Make Sure Your Compensation Plans Are In Order And Documented

22. April 2019 13:43 by Jason Kelley in

I recently finished resolving a dispute between a client and the IRS regarding the amount of compensation for the founder and owner of a corporation. While the amount of compensation during one of the years at issues was probably unjustifiably high if viewed by itself, the person's compensation over the years (and including the year in dispute) was readily justifiable when viewed over the entire period that the person worked for the business. We ended up resolving the dispute and the resolution was within $50,000 in compensation from my initial evaluation of the case. But it was an expensive "victory" for the client.

The strongest point for the IRS, and the reason it took as much time and expense to resolve, was the client’s lack of documentation of a consistently applied compensation plan. The client had annual minutes (which many clients do not), but those minutes did not address how the owner’s compensation was determined. The client also did not have a written employment agreement, nor did they have any written (or “understood”) basis for calculating the client’s incentive compensation each year. This lack of a consciously determined pattern to the compensation ended up costing the client several thousand dollars in attorneys fees, and a like amount in additional taxes.

The moral of the story: properly pay and report compensation to employee/owners as such; have a written employment agreement or at least some sort of documentation in your minutes of the oral arrangements for compensation; make sure you have a documented or easily proved method for determining incentive compensation that is reasonable in amount.

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3 Tips On Managing Your Corporate Debt

7. April 2019 17:58 by Jason Kelley in

Whether that be a term loan, line of credit, or some other bank credit facility, a business usually has some sort of debt on the books. For big business especially, it’s important to know how to best manage your debt so it doesn’t hinder your growth or sink your business altogether. Here are three suggestions to better manage your debt as you grow your business.


1. Negotiate better terms

If protecting your cash flow is a key goal of yours, then making your minimum payment as low as possible gives your company flexibility to protect its cash flow. See if you can have your interest and principle accrue, or if you can have interest only payments due. You can always turn an interest only payment into an amortizing one by paying down additional principal.

2.Negotiate better amortization schedules

The longer it takes to pay off your loan, the lower your payments are going to be. If the loan amortizes over ten years, your payments are going to be lower than if it pays off over five. You may have to pay extra principle, but the key is to minimize your required payments to guard your cash flow.

3. Negotiate better interest rates

This may take a little tact and salesmanship, but the best tool to help you negotiate interest rates with your lenders is to get them competing for your business. This shift takes you out of the position of “applicant” and transforms your lenders into people trying to earn your business.

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Financial Reporting and the Law

2. April 2019 10:26 by Jason Kelley in



Morgan Lewis is a global law firm that practices financial, international, and commercial litigation that includes tax and estate planning forms of law, among others. Its blog informs both the company’s clients and the broader populace of the latest developments and financial regulations affecting how businesses and industries operate their accounting practices. Up and coming accountants who are planning to specialize in largescale financial services would do well to pay attention to this series of law blogs.

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Strategy and strategic planning – allies in the hunt for long term success

29. May 2018 12:42 by Jason Kelley in



Every company should have a vision. Every company has resource constraints, be it financial or human. The question is, how do you achieve your vision while optimizing your available resources to maximize value? A good start is to develop a coherent strategy, well formulated and adapted to the company and its environment.

There exists an almost infinite number of definitions of the concept strategy. Alfred Chandler in 1962 defined strategy as “the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.” (Source: Alfred Chandler, Strategy and Structure: Chapters in the history of industrial enterprise). Michael Porter in 1980 defined strategy as the “…broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals” and the “…combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there.” (source: Michael Porter, Competitive Strategy). Thus, the concept strategy covers goals, means, and resource allocation.

Creating a strategy is, however, only part of the equation. There are good strategies and there are bad strategies, the crux of the issue is how well do you execute it? An adage says that it is better to have a well executed poor strategy than a poorly executed good strategy. In short, a strategy is not better than its execution. This is where strategic planning comes in.

Strategic planning is about creating a road map for executing a chosen strategy. It is a quantitative exercise, but a well-designed strategic plan goes way beyond simply being a long term financial plan. It represents the outcome of the strategic discussions held and the choices and decisions made. One should not confound strategic visions and objectives. Growing by X% is an objective, strategy is about how you get there. As such, the qualitative aspect is at least as important as the quantitative ones in the strategic planning process, which is about a lot more than simply defining future growth and revenue targets.

Going forward I will provide my thoughts and insights into various aspects of the strategic planning function and how it can bring value to organizations of all sizes. In the meantime, thoughts and comments are welcome.

