News & Tech Tips

Demystifying deferred taxes

Jacob Courtright on March 27, 2023

Deferred taxes are a confusing topic — and the accounting rules for reporting these items often seem to defy the logic of real-world economics. Here’s a brief overview to help clarify matters.

What are deferred taxes?

Companies pay income tax on IRS-defined taxable income. On their Generally Accepted Accounting Principles (GAAP) financial statements, however, companies record income tax expense based on accounting “pretax net income.” In a given year, taxable income (for federal income tax purposes) and pretax income (as reported on your GAAP income statement) may substantially differ. A common reason for this temporary difference is depreciation expense.

For income taxes, the IRS allows companies to use accelerated depreciation methods to lower the taxes paid in the early years of an asset’s useful life. Some companies also may elect to claim Section 179 deductions and bonus depreciation in the year an asset is placed in service. Alternatively, for GAAP reporting purposes, companies frequently use straight-line depreciation. Early in an asset’s useful life, this divergent treatment usually causes taxable income to be significantly lower than GAAP pretax income. However, as the asset ages, the temporary difference in depreciation expense reverses itself.

The use of different depreciation methods for book and tax purposes causes a company to report deferred tax liabilities. That is, by claiming higher depreciation expense for tax purposes than for accounting purposes, the company has temporarily lowered its tax bill — but it will make up the difference in future tax years. Deferred tax assets may come from other sources, such as capital loss carryforwards, operating loss carryforwards, and tax credit carryforwards.

How are deferred taxes reported on the financials?

If a company’s pretax income and its taxable income differ, it must record deferred taxes on its balance sheet. The company records a deferred tax asset for the future benefit it will receive if it pays the IRS more tax than an income statement reflects. If the opposite is true, the company records a deferred tax liability for the additional future amount it will owe.

Like other assets and liabilities, deferred taxes are classified as either current or long-term. Regardless of their classification, deferred taxes are recorded at their cash value (that is, no consideration of the time value of money). Deferred taxes are also based on current income tax rates. If tax rates change, the company may revise its balance sheet, and the change flows through to the income statement.

While deferred tax liabilities are recorded at their full amount, deferred tax assets are offset by a valuation allowance that reflects the possibility the asset will expire before the company can use it. Deciding how much-deferred tax valuation allowance to book is highly subjective and left to management’s discretion. Any changes to the allowance flow through to the company’s income statement.

Now or later?

Financial statement users can’t afford to lose sight of deferred taxes. All else being equal, a company with significant deferred tax assets may be able to lower its future tax bill and preserve its cash on hand by claiming deferred tax breaks. Conversely, a company with significant deferred tax liabilities has already tapped into tax breaks and may need additional cash on hand to pay Uncle Sam in future tax years. Contact us for more information.

Are Your Employees Engaged? Does it Matter?

Jacob Courtright on March 14, 2023

Are Your Employees Engaged? Does it Matter?

Most small business owners know the frustration of hiring the wrong person for the job. Regardless of endless efforts to engage the apathetic employee in the work tasks or the company culture, this outlier will not meet the group’s expectations. The cost of poor employee engagement is more than monetary. The failed hire can ignite controversy and complaints among other productive team members or create a host of client complaints.

In business, anything that affects the organization’s operations affects its profits. Still, according to Matt Tenney (n.d.), “… employee engagement is probably the factor that has the biggest impact on an organization’s profitability and, by extension, its future success.” Employers must devote time and attention to employee engagement because the stakes are high.

What Is Employee Engagement?

Employee engagement is an employee’s cognitive, emotional, and behavioral state directed toward the desired outcomes of the work organization (Shuck & Wollard, 2010). It is an active psychological state related to the experience of work. It encompasses the current task, the job, the team, and the dynamic working experience (Shuck et al., 2017). It is distinct from job satisfaction in that satisfaction can be felt by an employee who is content with their position but needs to be more actively motivated. Job satisfaction indicates how fulfilled or satiated an employee feels with their position rather than how engaged they are in work and culture (Macey & Schneider, 2008; Shuck et al., 2017).

It is valuable to look at each engagement component in more detail.

