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Smolin Lupin is pleased to announce the merger of Simon, Spinelli & Ciambrone, a CPA firm headquartered in Spring Lake Heights, New Jersey.

The professional team from Simon, Spinelli & Ciambrone specializes in providing financial, tax, and accounting advice for individuals and businesses in a wide range of industries. The Spring Lake Heights team offers decades of knowledge and experience servicing clients and assisting businesses in meeting their goals. 

“We are thrilled to have Simon, Spinelli & Ciambrone join us in providing the quality accounting and consulting services Smolin has always been known for,” said Ted Dudek, CPA and Managing Member of Smolin. “We believe Smolin will benefit greatly from Simon, Spinelli & Ciambrone’s accounting and tax experience and their focus on building exceptional client relationships.” 

This merger will expand Smolin’s ability to deliver industry-leading financial and accounting solutions throughout New Jersey. Simon, Spinelli & Ciambrone’s unique construction accounting specialization will enhance Smolin’s existing client base in the construction industry. 

“Smolin’s reputation speaks for itself,” comments Stephen M. Spinelli, CPA. “Their many years of industry experience and shared commitment to fostering client relationships make them a perfect fit for our team. Their approach to client satisfaction exactly mirrored ours over the years.”

As part of this merger, a service location for Smolin will remain in Spring Lake Heights in the previous offices of Simon, Spinelli & Ciambrone. 

About Smolin Lupin

Since 1947, Smolin has been committed to providing industry-leading professional financial and accounting services uniquely designed to meet the needs of each and every client. Smolin’s attention to the needs of each client has helped them become the successful and respected CPA firm they are today. Smolin Lupin is an Independent Member of the BDO Alliance USA and one of the NJBIZ Top 20 Public Accounting Firms in New Jersey.

Ineffective reporting and inventory management can lead to impaired business profits and bloated working capital—and best practices for inventory management may have recently changed in industries that rely on overseas suppliers. 

Now may be a good time to review your current practices and make needed adjustments.

Choosing the right reporting method

Keeping accurate records is key to effectively managing your inventory. 

Generally speaking, there are two main inventory accounting methods you can use for tax and financial accounting:

1. First in, first out (FIFO)

FIFO refers to selling the oldest stock first. This method tends to work best with perishable items, dated goods, and collectibles. This approach also tends to result in higher income in inflationary markets, since older purchases with lower costs are included in cost of sales. (The opposite tends to hold true in deflationary markets.)

2. Last in, first out (LIFO) 

LIFO may be your best option if you tend to retain inventory items like durable goods and repair parts for long periods. Using LIFO allows you to allocate the most recent—and thus, higher—costs first, which can maximize your cost of goods sold and minimize taxable income.

FIFO is the more frequently used of the two because it better reflects the usual flow of goods and is easier to account for. By comparison, LIFO can be highly complex since it deals with inventory costs that may be several years old, rather than the actual inventory.

Is it worth it to change your approach?

You may be able to change your company’s method if you’re dissatisfied with it. However, the process for doing so tends to be complex. 

If your business wishes to change its inventory accounting method for tax purposes, you’ll first need to request permission from the IRS. And if you wish to change methods for financial accounting purposes, you’ll need to have a valid reason. Because of this, changes in accounting for inventory aren’t easy or routine.

How effective is your inventory management?

Inventory represents a significant item on the balance sheet for many companies—including manufacturers, retailers, and contractors. 

On one hand, keeping too much inventory can diminish your working capital (your current assets minus your current liabilities), and that may make it hard for your company to pursue value-added business endeavors like purchasing machines, launching new products, or hiring salespeople to bring in additional revenue.

On the other hand, leaner “just-in-time” inventory practices may reduce your security and storage costs, which can free up cash while allowing you to keep a closer tabs on what you have in stock. However, this may require you to upgrade your company’s current inventory tracking and ordering systems. Newer systems give you the ability to forecast demand and minimize overstocking. Whenever it’s appropriate, you can even make supply and demand estimates more accurate by sharing data with customers and suppliers.

There’s a limit to how “lean” your company can operate, though—many companies learned during the pandemic that carrying a reasonable amount of “safety stock” can help them avoid the fallout of a supply chain crisis. In the face of current supply chain risks, it may be time to adjust previous assumptions about optimal inventory levels and reorder points.

Optimize your inventory management

When you review your company’s inventory practices, start by identifying sources of inefficiency—then you can work on finding the best solutions. If you need further guidance 

on inventory reporting methods and best practices in your industry, contact us.

If your business employs workers who receive tips for serving food and beverages and you pay Social Security and Medicare (FICA) taxes on tip income for these employees, you may qualify for a federal tax credit.

The FICA credit

This tax credit applies with respect to tips received by your employees in connection to providing customers with food or beverages, even if the food or beverages served are not for consumption on the premises. 

For FICA tax purposes, these tips are treated as if you paid them directly to your employees, even though they were actually given by customers. You employees must report their tips to you, and you’re required to withhold and remit the employee’s share of FICA taxes. You’re also responsible for paying the employer’s share of those taxes.

This tax credit is claimed as part of the general business credit and is equal to your share of FICA taxes paid on tip income in excess of the amount needed to bring your employee’s wages up to $5.15 an hour. This means that if the tip income only brings an employee up to the $5.15-per-hour level, calculated monthly, no tax credit is available. However, you won’t need to worry about this calculation if you pay each employee $5.15 an hour or above, excluding tips.

It’s worth noting that the amount was frozen at $5.15 per hour by a tax law passed in 2007, when $5.15 was the amount of the federal minimum wage. Although the minimum wage has now increased to $7.25, the amount for credit computation purposes has stayed at $5.15.

A brief illustration

Say, for example, that a server working at your restaurant is paid $2 an hour plus tips, and that he works 160 hours over the course of the month. At the end of the month, his income is $320 in addition to $2,000 in reported cash tips.

Since the waiter is paid $3.15 less than the $5.15 rate for the FICA tax credit, he will be below the $5.15 rate by $504 (160 times $3.15) after 160 hours worked. Because of this, the first $504 of the waiter’s tip income will only serve to bring him up to the minimum rate. The remaining tip income will be $1,496 ($2,000 minus $504). 

That means that if the waiter’s employer pays FICA taxes on his wages at the rate of 7.65%, the employer’s credit will be $1,496 times 7.65%, or $114.44 for the month.

While your share of FICA taxes is generally deductible, you can’t deduct FICA taxes that are paid with respect to the tip income you used to determine the credit since that would amount to a double benefit. However, you do have the option to refrain from taking the credit, which will allow you to still claim the deduction.

Take advantage of this tax credit

This tax credit on tips may be valuable to you if your business pays FICA taxes on your employees’ tip income. However, there may be additional rules that apply. Please reach out to us if you have further questions about this credit or the rules governing tipping and FICA taxes.

Even though last-minute updates to contracts can be challenging for businesses, they provide a chance to increase profits—but they must be handled in accordance with appropriate accounting rules. However, with a strategic workflow in place, they don’t have to derail progress towards completing contract agreements. 

Common contract issues

One of the most common issues with contracts is that customers change their mind about the scope of a project after they’ve signed the contract—but before any work has been completed. When this happens, schedules can be delayed. 

To keep a project on schedule, contractors may start proceeding with the new scope of work. However, if new costs and revenue projections aren’t accounted for in the project budget, this decision can negatively impact their financial statements.

For example, if a contractor attributes costs to a change order for the total incurred job costs to date and they don’t make a corresponding adjustment to the total contract price and total estimated contract costs. To a lender or surety, this may indicate excessive underbillings.

Similarly, profit fade can take place if contractors overestimate change order revenue. If a contractor increases the total contract price from projected out-of-scope work but ultimately doesn’t secure the necessary change order approval, profits may be lost as the job moves forward. This can also decrease financial statement users’ confidence in the accuracy of documents.

Types of change orders

While there are many types of contracts, change orders can be divided into three general categories:  

1. Approved change orders: For approved change orders, it’s acceptable to update incurred costs, total estimated costs and the total price for the contract. Depending on the change-order provisions, these updates may increase a business’s estimated gross profits.

2. Unpriced change order: When parties agree to a scope of work within a contract but have yet to finalize price negotiations, the accounting treatment depends on the probability that costs will be recovered. If recouping costs isn’t probable, change order costs are handled as costs of contract performance during the period they’re incurred. As a result, the contract price isn’t adjusted and the contractor’s estimated gross profit decreases.

