February 2018 eNewsletter

Old Fashioned Strategies Won't Work in Today's Modern Labor Market

Rich Oakes, President, GigSmart

Several weeks ago, I was discussing the current labor market with a friend of mine who owns a small business in the Cincinnati area.  When discussing his organization’s current labor challenges, he used the word “Old Fashioned” in a sentence outlining a potential strategy forward.  I couldn’t help but laugh as we bantered back and forth throughout the discussion.

The stats are staggering.  There is nothing old fashioned about the modern labor market.  Monster.com, Carreerbuilder.com, McKinsey, Randstad, and many more have written and continue to write articles about the growing Gig Economy.  The American labor force is choosing independent work over traditional employee positions at increasing rates year-over-year.  A McKinsey report on the Gig Economy makes a very strong argument that the Industrial Revolution moved much of the workforce from self-employment to structured payroll jobs. Now the digital revolution may be creating a shift in the opposite direction.

Most of us know IKEA as one of the largest retailers who specializes in selling ready to assemble furniture.  Recently, IKEA purchased TaskRabbit, a marketplace that matches freelance labor with local demand.  It allows consumers to find immediate help with everyday tasks, including cleaning, moving, delivery and handyman work.

Long ago, IKEA recognized their “assembly” process as an opportunity for improving customer experience.  In November 2016, IKEA and TaskRabbit partnered on a pilot program to make TaskRabbit available to IKEA customers in London for furniture assembly.  That pilot was successful enough to drive the acquisition of TaskRabbit by IKEA. It is clear from this decision that IKEA understands today’s labor market.

I wish I could have overheard the discussions within IKEA when key managers and executives were discussing how to address this customer experience “assembly issue.” I’m confident that there was the traditional “old fashioned” personnel approach presented that would have required IKEA to add more permanent headcount, build up assembly efforts by adding employees, creation of a new internal department, more infrastructure, more everything.  The “if we just throw more full-time employees at it, we can fix it” approach.

Instead, in that room, there was a different approach that was more in touch with today’s modern workforce. Someone at IKEA recognized that the recruiting landscape right now is very difficult.  Most companies have current openings unfilled because there is a war for talent taking place.  IKEA also understood that there are approximately 55 million Americans working in the Gig Economy with little interest in PT or FT employment.  They had clearly read recent publications outlining the trend that 39 percent of traditional American workers say they are likely to consider shifting to freelance work within the next two to three years.  They also recognized that one of the biggest activities TaskRabbit freelancers completed day in and day out, was assembling IKEA furniture.

While most talent acquisition strategies focus on adding more FT & PT employees, IKEA took another path. They saved millions in additional headcount costs and embraced an organization which is filled with freelancers who crave flexibility and control.  From a labor perspective, everyone wins.

LinkedIn and The Adecco Group just released a study titled “Flexible Working, A career and lifestyle pathway.”  In short, the study conveyed four key messages:

  • The majority of those involved in flexible work do so through active choice to meet current personal needs or career ambitions.
  • Young adults (aged 18-26) have a very positive view of independent work and independent workers, and a majority aspire to such employment.
  • A rapidly growing new class of independent professionals are creating financially and professionally rewarding careers with a more desirable work/life balance.
  • Flexible work is a positive development for workers, companies, and society.  However, it presents challenges that will require everyone to update their thinking formed in a world where permanent employment predominated.

This same study recommends that businesses hire independent workers when they have staffing gaps, as well as encourages businesses to build a network of independent workers to draw from when unexpected labor needs arise.

Small businesses across the country are taking notice.  SCORE, the nation’s largest network of volunteer expert business mentors, just released data in December ’17 that shows small business owners reported a 37 percent increase in hiring gig/independent workers over the past six months (more than any other type of worker).  Specialized expertise and seasonal needs were stated as the top reasons.

Wayne Gretzky said, “skate to where the puck is going to be, not to where it has been.” For all of us responsible for our organization’s staffing strategies, we need to skate towards the modern labor market.  The trends are real.  The American labor force is changing.  Will we continue to follow the old- fashioned path of trying to staff our organizations with full or part-time employee based hires and complain month-over-month about positions that continue to be unfilled?  Or like IKEA, will we embrace a modern approach that is in alignment with where the current labor force is evolving, finding the right mix of employees and independent labor to fuel the growth of our organizations?

Old fashioned won’t cut it anymore – The labor force is changing, and like IKEA, we need to be ready.

Dawn of a New Era

Howard L Richshafer, Esq. / CPA, Wood & Lamping LLC

The 2015 Bipartisan Budget Act repealed 35-year-old IRS audit procedures for LLC’s and partnerships.

