The Changing Workers’ Compensation Experience Modification

The way workers’ compensation experience modifiers are calculated is changing in the state of Texas, which could have either a positive or negative impact on your business, depending on your current situation. If your compensation experience modification is scrutinized before you can work or bid on jobs, you will want to take special heed. Charles Comiskey of risk management firm Brady Chapman Holland & Associates explains the changes and what they mean for your business below.

Background

A workers’ compensation experience modifier is a comparison of a company’s actual incurred loss experience as compared to actuarially anticipated loss experience for a company of that same size and operations. Perfectly average loss experience results in a modifier of 1.00. A debit modifier (one in excess of 1.00) is indicative of adverse experience, and a credit modifier (one below 1.00) indicates favorable experience. The loss experience used to perform this calculation is based upon the three oldest of a company’s past four workers’ compensation policy periods.

Each loss is divided into primary and excess portions. Currently, the first $5,000 of every loss is considered to be a “primary” loss, and all amounts greater than $5,000 are deemed to be “excess” loss. Primary losses are fully weighted in the modification calculation, but the amounts of loss excess of that $5,000 limit receive a lesser weighting. This means that frequency of primary losses can have a more dramatic effect on increasing a modifier than large losses do.

Upcoming Changes

Why should you care how this calculation is done? Because it’s changing for the first time in almost 20 years, as the formulas have not kept up with rising costs of medical care. In most states (but not in Texas) the change was effective Jan. 1, 2013. If you have operations in multiple states, your modification is likely already affected.

With this change, the level of fully weighted primary losses will increase from $5,000 to $10,000 when approved by each state, and it is projected to increase to $13,500 the following year and to around $17,000 the year thereafter.

Impact on Your Business

What does this mean to you? If your current modification is a debit, expect that penalty to increase. On the other hand, if your modifier is a credit, it will likely improve. If your workers’ compensation experience modification is scrutinized by others before you are permitted to work or even bid on certain jobs, take heed – this change could endanger your livelihood.

Timing

When will this happen in Texas? That’s a great question that deserves an evasive answer. This has not been announced by the Texas Department of Insurance and until it is, we don’t know. But the expectation is that it will be done, and not in the distant future.

Improving Your Modifier

Keep in mind that a modifier of 1.00 is not a goal to which your business should aspire. It’s average. It’s a “C” grade. Safety, quality and productivity go hand-in-hand, and good loss experience can be achieved. Every company whose workers’ compensation is subject to experience modification has a minimum possible modifier. Those that reach that level get an “A+”. The questions that should be asked are:

1. What is our minimum possible modifier?
2. What’s keeping us from getting there?

It can be done.

For more information, contact Charles Comiskey or Doeren Mayhew’s dedicated Construction Group, with CPAs in Troy, Mich., and Houston, Texas.

Charles E. Comiskey, CPCU, CIC, CPIA, CRM, PWCA, CRIS, CCM, is Sr. V.P. of Brady Chapman Holland & Associates. Comiskey is a nationally recognized expert and frequent speaker on risk management and insurance issues to various legal, construction and real estate associations and similar groups across the country. He has served as a pre-trial consultant/expert witness in approximately 200 matters in State and Federal courts, serving in behalf of both the defense and plaintiff. He can be contacted at 713.979.9706 or charles.comiskey@bch-insurance.com.

Be Careful When the Government Tells You the Check Is in the Mail!

by Bill Leary, CPA, Director, Tax Group, Doeren Mayhew

Among the looming federal crises, don’t forget about the federal debt ceiling debate. Congress just moved it off of its short-term radar earlier this month to focus on the sequestration crisis, which itself could impact all aspects of future governmental services and commitments – and you and me as well.

The AICPA recently released a paper on the potential implications of the debt ceiling. Some assume that the crisis will only affect financial markets and international lenders, but it’s not that simple. Imagine government checks not being honored by banks and Social Security and federal employees not paid. The Administration cannot unilaterally curb spending or delay payments indefinitely to manage cash, but it can delay hiring, cancel contracts and slow down projects. Translation: government contractors beware! Closer to home, the AICPA warns that without relief, tax refunds could be delayed this summer.

We faced a fractious debate last year about raising the allowable federal debt ceiling to pay its bills. The 2011statutory limit of $16.4 trillion was reached at the end of December, and Treasury Secretary Geithner suggested extraordinary measures last year to meet the government’s daily cash needs. In January,

Geithner predicted that government funds would soon run out.

