Section 174 – Let’s Get You Up to Date

Section 174 – Let’s Get You Up to Date

Elected officials, the Association of International Certified Professional Accountants (AICPA), business leaders, and others were holding their collective breath waiting to see if debt ceiling negotiations would result in the repeal or alleviation of Internal Revenue Code (IRC) Section 174 changes, but no such luck. So, IRC Section 174 – which changes how businesses expense research and experimentation (R&E) costs effective plan years January 1, 2022 and later – is the law.

Per a provision of the 2017 Tax Cuts and Jobs Act (TCJA), Section 174 R&E expense changes became effective January 1, 2022 going forward. The hope was – and continues to be – that the pre-2022 expense provision gets restored, but that hasn’t happened. The AICPA has requested additional guidance, but that hasn’t been provided. So, the law stands, and it means there are changes to how businesses must account for R&E expenses.

Before the change, you could immediately deduct the full cost of R&E expenses from taxable income. As of tax years starting January 1, 2022 and going forward, under Section 174, all R&E expenditures will be capitalized and amortized for five years if conducted in the U.S.; 15 years if conducted outside the U.S. What’s more, they now include R&E for software development. This means, your tax liability will likely change and possibly increase significantly.

Costs subject to capitalization include wages and nontaxable benefits for researchers; 100% of contract research costs; supervisor wages for researchers; supply costs; overhead expenses (i.e., rent and utilities); equipment depreciation; pilot model costs; and software development expenditures.

One of the biggest challenges businesses face is finding all of the R&E costs that fall under Section 174. Since other IRC codes (i.e., Section 41) come into play, identifying R&E expenses should be a priority.

According to Thomson Reuters, to qualify, activities have to meet the IRS four-part test for business purpose; technological in nature; elimination of uncertainty; and process of experimentation. (Britton, Nadya. “5 things you need to know now about Sec. 174 capitalization.” May 25, 2023. Thomsonreuters.com.)

Businesses will also need to follow accounting method change procedures (File Form 3115), except for the first year when a business can include a white paper statement that contains defined elements with its tax return. Plus, businesses should check whether their state conforms to IRC 174 (which is the case in New York).

Those are the highlights. For additional information, the RSMUS Alliance – of which RBT CPAs is a member – has comprehensive Q&As and a resource center available. If you have any questions about this or business accounting, tax, audit or advisory services, please remember RBT CPAs is here to help you succeed — give us a call.  Also keep an eye out for more updates from RBT CPAs on Section 174 in the weeks ahead.

 

RBT CPAs is proud to say all of its work is prepared in the U.S.A.  We never outsource outside the U.S.A.

Managing ASC 842’s Ripple Effect from Financial Statements to Bonding

Managing ASC 842’s Ripple Effect from Financial Statements to Bonding

Now that financial statements reflect ASC 842, construction companies need to understand the potential effects on bonding and business so they can plan accordingly.

Last year, private companies were focused on identifying and categorizing leases to ensure they were accurately reflected on financial statements to comply with the lease accounting standard ASC 842 (which replaced ASC 840). Financial statements for year-end December 31, 2022 and beyond reflect the new standard. (Public companies adopted the standard for reporting periods starting January 1, 2019.)

Impact on Bonding

To work on certain projects, you may need a bond from a surety company to guarantee the terms of a contract will be fulfilled, as well as a certain bonding capacity (the maximum amount of coverage a surety company will provide). Sometimes a project owner may not require bonding, but instead uses bonding capacity as a prerequisite for being able to bid on a project.

Having a high bonding capacity shows a project owner that your business can meet its contractual obligations. It also allows you to bid on larger projects, enhancing your business’ ability to grow. There are even times that bonding capacity can mean the difference between winning and losing a contract.

ASC 842 impacts bonding and bonding capacity because financial performance is one of the primary factors a surety company will review when determining whether to issue a bond and for how much (they may also look at your work portfolio, experiences, references, business practices, and more). ASC 842 requirements can significantly impact financial performance reporting, potentially increasing challenges in obtaining bonding approvals or leading to higher bonding costs.

Impact on Financial Statements

Before ASC 842 took effect, operating leases simply had to be disclosed in a footnote on financial statements. With ASC 842, all leases – financing and operating – are recognized as assets and liabilities on the balance sheet. There is one exception: short-term leases, defined as leases with terms of 12 months or less at the lease commencement date, are not included.

