Common Unclaimed Property Issues for Small Businesses

Oftentimes, small companies hold unclaimed property without realizing it, mistakenly assuming only mid-sized and large companies have the potential to generate it. In fact, many are not aware that such liabilities even exist. If small businesses do have some awareness, they do not fully understand the numerous responsibilities concerning unclaimed property and the consequences for noncompliance. Unclaimed property regulations apply to companies of ALL types and sizes like sole proprietorship, partnerships, limited liability companies (LLC) and S Corporations. There are no minimal revenue thresholds or need to be incorporated or located in a particular state to be subject to its unclaimed property laws.

Some of the most common properties that affect small-sized companies include:

• Unredeemed gift cards/gift certificates: For many businesses, this is a great way to attract new customers and increase revenue, but the unclaimed property laws vary from state to state and complying with the laws can be challenging. A consistent review of gift card balances and last activity date is highly recommended to identify outstanding unclaimed property liabilities.
• Uncashed payroll and vendor checks: High turnover rates and lack of payment processors in small-sized companies make employee and vendor payments a big area of unclaimed property exposure. Maintaining accurate contact information with current/former employees and vendors and researching checks that remain outstanding greater than 90 days are good practices to ensure uncashed payments are timely used.
• Aged credit balances and aged prepaid balances sitting in accounts receivable: Customer credit balances are often overlooked and can result from different reasons like invoice adjustments, prepaid deposits, returned products, duplicate payments, etc. Businesses need to consistently review the aging reports, resolve credit balances timely and maintain good documentation to support any credits that are not due and owing. It is also important to note that most states do NOT allow for the write-off of small balances.

States employ numerous ways to ensure compliance with unclaimed property laws, and their enforcement efforts are rapidly expanding across all types of companies. For small businesses, unclaimed property amounts may appear immaterial, but they have the potential to become significant over a period time due to penalties, interests and estimations in the event of an audit if not managed properly. The means by which states may test compliance can vary widely, including third-party audits, contractor-assisted examinations, state directed self-audits and voluntary compliance programs, all which can be very overwhelming for a company not accustomed to dealing with unclaimed property.

Organizations must understand business areas exposed to potential unclaimed property, the measures available to reduce the risk and the steps required to comply with the law.