A crisis was averted earlier this month when legislation suspended the debt ceiling through mid-May and allowed federal borrowing to continue. Once again, Congress “kicked the can down the road.” Senate Majority Leader Reid (D-NV) viewed “a short-term solution is better than another imminent, manufactured crisis.”

If there is no action by May, it will be “déjà vu all over again.” Temporary funding measures could let the government pay bills through the middle of July, an auspicious time in Washington when Congress approaches its sacred August recess and abandons its legislative functions.

In Washington, crises drive political insiders to suggest clever, radical or “flimflamsical” solutions. After lively debate, we are told a platinum coin will not allow us to side-step the debt crisis. It has been suggested that the Federal Reserve destroy the $1.6 trillion in government bonds it now holds to avoid the crisis. Some have suggested selling federal assets such as its gold reserves and public properties. An Assistant Secretary of the Treasury ironically concluded “a ‘fire sale’ of financial assets would be damaging to the economy… and undermine confidence in the United States.”

Treasury Secretary-designate, Jacob Lew commented on Congress’ “political dysfunction” during his confirmation hearings. Stating what the public knows, Lew observed, “Congress’ short-term-crisis, deadline-driven practices … are undermining the economy.” If confirmed Lew will faces a host of challenges himself, including the debt crisis and sequestration.

Bill Leary is a Director in the Tax Group at Doeren Mayhew, and can be reached at 713.789.7077 orleary@doeren.com.

Simplified Method for Claiming Home Office Deduction

Individuals who maintain home offices will have an alternative method for computing their home office income-tax deductions for the 2013 tax year and beyond. The IRS has announced a new “safe harbor” deduction that is easy to calculate — and can help avoid the record-keeping headaches normally associated with deducting home office expenses.

Background

In general, federal tax law prohibits a deduction for the business use of a dwelling that is also used by the taxpayer as a residence during the year. However, exceptions apply.

An individual may claim deductions for direct expenses and the business-use portion of indirect expenses relating to a home office if:

• Part of the home is used regularly and exclusively as (1) a principal place of business or (2) a place to meet or deal with customers or clients in the ordinary course of business.
• In the case of an employee, the use of the home office is also for the convenience of the employer.

Where space within the dwelling is used on a regular basis for the storage of inventory or product samples for use in the taxpayer’s business of selling products at wholesale or retail, the expenses are deductible if the dwelling unit is the sole fixed location of the trade or business.

These home office deductions are limited to the business activity’s gross income reduced by all other deductible expenses that are allowable regardless of business use (examples: mortgage interest, real estate taxes) and by business deductions that are not allocable to the home itself (examples: supplies, advertising expenses). Excess home office expenses can be carried forward to later tax years.

Currently, an individual must file a 43-line form (IRS Form 8829) to claim a home office deduction.

The New Rule

For tax years starting in 2013 (that is, for tax returns filed in 2014 and later), an individual maintaining a home office may use an optional safe harbor method for computing the home office deduction.

With this method, the taxpayer may determine the deduction for qualified business use of the home by multiplying a specified rate ($5 for 2013) by the number of square footage in the home used for business purposes, not to exceed 300 square feet. Therefore, the maximum deduction under the safe harbor method will be $1,500. The $5 rate may be updated by the IRS from time to time, as warranted.

Example: Jackie uses a 500-square-foot area in her basement exclusively as the principal place of business for her beauty salon. If Jackie elects to claim her home office deduction using the safe harbor method, she can only claim a deduction of $1,500 ($5 times 300, the maximum square footage allowed).
This safe harbor method is an alternative to deducting the actual expenses of maintaining a home office.

Generally, a taxpayer using the safe harbor cannot deduct any actual expenses related to the qualifying business use of the home for that year. Exceptions apply for:

• Otherwise allowable residence-related deductions such as mortgage interest and property taxes (as long as the taxpayer itemizes deductions) and
• Non-home office business expenses.

An individual may elect each year whether to deduct actual home office expenses or use the safe harbor method.

Caution Is Required

One important thing to keep in mind is that for many individuals, the safe harbor method will result in a smaller home office expense deduction than using the actual expense method. While the recordkeeping and reporting requirements are tougher, the actual expense method could result in a much higher deduction.

Moreover, if you are self-employed, a larger home office deduction could reduce your income for self-employment tax purposes as well as income-tax purposes. As a result, we recommend computing the deduction using both the actual expense method and the optional safe harbor method (starting with 2013’s return) to see which provides the larger tax benefit.

For more information, contact Doeren Mayhew’s dedicated Tax Group, with CPAs in Troy, Mich., and Houston, Texas.