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3 Hidden Problems That Surface When Building A Payroll System

9. May 2018 10:45 by Jason Kelley in

Every entrepreneur dreams of having a well-oiled payroll system with zero hiccups. Unfortunately, business dreams rarely reflect reality: payroll is complicated and ever-changing.

When implementing a payroll system, you should expect to devote some time to troubleshooting bugs, smoothing the processes, and learning from unexpected fires. For reference, my co-founder and I have devoted more than a year to fully learning the ropes of our financial, payroll, and accounting software.

At the same time, payroll is something that countless businesses have already done. Even though every organization is different, there are some problems that you can avoid off-the-bat.

There’s no need to reinvent the wheel. Here are some common problems that entrepreneurs can avoid, avoid, avoid.

Payroll Problem #1: Mismanaged Taxes and Deductions

There are many moving parts to your payroll system. From a tax and deductions perspective, Charles Read, president, and CEO of payroll advisory company Get Payroll encourages business owners to watch out for the following:

  • Pre-tax deductions that have been treated as the post-tax deduction by the business or a previous service bureau. (Usually Insurance)
  • Lack of child support garnishments being processed.
  • Not understanding the requirements and rules for child support garnishment enforcement.
  • Back taxes and penalties that have not been filed or paid.
  • Not getting all prior wage and tax info.
  • Manual paychecks recorded only in accounts payable and not in the payroll for tax reporting or filing.
  • Uncashed payroll checks that need to be submitted to the state.
  • Employees not actually on the payroll.
  • No written policy for paid time off.
  • Family members not on the payroll for tax purposes that should be.
  • Misclassification of employees as independent contractors and vice versa.
  • No written cafeteria plan.
  • Benefits/bonuses/gifts/etc. that is income to the employee not being recorded as payroll.
  • Tax avoidance scams that the company has bought into that are illegal.
  • Not registering in all of the States that they actually have employees in.
  • Not recording executives as employees.
  • Buying a shell company without checking on the actual state unemployment rate the shell has in place.
  • Not understanding overtime rules.
  • Not understanding that Labor Posters can be had for free.
  • Not understanding the Fair Labor Standards Act.
  • Misuse of training wage provisions.
  • Not understanding the goals of the US Department of Labor and The State Unemployment department.
  • Not knowing about New Hire Reporting.
  • Not keeping adequate records on payrolls for IRS purposes.
  • Not understanding or knowing the rules for depositing and filing employment
    taxes; federal, state, local.
  • Not filing 1099s.

The best way to avoid this (partial) list of potential issues is to work with a tax advisor or consultant off the bat.

“Employers who try to deal with the IRS themselves get into the worse hot water,” explains Read. “It’s advantageous to work with a CPA who is a payroll processing expert instead.”

Payroll Problem #2: Communication with Employees

Remember that your team does not have the same insight into your payroll system that you do as a business owner. Sometimes, from an employee’s perspective, the numbers don’t add up.

“A major problem that can surface when building your payroll system is tax withholding, as well as changing the number of exemptions, explains AJ Saleem, who owns a start-up tutoring company, Suprex Tutors Houston.

“Certain employees would prefer a different way to withhold money and this can be a concern.”

One way to resolve potential miscommunication—and unnecessary employee disgruntlement—is to work with a benefits administrator. If you’re unable to hire a full-time point person for HR, consider working with a consultant or outsourced firm that can help your team members understand their withholdings.

Ensure that every employee feels confident in coming to you with questions. Communicate that payroll can be complex to manage, so everyone within your organization understands your side of the story too.

Payroll Problem #3: Business Unit Segmentation

Business owners need to track payroll across multiple departments and teams for effective cost management, forecasting, and future hiring. A common mistake occurs when business owners don’t prepare themselves at the infrastructure level to track wages across departments.

“If a client wants to track wage costs across different departments, the mapping must be setup correctly inside the payroll system,” explains Thomas J. Williams, a tax accountant who operates Your Small Biz Accountant, LLC.

“Otherwise, all the earnings are placed into one wage account, making the payroll reports inaccurate.”

The key to building a structured payroll system is to know your growth plans and trajectory. How will you want to track costs across teams, long-term, and how will these metrics involve your cost management and investment decisions in the future?

Avoid ending up in a payroll system laundry pile by creating clearly defined segments off-the-bat.

Final Thoughts

Streamline your payroll operations before your business goes through its first major growth spurt. And if you’ve already gone through a growth spurt?

If your business is showing signals of a potential upwards trajectory whether you’ve been in business for six months or six years,, the best time to streamline your payroll is now. The ideal time is when you hire your first employee or have the capital to invest—signals of a sustainable operation.

