the private sector received at age 70.for someone to look at those options and take benefits?determine what makes sense based on Go to www.ssa.gov and set up an account. There’s also a rule that allows you topersonal circumstances,” says Roy H. It’s the only way to access Social Security collect benefits on an ex-spouse if yourKramer, CPA, CDFA, CDS, NSSA, a statements that previously were mailed. benefits are less. You have to be at leastmember of Tax Services at Brown Smith There may be mistakes, and correcting 62, been married at least 10 years andWallace. them can be a time-consuming process not currently married. You can apply for made more difficult if years have passed and spousal benefits if the ex-spouse is eligible Kramer, a certified National Social documentation may not be readily available. for benefits, regardless of whether he orSecurity Advisor, says it’s important to she has applied. Overall, Social Securityreview Social Security benefits in the A common error may be a Social Security benefit decisions are more effective whencontext of overall retirement funds, and number improperly transcribed when a considered in conjunction with tax planning.with a qualified independent adviser. person is married, and years can go by before it’s caught. Most people don’t keep How are benefits determined? Smart Business spoke with Kramer about copies of W-2 forms and tax returns after It’s an indexed average of the 35 highest-myths and mistakes people make when it the statue of limitations has expired. So it’s earning years of work history. But in ordercomes to Social Security benefits. important to review the information on the to qualify for Social Security, you must have website to ensure there are no glaring errors. paid into the system for at least 40 quarters.Should Social Security be included as part What are some often overlooked strategies? When deciding whether to take earlyof an overall retirement strategy? One option, which has been available since retirement at age 62, collecting benefits atIt’s an important component of your 2000, is called file and suspend. If you are the established retirement age of 66 — forentire financial planning and retirement married, typically one spouse is a high- those born in 1954 or later — or waitingstructure. A lot of people think it’s not income earner and applies for benefits at the until age 70, you have to consider yourgoing to be around for their retirement, so retirement age of 66. But he or she suspends personal situation.they don’t factor in Social Security, which receipt of those benefits until age 70. Thatis a mistake. provides what is called a delayed retirement One couple with both spouses in poor credit, which increases the benefit by 8 health needed the money and filed at age 62. The federal government has projected percent a year for a total of 32 percent more The thought of them living to the averagethat 100 percent of current benefits are at age 70. Applying for benefits allows the age expectancy of 84 for a woman and 81 forfunded through the year 2033, and then other spouse to claim spousal benefits of a man was not a realistic possibility.at 75 percent for subsequent years. So half of the applicant’s Social Security benefit,we know Social Security has sufficient without reducing the first filer’s benefit But if you can afford it and have a familyresources to pay benefits through 2033 and amount. So the family can collect Social history of longevity, you can wait untilretirement planning should reflect that. 70 and enjoy that 32 percent increase inClearly, there also will be some discussion benefits for a long time. ●about what to do post-2033 because thatreduction would be devastating to retireeswho worked so hard and paid into SocialSecurity their whole lives.14 Insights: Accounting Reprinted from Smart Business St. Louis

Year-end tax planningHow the ACA and the end of Bush-eracuts affect tax strategy interviewed By Roger Vozar Cathy Goldsticker, CPA Member, Tax ServicesIt’s wise to consider the tax implications of Brown Smith Wallace business and financial decisions as the year winds down. This year, many tax benefits (314) 983-1274 Website: To request your free copy of our 2013 Year-End from the American Taxpayer Relief Act of [email protected] Tax Planning Guide, visit bswllc.com/taxguide. 