With the accounting profession in a position where 300,000 professionals have left their jobs within two years and fewer are entering the field to fill these positions, advisory services can be transformative for your team. After all, your firm is unique. It’s important to home in on what your existing clients already want and need. It’s often more affordable and easier to sell to existing clients than attract new ones, so start thinking of offering more to the clients you already have relationships with.

But what if your clients really want or need a service that you’re not equipped to offer? Or what if your resources are stretched and you want to launch your services with as little friction as possible? Technology can help solve both problems.

Leveraging Technology

The right technology can help bridge skills gaps, ensure your services are delivered efficiently, provide the necessary insights and save time by automating tasks.

While there are many solutions available, here are a few apps that will help you start offering advisory services:

●     Ignition automates proposals and payments for your advisory services to help you reclaim revenue and improve cash flow management.

●     Clockwork.ai is AI-powered financial planning and analysis (FP&A) software built for professionals. Use it to provide clients with real-time financial insights and automate technical finance tasks like scenario planning and cash flow forecasting.

●     Karbon is a practice management platform that can help you streamline your workflow and enhance the delivery of your services.

Every firm will have its own goals and audience. You may find that there are other solutions that help meet your individual needs. However, these three apps will cover the basics and help you deliver your advisory services more efficiently.

Once you’ve hammered out your services, pricing and technology, the only thing left to do is implement your services and monitor your results.

Monitor and Improve

Once you’ve launched your services, this isn’t the end of the road. Your goal is to deliver quality service that meets your clients’ needs and position yourself as a one-stop shop for their financial needs.

Implementing a feedback loop can help you determine whether you’re on track to reaching these goals. Then, you can use client feedback to improve your services over time.

For example:

●     You can send out questionnaires and services regularly to ask, “how am I doing.”

●     After client meetings, ask how you can improve or whether there are services they want or need that you don’t offer.

Make sure that you review this feedback regularly and actively implement changes to improve your services.

Scaling Your Advisory Services

As you continue to improve your services over time, you may reach a point where you’d like to scale your services. Clockwork has an excellent guide on how to scale advisory services that I highly recommend you check out.

There are so many “myths” about the accounting field — from the hours worked to the traditional pathways. My real-life story breaks all of them!

Myth 1- Need to love math. Let me tell you what I love about my career in accounting; it’s not math.

Myth 2 - Need to be happy with a boring job. Read my story to break this myth.

Myth 3 - Need to stay in public accounting. I initially had plans to stay but another opportunity came along.

Myth 4 - Need to work long hours. Perhaps sometimes there are extra hours to put in at times but there are also lots of alternatives to that.

Where it Began

My story began with majoring in accounting at Montclair State University. Upon graduation I worked at Coopers & Lybrand in their audit department. I spent 8 years in public accounting as an auditor and loved it. I met so many interesting, friendly people and saw so many different companies. It was an adventure I am so glad I experienced. For example, I had clients that made Band-Aids (It was really neat to watch how these were made); companies that harvested bones for use in the medical field (what an experience I had doing the inventory there!); several colleges as clients (It was so fun to stroll through campus on my way to work). With all of these interactions, I learned a lot about the business world and developed the skills I needed to make the jump to my next job.

Next Steps

My next step was to get a job at a large publishing company as an internal audit manager.  I was able to travel across the U.S. meeting the people who ran the operations of these company units and received an understanding of how businesses ran outside of the numbers. It was a great way to see the country too!

Next, I took several years off to have children. I decided to go back into the accounting world part time. To accomplish this, I started cold calling local CPAs and small accounting firms. It did not take long to find work. My first job back was working for a sole practitioner doing accounting and tax returns. He was happy to get the help and was very flexible with my work schedule. Once he retired, I decided to go to a small firm. I have been working part time at small firms for almost 20 years, doing reviews, tax returns and estate work. The firms have been flexible with my work schedule — I have been fully remote now for five years.

Becoming a CPA today opens many doors. It’s up to the individual to enter them and find out what they like to do best.

8 Steps to Take Now and to Prepare for the Next Big Hike

The Department of Labor (DOL)’s new overtime rule is here – and it means big changes for many employers. Moreover, the rule impacts CPAs both as employers (since you may need to increase the salaries of your managers) and as trusted advisors to your clients to alert them regarding this important development. Specifically, the salary threshold for the so-called “white-collar” exemptions just rose to $43,888 on July 1 (and will jump to nearly $59,000 at the start of 2025). What’s more, the threshold for the “highly compensated employee” (HCE) exemption rose from $107,432 to $132,964 on July 1, then will increase to a whopping $151,164 on Jan. 1, 2025. While legal challenges to the rule are ongoing, you can’t count on a court halting the rule before the next effective date. So, now is the time to ensure your practices comply with the most recent requirements and to get ready for Phase II. Here are the top eight steps to consider.

1. Review pay practices. Under the federal Fair Labor Standards Act (FLSA), employees generally must be paid an overtime premium of 1.5 times their regular rate of pay for all hours worked beyond 40 in a workweek — unless they fall under an exemption. One of the criteria for the FLSA’s executive, administrative and professional exemptions (the so-called “white-collar” exemptions) is earning a weekly salary above a certain level. As of July 1, that level is $844 a week ($43,888 annualized). For the next phase, which takes effect on Jan. 1, 2025, the salary threshold will rise to $1,128 (or $58,656 a year). For the HCE exemption, employees must be paid at least the HCE threshold of $132,964 on July 1, and $151,164 on Jan. 1, 2025. For more information on how the new overtime rule impacts HCEs, click here.
2. Work through your decision tree. Do you currently have white-collar exempt employees who earn less than $58,656 a year (or $132,964 for HCE)? You will have to decide whether to raise their salary to meet the new threshold or convert them to non-exempt status. If you decide to convert them, there are many considerations, and you should work with legal counsel. Additionally, you may want to start tracking their actual hours worked now to help you understand the potential impact of converting to non-exempt status, as those individuals will need to be paid overtime.
3. When reclassifying employees to non-exempt, consider the impact on employee morale and prepare a communication plan. Reclassifying employees to non-exempt could have a negative impact on morale. Many employees associate prestige with being classified as an exempt-salaried employee, they like the flexibility that comes with being salaried, and they don’t want to track and record their hours worked.
4. Plan to provide advance notice of changes. You’ll want to provide a written communication to each employee about the specific changes to their compensation and what new responsibilities come with the changes, such as timekeeping and record keeping. 
5. Review your policies on company equipment and personal devices. Do you have different policies for exempt and non-exempt employees when it comes to issuing company equipment and using personal devices? Exempt employees may have more leeway to use company laptops or their own personal devices — such as smartphones — to conduct business while traveling or outside of their regular office hours.
6. Develop a training plan for managers and newly non-exempt employees. It is highly recommended that you provide detailed training to newly reclassified employees and their managers prior to the changes taking effect. The specifics may vary from business to business, but you’ll want to cover scheduled hours, overtime approval policies, timekeeping procedures, rules about meal and rest breaks and more.
7. Ensure exempt employees meet the duties test. Besides the salary test, exempt employees also need to satisfy certain duties requirements. Neither their job title nor job description alone determines whether an employee qualifies for a white-collar (or any other) exemption. This is a good opportunity to ensure they meet these standards as well.
8. Track legal challenges. A district court temporarily halted the rule only as it applies to the state of Texas as an employer while it hears an underlying legal challenge. Other lawsuits are likely to be filed throughout the country seeking a broader injunction, and you should also monitor appeals in 5th Circuit Court of Appeals. Meanwhile, New Jersey employers (and private employers across the country) will need to adjust their compensation practices to comply until and unless a court says otherwise. 