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Swept Away? How To Avoid An Asset Protection “Perfect Storm”!

25. January 2018 17:46 by Jason Kelley in

When it comes to asset protection, a lot can go right…but a lot can also go wrong. And often, what goes the most drastically wrong involves getting tripped up by details that can seem insignificant, even trivial — until they trigger the painful reality of being blown off course. Fortunately, these storms don’t have to sink you; they can be dealt with safely. But sometimes avoidance tactics seem to be more trouble than they’re worth, and you can wonder if all that detail is really necessary. Shortcuts are great if you know what they can (and can’t) do for you in the long run. But not knowing can get you in trouble — expensive trouble.

Simplify, Simplify, Simplify (Maybe)!

It’s only human nature to try to make things as simple as possible. And, in many cases, simplifying a process is the best thing you can do for yourself.  Why spend the time and effort working through Steps 1 thru 4 to reach Step 5 if an alternative approach allows you skip those intermittent steps and still arrive at Step 5 none the worse for wear?  There’s no reason not to take the shortcut, right?

Maybe. But the problem comes in when Steps 2 through 4 cover contingencies and provisions that may not be readily apparent to an untrained eye.  Specifically, the case I’m talking about today involves the difference in perspective between your CPA and your asset protection attorney.

Susan’s Situation

One of my clients, Susan, had me set up multiple single member Limited Liability Companies to protect a collection of rental properties for her.  In the process of doing this, a separate corporation was set up to manage these LLCs, with their secondary purposes of buying, rehabbing, and reselling the property. With the structure complete, and the rental properties deeded to appropriate LLCs, Susan’s corporation became a manager: its role was to manage all the holdings of the various LLCs. This included paying bills, collecting rents, and all those other myriad details.

Part of this structure included setting up a bank account for each LLC. That way, each could deposit rental income and pay bills associated with the properties held therein. One of these fees, in turn, is a management fee paid to the corporation for its monthly service, an amount determined in separate property management agreements with each LLC.

It Was Plenty Simple…

Under the structure, then, each LLC collected its own rent, paid its own bills, and distributed profits to Susan as sole owner. All my client then had to do was deposit monies into appropriate accounts and write a few checks each month.

….Or So I Thought.

For reasons I’m still not clear about, this simple structure became a hassle for Susan. When it did, her CPA stepped in and convinced her to close the individual LLC accounts. He told her that running everything through the management corporation would simplify and streamline the process. She could allocate her taxes through QuickBooks, merely by making ledger entries that indicated which LLC made income or sustained loss. She could run her business out of just one checkbook!

Susan was thrilled. She’d cut right through those pesky Steps 2 through 4, and her life was much simpler. And the system worked, for three good years…

Until someone sued Susan’s corporation.

Susan fought the lawsuit, but she lost, and a judgment was entered against her corporation. But, still, she thought — no problem. She could simply dissolve the corporation and walk away; after all, her assets were all held in separate LLCs, so her properties were protected from corporation debt. Right?

Unfortunately, Susan was wrong.

The plaintiff, confronted with her proposed action, sought to attach the assets of each LLC — and was successful.

“Why Didn’t You Protect Me?”

Understandably, Susan was upset by all this, and she came to me demanding to know why the plan I had created for her hadn’t protected her assets. This resulted in one of those difficult conversations, the kind we as asset protection pros hate to have: the one where you tell a client, as tactfully as possible, that your plan would have protected her, had she stuck to it. But she hadn’t.

That “running her business through one checkbook” became the “loophole” whereby her LLCs were no longer regarded as separate entities anymore. That, in fact, is why the court ruled the way it did: it cited that by failing to have separate bank accounts for each LLC, she had failed to treat them as separate businesses; the assets all became part of her corporation and were no longer “untouchable.”

Don’t Try This At Home! (Or Anywhere Else!)

The lesson learned? For asset protection, each of your businesses must be able to stand on its own. Don’t let a CPA or other professional convince you that you don’t have to bother with separate accounts, that you can sidestep important details, and still reach the same end. From a tax standpoint, the CPA might well be one hundred percent right; however, in terms of asset protection, he’s not. Trying to take “shortcuts” in this area can result in your “shorting out” your own plan…as it did for Susan.

Fortunately, you can avoid being swamped by an unexpected legal storm — but even the best CPA or tax specialist may not know about all the “life preservers” you’ll need to save yourself. That’s why it pays to consult professionals who deal with asset protection regulations every day. Call us, and we’ll gladly take you through all the steps you need to be sure…not sorry!