  • Old Rules. Under the old rules, assume IRS audits a 2015 partnership income tax return.  The audit occurs in 2017. IRS proposes adjustments in 2017.  IRS must pick up each of the partners’ 2015 tax returns to collect additional tax, interest, and penalties from each 2015 partner. The 2015 partners were liable for any additional tax, interest, penalties.
  • New Rules. The new law dramatically changes the old rules.  Under the new statutory regime, any additional tax, interest, and penalties must be paid by the current 2017 partnership − not the 2015 partners.

Note: These new audit rules will apply to all LLC’s and partnerships with tax years beginning on January 1, 2018.  Thus, IRS must apply the new rules beginning with 2018 tax returns filed in 2019, and years thereafter.  Tax returns for years prior to 2018 will still be subject to the old audit rules.

Note: New partners coming into partnerships should be aware of possible IRS audit adjustments relating to prior tax years when they were not partners. The economic impact falls on partners in years subsequent to the audited year. If partners have changed over the years, those who pay the price may be different from those who reaped any tax benefits in earlier years.

Note: IRS must apply the highest individual or corporate tax rate when computing additional tax, interest, and penalties. So, if IRS audits a partnership’s 2018 tax return in 2020, the highest tax rate would be 37% (i.e., the highest individual tax rate for 2018).  And assess and collect it against the 2020 partnership.

  • Although mandatory compliance is nearly two years away, now is the time for partners, LLC members, accountants, and lawyers to review business structures, and amend partnership and operating agreements to prepare for the new changes.
  • Opt-out for Smaller LLCs/Partnerships. The best news of all relates to the so-called “opt-out” election.  Certain partnerships or LLC’s can opt-out of the new rules.  By opting-out, IRS must use the old audit rules to collect any additional tax, interest, or penalties. But to qualify, certain preconditions must be met.
  • An LLC/partnership with 100 or less “qualifying partners” can opt out. But the entity must make an annual opt-out election with its tax return.  And the entity must advise its current members or partners that it is opting out.  If the entity opts out, IRS must proceed against each member or partner separately to collect any additional tax, interest, and penalties.

To opt out, every current partner must be a “qualifying partner.” A qualifying partner is:

  • An individual;
  • C corporation;
  • S corporation; or
  • An estate of a deceased member/partner.

Note: a trust, another LLC or partnership, foreign partner, or, tax-exempt organization cannot be a “qualifying partner.”

  • Primary advantage of opt-out election. Avoiding additional tax, interest, and penalties based on the highest individual or corporate tax rate.  For example, partners may not be in the highest tax rate themselves and so the opt-out would minimize any unnecessary additional tax, interest, or penalties.
  • An opt-out may be significant for businesses having tiered ownership structures, whether for asset protection or tax purposes. For instance, a partnership having multiple partners in order to shield operating assets from risk may be ineligible to elect out.
  • So, LLC/partnerships must either subject themselves to the new rules at highest tax rates, or, make an annual election to opt out.

All partnerships and LLC’s must take certain steps now to avoid unnecessary tax assessments if IRS audits the entity’s tax return.

The following issues are relevant:

  • Each entity must determine whether it can opt-out; whether owners should be restricted to qualifying partners; and also whether it is prudent to convert to a qualifying entity type or amend the partnership/operating agreement to protect existing partners/members.
  • Assure it doesn’t add non-qualifying partners or outgrow the opt-out, and that the annual opt-out election is timely filed.
  • Amend existing partnership and operating agreements to indemnify new members/partners from the economic impact of an assessment based on an audit year when they were not members/partners. (Indemnification should be a standard item of discussion for each new agreement.)
  • Amend existing partnership and operating agreements to specify rules for nominating the “partnership representative” (the “PR”).  Under the new rules, the PR has sole authority to make tax decisions binding the entity and all partners and members. Those amendments must also address appointing the PR, scope of PR’s duties, indemnifying the PR, removing the PR, resignation of PR, appointing successor PR, and how to involve partners in PR decisions.
    Problem: If partnership fails to identify PR, IRS must nominate one.

Existing partnership and LLC operating agreements should be reviewed and amended sooner than later.  While amendments can always be made to reflect further guidance, as a practical matter it may be difficult for existing partners to agree on tax allocations, so the sooner the process begins the less likely problems will arise when a future IRS audit occurs.

One fact is certain, the purpose of the new audit rules is to streamline IRS partnership/LLC audits.  Hence, these audits will increase.  These entities must be prepared to minimize adverse tax consequences by planning now.