The change enhances transparency and enables a more apples-to-apples comparison of companies’ debt related to leases and overall finances. At the same time, it can also impact key metrics on your financial statement and ultimately your ability to secure bonds (or loans), your bonding capacity, and more.

For example:

  • Debt-Service Coverage Ratio (DSCR) measures a company’s available cash flow to pay current debt obligations (principal and interest). As a result of ASC 842, DSCR may decrease, putting your ability to service existing debts into question and impacting perception about your business’ financial stability.

 

  • Working capital shows a company’s ability to pay current liabilities with current assets. It’s calculated by subtracting liabilities from assets. ASC 842 reporting requirements may result in a decrease in working capital, impacting perception about your business’ health and operational efficiency.
  • Debt to equity ratio (D/E) compares total debt to shareholder equity, revealing how much your business relies on borrowed funds to operate. A lower D/E is favored because it means your business has a lower risk of defaulting on a loan. However, a ratio that’s too low may be interpreted to mean a business isn’t using debt effectively for expansion. ASC 842 can increase liabilities and ultimately D/E, signaling potential issues with your company’s financial leverage.

The changes resulting from ASC 842 can affect a number of other metrics as well (i.e., interest coverage, return on assets, debt coverage ratio, and more).

Managing the Impact

Nobody likes surprises, especially when it comes to finances. Considering the broad impact of ASC 842, no doubt your stakeholders – including banks, surety companies and others – are aware of the new disclosure requirements for leases. Proactively communicating the impact ASC 842 has on your financial statement may help manage perceptions. (If you need assistance, you may want to consider speaking with your accountant.)

This may also be a good time to re-evaluate your leasing strategy. Is leasing still a better option than ownership? Is there any benefit to moving to shorter-term leases (i.e., 12 months or less) to minimize potential impact on financial reporting?

Finally, consider the longer-term. Based on how ASC 842 impacts your balance sheet and financial statement, are there business or operating changes you should consider to bring financial metrics back to where you want them to be?

Are You Prepared for a Credit Crunch?

Are You Prepared for a Credit Crunch?

During Covid, more money was pumped into the economy than ever before. Now, liquidity is being removed from financial markets faster than ever before thanks to the Federal Reserve. Among the many other potential effects is a tightening of credit in the marketplace, which may hinder business’ growth opportunities. While we’re waiting to see how things play out, there are steps you can take now to put your business in a better position for getting new capital, should you need it.

As reported by Forbes, “The exact effect of this quantitative tightening is not known as we are in uncharted territory, but it could result in upward pressure on interest rates and siphon liquidity out of the financial markets, meaning commercial banks may have less capital to lend.” (Weissmueller, Ryan. “How To Set Your Company Up for Success in a Possible Credit Crunch.” March 8, 2023. Fortune.com.)

To increase your business’ likelihood of securing new capital:

Be prepared to sell your business case to lenders.

What distinguishes your company from others? How are your margins and cash reserves? What do your quarterly results say about your business? Did you make strategic moves to take advantage of market forces and successfully navigate the last few years? Are you looking to grow or maintain the status quo until things turn around? Now is the time to tell your story, using plenty of details and facts to back it up.

What’s your contingency plan?

Showing lenders you have a viable plan to address different market challenges can boost their confidence in you and your business.

Minimize risks.

Do you have protocols in place for ensuring you receive prompt payment from customers? If your inventories are high, what’s your plan to lower them? Are you taking steps to protect and boost your credit rating?

Pick the right lender.

As recent events prove, it’s vital to make sure your lender’s business is healthy. Have you looked at its performance, reserves, and loan quality? What about its portfolio? Perhaps most important: do you they know and understand the construction business and industry?

Looking at the bigger picture, many of the steps you can take to prepare for a potential recession, can also help position your business to secure capital while riding out uncertain times. Consider:

How well do you know your numbers – how much cash you have, what’s your inflow and outflow, and how upcoming projects and deadlines may impact results? What about your operating costs and overhead – are there opportunities to lower them?

What’s your contingency plan should we enter a recession? How will your business respond? Will you cancel loans on unused equipment? Sell materials? Adjust headcount? Are your suppliers in a good place financially? Having a plan in place now can save you precious time and money when you need them most. (It’s also a great way to show potential lenders you have viable plans to address uncertain times.)

Do you have enough cash on hand to cover operating expenses and negotiate prices for rental equipment or purchases? How’s your emergency fund?

Have you done everything possible to increase margins? Are you getting the best prices for materials? Can you save by changing subcontractors? Should you rent instead of purchasing equipment? Are you estimating on jobs correctly? Have you reviewed contracts to make sure you’re not paying for anything you don’t use?

Are you balancing backlog and growth? While a strong backlog can provide a strong sense of security, the odds of projects being delayed or cancelled may increase. Double-down on looking for new business opportunities.

Are you engaging your employees to identify challenges and solutions? They see the news and know the headlines. Empower them and your business by asking for their help identifying and eliminating inefficiencies.

Do you have a business advisory service or accountant like RBT CPAs to help you develop and adjust your financial plans? In good times and bad, we’ve been helping Hudson Valley businesses adjust to the ever-changing economic landscape for over 50 years. We believe we succeed when we help our clients succeed. Find out why 97% of individuals and businesses who become RBT clients remain RBT clients for the long haul. Give us a call today.

Overcome Staffing Challenges with Customized Compensation and Benefit Plans

Overcome Staffing Challenges with Customized Compensation and Benefit Plans

As an accountant, I can always depend on numbers to make sense, until they don’t. Take the talent shortage, for example. According to the AGC 2023 Construction Hiring and Business Outlook Report,  69% of survey respondents expect to increase headcount this year. At the same time, 80% indicate they’re having a hard time filling some or all salaried or hourly craft positions. Results are higher for respondents in the Northeast (76% and 88%, respectively) and New York (83% and 86%, respectively).

Add to that the existing shortage of 650,000 construction workers, plus the expectation that more than 40% of the current U.S. construction workforce will retire in the next decade, and the math just doesn’t add up.

The equation gets even more complicated. There are 67 workers for every 100 open jobs in the U.S. according to the U.S. Chamber of Commerce. People are staying out of the workforce. Immigration is at an all-time low. Headlines are screaming about shortages in doctors and nurses, government employees, teachers, accountants, public service employees, techies, and more, making competition for limited human resources fierce and the need for a comprehensive, multi-faceted talent acquisition strategy table stakes.

Put simply, there are more jobs than people and that’s not going to change. What has to change is how companies acquire and retain talent, while reinventing how work gets done. This includes coming up with engaging compensation and benefits approaches that strategically differentiate your company from competitors’.

For example, what if an employer created a customized benefit for different employee classes that provides a modest benefit for less experienced team members, but grows as they become more experienced? It could have a multiplier effect based on length of service but allow the team member to receive payments at milestones so the benefit is real now and not 30 years away. The employer could contractually put money away for an employee, get a tax deduction, and gain a competitive retention and attraction tool.

According to Lou Bach who leads RBT CPA’s Spectrum Pension & Compensation affiliate, “These Non-Qualified Deferred Compensation Plans are usually reserved for top executives and have a salary deferral component, like 457 plans; however, since they are employment agreements, they are not limited to highly compensated employees. Rather than salary deferral, all contributions are provided by the employer. I’ve seen them referred to as ‘Tactical Employer Compensation Arrangements.’ We have actually done a number of these for clients, dating back over the last decade. Given today’s shortage of skilled labor, I believe we’ll be seeing more of these types of arrangements going forward.”

Willard Financial Group out of Springfield, MA, for example, has been custom designing select incentive plans since 1996 for key employees with specialized skills, ranging from executives and project managers to machinists and nurses. According to James D. Percy, J.D., CLU, ChFC, “Because these are non-qualified plans, such as deferred compensation and SERP (supplemental executive retirement programs), we can provide companies with the ability to pick and choose who participates and the benefit level for each employee. Once the company decides which employees will participate, we custom design a simple plan tailored to each selected individual or group.” That custom-designed deferred bonus plan with ancillary benefits can be tailored to the needs of each employee.

So, an employee with young children may find an agreement that pays a child’s college tuition in ten years, plus offers life insurance meaningful, while someone retiring in 10 years may prefer a payout equal to three times compensation at the end of a long-term project. The key is to design the custom plan to be meaningful and motivate each individual employee.

In addition to adopting creative approaches to pay and benefits, you may want to check out recruiting and retention resources at the AGC, U.S. Department of Labor, U.S. Chamber of Commerce, National Center for Construction Education and Research, and the Building Talent Foundation (BTF). Also find unique talent resources via organizations like Helmets to Hardhats, the Rework America Alliance, and Opportunity@Work.

Are Increasing Interest Rates Impeding Growth Plans? Consider this Lower-Interest Financing Option

Are Increasing Interest Rates Impeding Growth Plans? Consider this Lower-Interest Financing Option

With the Federal Reserve Board increasing interest rates seven times in 2022 and another hike likely next month, you may be hesitant about taking out loans to move forward with growth plans and investments in new products, technology, and equipment. What if we told you (or reminded you) there is a funding program available to eligible manufacturers in New York State that can save you 2% to 3% in interest, while supporting business growth?

The Empire State Development Linked Deposit Program (LDP) helps existing businesses in the state secure reduced-rate financing to improve productivity, performance, and competitiveness. Loans are available for 2% or 3% lower than the fixed interest rate a lender would normally charge (depending on factors like where your business is located; whether it is minority or woman owned; if it’s for a defense industry diversification project; the lending institution’s 4-year CD rate; and more). With the LDP, you may qualify for higher levels of funding and funding may be available even if you have less than stellar credit.

This is made possible by New York State, which makes a linked deposit of funds to induce a lender to charge the borrower a lower rate for the first four years of the loan. The lender pays the state a reduced rate of interest on its 4-year deposit (in the form of a CD) and it reduces the interest rate charged on the borrower’s loan by a like amount. Translation: You pay 2% to 3% less than the lender’s going interest rate on the loan.

Who’s eligible? If your manufacturing firm has 500 or less full-time employees based in New York State, you may qualify.

What can an LDP loan be used for? Prepare strategic plans to improve productivity and competitiveness; introduce modern equipment and/or purchase or expand facilities as part of a modernization plan; improve production processes and operations; introduce computerized information, reporting and control systems; reorganize or improve work systems; adopt total quality and employee participation programs; develop and introduce new products; identify and develop new markets; buy out viable companies; and obtain working capital for modernization activities to improve competitiveness and productivity, while creating or retaining jobs.

How much can I get? There are no loan minimums. The maximum for each linked deposit is $500,000 and the lifetime limit is $2 million. You can have up to three LDP loans for up to $1 million at any given time.

How much can I save? 2% to 3% on loans for a four-year term. So, if you’re approved for a 3% reduction on a $500,000 loan and the lender’s interest rate is 7% on the loan, your rate will be 4%. So, you stand to save $60,000 over the life of the loan.

EXAMPLE OF 3% REDUCTION:Without LDPWith LDP
Loan Amount$500,000$500,000
State’s Deposit– 0 –$500,000
Lender’s Interest Rate on Business Loan7%4% (with 3% reduction)
Lender’s Interest Rate on C/D3%0% (with 3% reduction)
Estimated Savings to Borrower (4 yr. term)$60,000

While the uncertain economic environment increases the temptation to curb spending as much as possible, as reported in Forbes, “Some experts say that economic downturns can present the best opportunities for growing a business while others are retreating.” If you agree with the later and are interested in learning more about the LDP, visit the Empire State Development Link Deposit Program for more information, including frequently asked questions, a list of lenders, an application, and more.

For additional insights, including how this may affect your accounting and taxes, give RBT CPAs a call. We’re a leading accounting, tax, and audit firm serving the Hudson Valley and beyond for over 50 years and we believe we succeed when we help you succeed.

Does Your Company Need a Mentor Program?

Does Your Company Need a Mentor Program?

Mentoring was once reserved for building senior leadership talent pipelines – not anymore. Today, over 70% of Fortune 500 companies make mentoring a fundamental part of their recruitment, retention, and engagement strategies for many employees. The fact is, when done right, mentorships can be a win-win, and their resurgence couldn’t have come at a better time.