Learn More

Attend our webinar (free for NJCPA members), Comply with Confidence: A Guide to the DOL's New Overtime Rule:

• Tuesday, Sept. 10, 12-1 p.m.
• Thursday, Sept. 23, 9-10 a.m.

Are We Listening?

The 2024 NJCPA Convention & Expo, themed “Your Story. Your Success,” informed, entertained and connected more than 600 attendees with storytelling at the Borgata Hotel in Atlantic City on June 11-14. We hope you were one of them.

Keynote speaker Sandra Bodin-Lerner, MA, owner of Be Compelling! LLC, explained the value of “effective listening” or understanding the speaker’s emotions and what they wanted someone to take away from the conversation. Good listening is a valuable skill, she added, and it can be taught. “Being heard is crucial to our self-worth. Everyone wants to be understood. It’s important to matter at work,” she explained. 

Following our convention, I flew out to Las Vegas for the 2024 National Association of Black Accountants (NABA) Convention & Expo. Hundreds of students and recent graduates from across the country attended to hear presentations about opportunities in accounting, personal branding, networking and leadership. I listened intently as they asked questions of the seasoned professionals and, in some cases, expressed frustrations with accounting and finance employers. 

It would be easy to dismiss their “complaints” as typical generational badmouthing, but as I took note of their disappointment around the absence of willing mentors, a lack of skills training and an unwillingness to provide time to study and sit for the CPA Exam, a thought occurred to me: Are we listening to our young professionals? We have a great opportunity to not only hear them but act. 

In a 2023 study, Righting Retention: A Look into the Accounting Profession’s Greatest Management Challenge, the Illinois CPA Society asked employers about their talent management offerings and asked employees about programs they value. They found a significant disconnect:

• 67% of employees view “career advancement paths and opportunities” as one of the most attractive benefits in an employer, but 48% of employers don’t communicate defined advancement paths for employees (or don’t know if they do).

• 30% of employees ranked “mentors/mentorship program” as a top need, but nearly 43% don’t offer a mentorship program, formal or informal, to foster employee retention (or don’t know if they do).

Results from a May 2024 KPMG study contrasted the stereotypical lazy, job-hopping Gen Z (born 1997 to 2013) narrative.

• When asked for the top three factors they value most in a future employer, respondents not surprisingly identified salary as most common (25%), but that was followed closely by a positive culture and working environment (24%) and opportunities for advancement (20%).
• 89% agreed or somewhat agreed that access to training on “soft skills” or professional skills (e.g., presentation skills, executive presence, client etiquette, interpersonal skills) is an important factor when considering a job/employer.
  

There is a dynamic level of energy from Gen Z on building their skillsets to grow in their careers. They have high expectations around transparency and are very willing to have conversations around salary, mental health challenges, work-life balance and career mobility. 

In the simplest terms, employees want to feel heard and supported. It’s up to company leaders to navigate these expectations if they want to remain competitive in the current labor market.

Where possible, employers should highlight the career pathways and options available for their people — both in the overall organization and specific to each individual. Investing in skills development and career advising will support people in advancing their careers within the organization.

We want to hear from you. Tell us how you are supporting your staff to improve recruitment and retention. And please take a look at the essential skills courses we’re offering.

Do new clients come to you, or do you need to find new clients? In my opinion, it used to be one of the defining characteristics of a “professional” was they did not need to seek out new business. Clients came to them. Accountants, lawyers and physicians fit into this category. I think a turning point came with the arrival of the TV series, “Boston Legal” (2004). When considering an associate for a partnership, they would ask: “How much new business are they bringing into the firm?” Today, finding new business is part of the job description for many fields.

One of the historically effective ways of getting new clients is through referrals. In an ideal world, your client does all the heavy lifting; the phone rings and someone says: “Joe sent me.” How do you get this to happen?

1. Start with an assumption. You need to believe your best clients want you to succeed. They want to help you grow your business. They might not know how. You need to make it as easy as possible for them.
2. Tell current clients you are looking to add more. They might think you are “full up.” This sounds basic, but referring business might not be on their radar until you tell them.
3. Remind them how you helped them. You have done a good job for your client, but they might be so comfortable with you, they do not remember the details. They had an issue or a problem. You addressed it. Who else has a similar problem?
4. Know family comes first. You have heard the expression, “Selling up and selling down.” Your client likely has influence over other family members concerning advice. Who do they know within the family that could benefit from the kind of advice you have been providing for them?
5. Add a sense of urgency. The high quality of service you deliver might be because your clientele is not as large as they think. Do some analysis. How many large relationships similar to theirs might you be able to add without straining your service model?
6. Avoid the word “referrals.” That is an expression within the category of industry jargon. Do they know someone you might be able to help? Is there someone they think you should meet? You might ask: “How well do you know (name)? They are the type of person I may be able to help.”
7. Be specific in your requests. Imagine you sold men’s suits. One person says: “I’m looking for a suit.” Another person says: “I am looking for a single breasted light grey suit in size 42 long. Which do you think the salesperson will find it easiest to address? If you say: “Do you know someone you think I can help,” their mind might go blank. If you ask: “Who else at your company is retiring in the next six months?” names will come to mind.
8. Teach them how to ask. Let us start with how not to ask: “My advisor is looking for new clients. He asked if I knew anyone.” You might suggest they say: “I had this (problem). I found a financial advisor who was able to address it. I am happy with the result. You have the same problem. Would you like to meet them? You can see there are benefits for the prospect.
9. Understand the in-person introduction. When someone is given your name, you don’t know if they will call or not. If you can arrange to meet with your client and their friend over coffee, you have the opportunity for a low-key introduction. This is why the client/prospect dinner strategy has been effective.
10. Avoid awkward moments. The wrong recommendations can put them off ever trying to send a referral again. You want something like: “You mentioned you had a problem. I have an advisor I like and trust. He has helped other people with a similar problem. He might be able to help you too. Would you like to meet him?

Your clients should want to see you succeed. They can act as your ambassadors if they know what to look for and how to bring your name into the conversation. 

Financial planning tools and techniques have evolved over time to meet families' changing needs and align with legislative shifts. Two important tools offer ways to alleviate the financial burden of future commitments, such as purchasing a retirement account or funding a child's college education.

Roth IRAs

A Roth IRA provides qualified distributions, which include:

• Distributions taken at age 59 1/2 or older
• Withdrawals made after the Roth IRA has been open for at least five years and the account holder is at least 59 1/2 years old
• Withdrawals due to total and permanent disability
• Posthumous withdrawals to the beneficiary
• Distributions of up to $10,000 for the purchase of a first home

These distributions are tax- and penalty-free if the original funds are not withdrawn before the age of 59 1/2. Exceptions for the 10% additional tax are outlined in IRS Topic #557, while qualified higher education expenses are detailed here.

Education funding through a Roth IRA offers benefits that are often limited in 529 plans, such as fewer investment options, restrictions on rebalancing and higher investment management fees. For individuals eligible for a Roth IRA, it is a sensible option to consider. Structured settlement

accounting professionals and their clients can utilize structured settlements to achieve financial planning goals. Unlike Roth IRAs, which have contribution limits and income-eligibility criteria, structured settlements do not impose such restrictions. Structured settlements can be funded without limitations and tailored to meet specific needs while growing tax-free or tax-deferred, depending on the circumstances of the case. For individuals whose income exceeds the threshold for Roth IRA eligibility, a structured settlement remains open for investment. How do you decide which option to use? I prefer structured settlements for the following reasons:

• Guaranteed return
• No fees

Unlimited Contributions

Did I mention there are no fees and a guaranteed rate of return?

When a specific need with a known timeframe arises, the optionality of investment is removed. Market volatility often occurs when resources are most needed. Adding financial stress to the emotional departure of a child to college has never seemed appropriate to me.

