When do valuable gifts to charity require an appraisal?
If you donate valuable items to charity and you want to deduct them on your tax return, you may be required to get an appraisal. The IRS requires donors and charitable organizations to supply certain information to prove their right to deduct charitable contributions.
How can you protect your deduction?
First, be aware that in order to deduct charitable donations, you must itemize deductions. Due to today’s relatively high standard deduction amounts, fewer taxpayers are itemizing deductions on their federal returns than before the Tax Cuts and Jobs Act became effective in 2018.
If you clear the itemizing hurdle and donate an item of property (or a group of similar items) worth more than $5,000, certain appraisal requirements apply. You must:
- Get a “qualified appraisal,”
- Receive the qualified appraisal before your tax return is due,
- Attach an “appraisal summary” to the first tax return on which the deduction is claimed,
- Include other information with the return, and
- Maintain certain records.
Keep these definitions in mind. A “qualified appraisal” is a complex and detailed document. It must be prepared and signed by a qualified appraiser. An “appraisal summary” is a summary of a qualified appraisal made on Form 8283 and attached to the donor’s return.
While courts have allowed taxpayers some latitude in following these rules, you should aim for exact compliance.
The qualified appraisal isn’t submitted to the IRS in most cases. Instead, the appraisal summary, which is a separate statement prepared on an IRS form, is attached to the donor’s tax return. However, a copy of the appraisal must be attached for gifts of art valued at $20,000 or more and for all gifts of property valued at more than $500,000, other than inventory, publicly traded stock and intellectual property. If an item of art has been appraised at $50,000 or more, you can ask the IRS to issue a “Statement of Value” that can be used to substantiate the value.
What if you don’t comply with the requirements?
The penalty for failing to get a qualified appraisal and attach an appraisal summary to the return is denial of the charitable deduction. The deduction may be lost even if the property was valued correctly. There may be relief if the failure was due to reasonable cause.
Are there exceptions to the requirements?
A qualified appraisal isn’t required for contributions of:
- A car, boat or airplane for which the deduction is limited to the charity’s gross sales proceeds,
- Stock in trade, inventory or property held primarily for sale to customers in the ordinary course of business,
- Publicly traded securities for which market quotations are “readily available,” and
- Qualified intellectual property, such as a patent.
Also, only a partially completed appraisal summary must be attached to the tax return for contributions of:
- Nonpublicly traded stock for which the claimed deduction is greater than $5,000 and doesn’t exceed $10,000, and
- Publicly traded securities for which market quotations aren’t “readily available.”
What if you have more than one gift?
If you make gifts of two or more items during a tax year, even to multiple charitable organizations, the claimed values of all property of the same category or type (such as stamps, paintings, books, stock that isn’t publicly traded, land, jewelry, furniture or toys) are added together in determining whether the $5,000 or $10,000 limits are exceeded.
The bottom line is you must be careful to comply with the appraisal requirements or risk disallowance of your charitable deduction. Contact us if you have any further questions or want to discuss your charitable giving plans.
© 2024
Businesses must face the reality of cyberattacks and continue fighting back
With each passing year, as networked technology becomes more and more integral to how companies do business, a simple yet grim reality comes further into focus: The cyberattacks will continue.
In fact, many experts are now urging business owners and their leadership teams to view malicious cyberactivity as more of a certainty than a possibility. Why? Because it seems to be happening to just about every company in one way or another.
A 2023 study by U.K.-based software and hardware company Sophos found that, of 3,000 business leaders surveyed across 14 countries (including 500 in the United States), a whopping 94% reported experiencing a cyberattack within the preceding year.