However, cost recovery is probable because of a contract price adjustment, the contractor can either:

• Defer costs until the time at which parties come to an agreement on a new contract price, or
• Handle them as costs of contract performance in the period incurred and increase the contract price to the extent of the costs incurred, resulting in no change in estimated gross profit

Assessing the probability of cost recovery is a complex calculation. Contractors should weigh their past experience in negotiating change orders along with other factors, such as client needs, times, and scope of work. If it’s probable that the contract price will be greater than the costs incurred (increasing estimated gross profit), the contractor may recognize increased revenue — provided realization of that revenue is “assured beyond a reasonable doubt.”

3. Unapproved changed costs: Unapproved changed costs must be handled as claims. Businesses should recognize additional contract revenue only when it’s probably that a claim will generate such revenue and the amount can be reliably estimated. Moreover, accounting rules should be strictly followed in these situations. 

Smolin can help

Accounting for change orders can be confusing. Contact us for help handling your company’s change order procedures and improving the accuracy and transparency of your financial statements.

Many workers receive at least part of their compensation from sales-related commissions—and some companies even allow for unlimited commissions in order to attract and retain the best talent.

However, it’s an unfortunate fact that some employees abuse this system by falsifying sales or rates in order to receive higher compensation. Although the specific methods of fraud vary depending on the salesperson’s specific industry and role, it’s important for companies to take the possibility of commission fraud into account—and to take steps to prevent it.

Commission fraud: three common forms

Commission fraud usually takes one of the following three forms:

1. Invented sales

This form of fraud occurs when a retail employee generates a commission by entering a fake purchase at the point of sale (POS). In some cases, employees who are involved in selling business services may also create fraudulent sales contracts.

2. Overstated sales

Workers may also commit fraud by altering internal invoices or sales reports or by inflating sales captured through the company’s POS.

3. Inflated commission rates

A company’s commission records may also be changed to reflect a higher rate of pay. This form of fraud may be used by employees who have access to such records, but employees who don’t have access can also collude with someone who does—including accounting staffers—to alter compensation rates.

Employees may also pursue more sophisticated schemes by colluding with customers or other outside parties.

Using data to detect fraud

Regardless of which method an employee uses, commission fraud schemes create a data and document trail that companies can use to detect fraudulent activity. For instance, conducting a regular analysis of your company’s commission expenses relative to sales can help you discover commission fraud in progress. Once timing differences have been accounted for, there should be a close correlation between the volume of commission payments and your sales revenue.

You should also make regular inspections of the total commission paid to each of your employees. If you have employees whose commission levels are significantly higher than average, it’s a good idea to analyze their sales activity and the associated commission rates to verify that the records are consistent. You can also create commission sales benchmarks organized by employee type, location, and seniority. These benchmarks will make it easier for your company to identify fraud in subsequent periods. 

Another method for spotting commission fraud is to randomly sample sales associated with commissions to ensure that you have the relevant documentation for each payment. By disguising your calls as customer satisfaction checks, you can also contact individual customers in order to verify sales transactions.

Some commission schemes also rely on cooperation between multiple employees or between employees and customers—these fraud attempts usually leave a trail of email correspondence. Within the bounds of your company’s policies and procedures, you may be able to identify these forms of fraud by monitoring your employees’ email communications.

Additional fraud-prevention processes

Your business can also implement certain processes to prevent fraud before it occurs in the first place. All of the following may help your company stop commission fraud before it happens:

Formalizing commission fraud policies

In your employee handbook, clearly state the consequences—such as termination or criminal charges—of committing commission fraud. It’s also important to routinely emphasize the measures your company takes to detect commission fraud, such as regularly scrutinizing individual payments for evidence of malfeasance.

Minimizing the possibility of record tampering

Rotating the accounting staff assigned to record commission statements can help prevent your salespeople from accessing accounting records. Segregating all accounting duties will also make it more difficult for fraud schemes to come to fruition within your organization.

Setting achievable sales goals

While many employees commit fraud for personal gain, it’s not uncommon for employees to inflate or falsify sales in order to meet unrealistic sales targets. It’s a good idea to regularly ask your sales staff whether they’re able to meet objectives. You’ll also want to pay close attention when salespeople express frustration or choose to leave your company. If unrealistic sales targets are a common complainant, your company may need to adjust them.

Making fraud more difficult

Commission programs are a great way to boost your company’s bottom line while improving employee compensation and morale—but without the right policies in place, it can be all too easy for dishonest employees to take advantage of these systems. In order to make fraud as difficult as possible, your company may need to increase data analysis or reassess internal controls.

However, many companies find that they don’t have the knowledge or resources to implement these changes—and a CPA or forensic accounting specialist may be able to help. Contact us to get started.