Once college funding is secured, the financial plan turns to retirement. I often say that there are very few problems a good income stream cannot solve. Accounting professionals and clients who are able to afford structured settlements understand the significance of financial security. Securing the foundation of your financial plan before delving into financial risks is crucial.

IRAs, 401ks and other investments do not guarantee returns. The past 16 years of uninterrupted growth have created a nonchalant attitude towards risk. Educating your clients on these risks will be the most challenging task for financial planning professionals. As a CPA, you can explain guaranteed cash flow and the impact of unlimited income deferral on a taxable basis.

Unlike other retirement assets, structured settlements allow you, as the tax planner, to customize income recognition while establishing a guaranteed retirement income for your client. Knowing which vehicle to use ensures a more comprehensive financial plan. Being well-informed about utilizing tools such as structured settlements can make a significant difference when it matters most.

There it is — that vast white space staring you right in the face. You’re hoping words will fill the page magically, but you have no idea where to start. Drafting a captivating story can be difficult. But with the right tips and tools, a white screen can quickly become an experience that takes readers on a journey.

So, how do you begin? Below are five tips for drafting a captivating story, offering a foundation for creating engaging content for your target audience.

1. Know Your Audience

Effective storytelling begins with understanding your audience. Start by building an audience persona profile so you know exactly who you’re writing for. Here are four common buyer persona segmentations:

• Demographics: Industry, job function, company size, location, age, gender
• Psychographics: Interests, values, lifestyle, business goals
• Media consumption: Where do they get information? What kind of content do they consume?
• Buying behaviors: What are their buying habits? What influences their purchasing decisions? How long is their buying cycle?

Defining this information will empower you to draft a relevant, relatable, captivating story for your target audience.

2. Write Like You Talk

The last thing readers want is content that’s too formal or feels patronizing. Write how you speak.

Writing styles have shifted. Formal writing is a thing of the past, with content exceptions like technical reports, legal documents and academics. Yet, conversational writing continues to trend among audiences of all ages.

Conversational writing gives you more freedom to engage your readers. Formal writing always talks at you, whereas conversational writing talks with you. Invite your readers into your story by using a conversational style with active, direct and engaging language. Writing like a conversation makes your copy more authentic, approachable and easier to understand and digest.

3. Use the KISS Method

Keep your language simple and to the point. As a professor of mine once said — Keep It Super Simple.

A good rule of thumb is to write at an eighth-grade reading level. Keep your sentences short, scannable and easy to digest. Ensure each word in your sentences has meaning for maximum impact. However, depending on where your content lives or its topic, consider adjusting the reading level up or down to better connect with your audience. Published or print work has higher reading levels, while online content is simpler as readers tend to scan.

4. Embrace AI Writing Tools

Artificial intelligence (AI) makes content creation quicker, no question. Some of the best business writers embrace AI as a writing assistant to help draft content and create captivating stories. ChatGPT, Gemini, CoPilot and Claude.ai are just a handful of online AI writing tools to assist with outlines, summaries and competitor research.

AI editing tools like Grammarly, Hemmingway Editor, Wordtune and Microsoft Editor can also strengthen your writing. These tools check for grammar accuracy, offer rewording suggestions to help with delivery and clarity and even check for plagiarism.

5. Make the Reader Take Action

Don’t forget a call to action (CTA). This is often easily missed. When drafting content, convey the action you want your reader to take and be clear. Using urgency or conveying value is also beneficial. Here are five different types of CTAs:

• Lead generation: Capture audience data to build your sales pipeline.
• Sales: Encourage readers to move further down the sales funnel.
• Engagement: Increase interaction and build relationships with your audience.
• Action: Motivate readers to do something specific.
• Consideration: Encourage readers to explore more before making a decision.

Wherever you are in your writing career, it never hurts to go back to the basics. And, above all, make sure your audience leaves knowing what you expect of them through a call to action.

Storytelling is a timeless skill, pivotal not only in our early learning but also in complex fields. The ability to transform abstract numbers into compelling narratives is crucial for an accounting professional. This skill is often underestimated, yet it’s vital for conveying complicated information in an understandable way to both clients and staff.

The Narrative of Numbers

Numbers tell a story. Beyond their quantitative truths, they detail a company's annual highs and lows while also illustrating strategic decisions made throughout the year. For example, a sudden dip in revenue in the third quarter might reveal a need for strategic realignment, while a peak in the first quarter could indicate successful campaign launches. As accountants, by interpreting these patterns, we not only present data but also provide actionable insights, transforming raw numbers into valuable narratives for our clients.

Teaching through Tales

Effective managers transcend basic instruction; they embed lessons within stories drawn from personal experiences and past challenges. Consider a manager using their personal experience to explain tax optimization strategies through a story about navigating a complex tax return. They could share how, by strategically leveraging deductions and credits, they significantly reduced a client's tax liability, demonstrating the direct impact of thoughtful tax planning. This narrative not only educates but also connects emotionally, highlighting the tangible benefits of expert tax management. This approach does more than just instruct, it connects and inspires. By sharing such personal narratives, we can accelerate professional development, making the learning process both more relatable and impactful.

Listening: The Heart of Effective Storytelling

The cornerstone of effective management and storytelling is active listening. This involves more than just hearing words; it's about understanding the underlying emotions and non-verbal cues. Active listening builds a foundation of respect, empathy and trust, which make it easier to convey ideas and necessary feedback in a manner that resonates personally with the audience. For instance, by truly listening to a staff member's feedback on their preferred learning style, a manager can tailor their guidance to better suit that individual's preferences in a way that works for them and, in turn, set them up for success.

At the core of great leadership in accounting is the ability to break down complex concepts into easily digestible narratives. Our effectiveness as leaders and advisors hinges not just on our expertise but on our capacity to convey this knowledge compellingly. Great leaders are not just directors; they are also listeners, learners and storytellers.

Storytelling for Managers

Incorporating storytelling into management isn't just about keeping one’s audience engaged. It’s about being approachable, relatable and translating professional lessons into practical, actionable guidance. This narrative method does not merely make our guidance relatable; it makes it impactful, ensuring that our teams and clients not only understand our advice but are also influenced by it.

In the language of business where numbers are the script, accountants are the best-suited storytellers to bring these numbers to life, aiding in the development of their teams and the success of their clients. By enhancing listening and storytelling skills, we can become more than just trusted advisors; we can become integral narrators of the business world and turn data into stories that inform, persuade and guide. 

Creating a Culture of Advocacy

The mission of professional membership organizations is primarily educational and informational, but here at the NJCPA we also leverage our expertise and influence in the state capitol, amplifying the voices of accounting and finance professionals such as you. 

Nearly 10 years ago, a member survey revealed support for being more active in Trenton. When asked what the top political priorities of the NJCPA should be, nearly 60% of members responded, “Advocating for legislation important to the CPA profession,” followed by “Establishing a larger presence on statewide policy issues” and “Educating and updating members on legislative advocacy initiatives.” Since then, the NJCPA has distinguished itself as an objective, evidence-based promoter of the highest accounting standards.

We learned long ago that just tracking activities in relevant areas doesn’t keep our members abreast of regulatory and legislative proposals; we strive to offer significant opportunities to provide input to important policymakers in Trenton and even with federal agencies. Remaining proactive, rather than reactive, is crucial, and that requires member engagement and support. 

As our survey indicated, most members recognized the need for associations to advocate effectively for themselves and their members, but those same surveys showed fewer members cited advocacy or government relations as a reason that they maintained their memberships. There was a disconnect between the member service (i.e., advocacy) and the perceived value that service provided to individual members.

In recent years, however, our advocacy efforts around tax policy, student loan debt, cannabis, childcare and other issues have catered to members’ interests and convinced them to act.

