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Shareen

CPA | Senior Manager

A voracious reader of mystery novels from a very young age, Shareen loves putting her sleuthing skills to work solving her clients’ accounting puzzles.

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Dan Wright , Matt Medlin
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Leadership today is being redefined by the forces present in a fast-paced market. Changes brought on by unexpected economic trends, rapid technological adaptions, increased security threats, and a global pandemic have made us all rethink modern leadership models. This is especially true for leaders catalyzing rapid growth.

We (the authors) have had extensive opportunities to observe successful start-up leaders for many years. We have helped advise technology start-ups through fast paced funding cycles, complex exit events, and assisted them in navigating through periods of rapid growth.

Naturally, we have observed a broad range of leadership styles and habits. To be sure, much of the success we have witnessed was closely correlated with the technical insights and vision of the founders and their teams. However, looking beyond the technical innovations, we have also recognized leadership styles and habits that often correlate with successful exits for the founders and the investors. This article is an attempt to summarize some of our observational insights associated with leaders facing rapid growth.

1. Adhere to a Vision-Guided Business Plan

When leading in a constant growth environment, leaders must create a vision, evolve the vision, and then exercise the discipline to adhere to that vision. Sure, the vision will change as real market conditions change, and as business plans guided by the vision change. But distractions can become dangerous. They drain resources that could eventually decide the difference between success and failure.

How does a leader distinguish between a distraction and something that requires a healthy iteration in their business plan? Here are a few suggestions:

  • Developing criteria for what is outside the vision may be just as important as refining a working description of your vision.
  • Consult definitive evidence whenever practically possible.
  • When relevant evidence is not available, educated judgment may often be a practical substitute.

In our experience, expensive distractions most often arise from internal sources. For example, when teams favor traditional, historic solutions because that is what they know and understand, innovation is discouraged or isolated.

Our nature is to create and revise a vision around what we are good at, instead of creating business plans based on market observation and feedback. When business plans are distracted or revised by the magnetic pull of what a company is already good at, that company is in danger of becoming irrelevant in the marketplace. When this occurs, innovative solutions that could have created significant market advantages are often lost. Focusing on the security of outlived solutions just because you’re good at execution is a costly distraction. Rather than clinging to comfortable execution methods, the best leaders question and challenge them.

Definitive evidence is obtained by carefully listening to and observing the market (i.e., potential customers and business partners). Companies who evolve in sync with market feedback and observation rarely become irrelevant. Instead, they create value by using their informed vision to anticipate, and sometimes shape, market trends.

2. Talent Acquisition: Establish Clear Roles and Link them to Individualized Reward and Incentives Systems

Leaders catalyzing rapid growth make huge investments in recruiting talent. But often when the star talent shows up to work, the new team member perceives a disappointing disconnect between what was promised and their actual role. Generally, the problem is not an intentional “bait and switch,” or even an overpromise. It’s more about vaguely defined roles and a lack of planning before the hire. Even worse, it can be about a failure to connect the role to the collective company vision and plans. Our experience demonstrates this is common with companies who are attempting to compete through rapid employee acquisition.

Disconnection can be avoided or reversed though careful dialogue and education. But those steps can only happen if the new team member’s role was carefully designed before the hire. Failure to consider a role and then recruit the best candidate can lead to high turnover and a negative reputation in the labor market. Educating team members about their roles and the business plan is critical to full engagement.

Once a team member’s role is carefully defined and understood, the next step is designing a reward system that clearly correlates mutually understood efforts to potential rewards. Rewarding your employees for a job well done is a given, but it is not enough to simply recompense high performers.

Many reward systems we have observed are vague, meaning they lack a clear correlation between the desired behavior and obtaining the reward. To truly get the most out of an incentive system, employees must see a direct connection to how what they accomplish on a day-to-day basis affects their rewards. (This is equally true for short-term and long-term rewards.)

Many companies have reward systems that are too ambiguous. As a result, employees can’t connect how their efforts resulted in the bonus or other reward they received.

For example, we have been asked to educate employee groups on stock option plans. We generally begin those discussions by educating employees on the economics and tax consequences of owning options. However, it soon becomes obvious that while the employees appreciate participation in option plans, they are more interested in understanding why they received options, the amount they received, and how they can earn more.