We all know the statistics – the average age of retirement in construction is 61 and today more than 1 in 5 construction workers is over 55. As if the talent shortage isn’t bad enough, issues are compounded when you consider the pending loss of institutional and on-the-job knowledge that will accompany workers into retirement. Before construction managers, project managers, and experienced tradespeople leave the workforce, it’s imperative to tap into their wealth of knowledge and set up future workers – and your company – for success.

Gen Zers and Millennials make up about 40% of today’s workforce and they’re unlike any predecessor. They place a premium on having a purpose and being valued and respected. Being in the first two digitally native generations, they want continuous learning. Both work/life balance and professional development are important. If a company’s values, culture, and environment don’t align with their priorities, they may not stick around for an interview much less a job.

Unlike what these employees learned in a classroom, apprenticeship or internship, mentorships can help provide insights into your company culture, the value proposition your company and their profession offer, and soft skills like decision-making, active listening, communication, and collaboration.

Mentor programs are used to build leadership and communication skills; provide networking opportunities; improve quality and safety; promote employee ownership of professional development; navigate on-the-job challenges; provide a window into career opportunities and professional development; expose new employees to all aspects of a job; foster diversity and inclusion; break down silos; hasten the pace of merger and acquisition integration; and more.

By pairing a workforce entrant with an experienced employee, new employees gain insights into why things are done a certain way, the rewards and challenges of a construction career, what clients really expect, or even the best way to stay safe on the job (which is valuable considering 60% of on-the-job injuries involve employees with less than a year of service).

A mentor program can also serve as a retention tool for existing talent. When more experienced workers are asked to share experiences, skills, and knowledge, they feel valued and have another reason to put off retirement – in fact, retention rates are higher among mentors than non-mentors.

Today’s mentoring programs come in many formats – one-on-one, group, or even online – and last anywhere from a few months to a few years. Some build a talent pipeline by offering mentoring to high school or college students. Others focus on new hires or any employee seeking development. There are even reverse mentorships, where experienced business leaders pair up with new workers to learn about growing up with technology and other traits of Gen Z and Millennials.

Numerous construction associations offer mentor programs as part of their skill building toolkits. Still, many employers build customized programs targeting employee and company priorities. Software is available to help track and facilitate program activities.

Visible executive support is vital to help build support of the program; foster participation; and market an employee value proposition. “We have the best people. We learn from each other. We help each other succeed.” Those are potent selling points to employees that value living a meaningful life.

To maximize ROI, a program should have a formal structure and process for recruiting and training mentors, goals and success measures, and prescribed activities and timelines. One way to promote effectiveness is by conducting a pilot; asking for feedback; and making adjustments before launching companywide.

One challenge to prepare for is motivating existing employees to step up as mentors. Consider what’s in it for them. Plan for special recognition in company communications and at events. Share success stories. Provide incentives ranging from gift cards and extra time off to bonuses.

While there is no magic bullet for resolving current staffing challenges, mentoring programs check off a number of boxes in terms of delivering value to recruits, employees, companies, and clients. Interested in learning more? Our Visions Human Resources affiliate staff is available to work with your team on mentor programs (as well as other recruiting and retention tools), while RBT CPAs can free you up by taking on your accounting, tax, bookkeeping, and audit responsibilities. Give us a call today.

How the Inflation Reduction Act Will Transform Construction

How the Inflation Reduction Act Will Transform Construction

What the introduction of the Intranet did for retail, the Inflation Reduction Act (IRA) – combined with the Infrastructure Investment and Jobs Act (IIJA) – will do for construction, fundamentally changing every aspect of the industry as we know it.

IIJA laid the groundwork for what some are calling the next industrial revolution. As we noted earlier this year in our thought leadership article, Hudson Valley Construction: Get Ready to Get Building (Marchione, 2022),  “The $1.2 trillion law has money for everything from roads, bridges, railways, and highways to clean water, a stronger power grid, internet, climate change, and more. It includes 375 programs, of which 125 are new. Of the $1.2 trillion budget, $550 is new spending. There’s also $650 billion in previously authorized funding for roads and other infrastructure.”

We followed that up with Prepare for the Infrastructure Construction Boom (Marchione, 2022), which included these tips: “For those in the construction industry, it’s a good time to become acquainted with the White House guidebook; raise your hand and let government representatives know if there are particular areas of interest to you; examine staffing and training needs for your organization, and consider whether you should be partnering with other firms.