2012 (ATRA), which was extended through 2013, and many Bush-era tax cuts will end. Insights Accounting is brought to you by Brown Smith Wallace The tax law changes from ATRA extensions ending and the implementation of the if you hold your S corporation and related trying to stay below the $400,000 level and Affordable Care Act (ACA) introduce layers assets for five years, built-in gain tax goes avoid the 39.6 percent tax bracket. of complexity. away. Starting next year, the waiting period is 10 years. For owners looking to sell assets How will taxes change as a result of the ACA? “It’s difficult for anyone to keep track of or a company, that may expedite the impetus There is a new 3.8 percent tax on investment everything that is expiring, let alone what’s to sell before the end of 2013. income and 0.9 percent Medicare tax that new. There are more moving parts than I’ve applies to self employment income for high seen in a long time,” says Cathy Goldsticker, Also being eliminated are faster write- income earners. Careful planning could CPA, member, Tax Services at Brown Smith offs for depreciation. Under Section 179, avoid the claws of this extra tax. Wallace. companies were able to deduct $500,000 for equipment in year one assuming less than To avoid these taxes and receive more “You need to plan and do some projections $2 million in assets was acquired during the benefit from your writeoffs, you might so you don’t discover in April that you have year. That will revert to the previous limit of want to bunch deductions that are subject unexpected taxes due or you didn’t take $25,000. Bonus depreciation, which allowed to phase-outs based on income. Instead of advantage of a departing tax write-off.” you to write-off half of qualified property, paying expenses such as advisory fees, and is being removed for common acquired tax planning and preparation fees in 2013 Smart Business spoke with Goldsticker depreciable items. and 2014, you might see if you can pay them about strategies businesses and individuals in the same year. can follow to reduce tax liabilities. You should think about accelerating your planned purchases, but also consider what Do the expiring cuts mean it’s best to move What effect does the ATRA have on 2013 your future income levels might be. You up as many deductions as possible? could be taking away deductions from future You can’t look at your taxes in a vacuum; taxes? years when it’s possible to get a bigger bang you still need to consider the impact of all Many of the provisions enacted under for your buck with higher tax rates. options to determine the best route. Among President George W. Bush are set to expire. the many moving parts, we could still see Although the tax brackets from the Bush On the personal side, this is the last year extensions of some provisions. tax cuts will remain in place and are now business owners will have a choice between permanent, individuals with taxable incomes deducting sales taxes or state income taxes You should take the facts as they of $400,000 or more — $450,000 for because the sales tax option will be going currently stand and put together pro forma married couples filing jointly — are subject away. This could be a lost state benefit for projections for the next several years. Do to a top marginal tax rate of 39.6 percent those paying Alternative Minimum Tax. some tax calculations for these years to instead of the 35 percent marginal rate. figure out what you’ll encounter from a These individual tax rates also will affect the This also will be the final year that cash-flow standpoint, as well as what you taxes of the owners of pass-through entities. taxpayers ages 70½ and older can transfer could do to reduce some of the current up to $100,000 from an IRA to a charity and increases. ● A business relief provision that is scheduled bypass having the IRA distribution included to expire is for the built-in gain tax that is as income. That can be important if you’re created when converting your C corporation to an S corporation, but is imposed after a subsequent sale of corporate appreciated assets. The temporary rule has been thatReprinted from Smart Business St. Louis Insights: Accounting 15

TELL USWHERE ITHURTSLike many businesses, your firm may be facedwith critical financial concerns about HealthCare Reform. The decisions you make now totry to alleviate escalating costs will impact thelong-term health of your organization.Brown Smith Wallace has the expertise to helpyou review your options and develop a strategyto manage health care expenses, minimize taxliabilities and offer the right employee benefits.Start taking preventive measures to protectyour bottom line. Contact Ron Present today at(314) 983-1358 or [email protected]. RON PRESENT, CALA, CNHA, LNHA PRINCIPAL IN CHARGE, HEALTH CARE ADVISORY SERVICES COMPREHENSIVE ACCOUNTING & TAX CONSULTING | INTERNATIONAL CORPORATE TAX STRATEGIESAUDIT & RISK MANAGEMENT SERVICES | MANAGEMENT CONSULTING | FINANCIAL ADVISORY SERVICES St. Louis 314.983.1200 St. Charles 636.255.3000 Glen Carbon, IL 618.654.3100 Toll free 1.888.279.2792Learn more about Brown Smith Wallace at bswllc.com or follow us on: