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Issue II 2019

SAX FOCUS NEWSLETTER

IN THIS ISSUE 03

CONSTRUCTION CORNER

HEALTHCARE CORNER

Selecting & Implementing the Right Software for Your Construction Business Written by: Missy O’Shea, CPA

High Deductible Plan Jeopardy for Medical Practices Written by: George S. Charne, CPA

MANUFACTURING & DISTRIBUTION CORNER

NOT-FOR-PROFIT CORNER

The Current and Future State of the Manufacturing & Distribution Industry Written by: Joshua Chananie, CPA

The Importance of a Conflict of Interest Policy Written by: April Kushner, CPA

REAL ESTATE CORNER

TAX CORNER

Prepping Real Estate Firms for an Economic Downturn Written by: Jason Borofsky, CPA, MBA

2019 Year-End Tax Advice: Business & Individual Tax Saving Moves Written by: Gina Perrone, CPA, MST

TRANSACTION ADVISORY CORNER

WEALTH MANAGEMENT CORNER

Challenges and Opportunities Facing a New CFO Written by: Todd W. Polyniak, CPA

Protecting What's Yours (While You're Alive) Written by: Marie DeCaprio, CFA®, CFP®

The information contained within this newsletter is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax or financial advice from a professional.

Sax Focus • www.saxllp.com Page 2

CONSTRUCTION CORNER

Selecting Selecting&&Implementing Implementing the theRight RightSoftware Softwarefor forYour Construction Your Construction Business Business

Written by:

Missy O’Shea, CPA Partner

Construction Practice moshea@saxllp.com

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The construction industry has always been described as unique given the constant demand for real-time data, cash flow emphasis and specific reporting required on a job-by-job basis. It also typically involves an accounting method that is solely dependent on the contractor’s ability to reasonably estimate the costs to perform the work and then properly track those costs on a consistent basis. It is in fact one of the riskiest industries to operate within. One lost job, a missed bid or a bad estimate can severely affect a contractor’s business and resonate for years after. Those inherently risky elements of the construction industry now coupled with the implementation of the new Revenue Recognition Standard make it more important than ever that contractors ensure they have the proper accounting software in place to meet all of their needs. The concept of new construction accounting software for a business can be daunting to a lot of contractors, both deciding to make the switch and choosing the right software to implement. It is a big undertaking and one that requires sufficient due diligence and time investment. However, there are reasons why you may need to bite the bullet and take the initiative on. This includes keeping up with technological advancements to enhance capabilities and streamlining processes to make your business more efficient to increase profit. The functionalities you require, the ease of implementation and use, the architecture of the system, the vendor you will use, and the total costs of system ownership are critical components that need to be weighed in your decisionmaking process. When making these decisions, there are a few key points to keep in mind: Size and complexity of the business. Not all construction accounting software is suitable for every contractor. In relation to size, there are general job volume and revenue thresholds that can help steer contractors in the right direction as a starting point for software options. For example, if you are a contractor that performs $5 million a year in revenue which consists of a handful of individual jobs, you probably don’t need the most sophisticated software option on the market. With that said, if you are a larger contractor performing over $25 million a year which consists of 15 or more individual jobs, then you can remove some of the lowertier software options from the consideration list right off the bat. So, just size and volume of the contractor can help narrow down the list of options up front. With regards to the complexity of a contractor’s business, there are various potential elements that can automatically push them into a “higher” software option bracket, such as being a union contractor, having multi-state operations, having multiple related companies to be housed within one software, performing complex jobs which requires extremely detailed job costing and tracking, performing government work which requires specific reporting, etc. One of the key areas to focus on here that can also quickly eliminate some options is the job costing function and capabilities in the software. As mentioned, the contractor’s potential to make a profit and effectively stay in business involves an accounting method that heavily relies on their ability to accurately estimate the costs to complete the projects and then properly track the actual costs as compared to the estimate on a timely and regular basis. If the industry or specialty of the contractor involves multiple cost

codes, phases and line items to be allocated and tracked, certain software options won’t be able to handle that type of detailed activity and reporting and can be ruled out. Even more so now with the new Revenue Recognition Standard in place, contractors that historically had more straightforward operations could potentially become more complex. Lastly, with the increased complexity of a contractor’s operations most likely comes the need for more automated or “one-click” functions within the software. While most of the higher-end options have these capabilities, it is important to have a good understanding of what they can offer to essentially make the contractor’s life easier (direct payroll importing, automatic depreciation entries, automatic job cost allocation of indirect costs, worker’s compensation accruals, notifications for over-budget jobs etc.). Contractors need to ensure that the software can handle their daily needs and all accounting and reporting aspects of their operations. Access and Integration. The construction industry hinges on live, real-time data and continues to include and incorporate more advanced technology. These days, ensuring a contractor has an accounting software in place that can be remotely accessed by the accounting staff, and more importantly, by employees in the field is extremely important and should be a top priority. This remote access from the field can allow direct, daily reporting of labor hours per person/ per job and machine usage hours per piece of equipment/per location into the accounting system. This live information can then be compared to the budgeted amounts to allow the contractor to proactively catch potential overages and adjust as needed rather than reacting after the fact and trying to go back through the information to figure out what happened. Being able to give Supervisors and Project Managers the capability to see and enter real-time data from the job site helps to provide more timely and accurate information to use for analysis and job status updates. With respect to integration, there are three main areas to consider when looking into a new accounting software: 1. Payroll. Many contractors outsource the payroll function to a third-party given the high level of reporting requirements and time dedication it would require performing in-house. Specifically, for those contractors that use various unions which all have set standard and overtime rates based on classification and those that have operations in multiple states, the payroll reporting can be intricate and tedious. With that said, it is imperative to make sure the accounting software can be integrated with the payroll provider so that the information can be imported timely, in detail and with minimal manual input required. 2. Bidding and Job Estimates. Many contractors continue to utilize a bidding and estimating software that is separate and not integrated with their general accounting system. However, the tracking of actual costs incurred, change orders awarded and the overall status of the job will most likely be maintained in the new accounting software as most offer a project management module. As such, contractors should ensure that there is some sort of integration capability between the estimating software and the accounting software at a detailed level to track costs by code, phase, etc.

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SOFTWARE IMPLEMENTATION 3. Going Paperless. The larger contractors have significant levels of payments and invoices to process and record on a daily basis. There are separate software options in the marketplace that allow for full electronic processing, job costing and approval of vendor payments that can then be directly imported and posted within the accounting software. There is also accounting software options that can perform similar functions and document storage within the software itself. If a contractor is looking to move towards paperless operations, they should consider the above options and capabilities of the accounting software, including integration with outside processing software. Training and Support. With the introduction of anything new into the business, training and development is imperative. This concept holds even more weight and importance in relation to transitioning to a new accounting software. As mentioned, the construction industry is inherently unique, specifically in relation to the accounting method and detailed job tracking required. While the accounting software itself has very sophisticated capabilities, your output will only be as good as the original input entered by the contractor’s employees. So, if the staff is not properly trained from the get go, that fancy software the contractor purchased will be useless. Most of the software options include the required training seminars at the initial implementation, however, the contractors should inquire as to what is offered for continuing education and support, how it is scheduled and who will be delivering the sessions, how they are charged for additional training or regular support, etc. In addition, some accounting software is better than others when it comes to the built-in user guide, instructions and FAQ’s included within the software package which can result in the accounting staff teaching themselves various items rather than having to schedule a private training session. The on-going training and support packages can be a huge deciding factor for some contractors as it tends to be one of the areas where the accounting software selections can be vastly different. Price. Although price is typically at the top of the contractor’s list for considerations, having the right accounting software in place is too significant to discard options based solely on price. The consideration of the cost of the accounting software has to be looked at from both sides. The cheapest software probably doesn’t do everything a contractor will need and will only result in needing high levels of customization and more manual input and time dedication from staff which equates to spending more money overall anyway. So, just because the base software and setup may be the cheapest, it doesn’t mean it will end up costing the contractor less in the long-run. On the flip side, the most expensive software option doesn’t mean it is the “best” fit for the contractor. A lot of the big software companies will try to sell contractors an extremely sophisticated software option with all the bells and whistles. However, the contractor may not need all the modules such as inventory or fixed assets, or all of the high-level functions turned on that make that software option unnecessarily expensive. While the cost can drastically fluctuate based on various factors (training, transition, users, modules, customization), it is important to weigh all the options before making price the deciding factor. A pricier option now may save you in the future - because as you know from construction, you get what you pay for.

Prepare for Change. A key to success in the evaluation and implementation of new software is getting buy-in from the top and establishing a cultural commitment to change. It is important to have a cross-functional project team in place, so you are making these significant decisions with perspectives from all angles of the company. Documented business requirements are critical and performing analysis and due diligence on prospective vendors and systems will make all the difference. In the end, it is vital to have a comprehensive implementation plan in place as it will take time and resources away from daily operations. You need clarity on what you are getting into and how long it will take so you are fully prepared for the transition. In Conclusion Even if you are not sure where you want to go with a new accounting system, it may behoove you to begin looking into the various options. It’s all about evaluating the needs of your business and making sure you have the right tools in place to meet your unique needs. Don’t hesitate with bringing in the resources that will take your capabilities to the next level. In addition, having a good financial and project management process is also not enough to make sound business decisions. You need to understand where you are today and where you are headed. These decisions can’t be made on a whim and should be a part of a strategic process that takes advantage of the combined thinking of your internal business and your external trusted advisors. If you are considering a software change, or even just evaluating the capabilities of your current software, keep the above key concepts in mind. Advisors within Sax’s Construction Practice can assist you in analyzing your needs and ensuring your unique needs are met. Should you want to speak further on this topic, feel free to reach out to a Sax Advisor at (973) 472-6250 or visit www.saxllp.com.  Missy O’Shea, CPA is a Partner at Sax and a key member of the firm’s Construction Practice. She assists clients with accounting, auditing and financial services that are unique to the industry. Her areas of expertise include attest engagements, accounting software consulting, bonding capacity and bank line consulting. Missy can be reached at moshea@saxllp.com.

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HEALTHCARE CORNER

High Deductible Plan Jeopardy for Medical Practices

Written by:

George S. Charne, CPA Senior Manager

Healthcare Practice gcharne@saxllp.com

here has been a steady rise in patients covered by High Deductible Health Plans (HDHP). The National Center for Health Statistics (NCHS) released a study in August 2018 which indicates that patients covered by a HDHP increased from 25.3% in 2010 to 47% in 2018 (see Table 1). Even more alarming is that less than half of those patients covered by a HDHP had a Health Savings Account (HSA). The majority of employers are gravitating to HDHPs which enable them to secure coverage at lower rates. This has caused popularity of HDHPs to rise. Some employers no longer offer “traditional” plan coverage. While HDHP costs to the employee charged by employers will be lower, most employees do not put aside funds to cover the higher deductibles and co-shares incurred with HDHP coverage. These trends can have a negative impact on cash flow for your practice.

Patients are oftentimes not properly educated as to the ins and outs of their plans. Many have recently switched from traditional insurance. Such patients know that they have medical insurance, but don’t realize that they no longer have coverage for their first dollar of claims exposure. They become surprised when your receptionist advises them of their responsibility when they visit, or even worse, receive a bill stating that they owe much more than the traditional copay. While about 45% of the patients covered by a HDHP have HSA accounts, sufficient funds may not be available early in the year to cover the out of pocket costs. We asked industry expert Paul Friedman, Area Vice President for Gallagher Benefit Services, what impact he is seeing. He advised, “I don’t think Primary Care Practices will feel the burden of high deductible plans as many of their patients have typical charges that are less than $150.” He feels the greatest impact will be felt by “Specialists, Outpatient Surgical Centers and Outpatient Diagnostic Centers, where charges may exceed $500.” Sax Focus • www.saxllp.com Page 6

HIGH DEDUCTIBLE HEALTH PLANS Table 1

Many practices are feeling this cash crunch and instituting various financial policies to protect their revenue including the use of up-front payments. Here are some ideas to incorporate into your policy: • Develop templates to prepare cost estimates of the amount your patients will need to pay. • Review the estimates with patients in advance of their treatment. • Determine where the patients stand with their deductibles, so that the patient understands what reimbursement (if any) they can expect to receive from insurance. • When you are unable to determine costs or deductibles, collect a flat amount in advance of the procedure. • Give multiple payment options, including credit card, Apple Pay, PayPal etc. • Keep your eyes open for new payment options. Mr. Friedman highlighted a program called “Paytient”. This is a new way employers can help their employees with health care loans paid back through payroll deductions. • Allow patients to set up payment plans, where you either charge a credit card or bank account on agreed intervals. • Continually update patients about their outstanding obligations by sending statements no less frequently than monthly.

Keep in mind, the longer a patient balance is outstanding the less likely you are to collect the outstanding balance. According to the Healthcare Business Management Association (HBMA), there’s less than a 30 percent chance of collection from a patient if that balance reaches 90 days. Therefore, you need to be on the offense with accounts receivable. Be sure to hire trained billing staff that preferably has experience with your specialty. Develop key performance indicators (KPIs) that are reviewed on a regular basis. One of the most important KPI is your accounts receivable aging reports. These should be run and analyzed not only sorted by patient, but also by insurance carrier and provider. These will help you identify trends early so that you can rectify them before they become a big issue. You should also establish a relationship with a collection agency that can assist you with collection activities. The bottom line is that you need even more diligence to collect those hard-earned payments. For more information on high deductible health plans, be sure to reach out to a Sax Healthcare Advisor at (973) 472-6250 or www.saxllp.com.  George S. Charne, CPA is a Senior Manager at Sax and a member of the firm’s Healthcare Practice. He has over 30 years of experience auditing Employee Benefit Plans. He can be reached directly at gcharne@saxllp.com.

• Follow up on outstanding balances when the patient comes to the office for follow up visits. • Train your front desk staff on how to ask patients for payments and educate them on the various payment options. It might be helpful to provide them with scripts until they feel more comfortable.

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M&D CORNER

The Current and Future State of the Manufacturing & Distribution Industry

Written by:

Joshua Chananie, CPA Partner-in-Charge

Manufacturing & Distribution Practice jchananie@saxllp.com

November 12, Sax’s Manufacturing & Distribution Practice held their Industry Update event and gathered with over 70 industry professionals to explore current trends in the industry, obstacles professionals in the sector face, and where the market is headed. Panelists included Jack Sandbach, President of Global Beauty Holdings (which includes Packaging Distribution Resources); Samir Bhatia, Owner of Amazing Commerce, Inc.; and, Darren Slosberg, Chief Executive Officer of Legacy Converting. Attendees walked away with meaningful insights and leading practices to help their companies navigate the changing industry. “THE CURRENT AND FUTURE STATE OF THE INDUSTRY” RECAP The manufacturing and distribution industry is transforming at an unprecedented pace. The only way manufacturers and distributors can stay ahead of their competition is to embrace change.

Over the last several years, three key issues continue to be at the forefront: The U.S. China trade relationship remains on rocky ground. Over a year after the Trump administration first imposed tariffs on Chinese imports, the trade war shows no sign of cooling off which may have a negative economic impact in the near future. Many companies have chosen not to abandon longstanding supplier relationships over a trade dispute, and instead choose to absorb the tariffs or find ways to share the costs with suppliers and customers but are being more cautious. A company’s willingness to absorb these additional costs has caused issues with growth as it relates directly to delays in additional investment of people and property (inventory, technology, machinery and equipment). Without an immediate end to the trade war in sight, management mindsets and business decisions may need to shift, especially as we go into the period of Chinese New Year factory shutdown. Sax Focus • www.saxllp.com Page 8

CURRENT & FUTURE STATE OF M&D Joshua Chananie, Head of Sax’s Manufacturing & Distribution Practice and moderator of the Industry Update event mentioned, “Manufacturers not only need to assess the impact on their global supply chains, but they may also need to reassess their industrial systems’ security controls and more closely scrutinize imports for potential exploits, unintentional or otherwise.” At this juncture, companies need to consider diversification from a product sourcing, quality, and pricing standpoint. Business Succession – Embracing Tomorrow, Today Despite turbulent trade conditions and disruptions to supply chains, U.S. manufacturing continued to expand in 2018 and in 2019. Future manufacturing growth will be hamstrung by workforcerelated issues. The U.S. manufacturing workforce skews older and an increasing number of workers are entering retirement each year. Even worse, there are not enough new, upskilled workers entering the sector to replace them. New technology doesn’t act in a vacuum and man and machine are working together. In addition, workers will require new sets of skills to wield the latest technologies that manufacturers integrate into their operations. This means that manufacturers need to both retrain their existing workers, as well as recruit a new generation of tech-savvy workers to ensure long-term success. To successfully navigate this crisis and bridge the impending skills gap, manufacturers will need to take proactive steps to bolster their recruitment pipelines. Chananie stated, “Manufacturing is no longer a dark and dirty profession—but many eligible young professionals believe the sector is stuck in the days of their parents and grandparents. Manufacturers need to participate in recruitment initiatives, like NJMEP’s Manufacturing Day, launch programs to educate the next generation about the opportunities a career in manufacturing presents, and help eliminate the stigma that a degree and a skillset earned from a trade school are not a better alternative to a four-year degree.” He continued, “They also need to show how businesses are incorporating new technology into their operations and that their business encourages creative and innovative thinking. Unfortunately, if manufacturers don’t have technology to showcase, that’s a problem in it of itself.” Darren Slosberg, Chief Executive Officer of Legacy Converting, a disposable wiping manufacturer in the United States serving a global clientele mentioned, “The right people are out there, they are just harder to find than a decade ago. We understand that if you want to be the best, you need to have the best people. Our company takes strategic measures to go after respected people in our industry, we work with staffing agencies to bring in top talent, and we pay our people to bring in good people.” Samir Bhatia, Founder and CEO of Amazing Commerce Inc., a global distributor and manufacturer of vitamins and supplements, added “The distribution side is pretty straightforward with

regards to training. We try and retain as many people as possible, but we don’t see too many issues there if we need to replace people. On the manufacturing side, this requires a specialty and we are willing to pay over market price for a standout worker.” Jack Sandbach, President of Global Beauty Holdings, a conglomerate of warehousing and beauty product distribution, also interjected, “For the most part when it comes to retaining our employees, it is really about us and our managers doing what they are supposed to do with regards to continuous training and letting our workers know how much we appreciate their work and dedication.” Innovation: Technology, Blockchain, etc. We are in the era of e-everything. It’s clear that the next generation of supply chain businesses will need to drive efficiencies through big data, predictive analytics, artificial intelligence, robotics, crowd sourcing and shipments, and autonomous vehicles. Bhatia stated, “Innovation is so important for a business. Especially if your goal is to be around long-term. We want to have machinery that will withstand the next few years, so we made sure we made that large investment in the most state-of-the-art operations to withstand consumer demands and expectations now, and in the immediate future.” He continued, “We also make sure we stay on top of what the new technology in our sector is. We travel to tradeshows around the world and we make sure to keep in touch with other manufacturers through our own network, and through events like these so we can all discuss the ongoing technology transformation in our space.” Blockchain has also generated significant buzz the past few years, attracting a flood of entrepreneurial interest and venture capital. It is predicted to increase global trade by nearly 15% and reduce documentation costs representing an estimated 20% of global trade expenses. While limitations related to scalability and speed have prevented widespread adoption so far, blockchain does have potential to revolutionize processes across several industries. Chananie states, “blockchain can provide real value to manufacturers with operations anywhere in the world. At its most basic level, blockchain is a transparent and secure conveyance method. By integrating supply chains with blockchain, manufacturers can track goods from the factory floor to cargo ships, secondary production facilities and beyond. In Conclusion The Manufacturing & Distribution industry is changing fast. To be successful in this rapidly changing business environment, companies need to consider new and better ways to meet customer requirements and allocate the right people and resources – quickly, efficiently and profitably.  For more information on the manufacturing and distribution industry, feel free to reach out to Josh Chananie, Partner-in-Charge of Sax’s Manufacturing & Distribution Practice at jchananie@saxllp.com.

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NOT-FOR-PROFIT CORNER

The Importance of a Conflict of Interest Policy

Written by:

April Kushner, CPA Senior Manager

Not-for-Profit Practice akushner@saxllp.com

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CONFLICT OF INTEREST M

ost individuals who work for a not-for-profit organization or serve on the board of directors/trustees may not know what a conflict of interest means. People are often unaware that their activities or personal interests could conflict with the best interests of the organization and this in-turn can do harm. A conflict of interest can be defined as a situation in which a person is in the position to derive personal benefit from actions or decisions made in their official capacity. Sometimes the conflict can be financial, but most often the conflict is two competing interests. Examples include a board member sitting on the board of another non-profit and sharing information, staff positions given to relatives or friends, or a board member who is also a parent/client/ beneficiary. This duality of interest would prevent a board member from being impartial and/or loyal to the organization. Since conflicts can arise from personal, professional, or volunteer positions, an organization should seek to raise awareness among employees and board members, encourage disclosure and discussion regarding anything that may be a conflict, and inspire a culture of transparency and openness. How Important is a Conflict of Interest Policy? It may not be the most glamorous or exciting topic on your board meeting agenda, but a conflict of interest policy is very important for a not-for-profit organization and helps to fulfill the fiduciary responsibilities of the board. For many organizations, especially those who receive federal funding, grant agencies and Uniform Guidance require procurement policies to have written standards of conduct covering conflicts of interest and governing the actions of its employees engaged in the selection, award, and administration of contracts to vendors. The policy should discuss employees as well as any organizational conflicts of interest with related parties or other organizations. To put it into perspective, the Center for Medicare and Medicaid Services has guidelines for conflicts of interest to protect consumers and to ensure they receive the best care. With the NJ State Department of Human Services, Division of Developmental Disabilities moving to a fee for service model instead of cost reimbursement, funds received are now Medicaid dollars and organizations should have a conflict of interest policy covering board members. New York State law also requires not-for-profit boards to adopt a process so that board members can annually disclose potential conflicts of interest. Form 990 that is filed with the IRS asks a series of questions in Part VI, Section B and one of the questions is whether there is a written conflict of interest policy in place. The form also asks whether officers, directors or trustees, and key employees were required to disclose annually any interests that could give rise to conflicts.

Most organizations already have a policy in place, but if you don’t, where should you start? If you do have a policy, how do you ensure that it is understood by employees and board members. How is your organization monitoring the policy to ensure it is complied with? What Should be Included in a Conflict of Interest Policy? A conflict of interest policy should be in writing and reviewed annually. Required elements would include the purpose of the policy, definitions, procedures, and violations. The policy should specify that directors, officers, and key employees must act in the best interests of the organization. Anyone who has a conflict, or thinks they have a conflict, is required to disclose it and a board member who has a conflict should abstain from voting on the matter. The policy should then be signed and dated by the individual. Monitoring the Policy Management and the board should discuss how they are going to monitor the policy and how often. Many organizations make it a regular process, at least once a year, to add to their board meeting agenda a discussion regarding conflicts of interest. The discussion would include examples of situations that could result in a conflict of interest and educating board members. The board should also consider how they would manage a potential conflict so when a real conflict arises the board will be ready to handle it with more ease. Either the policy or a questionnaire could be used each year and given to board members to reiterate what a conflict of interest is, examples of a conflict, and ask the individual to disclose any existing or potential conflicts. Minutes of the meeting should reflect the discussion and review of the policy. Minutes should also reflect when a board member does disclose a conflict and how the conflict is or will be managed. Conflicts that are not managed properly can result in significant penalties called “intermediate sanctions” that are assessed against the person who benefits as well as against the organization. An organization should make the policy an annual topic of discussion, instead of waiting for a situation to arise to ensure that they are in compliance with the policy requirements as well as federal and state regulations.  April Kushner, CPA is a Senior Manager at Sax and an important member of the Not-for-Profit Practice. She has in-depth expertise providing industry-specific accounting and consulting services to non-profits, in addition to single audit requirements and procedures. She can be reached at akushner@saxllp.com.

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REAL ESTATE CORNER

Prepping Real Estate Firms for an Economic Downturn

Written by:

Jason Borofsky, CPA, MBA Partner

Real Estate Practice jborofsky@saxllp.com

Economists, CEOs and business owners each have their own opinion on if or when the U.S. economy will fall into a recession. Some experts indicate that there is a good chance an economic downturn or recession will happen within the next two years, making it logical for real estate professionals to begin bolstering protections. Regardless of the timing of the recession in the future, adequately addressing a down market is essential to business survival. What steps can real estate firms take now that will help them get through a recession and come out the other end even stronger? Loan Considerations Evaluate your portfolio to determine which properties will be most vulnerable during a recession. If passing your loan covenants are an issue today, would the company still pass if there was a decrease in occupancy or if you were forced to freeze or decrease rents to retain tenants? Decreased occupancy or rents would also result in a lower net operating income and a decreased valuation. This could be an issue

if the loan on your property is maturing within the next several years and the company will need to refinance. What you can do now is run various scenarios and evaluate if it makes financial sense to refinance today, as rates continue to be low, or wait for the maturity date of the loan. Most commercial loans have a prepayment penalty outlined in the agreement that would have to be taken into consideration. One potential result of performing your projection on loan covenants or ability to obtain necessary financing during a recession is a decision to sell the property. Better to sell the property now than during a recession when your valuation is likely to decline, and the company may be dealing with loan covenant and financing issues with the bank. Improve Quality of Assets Do you have significant deferred maintenance on your property? You should consider completing deferred maintenance through funds available from current cash flow.

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ECONOMIC DOWNTURN PREPARATIONS

During the downturn, this could prove to be difficult due to decreased cash flow, issues with capital calls with existing owners and the potential difficulty in obtaining financing to complete the maintenance. In addition, consider performing renovations or investments in technology that will improve the quality of the property and even result in reduced expenses and increased attractiveness to tenants. More and more properties are being built or retrofitted with smart technologies that will enable the building to operate with greater efficiency. An example of a smart technology is the ability to easily track and perform preventive maintenance on the property. As a result, this will reduce the likelihood of equipment breaking down, ensure the equipment is running as expected, and prolong the life of the equipment. Whether you are reducing your deferred maintenance projects, performing renovations, or making investments in smart technologies, this will only improve the quality of your property and the attractiveness to buyers or tenants regardless if you are in a recession or not.

Another way to improve the quality of your asset(s) is to evaluate the likelihood that your tenants can withstand a downturn. Your net operating income and valuation might be acceptable today, but what if your tenant is negatively affected by the downturn and vacates their space? Performing financial stress tests on your property based on the likelihood that the tenant will stay in business and pay their rent is an important component of financial planning and will help you make informed decisions in the areas previously mentioned. Planning now for the next recession will only help you stay ahead of the curve and continue to capitalize on opportunities as they arise before, during, and after the recession.  Jason Borofsky, CPA, MBA is a Partner at Sax LLP and a member of the firm’s Real Estate Practice. He has provided industry-specific accounting, auditing, tax and consulting services to property owners, developers and investors for 14 years. He can be reached at jborofsky@saxllp.com.

Sax Focus • www.saxllp.com Page 13

TAX CORNER

2019 Year-End Tax Advice: Business & Individual Tax Saving Moves

Written by:

Gina Perrone, CPA, MST Senior Tax Manager

SAX LLP gperrone@saxllp.com

Most of the provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018. With the first TCJA tax season behind us, we move from questioning “How does the new tax law affect me?” to “What tax planning can I do now to minimize my taxes under the new tax law?”. This Tax Alert provides business and individual year-end tax planning opportunities to consider before year-end. For even more information on tax strategies, reference Sax’s 20192020 Tax Planning Guide here. Sax Focus • www.saxllp.com Page 14

2019 YEAR-END TAX ADVICE Business Tax Saving Moves ĥ Maximize your 20% Qualified Business Income (QBI) Deduction • Under the TCJA, business owners can deduct 20% of their qualified business income. Thus, the higher your business’s QBI, the higher the deduction. • Instead of the business making charitable contributions, maximize QBI by distributing cash from the business to the owner, and have the business owner make the charitable contributions. Be sure to consider any basis issues and whether the owners will benefit from the donation on their personal return. • If your QBI deduction is limited because your taxable income on your personal tax return is too high, consider reducing your income by doing the following: Î Contribute to an employer retirement plan Î Make a deductible contribution to an Individual Retirement Account (IRA) Î Contribute to a Health Savings Account (HSA) Î Defer business income or accelerate business expenses Î Increase your itemized deduction by “bunching” medical and/or charitable deductions into one tax year. (See “Individual Tax Saving Moves” to follow) ĥ Boost Tax Savings by Purchasing Equipment & Vehicles • Cash in on immediate write-offs of most depreciable assets. Consider purchasing fixed assets by year-end that qualify for full expensing through a Sec. 179 deduction or bonus depreciation. The asset must be placed in service by December 31, 2019. • One type of asset that could deliver a big write-off on your 2019 tax return is a “heavy” vehicle. This includes SUVs, pickups and vans that are used over 50% for business. • Even if cash is tight, you can still benefit from this immediate write-off since the deduction is the same whether the asset is purchased outright, leased or financed. ĥ State Apportionment Review • As states are more aggressively scrutinizing apportionment methods, it is important for businesses to correctly identify any potential state filing requirements for the year. Before year-end, extrapolate estimate apportionment data for Q1-Q3 of 2019 and Q4 of 2018 to identify the activity in each state. Forward this data to your tax professional who can assist you with determining any potential state filing requirements for 2019 and suggest planning opportunities to circumvent state exposure. Top Accounting / Bookkeeping Considerations ĥ Meals and Entertainment • Most of the time, meals and entertainment expenses are grouped together into one general ledger expense account. With the passing of the TCJA, the deductibility of these items changed. Make sure expenses for meals, entertainment and travel are recorded in separate general ledger accounts based on deductibility: Î Holiday party, employee events = 100% deductible Î Meals, de minimis snacks (i.e., coffee, donuts, bottled water) = 50% deductible Î Entertainment = nondeductible

ĥ Nonresident tax payments paid on behalf of partners or shareholders should be treated as distributions, not as a business expense. ĥ Accrue for current year distributions that will not be paid until 2020. ĥ Does your business have a Capitalization Policy? Be sure this is followed. ĥ Write-offs and write-downs to save on taxes Î Review your list of equipment. Are there any items that are obsolete or worthless beyond repair? If so, write them off. ĥ Improvements vs. Repair • Check to make sure major expenditures are recorded properly. Classifying an expenditure as a repair is more beneficial since repairs are treated as an expense in the current year as opposed to improvements which are capitalized and written off (deducted) over time. • Here are general guidelines you can use to determine if an item should be expensed as a repair or capitalized as an improvement. Î Repairs » Work that restores property to its original state. » Routine maintenance (activities your business reasonably expects to perform more than once during the property class life – 10 years for most equipment) » Examples of repairs - repaving a parking lot, replacing a portion of a roof and interior /exterior painting. Î Improvements » Work that increases the value of property or extends its life » Upgrades to existing items » Improvements are usually labor intensive and typically cost substantially more than repairs. » Examples of improvements – replacing entire roof, enlargement of building Payroll / Year-End Information Reporting Reminders ĥ Make sure all employee and independent contractor information is on file and up to date. • Verify SSNs and EINs are accurate • Check that Form W-4 is on file for all employees and Form W-9 for non-employees. This avoids scrambling around in January when processing Forms W-2 and 1099-MISC. ĥ Start preparing for Affordable Care Act (ACA) Annual Reporting if your business is subject to ACA reporting requirements. Evaluate whether proper data collection is in place to meet these reporting requirements. Reminder for S-Corporation Owners– Before finalizing your yearend payroll, don’t forget to include shareholder-employee medical insurance premiums in wages. This includes premiums paid by the S-corporations for the shareholder’s spouse and dependents. Health insurance premiums are additional wages reportable in Box 1 (wages), Box 16 (state wages) and Box 14 (Other).

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Individual Tax Saving Moves ĥ Reduce ordinary income by maxing out on contributions to taxfavored retirement accounts. Î Wage earners should consider making 401(k) contributions, or at least contributing up to the employer match. This will decrease your current year taxable income, plus the earnings grow tax-deferred. Î Consider making contributions to your HSA. Like a 401(k) plan, contributions to an HSA reduce your current year taxable income. Any unused amount is not forfeited (as is for a Flexible Spending Account) but instead grows tax-deferred. Î If you are self-employed, consider setting up a SEP-IRA by the due date of your personal tax return (including extension). ĥ “Bunch” deductions to maximize their benefit. If you think you will likely claim the standard deduction in 2019, consider bunching the following contributions to next year: • Medical Expenses Î The threshold increased in 2019 from 7.5% to 10%, making it harder for taxpayers with high adjusted gross income (AGI) to deduct medical expenses. Try to bunch medical expenses in the tax year where you expect to have lower AGI. Please note: paying with a credit card is considered paying medical expenses in that year, even if the credit card bill is not paid until the following year.

• Charitable Contributions Î Consider bunching donations in alternating years by delaying a year’s worth of charitable giving from one year to the next. Î Consider gifting to a donor-advised fund. This will allow for a charitable tax deduction in the year of the gift, but the donor spreads the grant-making over many years. This strategy provides a tax deduction when the donor may be subject to a higher marginal tax rate while actual payouts from the account can be deferred until later. Î If you are 70 years or older, lower your taxable income by directing your required minimum distribution (RMD) to a charity. This will allow you to exclude up to $100,000 of your RMD from taxable income. This is a good strategy for those who want to be charitable but benefit more from the standard deduction instead of itemizing. ĥ If you anticipate a loss in 2019, consider a Roth IRA conversion. The ordinary income generated from the conversion can be offset by your net operating loss (NOL) allowing you to pay less or no tax on the conversion. Review your investment portfolio before year-end. • Are you expecting large capital gains from your investments or a business in 2019? If so, look for investments that might be disposed of to produce capital losses to offset expected capital gains and reduce net investment income tax. • Take advantage of the 0% capital gains tax rate. If your taxable income is too high to benefit from the 0% rate, consider gifting

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investments like appreciated stock or mutual fund shares to your children or grandchildren. Chances are, they will be in the 0% or 15% capital gains tax bracket if they sell the investment at least one year after the gift. Be sure to consider the “kiddie tax rules”. • Do you have large capital loss carryovers from prior years? Try to offset these loss carryovers (whether short-term or long-term) with current year short-term capital gains (STCG) when possible since STCGs are taxed at ordinary tax rates than the preferential long-term capital gain tax rate. The difference in short-term vs. long-term gains can be as high as 17% (40.8% vs. 23.8%). • Be sure that your tax planning strategy is in line with your overall investment strategy and consider the wash sale rule (occurs when you sell a security at a loss and then purchase that same security within 30 days). ĥ Paycheck Checkup • Check your W-2 withholdings if you expect to owe in April. The IRS strongly encourages wage earners to complete a newly revised and redesigned Form W-4. Check your withholdings using the new IRS withholding estimator on IRS.gov. Doing so now will provide a more accurate result and avoid any surprises and compilations when preparing your return. It also helps avoid any underpayment penalties. ĥ Flexible Spending Account (FSA)

Wealth Transfer Strategies ĥ Utilize the $15,000 annual gift tax exclusion for 2019 • Consider making cash gifts to a child or grandchild with earned income which they can use to make IRA or Roth IRA contributions. • Fund 529 plan for a child or grandchild. There is a special election that allows you to fund up to 5 years of annual exclusions in 1 year without incurring a taxable gift or GST tax. In Conclusion The best way to reduce taxes is with year-end tax planning. Waiting until next year when your tax return is filed may be too late to implement many tax saving strategies. By asking the right questions now and understanding your financial goals, Sax advisors are able to customize tax strategies around your specific business and individual needs. For any questions or issues with regards to your tax planning, lean on a tax advisor at Sax for expert guidance. Reach out anytime at (973) 472-6250 or www.saxllp.com.  Gina Perrone, CPA, MST is a Senior Tax Manager at Sax and specializes in high quality tax services and planning opportunities to meet clients’ ultimate goals and objectives. She can be reached directly at gperrone@saxllp.com.

• Be sure to check your balance. You must incur qualifying expenses by December 31st to use up these funds or you will potentially lose them. Use expiring FSA funds to pay for eyeglasses, dental work or prescriptions for examples. Sax Focus • www.saxllp.com Page 17

TRANSACTION ADVISORY CORNER

Challenges and Opportunities Facing a New CFO

Written by:

Todd W. Polyniak, CPA Partner

Transaction Advisory & Outsourced CFO Practice tpolyniak@saxllp.com

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NEW CFO CHALLENGES & OPPORTUNITIES W

hen a private equity firm invests in a company, they set some very high standards to maximize value from their investment. They require the sponsored company to grow and evolve in new and different ways – and to do so quickly. To meet this level of demands, a new CFO is oftentimes brought in at the infancy stage of the investment to accomplish just that. As a cornerstone in any management team, the private equity company and the investors they represent rely heavily on a strong CFO. This role has evolved into much more than the head of Finance, but rather the direct link between the goals of the private equity firm and the successful transformation of the sponsored company. This carries a number of unique challenges and opportunities. What is required of the new CFO? This role requires grit, guts and leadership prowess. The private equity firm, especially their investors, will want to see their investment thrive as soon as possible, and the new CFO will be expected to deliver nothing less. He/she must be well equipped to work effectively under a sense of urgency, be highly strategic to drive operating excellence, be the sound link between the private equity board and the purchased organization – and held accountable for rapid improvement in financial results. What does the new CFO look like? Due to the unique dynamics and high expectations for a successful transition, private equity firms are typically more comfortable with an executive who has previously worked as a CFO of a private equitybacked company. Unlike a Controller who is responsible for reporting financial results, a private equity CFO needs to drive those financial results through the entire company. He/she will not be working on a granular level but will have full financial accountability for the organization and must properly manage the core functions of finance and operations. This requires the new CFO to wear many hats, and to be a thought leader in various areas of the business (i.e., Information Technology, Legal, Human Resources, Real Estate, Supply Chain). In addition, the new CFO needs operational savviness, a sharp eye for cash flow opportunities, and must be highly strategic and forward looking to drive value, growth and profitability. What challenges & opportunities face the new CFO? Many challenges await a new CFO tasked with the successful transformation of a purchased company, but we would argue that with every challenge is an opportunity. To put it broadly, the new CFO is charged with pressing the reset button for the company and ensuring it is as efficient and profitable as possible on the go forward. This requires several moving parts. The private equity company, and in-turn the new CFO, will put a magnifying glass on every aspect of the company to identify potential areas of improvement. This will certainly shake things up within the company at the onset. However, a fresh look and an objective assessment of the company’s operations leads to increased efficiencies and cost savings, resulting in a more profitable investment for the PE Fund.

Often times new systems and programs must be implemented to take the company to the next level. The new CFO must understand what solutions are best for the company, and its industry, and see the implementation through to completion. This execution needs to be accomplished quickly and correctly. Finance processes, sales processes and vendor relationships need to be evaluated and holes for improvement identified. That is the challenge, but the opportunity lies in a refreshed accountability for achieving measurable value. The successful CFO will be integral in the assessment and development of the workforce and will be responsible for building high-performance finance and operations teams. Oftentimes, the employees of a company are unaware of the purchase until shortly after and soon face swift changes and new standards they must follow. This can easily cause friction, animosity and fear internally. A new CFO during this transition will need to be a true leader and delicately handle this morale, while effectively aligning team member skill sets with the future needs of the company. Questions arise like, do these team members meet the caliber of standards moving forward? If not, can they be redeemed by training? The new CFO will be required to retain the best internal talent and attract and retain the best available external talent. This may be the most significant challenge faced by the new CFO, but if done well, he/she can ensure the organization has the right team that aligns with the strategic goals of the private equity firm moving forward. Resources a new CFO can draw upon Professional relationships, such as an accounting and legal advisor, provide meaningful value to a new CFO through innovative, strategic ideas and thought processes. In addition, they help the new CFO to ask the right questions and add important insights throughout various aspects of the transition. Private equity transactions are widely common, but certainly come with their own unique set of challenges and opportunities. A network of fellow CFOs can also be an important resource for a new CFO when facing certain hurdles, and they can serve as a sounding board to hash out the proper direction and actions to take. In Conclusion The face of the new CFO in a private equity-backed company comes in many shapes and sizes, but they must certainly be strategic, have expertise within every facet of a company, and have an eye towards both the future and the immediate present. The expectations and pressures that accompany this role are high and heavy. Through a successful transformation, however, will be a strong exit at high value. At Sax, our Transaction Advisory Practice helps owners, management and board members solve financial management issues by providing unique guidance in all industries. For more information or questions, reach out to a Sax advisor at (973) 472-6250 or visit www.saxllp.com.  Todd W. Polyniak, CPA is Partner-in-Charge of Sax’s Transaction Advisory & Outsourced CFO Practice and Accounting and Auditing Department. He has over 30 years of experience with in-depth auditing, accounting and advisory services, serving a multitude of industries and business leaders. He can be reached at tpolyniak@saxllp.com.

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WEALTH MANAGEMENT CORNER

PROTECTING WHAT’S YOURS (WHILE YOU’RE ALIVE)

Written by:

Marie DeCaprio, CFA®, CFP® Partner

SAX Wealth Advisors mdecaprio@saxwa.com

hether due to disability, dementia, or simply enjoying an exotic vacation, there are many ways you can end up unavailable to make critical financial or health care choices for yourself or your loved ones. If you’ve not documented your desires in advance, it can add extra stress for everyone, plus the outcomes may not be what anyone had in mind! One source of confusion over when and how to protect what’s yours is understanding which legal logistics apply during your lifetime, and which don’t come into play until after you pass. Today, we’ll cover a trio of tools for protecting your interests while you are alive: 1. A financial power of attorney 2. Trusted contact person(s) 3. A healthcare advance directive I. A Financial Power of Attorney The Basics. A financial power of attorney (POA) is a legal document authorizing someone (your “agent”) to make financial decisions on your behalf. No matter how much authority you grant an agent, they still owe you a fiduciary level of care, which means any decisions they make for you must be based on what they believe to be in your best financial interests.

When It Applies. A POA applies while you are alive, but unavailable to act for yourself. You can structure it to: • Begin immediately or upon a triggering event (such as a debilitating accident or illness) • Remain in force during a finite time period or be ongoing • Apply to all your financial matters, or only to specific transactions Common Scenarios. A financial POA can be helpful to address: • Capacity: If you become incapacitated due to illness, injury or dementia. • Availability: If you’re unable to be present for a financial transaction, such as if you’re traveling abroad or you’re otherwise preoccupied. • Convenience: If you’d simply like to make it convenient for someone else to be able to make financial decisions for you – such as your spouse or a trusted sibling (in general), your parents (if you’re heading off to college), or your adult children (if you’re aging). Additional Tips. • Again, anyone to whom you grant a POA is only your legal agent while you are alive; their authority ends the moment you pass away. Your estate’s trustees should take it from there. Sax Focus • www.saxllp.com Page 20

PROTECTING WHAT'S YOURS • Your agent(s) should have access to the documents that describe the POA you’ve granted them. If they can’t prove what their role is, they may not be able to act on it when needed. • Most banks and account custodians have their own POA forms they would prefer you use; also, they may be wary of POA paperwork that is several years old. Check with the financial institutions you frequent about their policies, and consider annually reestablishing any durable POAs, to ensure they remain relevant. • You cannot grant a POA if you are deemed to be of unsound mind. This makes sense, since you may inadvertently name a “bad” player or others may be able to contest the POA you’ve established. Don’t wait until it’s too late. II. Trusted Contact Person(s) The Basics. In 2017, the SEC approved the role of a trusted contact person as part of a FINRA Rule 4512 amendment. The amendment requires your account custodians (brokers) to encourage you to name a trusted contact as an extra line of defense for your investment accounts. If the custodian feels you are being financially exploited, they then have a back-up person they can talk to about some of their concerns. The additional input may enable them to delay disbursing funds from your account “where there is a reasonable belief of financial exploitation.” [Source] When It Applies. While the primary aim of the FINRA amendment is to prevent financial elder abuse, there are at least two scenarios when a trusted contact can be useful: • If you are unavailable, and the custodian believes your account may have been compromised • If you are cognitively impaired Common Scenarios. Imagine you’re on a mid-Atlantic cruise, and your advisor receives a suspicious trade order from “you.” They try but cannot reach you to verify it’s really you. If there is no trusted contact to reach out to, they may have little choice but to execute the trade and disburse the funds as ordered. If a trusted contact can instead provide evidence that the order is likely fraudulent, your advisor may be able to place a temporary hold before disbursing the funds. Similarly, if a loved one is exhibiting signs of dementia, a trusted contact can help prevent them from falling prey to financial exploitation. What if your aging parent tries to empty out their own bank account to help a “friend” in need? If your parents have named you as a trusted contact, an account custodian who suspects foul play can reach out to you, explain the circumstances, and receive your “second opinion.” Additional Tips. If you’ve named someone as a trusted contact, your advisor or account custodian can discuss some of your relevant circumstances with them and gather pertinent information from them. But a trusted contact cannot make any financial decisions on your behalf, nor can they view your account. Unless you grant it to them separately, a trusted contact does not have a financial power of attorney, as described in Section I.

III. A Healthcare Advance Directive The Basics. Your healthcare advance directive can offer two types of protection: • Your living will provide your life-sustaining and end-of-life medical care instructions, and related healthcare preferences, in case a time comes when you cannot state them for yourself. • Your healthcare directive can also name healthcare representative(s), or agent(s) and grant them healthcare power of attorney. If you cannot make your own healthcare decisions, your agent can decide on your behalf, guided by your living will. Medical professionals can also more freely discuss your condition with your agent, without violating HIPAA privacy rules. When It Applies. Your healthcare advance directive only comes into play if you are alive, but unable to direct your own medical care. Common Scenarios. Accidents and illnesses can rob you of your mental capacity – temporarily or permanently. If you do not have an advance directive in place, healthcare professionals and/or key family members may have to make medical decisions for you, without knowing what you would have preferred. Also, the individual(s) you would most want to have making decisions on your behalf may not be able to do so if you haven’t named them as your representative(s) in your advance directive. This can be stressful if not heartbreaking for everyone involved. Additional Tips. • Not only should almost everyone have an advance directive, it should be easy to get ahold of it when needed. Distribute copies to your primary physician and any of your other healthcare providers to keep on file. Give it to key family members. At Sax Wealth Advisors, we also maintain a portal for storing clients’ essential paperwork – including advance directives. • IMPORTANT: Do you have children who recently turned 18? As soon as your child is an adult, healthcare providers may not be able to even discuss your child’s case with you unless you have a healthcare power of attorney. Also, as described in this Wall Street Journal piece, if your child is attending school in another state, it’s worth establishing a healthcare power of attorney in their state and yours. How Can We Help? We hope our handy summary has helped clarify the role these critical protections can play in safeguarding what’s yours during what we hope will be a long and prosperous lifetime. That said, professional legal counsel is usually warranted as you sort through the details. Let us know if we can put you in touch with select professionals to assist – or if we ourselves can help you sort through the logistics involved. That’s what we’re here for!  Marie DeCaprio, CFA®, CFP® is a Partner with Sax Wealth Advisors and has been managing portfolios, developing financial plans, offering investment advice and providing other wealth management services for more than 27 years. She works with high-net-worth individuals, family-owned businesses and qualified retirement plans, offering comprehensive and highly customized services and strategic financial plans. Marie can be reached at mdecaprio@saxwa.com.

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CONTACT US Clifton, NJ 973.472.6250 Pennington, NJ 609.737.6600 New York, NY 212.661.8640 New York, NY 212.268.9888 info@saxllp.com www.saxllp.com