Creating a comprehensive strategy
What can your small-to-midsize business do to protect itself? First and foremost, you need a comprehensive cybersecurity strategy that accounts for not only your technology, but also your people, processes and as many known external threats as possible. Some of the primary elements of a comprehensive cybersecurity strategy are:
- Clearly written and widely distributed cybersecurity policies,
- A cybersecurity program framework that lays out how your company: 1) identifies risks, 2) implements safeguards, 3) monitors its systems to detect incidents, 4) responds to incidents, and 5) recovers data and restores operations after incidents,
- Employee training, upskilling, testing and regular reminders about cybersecurity,
- Cyberinsurance suited to your company’s size, operations and risk level, and
- A business continuity plan that addresses what you’ll do if you’re hit by a major cyberattack.
That last point should include deciding, in consultation with an attorney, how you’ll communicate with customers and vendors about incidents.
Getting help
All of that may sound a bit overwhelming if you’re starting from scratch or working off a largely improvised set of cybersecurity practices developed over time. The good news is there’s plenty of help available.
For businesses looking for cost-effective starting points, cybersecurity policy templates are available from organizations such as the SANS Institute. Meanwhile, there are established, widely accessible cybersecurity program frameworks such as the:
- National Institute of Standards and Technology’s Cybersecurity Framework,
- Center for Internet Security’s Critical Security Controls, and
- Information Systems Audit and Control Association’s Control Objectives for Information and Related Technologies.
Plug any of those terms into your favorite search engine and you should be able to get started.
Of course, free help will only get you so far. For customized assistance, businesses always have the option of engaging a cybersecurity consultant for an assessment and help implementing any elements of a comprehensive cybersecurity strategy. Naturally, you’ll need to vet providers carefully, set a feasible budget, and be prepared to dedicate the time and resources to get the most out of the relationship.
Investing in safety
If your business decides to invest further in cybersecurity, you won’t be alone. Tech researcher Gartner has projected global spending on cybersecurity and risk management to reach $210 billion this year, a 13% increase from last year. It may be a competitive necessity to allocate more dollars to keeping your company safe. For help organizing, analyzing and budgeting for all your technology costs, including for cybersecurity, contact us.
© 2024
Tax tips when buying the assets of a business
After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:
- Buy the assets of the business, or
- Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership or LLC.
In this article, we’re going to focus on buying assets.
Asset purchase tax basics
You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.
For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.
When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).
Asset purchase results with a pass-through entity
Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.
Asset purchase results with a C corporation
If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%.
A tax-smart purchase price allocation
With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.
To the extent allowed, you want to allocate more of the price to:
- Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
- Assets that can be depreciated relatively quickly (such as furniture and equipment), and
- Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.
You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.
You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.
Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.
Plan ahead
Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase.
© 2024
A three-step strategy to save tax when selling appreciated vacant land
Let’s say you own one or more vacant lots. The property has appreciated greatly and you’re ready to sell. Or maybe you have a parcel of appreciated land that you want to subdivide into lots, develop them and sell them off for a big profit. Either way, you’ll incur a tax bill.
For purposes of these examples, let’s assume that you own the vacant land directly as an individual or indirectly through a single-member LLC (SMLLC), a partnership or a multimember LLC that’s treated as a partnership for federal income tax purposes.
Here are a couple of scenarios and a strategy to consider.
Scenario 1: You simply sell vacant land that you’ve held for investment
If you’ve owned the land for more than one year and you’re not classified as a real estate dealer, any gain on sale will be a long-term capital gain (LTCG) eligible for lower federal income tax rates. The current maximum federal rate for LTCGs is 20%. You may also owe the 3.8% net investment income tax (NIIT) on all or part of your gain and maybe state income tax, too.
Scenario 2: You develop a parcel and sell improved lots
In this case, the federal income tax rules generally treat a land developer as a real estate dealer. If you’re classified as a dealer, the profit from developing and selling land is considered profit from selling inventory. That means the entire profit — including the portion from any pre-development appreciation in the value of the land — will be high-taxed ordinary income rather than lower-taxed LTCG. The maximum federal rate on ordinary income recognized by individual taxpayers is currently 37%. The 3.8% NIIT may also be owed and maybe state income tax, too. So, the total tax hit might approach 50% of the gain.