When we wrote those articles, the IRA didn’t even exist. Now that it does, we still stand behind our initial thoughts and recommendations, but we also believe there’s a much bigger picture to consider.

There’s sort of a peer pressure aspect to the Act. While there are incentives targeting construction, there are also incentives for other industries that will ultimately impact how construction gets done.

For example, look at how the IRA impacts manufacturing. There are incentives for the creation of cleaner processes and materials that will be used in construction (i.e., paving materials). The same incentivization is true for the energy industry, public transportation, the automobile and heavy equipment industries, Internet and communication industries, and more. So, even if you were planning on taking advantage of the upcoming building boom based on the status quo, the “peer pressure” from other industries may give you no choice but to start transforming the way you do construction.

Going back to continue with our manufacturing example, to maximize IRA opportunities, let’s imagine manufacturers start shifting from the production of current construction materials to greener/cleaner/more sustainable ones, which will impact construction project planning (Strupp, 2022), sourcing, and procurement (especially given Buy American provisions). Everything from doors, windows, ductwork, insulation, wiring, heating and cooling systems, electric panels, paving materials and more will likely change.

Employees will have to be trained on using the new materials. Prevailing wage requirements under IIJA and the IRA will likely come into play. The equipment you use to get work done – from vehicles to handhelds – may have to be modified or updated to handle new materials. (It will be a good time to take advantage of the first federal tax credits (Electrification Coalition, 2022) for commercial EVs). No doubt, that’s just the tip of the ice burg.

So, as you consider how your business may benefit from IIJA and the IRA, also consider how it will have to change. Whether that change starts now or will be eventually driven by transformation in other industries is up to you.  In the meantime, if you need any assistance with accounting, audits, and/or taxes, RBT CPAs – the largest CPA firm in the Hudson Valley – is here to help. Give us a call today.

Tips to Prepare for a Workers’ Compensation Audit

Tips to Prepare for a Workers’ Compensation Audit

The best time to prepare for a Workers’ Compensation audit is at the start of a new policy year.

Setting up all processes and recordkeeping properly and keeping them updated throughout the year can help ensure you’ll be ready for an audit and help protect your company from penalties for violations.

According to the New York Workers’ Compensation and Employers’ Liability Manual, if your organization’s premium is:

  • $10,000 or over, it will be subject to a physical (a.k.a. on-site) audit once a year.
  • Within the $5,000 to $10,000 range, an audit will be conducted the first year a carrier offers the policy and at least once every three years thereafter (a signed payroll statement must be provided any year a physical audit is not conducted).

If an audit is impracticable, a signed payroll statement may be accepted.

At the start of a policy year, you provide your carrier with estimated payroll and the type of work your employees do. In turn, they assess the risk involved to calculate your annual premium. Since the number of employees you have, the work they do, how much you pay, and other factors can change during the year, an audit is conducted at the end of the policy year. As a result, you may get a refund; you may be charged more; or you may come out even.

Typically, your policy will contain a provision stating you agree to be audited. So, you are legally obligated to comply in a timely manner. For a physical audit, you’ll generally receive notice within 60 days of the end of the policy year. For a voluntary audit, within 30 days of a policy year, you may be asked to complete and submit forms related to payroll. If you don’t comply, you risk giving the carrier latitude to estimate audit figures (which are likely to be higher than the actuals you can provide) and apply penalties equal to 25% to 50% of your premium.

What You’ll Need

To prepare, your organization must keep good records and documentation for the policy period:

  • General information including a description of your operations; names and titles of owners and officers; number of employees at each location; and a description of work performed by contractors or subcontractors.
  • Job classifications and descriptions providing detailed information about what employees do.
  • Payroll records including payroll register; checkbook (if that serves a recordkeeping purpose); accounting ledger; Form 941, Form 944, W-2, 1099 and other tax forms; state unemployment insurance tax reports; hours, days and weeks worked annually; individual earnings, overtime and bonus records; salaries, wages and commissions. (TIP: Separate earnings and overtime for each employee classification, as they impact the premium differently.)
  • Financial data including payments to independent contractors and subcontractors, as well as casual laborers, and receipts for materials purchased.
  • Insurance certificates for every contractors’ and subcontractors’ Workers’ Compensation coverage.