Almost without fail, the stock-offering employers lack definitive answers to what matters to the employees beyond the generic economic mechanics. When we consult with the leaders, they’ll state they offer options because competing employers do. And the grants do, in fact, mirror those of their competitors. However, little thought has been invested into helping employees see definitive correlations between individual effort and reward.

Another difficult challenge for a leader in a high-growth environment involves recognizing that employees respond to, and are motivated by, different rewards. Balancing individual motivational differences and the perception of fairness, creates challenges that can only be resolved through innovation and significant leader effort. We have found the most successful reward programs involve leaders who spend one-on-one time with each team member to understand what is important to them. Some wish to maximize their income, others value more time off to enjoy family or hobbies, others may perceive opportunities for new experiences as a reward, and almost everyone values the experience of sincere leaders who express heartfelt appreciation for their unique contribution.

Creating individualized incentive programs offers many rewards for both the employer and the employees. One-on-one dialogues give leaders a chance to discuss performance barriers and challenges. And, they can yield significantly higher levels of engagement and create opportunities for team members to bond with their leaders.

3. Lead Dialogues; Minimize Monologues

In our experience, companies built on a “monologue” culture rarely succeed. This typically occurs when the founder/leaders are highly controlling and overvalue their own ideas and leadership style. In contrast, dialogue cultures encourage many voices to present their ideas and feedback. Team innovation (generally the most valuable form of innovation) is nearly impossible in a monologue culture, whose environments tend to favor tradition and historical methods and discourage innovation and change.

Effective leaders know that no matter how charismatic, entertaining, and persuasive they are, sustainable growth and adaptation can’t occur without meaningful, authentic dialogue happening at every level. Leaders who spend most of their days delivering monologues and “updating” the employees, rarely inspire the kind of teams that can respond quickly and effectively to the rate of change that high growth requires.

Monologues lead to exclusion, and team members who do not feel heard will not engage. Growth and adaptation are best fostered and embraced when everyone brings their best ideas to the conversation. The DNA of game-changing solutions generally includes elements that evolved from collective efforts and ideas. Since high-growth companies must compete daily to attract and obtain the best talent, leadership must cultivate active dialogue.

4. Embrace the Art of Listening

For years, we have read books and articles on the importance of listening. It seems to be ubiquitous. Yet, it’s a fact that when leaders are overwhelmed with rapid growth or other complexities, they often revert to their own habitual instincts and ignore input from others. In hindsight, we have seen opportunities missed in tragic ways.

Given time and practice, the habit of objective listening can become the most powerful tool in any leader’s skillset. Listen to the market, listen to employees, listen to advisors, and listen to your peers in other similar leadership roles. Cast your listening net wide. Why invest in great talent and then not trust them enough to listen to them?

History is full of inspiration originating from unexpected sources. Ideas can come from anywhere once a leader develops the habit of listening. We are frequently surprised when we ask our clients, “What inspired you?” Often their epiphanies were triggered by inspiration from sources they would not have expected.

Bottom Line: Leadership Is Especially Difficult During Rapid Growth, but the Rewards are Great

As the economy continues to recover, many business leaders are challenged with rapid growth. Adherence to company vision and a well-thought-out business plan can help avoid the costs of distraction. Making quick, innovative adjustments in response to market observation and feedback is more important than focusing on preserving relevance for existing skills.

Growth generally requires talent acquisition. Clearly defining new roles before recruiting, and offering employees individualized reward systems, will result in higher job satisfaction, retention, and productivity. When team members are clear on how their efforts are essential to the collective success of the team, they are happier and more engaged.

And finally, leaders can gain advantages by eliminating monologue styles and developing authentic listening skills. Bringing everyone to the table for a chance to be heard opens up new ideas and avenues for further growth.

This article is part of the Learning, Adapting, and Growing: Leadership Perspectives series, which explores the role of leadership from a diverse array of perspectives. Each article is written by a Clark Nuber leader who shares their ideas on the unique challenges and opportunities they have experienced, and the lessons they’ve learned along the way.

© Clark Nuber PS and Leadership Perspectives, 2021. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Leadership Perspectives with appropriate and specific direction to the original content.