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Offshore penalties and Tax Evasion

6. January 2018 22:12 by Jason Kelley in



HMRC is continuing to increase the number of tools available to tackle offshore evasion and are taking an increasingly aggressive stance in relation to offshore matters.

The government’s initiative to direct a further £60m to fund a threefold increase in the number of criminal investigations into serious and complex tax fraud is ongoing, and the enhanced penalties (see below) for undisclosed ‘offshore’ matters make it more important than ever for those with undeclared liabilities to take steps to regularise their tax affairs.

HMRC’s Worldwide Disclosure Facility (WDF) is the latest ongoing initiative to provide a means for taxpayers to bring to light undisclosed offshore income and gains.  Following a number of previous ‘tax-favoured’ initiatives in this regard, the WDF offers no specific favorable terms but does provide a clear forum via which individuals can settle overdue matters.


The potential penalties related to undisclosed tax liabilities are currently as follows.  The categories refer to jurisdictions with varying level of perceived ‘secrecy’.  ‘Category 3’ jurisdictions typically have the lowest level of international information sharing agreements.

    Max. penalty if error is deliberate and concealed
(% of “potential lost revenue”)
Min. penalty if error is deliberate
(% of “potential lost revenue”)
Min. penalty if error is careless
(% of “potential lost revenue”)
Category 1 Voluntary n/a 30% 0%
  Prompted 100% 45% 15%
Category 2 Voluntary n/a 40% 0%
  Prompted 150% 62.5% 22.5%
Category 3 Voluntary n/a 50% 0%
  Prompted 200% 80% 30%

As might be expected, the rates of penalty are lower where disclosures are made voluntarily by taxpayers, as opposed to instances where HMRC prompt disclosure.  Similarly, the penalties for ‘careless’ as opposed to deliberate behavior incur a lesser penalty, and the timeframe over which unpaid tax may be assessed can also be limited in such cases.

If you would like assistance with offshore issues and managing a disclosure under the WDF please contact us.

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Value of strategic planning

23. December 2017 21:00 by Jason Kelley in


We see the value of strategic planning being made at several levels. Organizations, small and big, private and listed, often tend to be focused more on short-term operational issues than long-term strategic objectives. Taking some time to step out of the daily routine will facilitate taking a longer term perspective, while also potentially positively influence operations in the shorter term.

An important benefit of strategic planning is to create focus on the strategic direction of the organization. In a properly executed strategic planning process, one asks relevant, sometimes tough and difficult, questions meant to generate a critical thought process. Subsequent thinking and discussions should be performed with an open mindset, not restricted to existing solutions, including stepping outside of one’s comfort zone, acknowledging that the future may be very different to the current situation.

With a strategic plan developed a road map is in place for driving the organization forward with execution discipline being key. Keeping in mind that the only thing certain about the future is that it is uncertain and full of unknowns, both known and unknown, everything will definitely not go as planned, neither should one slavishly follow the plan come hell or high water. What the strategic plan does provide is direction and guidance with regards to what the organization wants to become and how to get there. An organization’s vision and long term objective may not necessarily change due to unforeseen events, but a detour may be required, in which case it is important not to lose track of your destination and ensure you continue to move forward in the right direction.

Finally, does a defined strategic plan stop you from being opportunistic? Not at all. To the contrary, it may actually serve as a support tool to improve decision making as whenever an opportunity arises, asking questions such as “does this fit with my strategic objectives?” and “can this decrease my execution risk” can actually improve the quality of decisions, e.g. through ensuring that opportunities accepted are coherent and aligned.

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Tips to avoid liability risks in your CPA practice

11. December 2017 17:20 by Jason Kelley in

CPAs face a huge amount of responsibility, and with responsibility comes risk. We can make sincere mistakes, or a client may allege that we made a mistake and should have foreseen potential pitfalls. On top of all that is an ever-changing mountain of financial and tax regulations which CPAs are expected to constantly stay on top of.

The AICPA recommends and certain states mandate that accounting professionals and firms carry professional liability insurance, but a firm can still find itself wasting time in court even with insurance. Accounting firms should thus identify which areas often pose the biggest liability risks and know how they can reduce risk.

Know what you know

Accountants as a profession are transitioning into true financial professionals, willing to offer clients useful advice on how to get the most out of their assets.

But there is a dangerous downside to this trend. CPAs who have learned to do additional financial work in one field may decide that they can give advice in a separate field, often out of a desire to help clients and an unwillingness to admit that they do not know everything. And if a CPA performs a service for the first time and gets used later, their lack of professional expertise can be held against them.