We’ve encouraged members to participate in the NJCPA’s advocacy efforts and established a “culture of advocacy.”

Perhaps no recent issue is more personal to members than the need for talent. As we continue to address profession-specific pipeline challenges such as the CPA brand and barriers to licensure, we’re also looking at the talent shortage through the advocacy lens, examining broader workforce development opportunities that will create, sustain and retain accounting talent that can support firms and businesses. 

Lawmakers and business leaders recognize that accounting staffing shortages continue to be a significant challenge facing individuals, businesses of all sizes and local governments, and they support the NJCPA’s efforts to help grow the pipeline through public policy. 

I’ve mentioned previously that the NJCPA is actively supporting and advocating at the state and national levels for initiatives that recognize accounting as a science, technology, engineering and mathematics (STEM) subject and that allow STEM K-12 grant funding to be used for accounting awareness and education. Additionally, we’re pursuing both state and federal workforce development funds, researching new initiatives to increase accounting education in high schools and identifying state assistance programs that accounting students and employers can take advantage of.

While these efforts are led by the NJCPA government relations team, there are opportunities for members to get involved: 

• Be a key person. Collaborate with us and any legislators you know on a personal or business level to promote pro-CPA legislation and protect the integrity of the CPA license. 
• Donate to the New Jersey CPA Political Action Committee (NJ-CPA-PAC). Help us continue to promote and protect the profession in Trenton. 
  

As always, we invite you to share your thoughts. What issues are you most passionate about? What types of advocacy are you most interested in? Are you willing to contact your local representatives?

As an accounting professional, you’re no stranger to juggling multiple tasks, deadlines and responsibilities. Delegating effectively can be a game-changer, allowing you to focus on strategic initiatives, improve efficiency and empower your team. 

Let’s explore three key principles for successful delegation: 

1. Document your process. Before you delegate any task, take the time to document the process thoroughly. Why is this crucial? Well, consider it your roadmap. When you have a clear, step-by-step guide, it becomes easier to communicate expectations to your team. Here’s how to go about it: 
   • Break it down. Divide the task into smaller components. What are the inputs, processes and desired outputs? Document each stage meticulously. 
   • Include the rationale. Explain why each step matters. Understanding the “why” behind a task motivates your team and helps them see the bigger picture. 
   • Create visual aids: Flowcharts, checklists or process maps can make complex procedures more digestible. Visual aids enhance clarity and reduce ambiguity.  
     
2. Train your people to understand the process. Delegation isn’t just about handing off work; it’s about ensuring your team members grasp the intricacies. Here’s how to train effectively: 

• Conduct one-on-one sessions: Sit down with each team member and walk them through the documented process. Encourage questions and discussion. 
• Role play: Simulate scenarios. Ask your team to demonstrate their understanding by role-playing specific steps. This reinforces learning and builds confidence. 
• Have feedback loops: Regularly check in with your team. Are they encountering roadblocks? Do they need additional resources or clarification? Adjust your training accordingly.

3. Genuinely delegate and empower ownership. Now comes the critical part: delegation itself. Remember, it’s not just about offloading tasks; it’s about empowering your team. Here’s how to do it right: 

• Trust your team: Trust that your team members can handle the responsibility. Micromanagement stifles growth and creativity. 
• Set clear expectations: Be specific about deadlines, quality standards and desired outcomes. Ambiguity leads to frustration and inefficiency. 
• Encourage autonomy: Once you’ve delegated, step back. Allow your team to take ownership. When they succeed, celebrate their achievements. 

Remember, effective delegation isn’t about relinquishing control — it’s about optimizing resources. By documenting processes, training your team and genuinely empowering them, you’ll not only increase capacity but also foster a culture of collaboration and growth. So, go ahead, delegate strategically and watch your accounting team thrive! 

As we look to the approaching deadline for the expiration of the federal state and local tax (SALT) deduction limitation on Dec.31, 2025, there does not appear to be any slowdown in pass-through entity tax (PTET) activities from state taxing authorities. It also remains uncertain whether state PTETs will expire with or extend beyond the expiration of the federal limitation.

Recall that prior to Jan. 1, 2018, individual taxpayers who itemized deductions for federal income tax purposes were permitted to fully deduct from income certain state and local taxes paid. In 2017, however, the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, was enacted and included a provision that imposed a limitation on the aggregate amount of state and local property, income and sales taxes that could be deducted and capped such deductions at $10,000 per year (SALT cap). Thus, individual taxpayers who itemized and paid more than $10,000 in state and local taxes could not deduct the excess, unless the taxes were paid in carrying on a trade or business. If Congress does not act to make the SALT cap permanent, the limitation is scheduled to expire. Although there has been debate in Congress to raise the SALT cap, it remains unclear whether the limitation will be extended.

Following the passage of the TCJA, and to help mitigate the impact of the federal limitation on their residents, many states quickly responded by enacting PTET legislations as a workaround to the SALT cap. Under state PTET regimes, eligible pass-through entities, such as partnerships and S corporations, may elect to pay state income tax at the entity level. Under IRS Notice 2020-75, the pass-through entity is not subject to the SALT cap and is permitted to deduct the PTET paid as an uncapped business deduction on its federal return, thereby lowering the ordinary income that flows through to the pass-through entity’s owners. When the owners report income on their state returns, most states require an add-back of state taxes deducted from federal income. Because tax was already paid at the entity level, states with PTET elections generally permit the pass-through entity owners to claim a credit for PTET paid or exclude from income the amount of PTET previously taxed. State PTETs, therefore, effectively provide pass-through entity owners with a complete workaround to the federal individual SALT cap.

As of November 2023, 36 states and New York City all have PTETs in one form or another. Of these 36 states, Hawaii, Iowa, Kentucky, Montana, Nebraska and West Virginia became the latest states to implement their own state PTETs in 2023 alone. In addition, Maine, Pennsylvania and Vermont currently have proposed PTE legislations. 

PTET Expiration Uncertainty

While some states adopted specific effective periods, other states have provided no guidance on the fate of their PTET regimes beyond the expiration of the federal SALT cap. In California, for example, “beginning on or after Jan. 1, 2021, and before, Jan. 1, 2026, qualifying pass-through entities” may elect to pay the state’s entity level tax on income. Under recently enacted legislation in Oregon, the state’s PTET would expire at the same time that the federal SALT cap is set to expire “before Jan. 1, 2026.” In Nebraska, the Department of Revenue recently issued a set of frequently asked questions (FAQs) and clarified that the Nebraska PTET “is not tied to the federal SALT limitation. The PTET election will be available even if the federal $10,000 SALT limitation goes away.” However, in New Jersey and New York, no specific guidance is available regarding the expiration of the state’s PTET. Thus, absent legislation to the contrary, these states’ PTETs would presumably continue following expiration of the federal SALT cap.    

States have also revised legislation or continuously updated their administrative guidance on the mechanics of their PTET regimes. In January 2022, New Jersey Governor Phil Murphy signed Senate Bill 4068 into law (P.L. 2021, c. 419), which made several revisions and clarifications to the Pass-Through Business Alternative Income Tax (BAIT). Effective on or after Jan. 1, 2022, the legislation, among other changes, changed the PTE tax base for partnerships to include all income of a New Jersey resident individual, estate or trust, not just New Jersey-sourced income. BAIT for S corporations, however, continued to be calculated on the S corporation’s New Jersey-sourced income. The legislation also updated the BAIT credit structure and permitted use of such credits, including providing a shareholder, partner or member a credit based on their direct share of tax paid and allowing credits to be applied, for example, as a refundable credit against a PTE’s own tax liability for nonresident withholding tax, minimum taxes and filing fees. For corporations, credits can be applied against the surtax or the corporation business tax.