S corporation entity strategy to the rescue
Thankfully, there’s a strategy that allows favorable LTCG tax treatment for all the pre-development appreciation in the value of your land. However, any profit attributable to later subdividing, development and marketing activities will be high-taxed ordinary income because you’ll be treated as a dealer for that part of the process. But if you can manage to pay “only” the 23.8% maximum effective federal rate (20% + 3.8%), or maybe less, on the bulk of a large profit, that’s a win. Here’s a three-step plan to accomplish that tax-saving goal.
1. Establish an S corporation
If you’re the sole owner of the appreciated land, establish a new S corporation owned solely by you to function as the developer entity. If you own the land via a partnership, or via an LLC treated as a partnership for tax purposes, you and the other partners can form the S corporation and be issued stock in proportion to your partnership/LLC ownership percentages.
2. Sell the land to the S corporation
Next, sell the appreciated land to the S corporation for a price equal to the land’s pre-development fair market value. As long as the land has been held for investment and has been owned for more than one year, the sale will trigger a LTCG — equal to the pre-development appreciation — that won’t be taxed at more than the 23.8% maximum federal rate.
3. S corporation develops the land and sells it off
Next, the S corporation will subdivide and develop the property, market it and sell it off. The profit from these activities will be higher-taxed ordinary income passed through to the shareholder(s), including you. If the profit from development is big, you might pay the maximum 40.8% effective federal rate (37% + 3.8%) on that income. However, the part of your total profit that’s attributable to pre-development appreciation in the value of the land will be taxed at no more than the 23.8% maximum federal rate.
Seek professional help
The bottom line is if you’re simply selling appreciated vacant land that you’ve held for investment, the federal income tax results are straightforward. But if you’ll develop the land before selling, the S corporation developer entity strategy could be a big tax-saver in the right circumstances. However, it’s not a DIY project. Consult with us to avoid pitfalls.
© 2024
Could conversational marketing speak to your business?
Businesses have long been advised to engage in active dialogues with their customers and prospects. The problem was, historically, these interactions tended to take a long time. Maybe you sent out a customer survey and waited weeks or months to gather the data. Or perhaps you launched a product or service and then waited anxiously for the online reviews to start popping up.
There’s now a much faster way of dialoguing with customers and prospects called “conversational marketing.” Although the approach isn’t something to undertake lightly, it could help you raise awareness of your brand and drive sales.
Concept and goal
The basic concept behind conversational marketing is to strike up real-time discussions with customers and prospects as soon as they contact you. You’re not looking to give them canned sales pitches. Instead, you want to establish authentic social connections — whether with individuals or with representatives of other organizations in a business-to-business context.
The overriding goal of conversational marketing is to accelerate and enhance engagement. Your aim is to interact with customers and prospects in a deeper, more meaningful way than, say, simply giving them a price list or rattling off the specifications of products or services.
In accomplishing this goal, you’ll increase the likelihood of gaining loyal customers who will generate steady or, better yet, increasing revenue for your business.
Commonly used channels
The nuts and bolts of conversational marketing lies in technology. If you decide to implement it, you’ll need to choose tech-based channels where your customers and prospects most actively contact you. Generally, these tend to be:
Your website. The two basic options you might deploy here are chatbots and live chat. Chatbots are computer programs, driven by artificial intelligence (AI), that can simulate conversations with visitors. They can either appear immediately or pop up after someone has spent a certain amount of time on a webpage. Today’s chatbots can answer simple questions, gather information about customers and prospects, and even qualify leads.
With live chat, you set up an instant messaging system staffed by actual humans. These reps need to be thoroughly trained on the principles and best practices of conversational marketing. Their initial goal isn’t necessarily to sell. They should first focus on getting to know visitors, learning about their interests and needs, and recommending suitable products or services.