It is commonly said that the wisest men in the world are those who know just how ignorant they are, and CPAs should remember that. Instead of thinking that you can just learn what the client wants you to do on the fly, do not hesitate to recommend other, more specialized accountancies. You will reduce the risk of making a mistake and facing a potential lawsuit and your client will appreciate your firm’s honesty.

Cybersecurity and the Cloud

Accountants hold huge amounts of personal and financial information as part of their profession, information which criminals and hackers would love to obtain. The consequences of a data breach are not just embarrassment and lost reputation. Clients will look to sue, and small accounting firms cannot count on being protected from hackers by the shield of obscurity.

There are plenty of guides out there on how accountants can improve their cybersecurity. Basic measures such as not using Microsoft XP or Vista or purchasing cybersecurity protection programs will do a great deal to deter hackers who will search for easier targets. Cybersecurity training is also important so that employees can be aware of threats such as phishing, malware, and even basic concepts such as that Nigerian prince is not actually going to send you a million dollars.

The importance of cybersecurity and data protection takes on a further dimension when the growing popularity of cloud computing is factored. While storing data on the cloud can be cheaper and allow for increased scalability, security breaches with cloud vendors have occurred. Accounting firms should thus do their due diligence and select a cloud vendor with a good security reputation and inform clients that their information will be stored on the cloud. If your clients are concerned, it is better for them to be aired out now than after a data breach.

The Importance of Engagement Letters and Writing

Accountants have to remember that even if they did everything right, they are still at risk of being sued. A client whose financial situation suddenly gets worse can easily decide that you could have done something to prevent it even if that is not the case.

And if the client’s argument can get past a motion for summary judgment, accountants can find themselves stuck with the expenses both in time and money of a court case for years. Do not forget that it can be easy for a lawyer to spin a story to some jury about how the evil financial mogul defrauded the poor common American.

It is important for these reasons for accountants to document everything and not just that which is required by professional standards. Engagement letters, in particular, are an important documentation tool. They define what services the accountant provide, what responsibilities the accountant and the client share, and any limitations. Most importantly, accountants should provide only the services described in the engagement letter and do not try to push the boundaries. If an accountant wants to provide additional services, draft a new engagement letter.

Accountants may hesitate about providing letters to established clients. They fear that it would indicate a lack of faith and that they could potentially lose a client by doing so. But the downside of a lost client is trivial compared to the downside of a long and expensive trial.

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The Problem with Quit Claim Deeds

2. December 2017 15:54 by Jason Kelley in

When transferring real estate, there are several different property deed types to choose from, with the most popular being Quit Claim Deeds, Grant Deeds, and Warranty Deeds.  Unfortunately, too many real estate investors opt for Quit Claim option most likely due to its common parlance amongst investors when discussing the transfer of real estate.

A client just felt the pain of using a Quit Claim Deed when selling a property he owned for five years.  His situation set up as follows:


  • Jim buys a house in his own name with title insurance
  • Jim attends a seminar and learns about asset protection and the benefits of LLCs
  • Jim hires a local attorney to create an LLC and deed the property into the LLC
  • Jim’s attorney prepares a Quit Claim Deed and transfer the property into the LLC


  • Jim’s LLC sells the house for $130,000
  • They holds on to $120,000 and refuses to pay it over to Jim’s LLC because of a HELOC from the prior owner clouding title
  • Jim contacts his title company to bring a claim
  • Title company informs Jim it missed the HELOC when he purchased the property but Jim blew his policy upon transferring it into his LLC i.e., WE WON’T PAY!

You probably guessed where Jim went wrong – using a Quit Claim Deed.  Title insurance protects you from any defects or claims brought against you at a later date in connection with a title defect.  The key to staying protected when deeding property into an LLC is to ensure claims can still be brought against you.  You are probably thinking why would I want claims to still be brought against me?  The purpose of the LLC is to protect me from claims.  Well, we are not referring to lawsuits with third parties.  In this context, you will be suing yourself.  Sounds crazy but in reality that is what Jim could do if he had used the proper deed form.

A Quit Claim Deed transfers bare legal title to the grantee without any warranties of any sort.  Think of it like the “AS IS” clause in a real estate purchase and sale agreement.  A Warranty Deed on the other hand guarantees free and clear title of any defects.  When Jim’s LLC did not get paid on the sale of the property it could not bring a claim against Jim for transferring defective title because the type of deed he used (a Quit Claim) came without any warranties.  A Warranty Deed solves this dilemma because Jim’s LLC could sue Jim under his warranty of clear title.  Jim, in turn, will give the claim over to his title insurance company who agreed to insure Jim against any claims for a defective or clouded title.

We discovered it is sometimes the small things that end up generating the biggest problems.

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