In Maryland, new procedures for making the PTET election were issued in 2023. In Georgia, FAQs were issued in January 2023 providing guidance on eligibility and treatment of credits. Louisiana also recently added an option for an automatic prospective termination of the PTET election.

So, even with the approaching sunset of the federal limitation, taxpayers should continue to carefully analyze specific state rules to fully weigh whether a state’s PTE election is beneficial.

Picture this scenario: A happily married couple strolls into your accounting office with beaming smiles and shared financial goals. As a seasoned accountant, you're accustomed to the rhythm of joint tax filings and the typical benefits that they provide. But hold on, there's a twist. This couple is contemplating the unconventional move of filing their taxes separately. Now, in your world, that might elicit a quizzical look — a furrowed brow, perhaps, as the norm is typically "married filing jointly." However, when student loans enter the scene, the traditional tax-filing status quo takes an intriguing turn. While conventional wisdom often leans towards joint filings, the student loan factor introduces a new dynamic that shouldn't be overlooked.

The Differences

For married individuals grappling with student loan debt, the decision on tax filing status — whether to choose "married filing jointly" (MFJ) or "married filing separately" (MFS)—is a pivotal one. Not only does it impact their tax liability and monthly loan payments, but it also influences eligibility for crucial tax credits and benefits.

To comprehend the nuances, let's first explore the correlation between federal student loans and the tax filing status. Borrowers on income-driven repayment (IDR) plans, such as Pay As You Earn (PAYE) and Income-Based Repayment (IBR), traditionally had the option to file taxes separately, isolating the loan payment calculation to the borrower's earnings only and excluding the spouse's income from the calculation. Not all IDR plans allowed this initially, but with the recent changes and introduction of the innovative Saving on A Valuable Education (SAVE) plan, it now extends to all plans.

You might wonder, “Sure, filing separately may shrink the monthly student loan payments by excluding spousal income, but is it merely a short-term fix?” Not quite. Enter the aforementioned innovations of the SAVE plan, revolutionizing how unpaid interest is handled. Under this plan, any unpaid interest is entirely subsidized. In simpler terms, if the calculated payment based on income falls short of covering the monthly interest, that additional interest doesn't pile up on your loan balance; it simply vanishes.

Nonprofit or Governmental Careers

Furthermore, what if the client has a career in a nonprofit organization or governmental agency? Here's where things get really interesting. By making 120 monthly payments under the Public Service Loan Forgiveness (PSLF) program, the client can qualify for complete tax-free forgiveness. Yes, you read that right — after a decade of dedicated service, the entirety of their outstanding balance evaporates. I've personally advised on this type of forgiveness and have helped 16 clients qualify for a combined $2.6 million of forgiveness. So, it's very real!

Now what if the career path doesn't qualify for PSLF like for-profit ventures or entrepreneurship? Fear not, there's still a path to forgiveness, it will just take a little longer. Depending on the chosen IDR plan and the loan type (undergraduate versus graduate), the loans would become eligible for forgiveness after 20 or 25 years. So, by minimizing payments through strategic tax filings, you're not just reducing out-of-pocket costs now; it's a calculated move towards maximizing forgiveness and securing a brighter financial future.

So, it sounds great, but why would someone not want to file separately? This is where you come in. Couples filing separately often find themselves in higher tax brackets, leading to increased overall tax liabilities. Subsidized healthcare coverage, dependent childcare credits and other deductions can be compromised when couples opt for separate filings. Notably, Marketplace healthcare plans may be impacted, potentially forfeiting premium tax credits and other savings (with exceptions in cases like domestic abuse or abandonment). Couples may face additional taxes ranging from $2,000 to $3,000, coupled with limitations on IRA contributions and eligibility for Roth IRA contributions. Understanding these nuances is vital, and having a competent accountant like yourself advise on these adverse ramifications is critical.

Amending Returns

It's vital to address another significant aspect of tax filing status: the prospect of amending returns. When contemplating the possibility of amending tax returns from MFS to MFJ, it's essential to proceed with caution, especially considering the legal gray area surrounding such actions when it comes to student loan income recertification. While this pathway may hold the potential to recoup missed tax benefits, it's prudent to delay amendments until the tax return no longer influences current student loan payments.

All of these decisions should undergo thorough scrutiny on a case-by-case basis, factoring in individual circumstances and long-term financial objectives. Engaging in discussions with a qualified student loan expert can provide invaluable guidance, ensuring that any action taken adheres to legal and financial best practices.

Effectively managing staff is a challenge for everyone — and there is no one-size-fits-all approach, which makes this much trickier. As leaders, we are consistently wearing many hats, but it is imperative that managing staff is not put on the back burner. The ultimate goal of effective leadership and management is to create a cohesive working environment that motivates and fosters constant growth of the team. Here are five tips.

1. Communicate. Communication should always be encouraged. If staff feel comfortable conveying ideas, questions and concerns, an environment will inherently be created where employees feel valued, respected and motivated. Effective communication goes both ways though, and oftentimes we don’t focus on the active listening component. Being actively engaged with what another person is saying to us is extremely important as it gives every person the chance to share opinions while also feeling empowered.
2. Reward hard work and acknowledge growth. “Coach the players you have, not the players you wish you had.” Positive reinforcement is a highly effective management technique as it improves the overall employee experience, helps to motivate staff and shapes company culture. Feedback should always be honest, without being discouraging, so that it can be used as an opportunity for growth. Appreciate the unique skills and attributes each individual person brings to the table and focus on their strengths. When employees feel appreciated either through formal or informal recognition, they will feel encouraged to continue exhibiting the behaviors that led to the appreciation. When you notice someone producing quality work or exhibiting a positive behavior that you would like to see repeated, learn what motivates them and play on that. Perhaps providing incentives or perks to employees that align with company culture can be explored and incorporated into daily operations.
3. Get to know your team. Personalities respond differently to various leadership styles, plain and simple. To be an effective leader, you must get to know your staff by building professional relationships. Knowing your employees on a personal level will aid in cultivating their potential, and personalized attention can elevate their potential. Knowing how an employee works best and what inspires them should factor into your management techniques. Start learning about your employees by using active listening techniques and making time to talk about things other than work. Although sometimes cliché, ice breakers can really aid in getting the ball rolling here.
4. Encourage learning. It goes without saying that embracing a culture of constant learning and development truly benefits everyone in an organization. Improving one’s skills and overall experiences not only boosts retention of employees but also boosts their overall expertise and confidence. Encouraging formal learning, such as CPE, and informal learning (i.e., on-the-job training) is integral to a successful organization, but also a characteristic of an effective leader. Teach how you would have liked to have been taught.
5. Practice what you preach. Last but certainly not least, perhaps the most important tip: lead by example. Demonstrating to your staff that you hold yourself to the same standards that you expect from them is very powerful. It shows that you are a team player. Becoming a truly effective leader will require self-reflection and constant growth. As important as it is to give feedback, it’s equally important to seek feedback about your management skills. Depending on the comfort level and type of feedback, consider using an anonymous channel so that your staff are able to communicate their honest thoughts without the fear of retribution or awkwardness.

At the end of the day, a good manager understands that they’re only as good as the team behind them. By strengthening the team, you are elevating yourself as an effective leader.

In today’s work environment, the prevalence of hybrid teams has steadily risen. For CPAs, managing a team that seamlessly blends in-office and remote work has unique challenges and opportunities. As the accounting profession evolves, so must the leadership strategies employed by CPAs to foster collaboration, maintain productivity and ensure the well-being of their teams.

The Rise of Hybrid Teams in the Public Accounting World

The accounting profession has traditionally been office-centric, with CPAs collaborating in person in the office or at a client site. However, the advent of more advanced audio and video conferencing software, coupled with global events such as the COVID-19 pandemic, has reshaped the way firms operate. Hybrid teams — a blend of in-office and remote workers — have become a necessity for firms aiming to adapt to the evolving demands of the profession.