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Be Aware of Issues when E-Filing

For tax-exempt organizations that are currently working on filing their annual Forms 990, new rules surrounding mandatory electronic filing (e-filing) are causing quite a headache for tax professionals. Originally enacted on July 1, 2019, the Taxpayer First Act required all tax-exempt organizations to electronically file their annual returns. Though electronic filing for exempt organization returns was available before the passage of this Act, it was mandatory only for select organizations. And several forms and scenarios were unavailable for e-filing all together, such as the Form 990-T, Form 4720, initial filers, or organizations that had a name change or year-end change in any given year. The rollout of mandatory electronic filing came in waves, leading to mandatory electronic filing requirements for the following forms:
  • Form 990 and Form 990-PF: mandatory for tax years ending July 31, 2020 and later;
  • Form 990-T: mandatory for tax years ending December 31, 2020 and later (except those postmarked on or before March 15, 2021);
  • Form 990-EZ: mandatory for tax years ending July 31, 2021 and later; and
  • Form 4720 filed by private foundations: mandatory for 2020 forms with a due date of July 15, 2021 and later (except those postmarked on or before June 15, 2021).
Though the IRS has long been preparing for the rollout of mandatory electronic filing, the first half of 2021 was filled with delays, confusion, and a mismatch of information between the IRS, tax professionals, and software providers regarding what and how returns are required to be e-filed.

Issues with the Form 990-T

The most significant change for this filing season is the Form 990-T. Not only is the Form 990-T eligible for electronic filing for the first time in history, but e-filing became both available and mandatory at the same time. Furthermore, the IRS was delayed in releasing the 2020 Form 990-T e-file schema, so the rollout did not occur until March 2021, which left software providers scrambling to update their systems in the middle of a filing season. Electronic filing of the Form 990-T would have been a challenge on its own, but organizations also regularly attach any required foreign filings to this return, such as Forms 926, 5471, 5713, 8865, and more. Such filings may be subject to hefty fines for failure to file, are not open to public disclosure, and may contain sensitive information, so it has added another level of complexity now that these forms are also required to be e-filed with the 990-T. All of this complexity has caused practitioners across the nation to spend significant time and resources resolving e-file issues with the IRS and software providers. The IRS has confirmed there are no exceptions for electronic filing, so exempt organizations and tax professionals should be prepared for the challenges surrounding electronic filing as they work to complete their 2020 tax filings.

E-Filing: Notable Issues and Advice

Here are some issues to be aware of, and advice to keep in mind, with regard to e-filing your exempt organization returns:

File Before the Due Date

The IRS is rejecting a larger percentage of e-filed returns this year. Though the IRS does have a 10-day grace period for re-submitting a rejected return (in order to be considered timely filed), it is not necessarily quick, easy, or intuitive to resolve e-file issues. It can take multiple calls to both a software provider and the IRS to obtain the proper diagnostic codes to allow for the e-file. Keep in mind that the IRS is still answering phone calls in limited capacity due to COVID-19 shortages, and it can take multiple attempts and hours on hold before being able to speak with a representative. Moreover, if your form is required to be filed in conjunction with a state return, some states have grace periods shorter than 10 days, and some have none whatsoever. File returns ahead of the deadline to allow flexibility.

If Your Entity had an Organizational Change, Prepare for an E-File Reject

The IRS e-file schema is rejecting filings for entities that are reporting a name change or year-end change, or those filing an initial return or short-year return in the current year. Additionally, if you reported an operational change on a prior year or paper-filed return that has not yet been processed, then the IRS database will have outdated information that may also result in a rejection of your current return. The tax preparer will need to work with their software provider and the IRS to obtain the proper override codes for filing. Preparers should also note that the phone number for the IRS E-file Help Desk is not the same as the TE/GE customer service line. If the rejection is the result of an IRS issue, the correct phone number to call will be provided when the return initially rejects.