Social media. More and more businesses are actively engaging followers in comments and direct messages on popular platforms such as Facebook, Instagram and Tik Tok. This can be a tricky approach because you want responses to be as natural and appropriately casual as possible. You don’t want to sound like a robot or give anyone the “hard sell.” Authenticity is key. You’ll need to carefully choose the platforms on which to be active and train employees to monitor those accounts, respond quickly and behave properly.
Text and email. If you allow customers and prospects to opt-in to texts and emails from your company, current AI technology can auto-respond to these messages to answer simple questions and get the conversation rolling. From there, staff can follow up with more personalized interactions.
A wider audience
Like many businesses, yours may have already been engaging in conversational marketing for years simply by establishing and building customer relationships. It’s just that today’s technology enables you to formalize this approach and reach a much wider audience. For help determining whether conversational marketing would be cost-effective for your company, contact us.
© 2024
Should you convert your business from a C to an S corporation?
Choosing the right business entity has many implications, including the amount of your tax bill. The most common business structures are sole proprietorships, partnerships, limited liability companies, C corporations and S corporations.
In some cases, a business may decide to switch from one entity type to another. Although S corporations can provide substantial tax benefits over C corporations in some circumstances, there are potentially costly tax issues that you should assess before making the decision to convert from a C corporation to an S corporation.
Here are four considerations:
1. LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.
2. Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.
3. Passive income. S corporations that were formerly C corporations are subject to a special tax. It kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.
4. Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.
Other issues to explore
These are only some of the factors to consider when switching a business from C to S status. For example, shareholder-employees of S corporations can’t get all the tax-free fringe benefits that are available as a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors must be taken into account in order to understand the implications of converting from C to S status.
If you’re interested in an entity conversion, contact us. We can explain what your options are, how they’ll affect your tax bill and some possible strategies you can use to minimize taxes.
© 2024
Timelines: 3 ways business owners should look at succession planning
Business owners are rightly urged to develop succession plans so their companies will pass on to the next generation, or another iteration of ownership, in a manner that best ensures continued success.
Ideally, the succession plan you develop for your company will play out over a long period that allows everyone plenty of time to adjust to the changes involved. But, as many business owners learned during the pandemic, life comes at you fast. That’s why succession planning should best be viewed from three separate but parallel timelines:
1. Long term. If you have many years to work with, use this gift of time to identify one or more talented individuals who share your values and have the aptitude to successfully run the company. This is especially important for keeping a family-owned business in the family.
As soon as you’ve identified a successor, and that person is ready, you can begin mentoring the incoming leader to competently run the company and preserve your legacy. Meanwhile, you can carefully determine how to best fund your retirement and structure your estate plan.
2. Short term. Many business owners wake up one day and realize that they’re almost ready to retire, or move on to another professional endeavor, but they’ve spent little or no time putting together a succession plan. In such a case, you may still be able to choose and train a successor. However, you’ll likely also want to explore alternatives such as selling the company to a competitor or other buyer. Sometimes, even a planned liquidation is the optimal move financially.
In any case, the objective here is less about maintaining the strategic direction of the company and more about ensuring you receive an equitable payout for your ownership share. If you’re a co-owner, drafting a buy-sell agreement is highly advisable. It’s also critical to set a firm departure date and work with a qualified team of professional advisors.
3. In case of emergency. As mentioned, the pandemic brought renewed attention to emergency succession planning. True to its name, this approach emphasizes enabling businesses to maintain operations immediately after unforeseen events such as an owner’s death or disability.
If your company doesn’t yet have an emergency succession plan, you should probably create one before you move on to a longer-term plan. Name someone who can take on a credible leadership role if you become seriously ill or injured. Formulate a plan for communicating and delegating duties during a crisis. Make sure everyone knows about the emergency succession plan and how it will affect day-to-day operations, if executed.
As with any important task, the more time you give yourself to create a succession plan, the fewer mistakes or oversights you’re likely to make. Our firm can help you create or refine a plan that suits your financial needs, personal wishes and vision for your company.