Embracing Technology for Seamless Collaboration

In a hybrid team environment, technology is the anchor that holds everything together. Firms need to invest in robust communication and collaboration tools that facilitate seamless interaction among team members, regardless of their physical location. Cloud-based software, video conferencing platforms and project management tools have become essential components of a CPA firm’s digital infrastructure.

Providing comprehensive training on these tools is crucial to ensure that all team members, whether in the office or working remotely, are proficient in using the technology. This not only enhances collaboration but also ensures that everyone is on the same page when it comes to adopting best practices in workflows.

Fostering a Culture of Inclusivity and Communication

One of the primary challenges in leading hybrid teams is maintaining a sense of unity and camaraderie among team members who may be geographically dispersed. Firms need to foster a culture that values open communication and inclusivity. Regular team meetings, both virtual and in-person, help build personal connections and ensure that everyone is aligned with the firm’s goals.

Leaders should actively encourage team members to share their thoughts, ideas and concerns. This creates an environment where everyone feels heard.

On days when the team gathers in person, engaging in team-building events can prove invaluable, fostering positive camaraderie and significantly boosting morale. Something as simple as a team coffee break or a lunch can go a long way in encouraging connection, building personal relationships and developing professional trust.

Flexibility and Work-Life Balance

Hybrid teams offer the advantage of flexibility, allowing firms to attract and retain top talent by accommodating diverse working preferences. However, it is essential for leaders to strike a balance between flexibility and accountability. Clearly defined expectations, deadlines and performance metrics ensure that all team members, whether working in the office or remotely, contribute to the firm’s success. 

Strategic Presence

Mastering the art of knowing when to be in the office versus working remotely becomes a critical aspect of effective leadership in a hybrid environment. For professionals in public accounting, where relationships and networking are paramount, discerning the appropriate times to be physically present in the office is crucial. While the flexibility of remote work offers undeniable advantages, there are instances where being in the office facilitates spontaneous interactions, collaboration and networking opportunities that are integral to the profession. Striking the right balance involves a nuanced understanding of the demands of public accounting, ensuring that team members are strategically present when face-to-face engagements and networking are essential. 

Are you having sleepless nights worrying about the success of your company or your succession plan because it is dependent on the success of your staff? True leadership can reduce the issues involved in both concerns.

Leadership at a fundamental level involves:

• Identifying talent.
• Fostering the growth of your colleagues through creating an environment of self-belief.
• Limiting your involvement and upstarting your staff’s involvement.

Let me dissuade you from the blind belief that anyone will care more about or work harder in your business than you do. It is your business. However, finding people who comprise most of the characteristics of a “young you” should put you on a good path to determining the future of your company.

How do you identify those individuals? By showing them leadership. Have you given colleagues a reason to care? More importantly, through your leadership, have you given them a reason to believe in you? Cultural leadership starts at the top with you!

Leadership Environment

So how do you lead? Leadership requires multiple environmental factors to thrive. Social, economic and political factors can either foster or destroy a leadership message. A professional work environment involves the following:

• Outlining workflow expectations
• Recognizing strengths
• Constructively identifying weaknesses
• Rewarding the achievement of organizational goals
• Identifying “want to” versus “need to”

In college, we studied the ABCs of leadership. However, the lesson my father stressed when I worked with him stood above them all: “Your word is the one thing you must protect at all costs.” If people do not trust you, they will not work for you or with you.

Just because you understand the path you want to take, or the goals you wish to achieve, assuming others are clear can spell disaster. Remember, actively communicating reduces misunderstandings. This can be accomplished by using the following:

• Face to face dialogue, with equal footing
• Non-recourse expressions
• Positive feedback
• Giving credit for all ideas
• Being gracious

Valued colleagues will share their ideas while also sharing in yours. Achieving through collaboration should be the goal of any great leader. The saying goes, “Many hands make light work.” Several minds tackling a goal or problem in open communication does the same thing.

Open discourse uncovers flaws or exposes a thread of insight you missed on the first examination of the idea. The biggest limiting factor to achieving a proper course of action is any prior thoughts.

Avoid George Orwell’s Groupthink

Groupthink is the practice of thinking or making decisions in a way that discourages creativity or individual responsibility. Non-conformity, however, creates the basis for creativity. Therefore, for good leadership to thrive, individuals should be empowered to make mistakes while in a safe environment.

Finally, teachers are leaders of knowledge. While a lecturer looks for conformity and uses the phrase, “You will,” teachers prefer to use, “You can.” The subtle shift in language reinforces the leadership position as a mentor instead of a task master.

Thus, a one-size-fits-all leadership guide to succession planning does not exist. Each of us must walk our own path. But whichever path we take, it must have trust, communication and respect for the individuals we hope to lead at its core. Remember, the leaders you create will be your legacy.

In the dynamic world of the CPA profession, regulations are evolving and client expectations are on the rise. A CPA firm’s succession plan is paramount to its continuing existence in this environment. By definition, this succession planning refers to the strategic process of preparing for the transition of leadership and ownership within a CPA firm. This process becomes particularly critical as founding partners and seasoned professionals approach retirement age, leaving firms to the challenge of preserving the legacy and adapting to a leadership change.

Let’s delve into the story of the CPA firm, Smolin Lupin & Co., as it illustrates the intricate steps of succession planning and continuation of a CPA firm. Aaron Smolin and Herman Holzer founded the practice in 1947. They were both CPAs and former IRS revenue agents. Years later, Saul Lupin merged in his practice, and the firm was renamed Smolin Lupin & Co. 

Aaron was considered a visionary in the field, and the firm had grown to become a symbol of tax and accounting excellence. As Aaron got older and neared retirement, the firm, made of five partners, faced a crucial question: how could the firm ensure its enduring continuation?

Aaron had been a leader, a mentor, and a source of inspiration to the firm’s partners and staff. He tirelessly served clients and nurtured the careers of many young CPAs. As the years passed, it was clear that the firm needed a strategic plan to continue its legacy and secure its future.

Identifying a Successor

Smolin Lupin partners recognized the importance of addressing the imminent leadership transition. They knew that the first step was to plan for Aaron’s retirement. Aaron was not ready to walk after dedicating his life to the firm, so the partners devised a contractual process that would allow him to continue in a reduced capacity as a senior advisor, sharing his wealth of knowledge and experience with the firm’s staff and clients.

As Aaron’s retirement approached, the firm partners developed additional partners from within. A talented young partner, Ted Dudek, was eventually named a managing partner and became Aaron’s de facto successor. Over several years, Aaron worked closely with Ted and other younger partners, gradually transferring his knowledge and experience.

To ensure the firm’s continued success, the leadership team looked at the various age classes of staff and partners. Recognizing the importance of grooming the next generation, the firm invested heavily in professional development programs and mentorship initiatives. They nurtured emerging leaders and professionals, ensuring the firm’s expertise and management team remained unmatched.

Positive Results

The approach of strategic planning, leadership training and contractual requirements secured the firm’s future and maintained client trust, continuity and retention. Clients appreciated the firm’s dedication to preserving their relationships. Ted Dudek’s commitment and competence ensured a seamless leadership transition. This was evidenced by the most recent leadership change in the firm as two younger partners, Paul Fried and Sal Bursese, took over as CEO and COO.

In the end, Smolin Lupin & Co. successfully developed and navigated the challenges of partner retirement, contractual processes, planning strategies and staff development. The partners embraced management changes while preserving the firm’s legacy and reputation. By allowing Aaron and other retired partners to continue as senior advisors and developing future partners from within, the firm ensured a bright and enduring future for its accounting and tax practice.