A Qualified Electronic File is Not the Finish Line

We have seen many returns initially show a qualified electronic file, only to have the same return later rejected by the IRS. As software providers are continuing to update their systems, tax preparers should not assume that a return will be accepted by the IRS merely because the electronic file qualified upon export. Moreover, filers should be cautious to ensure that the electronic file contains all the intended forms and attachments, and that such forms and attachments are being transmitted with the proper return. We have seen returns qualify for electronic filing but fail to include attached filings. We have also seen electronic files erroneously include attachments with the incorrect return – i.e., foreign filings attached to the Form 990 electronic file rather than the Form 990-T electronic file.

Be Aware of What Forms and Schedules are Required

As the IRS continues to improve its e-file schema and software providers strive to keep up, attachments can get missed. Preparers should ensure that all required information is included in the e-file and should not rely solely on the software to auto populate. For example, certain foreign forms are available to be filed directly within the e-file schema, whereas others must be attached to the e-file via a PDF. Or, as is the case of the Form 5471, the core form is available for electronic filing within the schema, however, some of the required schedules are not available and must be included separately via PDF. Or, due to character limitations, the electronic file may not allow space for all required information and therefore supplemental statements will need to be attached via PDF. These are only a few examples of what we have seen, and filers should use extra caution to ensure that they are filing complete returns.

If a Software Provider Says You Need to Paper File, Do Not Listen

The IRS has confirmed there are no exceptions for electronic filing. If your organization submits a paper filed return, you may be assessed penalties for late filing, up to $105 per day. You may have to challenge your software provider.

The Return Might Look Different

If your organization has paper-filed in the past, your return presentation may change this year. Paper-filed returns allow for a lot of flexibility in how information is presented. Electronic filing requires a certain schema and, as such, many fields have character limitations, character rules, and only allow select attachments. This is something to be mindful of, and your organization may want to mention it to management and the Board of Directors in advance.

Management and/or the Board of Directors May Need to Make Decisions

In some situations, the only option for qualifying a return to e-file may be to utilize a workaround. For example, if an organization has changed its year-end, then the only option for electronic filing may be to select the “initial return” box on the face of the 990, per IRS direction. In this instance, our client elected to add an explanation to Schedule O to explain why the box was checked. Additionally, for new entities that are not yet in the IRS database, the organization may need to choose whether they want to spend resources working with the IRS on the matter - or delay filing the return until the database is updated automatically. In such situations, each organization will need to determine what level of risk they are comfortable with.

Small Organizations Will Need to Plan Ahead

The IRS has provided transition relief for small organizations that file Form 990-EZ. As such, the IRS will continue to accept paper-filed returns for organizations with tax years ending before July 31, 2021. For tax years ending July 31, 2021 and later, the Form 990-EZ will need to be filed electronically. Entities that have historically filed their returns on paper will need to create a plan in order to transition to filing electronically. The IRS has a list of approved software providers which can be found here. For organizations that regularly file Form 990-N (e-Postcard), the process for filing has not changed from the previous year. The Form is still required to be submitted electronically.

In Conclusion

The transition to mandatory electronic filing has been anything but simple for preparers and filers of exempt organization returns. Each organization should become familiar with their unique situation and be aware of the issues they may encounter when e-filing their returns for the first time. The best way to ensure returns are timely filed is to file well in advance of the deadline and leave plenty of time to resolve any potential e-file rejects. If you have any questions regarding e-filing, please contact a Clark Nuber professional. ©2021 Clark Nuber PS. All rights reserved.

“Hours Method” Now Available for Calculating the Seattle Payroll Expense Tax

As detailed in the original article published by Clark Nuber, in July 2020, the Seattle City Council passed City Ordinance 126108 establishing a new Seattle payroll expense tax that takes effect January 1, 2021.

Updates to the Original Tax

Following the passage of that ordinance, the Department of Finance and Administrative Services (FAS) conducted a rulemaking process and then published a Director’s Rule for the payroll tax. As a part of that process, FAS staff received numerous questions from businesses about how to apply the payroll expense allocation methodology included in the ordinance, especially in situations where employees split their time between work in Seattle and work in other jurisdictions. In response to the questions and comments from businesses, and in an effort to make it easier for businesses to understand and effectively comply with the law, the City passed Ordinance 126309. This ordinance adds an additional method that businesses may choose to use to determine their payroll expense subject to the tax, based on the proportion of an employee’s hours worked in Seattle compared to the employee’s total hours worked in all locations. As detailed in the previous Clark Nuber article, the original statute prescribed a methodology for determining when an employee is “primarily assigned” to Seattle based on a number of different alternative factors. If it is determined that an employee is “primarily assigned” to Seattle, then 100% of that individual’s payroll is subject to the Seattle payroll expense tax based on a progressive tax rate schedule for businesses with more that $7M of Seattle payroll and employees with greater than $150,000 of annual compensation.