Take Control

The word “audit” itself is unnerving; however, there are steps that can help you control the process and promote a positive outcome:

  • Designate one person to make sure everything is prepared on time for the audit; answer auditor questions; and get answers to any questions he/she may have.
  • Be prepared. Auditors work under tight deadlines. Help them move through the audit quickly by having all requested documentation and records accessible and organized. Keep all contractor/subcontractor documentation and information together.
  • Do not provide any information, documentation, or records that were not requested.
  • Review audit documents carefully. Focus on how the auditor classified employees and the audit’s impact on your business.
  • Do not sign anything until you have completed your review. Never sign if the audit documentation is not complete, even if the auditor says he/she will fill it in later.
  • Request and keep a copy of any audit documents for your files.

For additional information, refer to the New York Workers’ Compensation Rating Board manual, overview for employers,  employer rights and responsibilities, and website. RBT CPAs’ Visions Human Resource Services affiliate is available to provide advice regarding Workers’ Compensation. What’s more, RBT CPAs, a leading accounting firm in the Hudson Valley and beyond, is ready to take on your accounting, tax, and audit needs with the highest levels of professionalism and ethics. When you engage us to do what we do best, you’re freed up to focus on what you do best – running your business.

Compensation Budgets: Annual Plans Are Not Enough

Compensation Budgets: Annual Plans Are Not Enough

2022 started on a cautiously optimistic note for construction, considering the planned influx of investments from the Infrastructure Investment and Jobs Act, backlog of jobs, and other indices. Then came the war in Ukraine, the gas crisis, and higher inflation, adding to challenges created by supply chain issues and labor. In the blink of an eye, some data that typically would guide a business for a year is changing much faster, making it vital to review important metrics with greater frequency so you can plan and respond appropriately. Take compensation as an example.

Compensation has become a hotter-than-normal topic thanks to employers’ responses to the Great Resignation and tight labor market, prompting businesses to review and adjust compensation budgets more frequently than in the past. With just a little more than four months left in 2022, no doubt benefits and compensation planning for 2023 is underway. Leaders may want to keep in mind what has happened with compensation over the last few years and plan accordingly.

WorldatWork’s 2021 – 2022 Salary Budget Survey results released in August 2021 projected an average 3.3% increase to salary budgets. A quick pulse survey conducted December 2021 to early January 2022, showed in the six months between surveys, companies actually made a bigger increase to salary budgets, coming in at an average of 4%. This shouldn’t come as a surprise considering 94% of survey respondents indicated it was very or somewhat difficult to attract and retain talent.

Pearl Meyers conducted a quick poll about 2022 base salary in November and December 2021 and found almost 50% of respondents expected 2022 base pay increases to be higher than what they expected earlier in the year (12% expected increases to be significantly higher). Mercer quick polls conducted in August and November 2021 revealed the percentage of employers planning increases of 3.5% or higher doubled. A Willis Towers Watson survey conducted in October and November 2021 found 32% of respondents increased salary projections from earlier in the year.

What does this mean to construction companies and their compensation plans for the year ahead?  FMI, a consulting and investment banking company focused on engineering and construction, has been tracking compensation in the industry for two decades. In April of this year, FMI reported, “Average hourly wages for craftworkers, those considered production and nonsupervisory, climbed 6.2% from March 2021, according to the Bureau of Labor Statistics and the Associated General Contractors of America. This indicates that construction companies are paying more to attract workers and retain their current employees.”

In a Pay Practices Survey from February of this year, FMI found the average pay increase budgeted for 2022 was 4.6%. (Just one percent of survey respondents indicated they were not giving increases.) PAS, Inc’s Contractor Compensation Quarterly review issued in July shows average 2022 construction wages increasing 4.1%. However, there’s more to the story.

FMI reports that the U.S. Bureau of Labor Statistics tracks the overall employment cost index to measure changes in the price of labor in terms of employee compensation per hour of work. During the last quarter of 2021, employee compensation per hour of work increased 7.1% for private sector workers, but just 5.4% for construction workers. At the same time, the consumer price index increased 8.5% from April 2021 to April 2022. So, average construction pay increases aren’t keeping pace with other sectors or cost pressures in general.

