Understanding Unclaimed Property

Unclaimed property has become a topic of increased discussion in recent years, especially as states conduct unclaimed property audits. Examples include:

As a business owner, it’s important to be aware of unclaimed property and the role your business plays, as well as how unclaimed property can impact your financial statements and cause reporting issues.

Let’s start at the beginning.

Unclaimed property is an unclaimed financial asset your company owes to another business or individual. This can include uncashed checks, inactive savings accounts, life insurance proceeds, customer overpayments and unused gift certificates.

Unclaimed property happens when a debt remains outstanding for a specific period of time. Typically this is one year or more, as specified by state statute.

For example, your organization issues a pay check to its employee. One of those employees never cashes that check. The paycheck has now become unclaimed property.

So what am I supposed to do?

Here’s the short answer: Give the asset back or turn it over to the state.

In the above example, you should reissue the check if you can locate the employee.

There are a few steps you need to take in order to properly deal with unclaimed property:

  1. Identify the dormant accounts
  2. Notify the property owners
  3. Remit the asset to the property owners or to the state

Identify the dormant accounts

The first step is to determine if you are a holder (company in possession of an asset that belongs to someone else). The best way to determine this is by setting up processes and procedures that allow you to identify where unclaimed property exists.

Some of the procedures include:

  • Follow up on outstanding checks and credits after six months
  • Require all transactions in and out of accounts have to go through review and approval
  • If you’re thinking about acquiring a company, make sure you research and are aware of potential unclaimed property exposure
  • Keep good records, including name, address, taxpayer identification number, etc.

Notify the property owners

The next step to take as the holder is to locate the property’s rightful owner. This is a process known as due diligence.

After this period of due diligence, the holder has to submit a report to the state, listing who you weren’t able to contact, as well as payment for those outstanding accounts.

Remit the asset

At this point, either the asset is turned over to the property owner, or it gets turned over to the state (known as escheatment). Once it’s turned over to the state, they now have responsibility for it. In other words, they hold it so it’s available to the recipient at a later time, should they come looking for it. If no one comes for it, the state keeps the unclaimed property.

As a reminder, unclaimed paychecks are considered unclaimed property and subject to escheatment. If you have an unclaimed paycheck, the unclaimed property laws of the state where the employee last worked apply.

What happens if I don’t do these things?

States have been increasing enforcement efforts. Plus, you can be audited in relation to unclaimed property. The states even have unclaimed property examiners that come in to assess unclaimed property exposure in businesses.

Just to make things more fun, there’s no statute of limitations, meaning the state agencies can come knocking at any time.

Any other tips?

  • Research the laws in your state and know the particulars of unclaimed property reporting by state.
  • Set up policies and procedures to ensure you have good records and are tracking potential unclaimed property concerns.
  • If you’re confused or just need extra help, contact your CPA or business advisor.

 

 

 

State and local tax issues when buying or selling a business

You’ve always dreamed of owning a business. Now you’ve found the perfect one to purchase. You ask all the questions you can think of, come to an agreement on price and now you’re ready to go, right?

One major thing that sometimes gets overlooked is something called “successor liability.” This is the idea that when you buy a business, or the assets of a business, you generally also inherit all the liabilities associated with that business or the assets.

Some of these liabilities are pretty easy to figure out, but others may be hidden and difficult to know about or quantify. For instance, you can be audited for periods before your ownership and you can be assessed for sales or other taxes owed by the last owner.

Don’t believe us? Here are some common examples of successor liability discovered after the purchase of a business:

So what are some issues that could create tax exposures for you and your new company?

  • Company had the duty to file but failed to do so
  • The return was filed, but tax was not remitted
  • Company failed to pay use tax
  • Company did not have all the correct exemption certificates
  • Local taxes were ignored

So what can you do to reduce your risk when purchasing a business? Perform the proper due diligence. Due diligence can take a number of different forms, but generally includes reviews of the following:

  • Is the seller filing in the states where it has a duty to?
  • Are the returns accurately and timely?
  • Are taxability decisions correct?
  • Is the proper tax rate being applied?
  • Are exemption certificates accurate and up-to-date?
  • Has the seller been audited or received inquiries from any state?

Hiring a professional to assist you with a due diligence study can help you properly assess the potential liabilities and arrive at a more informed decision. Plus, it will hopefully save you some headaches later on.

But due diligence doesn’t just apply to buying a business. Let’s say you’ve finally made it to retirement and want to sell your business. Performing a due diligence study can help you be sure you have handled all these tax issues correctly and nothing will pop up unexpectedly that may scare away a potential buyer.

No matter what side you’re on, a little additional work upfront could potentially prevent some difficult, timely and expensive mistakes later.