This story is an example for other CPA firms, illustrating that a legacy could endure with thoughtful planning and a commitment to best practices. The journey of Smolin partners serves as a compelling reminder to all CPA firms to embrace similar practices, fostering continuity and excellence in our profession. By investing in mentorship, leadership training, planning strategies and a commitment to retaining expertise, we collectively shape a bright and enduring future for the CPA profession.  

Traditionally, succession planning has been about passing the business torch to the next generation of internal managers. However, alternative approaches, such as private equity (PE) investments, have become more prevalent. Private equity investors bring not only capital but also valuable management expertise and industry connections that can be vital for businesses poised for growth or undergoing significant changes. While the benefits of private equity investment abound, such investment also comes with unique challenges.

The Private Equity Advantage

Investment from private equity offers substantial benefits including the following:

• Capital boost and value enhancement: Private equity firms infuse substantial capital into businesses, facilitating technological advancements, market expansion or debt restructuring. For example, a PE firm investing in a growing local restaurant chain could allow the chain to open new locations in high-demand areas. This investment often leads to an increase in business valuation, crucial for owners aiming to maximize returns.  
• Strategic expertise: PE investors often possess deep industry knowledge and experience. This expertise is crucial in navigating a business through transitional phases, ensuring the company’s success and growth post-succession. For example, an automotive parts manufacturer has fallen behind its peers in the industry largely due to not keeping up with technological advancements and processes. A PE investor with deep experience in manufacturing invests in and collaborates with the company to streamline operations and adopt lean manufacturing techniques so it is better positioned in the face of its competitors.
• Expanded networks: Involvement with a PE firm opens doors to broader networks, including potential clients, suppliers and future leaders. This can be pivotal in repositioning the company in its marketplace. For example, a logistics company with PE investors is able to gain access to international suppliers by leveraging the PE firm’s extensive international network of contacts.

Challenges to Consider

PE investment comes with certain challenges that need careful consideration before moving forward with a PE investor.

• Potential loss of control: With PE investment, business owners often face a loss of control over their company. PE firms’ investment comes with the tradeoff of PE gaining significant influence and control in business operations. PE’s control can clash with the original owner’s vision. For example, a family business with a relatively informal hierarchy may bristle at adjusting to corporate management styles with strict chains of command implemented by a PE firm.
• Short-term focus: A common criticism of some PE firms is that they prioritize short-term gains over long-term stability. This often leads to decisions that aren’t in the best interest of the company’s long-term health. For example, a PE firm may push for rapid cost cuts that impact employee morale.: The introduction of a PE firm can lead to significant cultural changes within a company, potentially impacting employee morale and the company’s original ethos. For example, a company that prides itself on a family-type and friendly atmosphere is likely to have difficulties with a PE investor placing new executives within the company that shift the management to a more aggressive competitive culture.
• Cultural shifts: The introduction of a PE firm can lead to significant cultural changes within a company, potentially impacting employee morale and the company’s original ethos. For example, a company that prides itself on a family-type and friendly atmosphere is likely to have difficulties with a PE investor placing new executives within the company that shift the management to a more aggressive competitive culture. 

Weighing the Impact of PE in Succession Planning

Private equity can be a powerful tool in succession planning, offering financial strength and strategic direction. However, it is crucial to navigate this path carefully, considering both the advantages and pitfalls. Understanding the nuances of private equity will help position businesses for a successful transition, ensuring their legacy continues to thrive in the new business era.

You can’t say that we didn’t warn you!

It’s the season for IRS Employee Retention Credit (ERC) audits — yes, right during tax season, when you have nothing better to do. The ERC Voluntary Disclosure Program (VDP) ends on March 22. Additionally, bills are looking to restrict the ERC. But have you or your clients heeded all the warnings and lifelines that the IRS has already provided?

Let’s start by reiterating again CPAs’ responsibility when it comes to the ERC. In March 2023, the IRS Office of Professional Responsibility released Bulletin 2023-02, which highlighted the fact that practitioners were obligated to meet the provisions of Circular 230 in regard to ERC, whether a third party was used for calculation or not. Specifically, Section 10.22(a) requires “Diligence as to Accuracy.” What this means in practice according to 2023-02 is the following:

• Reasonable inquiry to confirm ERC eligibility
• Further inquiry if information from client appears to be incorrect, incomplete or inconsistent
• If practitioner cannot reasonably conclude that the client is eligible, they should not prepare the return
• Inform client of penalties for noncompliance

IRS Office of Professional Responsibility (OPR) Director Sharyn Fisk says her office will evaluate the facts and circumstances of each situation, and there’s not a one-size-fits-all answer to what due diligence looks like. But she was very clear in an interview with TaxNotes: “Not asking questions of a client or the third party who handled the ERC claim isn’t exercising due diligence,” Fisk said, emphasizing the importance of documentation as a way for tax practitioners to protect themselves.

The IRS has already begun to respond to the increasing incidence of fraudulent claims throughout ERC’s lifetime. In October 2023, the IRS issued IR-2023-193, which detailed a special withdrawal process to help those who filed an ERC claim and were concerned about its accuracy. On Dec. 6, 2023, IR-2023-230 announced that the IRS was sending out “an initial round” of more than 20,000 letters to taxpayers notifying them of disallowed ERC claims. From what we have seen, these letters are only for 2020 claims, while 2021 disallowances will assuredly be coming shortly. We suspect round three will then come through an automated system that will flag things like whether a business claimed all available quarters, automatically claimed $26,000 per employee, claimed PPP but did not account for it, or if state and federal wage numbers did not match. On Dec. 21, 2023, IRS Announcement 2024-3 outlined the details of the new ERC VDP program for businesses that claimed and received an ERC refund but were not eligible. This program is only available through March 22, 2024. If you decide to “come clean,” and you meet the other qualifications for this program, the advantages include the following:

• Repaying only 80% of the ERC you received
• The IRS not charging penalties or interest
• Not having to report the 20% of the ERC you get to keep as income
• Not having to amend income tax returns to reduce wage expenses

It is not a guarantee that you will be approved for VDP. You will need to make your case. If you end up dealing with an ERC audit, just be prepared to answer the following six key questions that the IRS will most likely be asking.

Question 1: Did your provider start operating during COVID or have “ERC” in their name?

If yes to either, watch out! The IRS has been explicit that there will be heavier scrutiny on these businesses so expect them to dig in their heels!

Question 2: Has the income tax return been amended to add back payroll expenses pursuant to IRC 280C?

If not, YIKES! ERC mills are not properly advising clients that this is MANDATORY! In fact, we are hearing many stories where such providers do not even realize this is a requirement.

Question 3: Is the taxpayer part of a controlled group?

This is a huge one many providers are missing. You may be asking yourself, “Why does the IRS need this?” Well, for the ERC calculation, you must aggregate all entities that are part of a controlled group. If you didn’t do this, you’d better keep your fingers crossed!

For example, to qualify for ERC in 2020, an eligible small employer must have had fewer than 100 full-time employees (FTEs) on average in 2019. Similarly, when determining whether a business qualifies under the revenue decline test, you measure their 2020/2021 gross receipts against their 2019 gross receipts in the relevant quarter. If an entity is part of a controlled group, you must aggregate all of the gross receipts when performing this analysis.

Question 4: Where is your proof of the government order and full or partial shutdown for each relevant quarter?

The IRS asks for not just the number of the government order, but a copy of the actual order. These typically come from the websites for each state/city/county. It needs to be clear that the order is a mandate and not merely guidance, i.e. does the order say you “shall” do something or that you “should” do something? In addition to retrieving a copy of the order, a detailed explanation of how the orders applied to the taxpayer should be provided, specifying exact dates and other proof of the full shutdown.