To address this, many employers are evaluating merit and performance pay enhancements, offering one-time lump sum payments, providing bonuses, and/or enhancing benefits. While FMI indicates construction employers should plan for a 5% compensation budget increase in 2023, flexibility is required to ensure long-term affordability while keeping an eye on pay compression, equity, and  compliance with fair pay regulations.

Considering U.S. Census Bureau data shows a decrease from May to June in spending on construction and the Associated Builders and Contractors report a backlog decline in July – that’s the second month in a row, more challenges lay ahead for construction businesses. Still, there’s more work than workers available, and certain parts of the country (like the Northeast and South) are experiencing backlog increases. While profit margins may be shrinking due to inflation and employee compensation increases, monitoring big picture financial landscapes, as well as compensation and other indices more frequently can help inform flexible decision-making during these tumultuous times.

If you need assistance with compensation planning, RBT CPAs’ Visions Human Resource Service Affiliate offers benefits and compensation analyses (along with a variety of other services). To free you up to focus on your compensation and benefits strategies, you can count on RBT CPAs to address all your accounting,  tax, and auditing needs. Give us a call today.

Proactively Manage Financial Reporting & Forecasting During Uncertain Times

Proactively Manage Financial Reporting & Forecasting During Uncertain Times

No doubt, uncertainties stemming from the impact of inflation, supply chain issues, labor shortages, and more have you focusing on every aspect of your business, from overall strategy and pricing to contracts, inventory, purchasing, and more. The last thing you need are mistakes related to your financial reporting and forecasting. Making adjustments to reporting and forecasting to reflect how macroeconomic factors are affecting your business is important. Following are considerations to help you think through the factors that may impact reporting and forecasting compliance.

General Considerations

  • Are your business cost structures changing? Will this continue in the future?
  • Is the impact of uncertainties short- or long-term? How does that affect related accounting estimates?
  • How are your forecasts impacting accounting estimates for goodwill and other long-lived assets for impairments? Are valuation allowances for the recovery of deferred tax asset balances needed? Are your liquidity and going-concern presumptions affected?
  • Are you meeting U.S. GAAP and/or SEC disclosure requirements?

Inflation

  • With inflation increasing costs to acquire goods, inventory, packaging materials, and even employee pay, should you consider passing on increases to customers via price increases?
  • If your company has long-term revenue contracts impacted by increased costs that you may not be able to pass on to customers, your business may experience a profitability decrease or loss. How will this impact accounting for the contract? Which period do you record the loss?
  • If you are renegotiating long-term contracts like leases or supply agreements, do you need to reassess their classification and measurement?
  • Are interest rate increases and fixed-rate financial asset decreases impacting estimated credit and loan loss reserves?
  • Are you changing your company’s investment strategy and any related accounting and reporting requirements?
  • Are you using the right discount rate for pension-related liabilities? While pension liabilities and related employer contributions may be lower due to higher interest rates, are they offset by higher employee wages?

Labor

  • Are your labor costs increasing? What are the accounting implications? Can you offset higher labor costs with price increases?
  • Has your company increased hourly wages, bonuses, incentive, or stock compensation or benefits? Do you know the implications on your accounting practices? For example, which period should you recognize retention bonuses? Do compensation structure and workforce changes warrant changes to assumptions used for pension liability?
  • Is the labor shortage requiring you to operate at a reduced capacity? If so, are there costs capitalized into inventory that should be expensed now (i.e., rent or depreciation)?
  • Do you have the right people with the right skills monitoring your internal controls, including those related to IT?

Supply Chain

  • Are supply chain costs significantly increasing and included in inventory? Should you adjust the cost of inventory based on its expected net realizable value? Should you consider using different materials, other suppliers, and/or a price increase to manage supply chain increases?
  • How are you reporting raw materials, finished goods, and supplies on your balance sheet? What is the actual point in time that you take ownership of each? Do your accounting processes and internal controls accurately capture inventories?
  • Do your cutoff procedures accurately help you recognize revenue in the right period?
  • If you are adjusting manufacturing processes or using different materials to manufacture products, does this affect warranties – including terms and conditions, product life cycle, or expected claims – and related accounting?

If you need a partner to help guide you through accounting, tax, and bookkeeping during uncertain times, call RBT CPAs. We’re here to help and provide you with peace of mind related to your accounting, reporting and forecasting, so you can focus on all of the other things you need to do to survive and thrive in 2022 and beyond.