© 2024
Inflation enhances the 2025 amounts for Health Savings Accounts
The IRS recently released guidance providing the 2025 inflation-adjusted amounts for Health Savings Accounts (HSAs). These amounts are adjusted each year, based on inflation, and the adjustments are announced earlier in the year than other inflation-adjusted amounts, which allows employers to get ready for the next year.
Fundamentals of HSAs
An HSA is a trust created or organized exclusively for the purpose of paying the qualified medical expenses of an account beneficiary. An HSA can only be established for the benefit of an eligible individual who is covered under a high-deductible health plan (HDHP). In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
Inflation adjustments for 2025
In Revenue Procedure 2024-25, the IRS released the 2025 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limits. For calendar year 2025, the annual contribution limit for an individual with self-only coverage under an HDHP will be $4,300. For an individual with family coverage, the amount will be $8,550. These are up from $4,150 and $8,300, respectively, in 2024.
In addition, for both 2024 and 2025, there’s a $1,000 catch-up contribution amount for those who are age 55 or older by the end of the tax year.
High-deductible health plan limits. For calendar year 2025, an HDHP will be a health plan with an annual deductible that isn’t less than $1,650 for self-only coverage or $3,300 for family coverage (these amounts are $1,600 and $3,200 for 2024). In addition, annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) won’t be able to exceed $8,300 for self-only coverage or $16,600 for family coverage (up from $8,050 and $16,100, respectively, for 2024).
Heath Reimbursement Arrangements
The IRS also announced an inflation-adjusted amount for Health Reimbursement Arrangements (HRAs). An HRA must receive contributions from an eligible individual (employers can’t contribute). Contributions aren’t included in income, and HRA reimbursements used to pay eligible medical expenses aren’t taxed. In 2025, the maximum amount that may be made newly available for the plan year for an excepted benefit HRA will be $2,150 (up from $2,100 in 2024).
Collect the benefits
There are a variety of benefits to HSAs that employers and employees appreciate. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Many employers find it to be a fringe benefit that attracts and retains employees. If you have questions about HSAs at your business, contact us.
© 2024
House rich but cash poor? Consider a reverse mortgage strategy
Are you an older taxpayer who owns a house that has appreciated greatly? At the same time, you may need income. Thankfully, there could be a solution with a tax-saving bonus. It involves taking out a reverse mortgage.
Reverse mortgage basics
With a reverse mortgage, the borrower doesn’t make payments to the lender to pay down the mortgage principal over time. Instead, the reverse happens. The lender makes payments to you and the mortgage principal gets bigger over time. Interest accrues on the reverse mortgage and is added to the loan balance. But you typically don’t have to repay anything until you permanently move out of the home or pass away.
You can receive reverse mortgage proceeds as a lump sum, in installments over a period of time or as line-of-credit withdrawals. So, with a reverse mortgage, you can stay in your home while converting some of the equity into much-needed cash. In contrast, if you sell your highly appreciated residence to raise cash, it could involve relocating and a big tax bill.
Most reverse mortgages are so-called home equity conversion mortgages, or HECMs, which are insured by the federal government. You must be at least 62 years old to be eligible. For 2024, the maximum amount you can borrow with an HECM is a whopping $1,141,825. However, the maximum you can actually borrow depends on the value of your home, your age and the amount of any existing mortgage debt against the property. Reverse mortgage interest rates can be fixed or variable depending on the deal. Interest rates can be higher than for regular home loans, but not a lot higher.
Basis step-up and reverse mortgage to the rescue
An unwelcome side effect of owning a highly appreciated home is that selling your property may trigger a taxable gain well in excess of the federal home sale gain exclusion tax break. The exclusion is up to $250,000 for unmarried individuals ($500,000 for married couples filing jointly). The tax bill from a really big gain can be painful, especially if you live in a state with a personal income tax. If you sell, you lose all the tax money.
Fortunately, taking out a reverse mortgage on your property instead of selling it can help you avoid this tax bill. Plus, you can raise needed cash and take advantage of the tax-saving basis “step-up” rule.