New, Alternative Methodology – The “Hours Method”

The new ordinance introduces an alternative methodology for determining the amount of compensation subject to the payroll expense tax for an individual employee that performs work partly within and partly outside Seattle. Businesses may now elect to compute the amount of an individual employee’s compensation subject to the tax using an “hours method.” Under the hours method, the business multiplies that individual’s annual compensation by a ratio of the individual’s hours worked in Seattle to the individual’s total hours worked in all locations. So, an employee that is compensated $300,000/year and spends 60% of their time working in Seattle would be subject to the tax, at an applicable rate, on $180,000 of their annual compensation. As summarized above, the tax only applies to employees that are paid greater than $150,000 in compensation during the year. Under the new “hours method” that threshold is determined before applying the ratio of the individual’s hours spent working in Seattle divided by total hours worked everywhere. For example, if an employee is paid $160,000 for the year and 50% of that individual’s time is spent working in Seattle, $80,000 of the employee’s payroll is subject to the payroll expense tax because total compensation paid to the employee during the year is greater than $150,000 (even though only $80,000 of that amount is subject to the tax). Under the previous statute, the terms of which are still in effect if a business does not select the new hours method described above, an employee that was not primarily assigned to any place of business of the taxpayer and performed at least 50% or more of their services in Seattle or an employee that was not primarily assigned to any place of business of the taxpayer and that did not perform 50% or more of their service in any city and resided in Seattle would be subject to the payroll expense tax on 100% of their annual compensation. Businesses that select to use the hours method must utilize the method for all employees for the entire tax year. Taxpayers using the hours method may also exclude from the measure of tax any compensation paid to employees working less than 40 hours in Seattle during the tax year. According to the city’s payroll expense tax rule, the city will presume 1,920 work hours for fulltime employees per year. If actual hours worked in any year are more than 1,920 hours, or they can be reasonably anticipated to be more than 1,920, the business must be able to document the increased number of actual hours for the calculation.

Next Steps for the Tax and Businesses

We expect that many businesses with employees performing work inside and outside of Seattle will find the hours method a welcome relief from what otherwise appeared to be a tax regime that unduly burdened businesses with traveling employees that resided in Seattle or with employees that were spending at least 50%, but less than 100%, of their time working in Seattle. Questions remain, however, on what type of documentation the city will accept on audit to support taxpayers’ determinations of compensation paid in Seattle under the alternative methodologies. The City held a taxpayer training webinar on July 7, 2021, and it has scheduled another training for August 4, 2021 at 10am PST. Registration information is available by clicking here. If you have any questions about the Seattle payroll expense tax and how it will affect your business, please contact any member of the Clark Nuber State and Local Tax group. ©2021 Clark Nuber PS. All rights reserved.

OMB Uniform Guidance on Administrative Requirements – Update for Procurement Standards

If your organization receives federal funding subject to the rules and regulations in the Uniform Guidance, make note of changes made in 2020 to the procurement standards. Though these changes were made and, for some awards, became effective in fall 2020, many not-for profit organizations are now receiving federal grants for the first time, highlighting the need to be aware of the procurement standards contained in the Uniform Guidance.

Overview

Procurement refers to the purchase of goods or services, typically for other-than-payroll and certain non-payroll expenses. Procurement standards require entities to establish policies and procedures before making purchases with federal funding and are often more prescriptive than how a typical not-for-profit would procure goods and services The revisions made to the Uniform Guidance this last fall are effective for new federal awards (subawards) and amendments to existing awards issued on or after November 12, 2020. The changes discussed below would not be effective for awards existing prior to, and not amended after, this date. Under the revisions to the Uniform Guidance, the following were key changes noted:
  • Organization of the existing Procurement Methods as Informal, Formal, and Non-competitive. The Revised Uniform Guidance did not add/remove existing Procurement Methods.
  • Wording changes that may not seem like a significant change but should be reviewed, nonetheless. The red-lined version of the Revised Uniform Guidance can be found here.
  • Potential for increases to micro-purchase thresholds to over $10,000.
To get started, the following are the Procurement Methods identified in the Uniform Guidance. I have detailed below what each means, and the changes, if any, that were included in the Revised Uniform Guidance.
  • Informal
    • Micro-purchase (up to $10,000)
    • Small purchase (up to $250,000)
  • Formal (over the small purchase threshold; $250,000+)
    • Proposals
    • Sealed bids
  • Non-competitive (sole source)