Cognitive Engagement

Cognitive engagement is evidenced in the employee’s proportioned attentiveness, focus, and concentration while using mental energy directed at work-related activities (Shuck et al., 2017). It is a proportional effort because it does not sacrifice one aspect of cognition to serve another. For example, the employee is actively working on the task at hand while remaining aware and effortful toward their role’s requirements and their inclusion in the culture and direction of the organization.

Emotional Engagement

Employees exemplify emotional engagement when they positively associate with the organization, resulting in a willingness to exert their energy toward supporting the organization’s purpose. These feelings manifest as pride in being a member of the team and a personal identification with the organization as a whole (Macey & Schneider, 2008). These team members might express that they believe in the organization’s purpose or feel that the organization holds personal meaning to them (Shuck et al., 2017).

Behavioral Engagement

Behavioral engagement manifests as observable behavior in the work setting and exhibits through innovation, initiative, proactive contributions, and going beyond what is typically required (Macey & Schneider, 2008). These engagement behaviors typified as “going beyond” include patterns of action that characterize organizational citizenship behavior (conscientiousness, support of other team members, support for the organization) but also encompass the employee’s desire to expand their role beyond what is required. This desire denotes a psychological state that will drive behavior even before the behavior materializes into an action (Macey & Schneider, 2008); Shuck et al., 2017). This pre-action bent of the employee toward behavior distinguishes behavioral engagement from performance (Shuck et al., 2017).

A Simple Definition of Employee Engagement

When we consider the cognitive, emotional, and behavioral characteristics of engaged employees, we can define employee engagement as the bent of an employee to exert their self-directedness toward a full and enthusiastic involvement with their work and workplace.

How Engaged Are Employees?

According to Gallup’s State of the Global Workplace: 2022 Report, 33% of employees in the U.S. are engaged at work. Worldwide, that statistic drops drastically to 21%. Further, the Gallup research indicates that 49% of people are not engaged, and 18% are actively disengaged.

Notably, the Gallup (2022) study found that employee engagement was rising globally in the pre-pandemic world. Engagement rose in the U.S. by 1% in 2021 but has yet to rebound to the pre-pandemic levels.

According to Gallup.com (2022), employees (49%) classified as not engaged are psychologically unattached to their work or company. In the workplace, these employees back down from intense or high-profile opportunities, preferring to exist in the realm of duty. These unengaged workers put in the time but need more energy or passion.

Actively disengaged employees (18%) are unhappy or unfulfilled at work. They feel resentment that their needs remain unmet. These workers make their unhappiness the focal point of everyone’s day, usually undermining the potential of the engaged workers and soliciting the unengaged workers into their club of discontent (Gallup.com, 2022).

By contrast, engaged employees are motivated and enthusiastic about their work and the workplace’s mission. This group is psychologically invested (think ownership) in their job and workplace outcomes. These workers generate innovation and act as catalysts in the high performance of a company (Gallup.com, 2022).

What Drives Employees to be Engaged?

Research in the area of employee engagement seeks to understand why employees choose to engage or disengage in the work and workplace. Kahn (1990) found that meaningfulness, safety, and availability were three conditions that shaped how people “inhabited” their organizational roles.

Meaningfulness has the strongest correlation to engagement. Meaningfulness is wrapped up in the enrichment provided by the job and the work role fit (May et al., 2004), while safety depends on co-worker relations and supervisor support. Availability encompasses the worker’s motivation to use their physical, emotional, and cognitive resources to perform and invest in work (May et al., 2004).

Things that undermine engagement are self-consciousness of how others perceive the employee or their work, a co-worker’s acceptance of the employee regarding attitudes or behaviors, and the energy drain of multiple outside activities brought on by membership in other organizations or participating in other commitments. Strikingly, external involvement in the family can positively influence employee engagement.

Perception and personality also affect how individuals react and shape their engagement at work. Cultural nuances, values, political and economic influences, and management styles may also influence employee motivation toward engagement, a caveat potentially impacting multinational corporations and the culturally diverse workplace (Kular et al., 2008).

One final twist in the employee engagement plot is that researchers have found an inverse relationship between the length of service and employee engagement. Brim (2002) found that an employee’s most engaged year is their first year of service, suggesting a continuum of employee engagement over time. Therefore, organizations must keep engagement flourishing (Kular et al., 2008).

The High Stakes of Engagement

Gallup (2022) has developed a method to measure employee engagement. The Q12® is a survey tool used to frame and improve employee engagement. Analyses of engagement from this survey tool indicate many positive effects of engagement. Engaged teams exhibited the following:

81% decrease in absenteeism
18% increase in productivity measured as sales
23% increase in profitability
10% increase in customer loyalty or customer engagement
Decreases in employee turnover
- 18% decrease in high-turnover organizations (more than 40% annualized turnover)
- 43% decrease in low-turnover organizations (with 40% or lower annualized turnover)
28% decrease in theft
64% decrease in safety incidents (accidents)
41% decrease in quality defects
58% decrease in patient safety incidents (mortality and falls) in healthcare services

Other researchers have found that engaged employees are nearly three times more likely to feel that their work positively affected their physical health compared to disengaged employees (Kular et al., 2008).

Successful companies must refrain from harboring unengaged or actively disengaged employees. Below are some simple steps to improving engagement for employees.

Ways to Improve Employee Engagement

Engagement is a dance between the elements of the workplace and the characteristics of the worker mediated by an organization’s leadership. Gallup.com (2022) reports that the manager determines 70% of a team’s engagement potential, placing employee engagement in a leader’s responsibilities. Leadership teams must exemplify engagement as a model to the employees they serve. Successful managers can set the workplace’s tone, communicate meaningfully without micromanaging employees, and foster motivation. With careful planning, employee engagement can be an achievable and sustainable goal.

Communicating within the group forms the cornerstone of engagement. For example, Gallup.com (2022) reports that employees who receive feedback daily are three times more likely to be engaged than those that receive feedback once a year or less. Consequently, only evaluating employees in once yearly job reviews may be detrimental to employee engagement. Kular and colleagues (2008) add that employees denied the opportunity to communicate and be involved in appropriate decision-making are a root cause of employee disengagement. Brim (2002) recommends that successful engagement is more likely when leaders focus on an employee’s strengths instead of fixing shortcomings.

Some simple steps leaders can take to improve engagement are as follows:

Ensure employees have a clear purpose regarding their role and its relationship to the company’s goals.
Help employees find their niche in the company and emphasize their unique contributions to the assigned tasks and projects.
Actively care about the employee holistically. Do not just emphasize their work or performance; become a safe and caring influence by encouraging work-life balance, healthy lifestyles, and strong relationships.
Help employees become their best selves by encouraging skill set development and training.
Communicate with employees through performance feedback. Inform them of relevant changes in industry trends, office policies, training initiatives, and employee perks.
Listen to employee concerns with responsiveness, respect, and interest.
Do not focus on one aspect of working to evaluate engagement. Instead, weave engagement throughout the employee’s service and experience.
Focus on engagement during all time frames of the employee’s association. Consider engagement during the hiring and onboarding process. Build engagement opportunities into job performance and development initiatives. Finally, remember to engage departing employees who have served well (Gallup.com, 2022).

Summary

Employee engagement is an ongoing pursuit of capturing the motivation of the individual employees on a team. As in all of life, communication through words and actions is the pivot point of engagement. Leadership is accountable for 70% of the engagement process, which means they must also remain engaged in the company goals, performance, and culture over the long haul. Employees engage at three levels: cognitively, emotionally, and behaviorally. Since employee engagement remains low, leaders will find that about two-thirds of their employees will be under-engaged, resulting in safety, quality, theft, turnover, productivity, profitability, absenteeism, and customer satisfaction problems. Under-engaged employees, therefore, result in a high cost to a company. Improve engagement by identifying an employee’s strengths. Encourage communication by being attentive to employee concerns and providing actionable feedback frequently. Think about employee engagement for all employees throughout their time of service.

While every employee will not respond with an engaged attitude, many will sense the care and respect that the leadership has toward the team and want to become a part of the thriving culture. Let employee engagement become the ‘secret sauce’ that drives strong and loyal employees to your business, keeps them actively motivated, and who, in turn, excellently serve your customers.

By Laurie Morgan, M.S, D.D.S., M.Ed

Healthcare & Dental Services Consultant

References

Brim, B. (2002). The longer workers stay in their jobs, the more disheartened they become. Gallup Management Journal, March. http://www.gallupjournal.com/GM/Jarchive/issue5/2002315c.asp

Gallup (2022). State of the workplace 2022 report. Gallup.com. gallup.com/workplace/349484/state-of-the-global-workplace-2022-report

Gallup.com (2022). Workplace/285674/improve-employee-engagement-workplace.

Kahn, W. A. (1990). Psychological conditions of personal engagement and disengagement at work. Academy of Management Journal, 33(4), 692–724.

Kular, S., Gatenby, M., Rees, C., Soane, E., & Truss, K. (2008). Employee engagement: A literature review. Kingston Business School Working Paper Series, 19.

Macey, W. H., & Schneider, B. (2008). The meaning of employee engagement. Industrial and Organizational Psychology, 1, 3-30).

May, D. R., Gilson, R. L., & Harter, L. M. (2004). The psychological conditions of meaningfulness, safety and availability and the engagement of the human spirit at work. Journal of Occupational Psychology, 77, 11–37.

Shuck, B., & Wollard, K. (2010). Employee engagement and HRD: A seminal review of the foundations. Human Resources Development Review, 9(1), 89-110.

Shuck, B., Adelson, J. L., & Reio Jr., T. G. (2017). The employee engagement scale: initial evidence for construct validity and implications for theory and practice. Human Resources Management, 56(6), 953-977.

Tenney, M. (n.d.). How employee engagement affects profitability. Business Leadership Today. https://businessleadershiptoday.com/how-employee-engagement-affects-profitability/

Close-up on sources of substantive audit evidence

Jacob Courtright on March 10, 2023

Organizations that understand how auditors verify account balances and transactions can minimize disruptions during audit fieldwork and maximize the effectiveness of financial statement audits. Here’s a summary of the types of “substantive evidence” auditors gather to help them form opinions regarding your financial statements.

Original source documents

Auditors can verify an account balance or record by vouching (or comparing) it to third-party documentation. For example, an auditor might verify the existence of a machine on your company’s fixed asset register by reviewing the invoice from the seller. Vouching enables an auditor to evaluate the accuracy of the amount recorded and whether the transaction was entered correctly in the accounting system.

Physical observations

Seeing is believing. Auditors sometimes verify the existence of assets through physical observations and inspections. For example, inventory audit procedures typically include observing or conducting a physical inventory count, inspecting the process to record incoming and outgoing inventory, and analyzing the inventory obsolescence process.

Confirmation letters

Auditors send letters to third parties — such as customers, banks or vendors — asking them to verify amounts recorded in a company’s books. There are two types of confirmations: A positive confirmation requests that the recipient complete a form confirming account balances (for example, how much a customer owes the company). A negative confirmation requests that the recipient respond only if the balance is inaccurate.

Comparisons to external market data

For assets actively traded on the open market, auditors may research pricing data to confirm the amounts claimed on the company’s financial statements. For example, if a company invests in marketable securities that it plans to sell within the year, the auditor could analyze the prevailing market prices to confirm their book value. Likewise, a random sample of parts inventory could be compared to online pricing sheets to confirm that items are reported at the lower of cost or market value.

Independent calculations

Auditors may verify internally prepared schedules and reports by re-creating them. If the auditor’s work matches the client’s version, it confirms that the underlying accounts appear reasonable. Auditors often rely on this procedure for such items as bank reconciliations and schedules of payroll-related expenses (for example, overtime, benefits and tax payments).

Collaboration is critical

An effective audit requires coordination between the audit team and the client. As we wrap up the audit of your 2022 financials, let’s work together to review the types of substantive evidence that were used for each major financial statement category. Contact us here. This process can identify potential bottlenecks in the auditing process and help you anticipate document requests and inquiries, making your next audit more efficient.

Tap into specialized functions in QuickBooks

Jacob Courtright on March 6, 2023

QuickBooks® provides an all-in-one solution that helps some small and medium-sized businesses manage their finances. While QuickBooks provides the accounting backbone for many companies, it has advanced features that go beyond basic bookkeeping tasks.

For example, the time-tracking functionality in QuickBooks captures the hours spent on a specific project and makes it easier to bill clients in real-time. Additionally, third-party data feeds and integrations can reduce your administrative burden.