For a partial shutdown, there must be a “more than nominal” impact, defined as a more than 10% impact to business operations. The IRS will request detailed information showing how a governmental order resulted in more than a nominal effect to business operations.

Question 5: Is part of your ERC claim due to a supply chain disruption?

The IRS is intensifying its approach towards taxpayers who claimed ERC due to a supply chain disruption. According to Notice 2021-20, taxpayers can claim the ERC if their SUPPLIER’S operations were fully or partially halted due to a governmental order and, as a result, the taxpayer’s business operations were also suspended due to the lack of critical goods.

The IRS has requested various details from these taxpayers including: 1) copies of governmental orders that led to the suspension of the SUPPLIER’s operations during the relevant quarters, 2) evidence that the supplier experienced a full or partial suspension of operations with specific operational data from the supplier, 3) clarification on which goods were delayed and why they were critical and 4) evidence that the inability to source these critical goods had a significant impact on the taxpayer’s business.

Question 6: Did the taxpayer apply for a PPP (Paycheck Protection Program) loan and later have it forgiven?

If the taxpayer applied for a PPP loan and later had it forgiven, they cannot use those same wages to calculate their ERC. That is double dipping that will get you in double trouble.

The IRS will therefore ask to see the following: 1) loan application, 2) loan forgiveness application, 3) documentation submitted with the forgiveness application itemizing payroll and non-payroll expenses and 4) calculations proving that there was no double dipping between PPP and ERC.

In summary, it’s been a wild ride with the ERC. The IRS has gone to great lengths to issue warnings to taxpayers about the marketing scammers pushing businesses to claim the ERC without having the knowledge and expertise to perform the analysis and calculations accurately.

Amid tax season, CPAs should take heed of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The standard, which was updated in December 2023, made a significant stride toward enhancing income tax disclosures in financial statements and will provide investors with crucial information for better decision-making.

According to FASB Chair Richard R. Jones, “It requires enhanced disclosures primarily related to existing rate reconciliation and income taxes paid information to help investors better assess how a company’s operations and related tax risks and tax planning and operational opportunities affect the company’s tax rate and prospects for future cash flows.”

Newly Required Disclosures

Rate Reconciliation for Public Entities

For public business entities, CPAs should be aware that the ASU significantly expands rate reconciliation reporting. The update mandates the disclosure of various categories in a tabular format within the effective tax rate disclosure. This includes:

• State and local income tax
• Foreign tax effects
• Enactment of new tax laws
• Effect of cross-border tax laws
• Tax credits
• Changes in valuation allowances
• Nontaxable or nondeductible items
• Changes in unrecognized tax benefits

Reconciling items need to be separately broken out if their impact is greater or equal to 5% of the applicable statutory federal income tax rate (1.05% = 5% X 21% U.S. corporate tax rate).

Public entities are also required to provide qualitative disclosures, such as a description of state and local jurisdictions contributing to the majority of the state and local income tax category, and an explanation of the nature and effect of significant year-over-year changes on reconciling items.

Rate Reconciliation for Private Entities

Private entities are required to disaggregate rate effects similar to public entities but are allowed to do so in a qualitative manner as a disclosure, rather than the quantitative impact within the rate reconciliation.

Income Taxes Paid

The ASU aligns guidance for both public and private entities, requiring the disaggregation of income taxes paid on the statement of cash flows between federal, state and foreign taxes paid. Further disaggregation is required based on individual jurisdiction if the tax paid is 5% or more of the total balance of each category.

Other Updates

Finally, the ASU addresses certain disclosures to conform with Securities and Exchange Commission (SEC) standards, as well as to simplify reporting around disclosures where there was diversity in practice:

• Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign.
• Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state and foreign income.
• Elimination of requirement to disclose, such as:
  • The nature and estimate of the range of the possible change in unrecognized tax benefits in the next 12 months
  • A statement that an estimate of the range cannot be made

Next Steps for CPAs and Their Clients

The FASB’s ASU introduces additional requirements for income tax disclosures, necessitating companies to gather and report more information. While this may initially be burdensome, most companies are expected to have access to the required information, making the adjustment primarily a one-time effort at adoption. Establishing frameworks to compile and report this additional data within financial statements will be crucial for ongoing compliance.

The guidance is prospective, with retrospective application being optional. Public companies need to comply with the new standards for annual reporting periods beginning after Dec. 15, 2024. For all other entities, the amendments are effective for annual periods beginning after Dec. 15, 2025. Early adoption is permitted, providing companies with time to plan and implement the necessary frameworks.

With this change, stakeholders, including investors, will now have access to more comprehensive information about a company’s tax position, sources of cash flows and the jurisdictions in which it operates. While the benefits are evident, company management should be prepared for potential stakeholder inquiries based on the dissemination of more robust tax data, particularly around jurisdictional and cash tax information. Overall, this move by FASB aligns with the broader industry trend of increasing transparency in financial reporting to better serve the needs of investors and stakeholders alike.

Recent guidance from the New Jersey Division of Taxation (TB-108) may have far-reaching implications for those companies that rely on the protections of P.L. 86-272 (a federal law which prohibits states from imposing net income tax on sellers whose only business activity in the state is solicitation of sales). CPAs should be aware of how those changes will impact nexus.

The guidance is modeled after the Multistate Tax Commission’s (MTC) 2021 Revised Statement on P.L. 86-272 which came on the heels of the Supreme Court’s decision in South Dakota v. Wayfair, Inc. The MTC’s revised statement concludes that “the Court’s analysis as to virtual contacts” in Wayfair is “relevant to the question of whether a seller is engaged in business activities in states where its customers are located for purposes of” P.L. 86-272.  The revised statement goes on to outline a number of virtual contacts with a state that would be treated as exceeding the protections of P.L. 86-272.

Already, a few states (New York, New Jersey and California) have published guidance consistent with the MTC’s position. By joining this list, New Jersey severely weakens the protection afforded by P.L. 86-272.

New Jersey

By definition, P.L. 86-272 prohibits a state from imposing a net income tax on foreign corporations that derive income within its borders, if the corporation’s only in-state activity is

[t]he solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State.

Like the revised statement issued by the MTC, New Jersey’s revised TB-108 applies a surprisingly expansive interpretation of what constitutes unprotected “in-state activity.” Under TB-108, certain electronic contacts, which are seemingly extraterritorial, are considered in-state activities that exceed the protections of P.L. 86-272. The following are some of the most surprising examples:

• Transmitting code or electronic instructions through the internet to repair or upgrade products as part of [a warranty]
• Placing apps or internet cookies on computers and devices in New Jersey to gather market or product research that is packaged and sold to data brokers or other third parties
• Contracting with in-state customers to stream (but not download) videos and music to electronic devices
• Providing certain types of post-sales assistance through an electronic chat, email or application that customers access through the company’s website
• Inviting and/or accepting applications for employment through an internet-based platform that are not specifically targeted to in-state residents or for in-state job positions other than for sales positions

This may come as a shock to some multistate businesses, so practitioners need to familiarize themselves with the full list of unprotected activities and should pay close attention to how taxpayers handle these issues in other states.

New York

On Dec. 27, 2023, New York formally adopted regulations that contain provisions resembling the MTC’s revised statement. Thus, New York has adopted the MTC’s position that placing internet cookies onto computers or other electronic devices to gather customer search information is an in-state activity that exceeds the protections of P.L. 86-272.  

California

In 2022, California published a Technical Advice Memorandum and FTB Publication 1050 adopting the MTC’s revised statement. Taxpayers challenged the guidance and a superior court found in their favor, finding that the publications were invalid underground regulations. The court, however, did not address the merits of the taxpayer’s claims, so the public may need to wait for a decision on appeal or for litigants in New Jersey or New York to fully analyze the issues.

More clarification may be needed regarding what business activities exceed the federal protections.