Informal Procurements

Purchases in the informal category include micro-purchases and small purchases.

Micro-purchases

Micro-purchases do not require formal procurement processes as long as the not-for profit considers the price to be reasonable based on research, experience, purchase history, or other information and documents it files accordingly. Purchase cards can be used for micro-purchases if procedures are documented and approved by the entity. With the latest changes in the requirements, entities now have the possibility to increase their micro-purchase threshold up to $50,000 with a self-certification that any one of the following conditions are met:
  • The entity is a low-risk auditee (as defined in section 200.520 of 2 CFR 200).
  • They perform an annual internal risk assessment to identify, mitigate, and manage financial risks
  • They are a public institution whose State law allows a higher threshold
Entities may even increase the micro-purchase threshold to over $50,000, but it does require approval by their cognizant agency for indirect costs.

Small Purchases

Small purchases are those between the micro-purchase threshold and up to $250,000. This threshold is also referred to as the “simplified acquisition threshold,” or SAT. Small purchases require price or rate quotations from an adequate number of qualified sources. These can be as informal as website or catalog prices, or more formal, such as written quotations from a vendor. As there is no defined minimum for “adequate number,” it’s important for entities to establish what they consider to be an adequate number of sources in their accounting policies and procedures. It’s also important for the entity to retain documentation of the price/rate quotes that it obtained.

About Thresholds

It's key to note that the thresholds referred to above are maximum limits. An entity can typically choose a lower dollar amount for any of the thresholds discussed here by incorporating them into its accounting policies and procedures. If an entity does elect a lower threshold, it is bound to that lower threshold for compliance purposes. In other words, during an entity’s Single Audit, the auditor will test procurement purchases against the purchasing thresholds established in the entity’s policies and procedures. For all procurement purchase thresholds, the entity needs to establish them in its accounting policies and procedures, even if the entity is defaulting to the maximum limits in the Uniform Guidance.

Formal Procurements

Purchases in the formal category are those over the small purchase threshold, and they typically require obtaining multiple bids through a formal process.

Sealed Bids

Sealed bids are publicly solicited and award a firm, fixed-price contract to the lowest eligible bidder.

Proposals

Proposals are used when awarding either a fixed price or a cost-reimbursement contract. They are also publicly solicited and are used when sealed bids are not appropriate. The entity often needs to perform technical evaluations of the proposals in order to consider all of the relevant factors.

Non-Competitive Procurements

Non-competitive procurements are only allowed under one of the following specific circumstances:
  • Purchases below the micro-purchase threshold;
  • Purchases only available from a single source;
  • The purchase needs to be completed more quickly than a sealed bid or proposal procurement process would allow, such as in an emergency situation like a natural disaster;
  • The federal awarding agency or pass-through entity approves the use of non-competitive procurements in response to a written request from the entity; or
  • Sealed bids or proposals were sought, but competition was deemed inadequate due to lack of eligible responses.
When using the non-competitive procurement, it is key that you confirm:
  1. One of the conditions does apply to the underlying procurement; and
  2. Justification for use of this method (i.e. condition that was met) is clearly documented.

Conclusion

With new procurement standards in effect, take the time now to ensure your entity is up to date with the revised thresholds and use the revision as a reminder to ensure your policies and procedures over federally funded procurement of goods and services meet requirements of the Uniform Guidance. Read through the guidance and review your written policies and procedures. And avoid future non-compliance and potential audit findings by revising your practices and documentation today. If you have questions on the new procurement standards, please send me an email. © Clark Nuber PS, 2021. All Rights Reserved.

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