Here’s an overview of the platform’s lesser-known capabilities:

Mobile app. You can download an app for smartphones and tablets to access your financial data anywhere, anytime. This feature allows you to track your business finances in real-time and quickly pivot as needed.

Reminders and alerts. You can set up automatic reminders for recurring bills and alerts that tell you when cash balances fall below a specific threshold or inventory levels are nearing the reorder point.

Profitability reporting. The software can help you determine profitability by tracking project-related time, expenses and revenue. This makes it easier to bill customers quickly and accurately.

Customer and vendor tracking. You can store customer and vendor information, including contact information, transaction and payment history, and notes.
Customized invoicing. Custom invoices can be created with your logo. The software can also facilitate customer payments with credit cards, the Automated Clearing House (ACH) and online payment platforms, such as PayPal or Venmo.

Purchase and sales order management. Built-in purchase and sales order management systems allow you to track incoming orders and outgoing shipments more effectively.

Bank and credit card data feeds. You can import transactions from bank accounts and credit cards, then classify each transaction within your accounting records. Additionally, you can enable system-generated classifications for recurring transactions or create rules manually.

Payroll administration. Users can administer payroll data within QuickBooks, making it easier to manage payroll processes on one platform and comply with tax laws.
Third-party integrations. Many third-party applications — including payment processors, payroll systems and e-commerce platforms, such as Amazon Business, PayPal, Square, and Shopify — work with QuickBooks.

We can help

If you understand QuickBooks’ full functionality, it can streamline your accounting processes, improve the accuracy and timeliness of your reporting, and make it easier to do business with your company. It can also facilitate communications between in-house and external accountants. In addition to providing your CPA with direct online access to your organization’s books, QuickBooks allows your accountant to send requests for information and documents through the platform. Contact us with any additional questions you have about QuickBooks and other accounting software solutions.

Now hiring: 10 questions to ask bookkeeper candidates

Jacob Courtright on February 17, 2023

Are you looking for someone to manage the books and records for your small business? Whether you’re operating a startup or an established business that recently lost its bookkeeper, hiring the right person for these tasks can be challenging.

Selecting a candidate in today’s job market requires a rigorous process. It’s important not to be hasty or wing it during the interview. Give your job posting adequate time to attract a healthy sample of qualified candidates. Write up a detailed job description with the help of your management team. Then brainstorm a comprehensive list of questions.

Here are 10 questions to consider in the brainstorming process.

How many years of bookkeeping experience do you have, and are you familiar with U.S. Generally Accepted Accounting Principles (GAAP)?
Do you possess any accounting-related qualifications, such as a certified public accountant (CPA) license or an undergraduate or graduate degree in accounting?
What accounting software programs are you proficient in? (Alternatively, if your company has an existing software system, ask if the candidate is proficient in that program — or if he or she recommends a different one.)
Do you have experience filing income, payroll and sales tax returns? If so, which tax software have you used?
Can you provide additional services — for example, can you create budgets, forecasts, valuations or business plans — that might benefit our business long-term?
Do you have experience streamlining existing accounting and reporting processes?
How long after the close of each month does it take you to generate monthly financials, and can you provide interim reports, such as daily cash statements or weekly flash reports?
Are there any areas of accounting where you need more experience or training? Are there any aspects of tax and accounting that you’d rather avoid?
Have you ever dealt with any discrepancies or audit issues before? If so, how did you address them?
Do you have experience working with an outside CPA firm? If so, explain the types of services the firm provided.

By asking these questions, you’ll gain a detailed understanding of each candidate’s capabilities. The questions will likely open an extemporaneous dialog about the candidates’ qualifications and your expectations.

Remember, there’s more to finding the right fit than just accounting know-how. It’s also important to consider the soft skills you’d like the bookkeeper to possess, such as trustworthiness, approachability and communication. Ask yourself: Will this candidate mesh well with the other personalities on my management team? And will this candidate bring fresh ideas and advanced skills to the table? Taking the time to choose wisely could save headaches and money later.

We can be a valuable resource during the hiring process. In addition to helping brainstorm interview questions, we can refer qualified candidates with experience in your industry who are looking for a new position. Or we can temporarily handle your bookkeeping tasks during the hiring process. Contact us to discuss the possibilities.