How the basis step-up works. The federal income tax basis of an appreciated capital gain asset owned by a person who dies, including a personal residence, is stepped up to fair market value (FMV) as of the date of the owner’s death.
If your home value stays about the same between your date of death and the date of sale by your heirs, there will be little or no taxable gain — because the sales proceeds will be fully offset (or nearly so) by the stepped-up basis.
The reverse mortgage angle. Holding on to a highly appreciated residence until death can save a ton of taxes thanks to the basis step-up rule. But if you need cash and a place to live, taking out a reverse mortgage may be the answer. The reason is payments to the lender don’t need to be made until you move out or pass away. At that time, the property can be sold and the reverse mortgage balance paid off from the sales proceeds. Any remaining proceeds can go to you or your estate. Meanwhile, you stay in your home.
Consider the options
If you need cash, it has to come from somewhere. If it comes from selling your highly appreciated home, the cost could be a big tax bill. Plus, you must move somewhere. In contrast, if you can raise the cash you need by taking out a reverse mortgage, the only costs are the fees and interest charges. If those are a fraction of the taxes that you could permanently avoid by staying in your home and benefitting from the basis step-up rule, a reverse mortgage may be a tax-smart solution.
© 2024
Why businesses may want to integrate ESG into strategic planning
When business owners and their leadership teams meet to discuss strategic planning, the primary question on the table is usually something along the lines of, “How can we safely grow our company to reach the next level of success?”
That’s certainly a good thing to ask and answer. But in today’s highly transparent world, where businesses can be cast in a negative light by inadvertently failing to see the big picture in any number of ways, there are other things to consider. One of them is the environmental, social and governance (ESG) concept.
3 critical activities
ESG generally refers to how companies handle three critical activities:
- Environmental practices, including the use of energy, production of waste and consumption of resources,
- Social practices, which may include fair labor practices; worker health and safety; diversity, equity and inclusion; and other aspects of your business’s relationships with people, institutions and the community, and
- Governance practices, including business ethics, integrity, openness, transparency, legal compliance, executive compensation, cybersecurity, and product or service quality and safety.
Missteps or miscommunications in these areas could draw public scrutiny or raise compliance issues with regulatory agencies.
Many potential advantages
On the bright side, there may be advantages to integrating robust ESG practices into your strategic planning and daily operations. Doing so, in some cases, could lead to stronger financial performance thanks to benefits such as:
Higher sales. Many customers — particularly younger ones — consider ESG when making purchasing decisions. Some may even be willing to pay more for products or services from businesses with stated ESG policies.
Reduced costs. Focusing on sustainability can help companies identify ways to reduce their energy consumption, streamline their supply chains, eliminate waste and operate more efficiently. Other ESG initiatives may help businesses avoid the costs and bad publicity associated with government intervention and liability concerns, such as product- or service-related lawsuits, discrimination or harassment claims, and boycotts.
Improved access to capital. Clear and demonstrable ESG practices may provide growing companies with access to low-cost capital. Some investors consider ESG when adding businesses to their portfolios. Plus, companies that implement transparent ESG initiatives may be perceived as lower-risk investments.
More success in hiring and retaining employees. As climate change continues to reveal itself and weigh on some people’s minds, certain job candidates may favor companies that can clearly demonstrate sound environmental practices. Once hired, these employees will likely be more inclined to stay loyal to businesses that are addressing the issue.
Other aspects of ESG also speak to the current concerns and values of workers. Many of today’s employees want more than a paycheck. They expect employers to care for their well-being and protect them from threats such as corruption, unethical behavior and cybercriminals. Comprehensive ESG practices may reassure such employees and keep them in the fold.
Your call
Not everyone agrees on ESG’s importance. Precisely how any business handles it, or whether ESG is formally addressed at all, is up to every company’s ownership and leadership team. Again though, as your business engages in strategic planning and looks to the future, considering the impact of ESG-related issues will likely be time well spent.
© 2024