Posts Tagged ‘Business’

Are you getting the most out of your accountant?

Often, clients put their accountants in a box like this and won’t let them out.  I have experienced this.  Once a client gets it in their head that “Polito is our tax guy”, it’s really hard to shake that image.   Our profession has so much more to offer!

When I was in the publishing business, before I knew what accountants did, I was the same way.  I called my accountant for tax stuff and little else.  I failed to take advantage of his years of knowledge and experience.  That business never flourished!

Many CPA’s start their careers as auditors for national firms auditing financial statements.  That is an extremely valuable experience.  Frequently, after between 2 to 5 years, these auditors  join public companies as controllers and chief financial officers….. and,  a significant number go on to become CEO’s of large public companies.  Indeed, there is a lot more to accounting than financial statement preparation and tax compliance!

About 10 years ago, we developed a service for a number of clients who had what I  term “technician syndrome”.  These clients  knew their particular trade or business and were fairly successful at it, but knew nothing about  the financial condition of their company.  They had no idea how they were really doing.  If there was cash in the bank, things were ok.  Actually, they were in a contest with their competitors but they weren’t keeping score!  In many cases, they didn’t understand the scoring system!

With the help of  my associates, I developed a series of graphs and reports tailored to each particular business.  We find elements of the financial records that if measured, could provide tools to gauge the success of various strategies.  We call these” Key Performance Indicators” (KPI’s).  We  model the effects of slight changes in these measures.  What would happen , for example if the company could increase margins by one percent?   What it would mean to the company, its owners, its employees, and other stakeholders.  We benchmark the clients by industry and size so they can see how they are doing compared to their peers.

We meet with these clients quarterly to go through the financial statements and the special reports that we designed specifically for that client.  At first, these meetings were the only time the clients seriously looked at their financial data. The meeting  is a really important part of this service.  It takes fairly deep study and analysis to really utilize the data.  This analysis coupled with the prodding of a seasoned professional outside the business, provides a stimulating atmosphere for new ideas on how to improve the business.  The brainstorming that goes on in these meetings is extremely valuable.

How do we use the data?

Using break-even analysis, we illustrate profitability scenarios.  We work with clients to develop budgets that support their strategies and we develop financial tools to measure the effectiveness of new strategies.  We develop forecasting models which our clients can use to project income and cash flow, and finally, we do tax projections with cash analysis so that the demand on cash for any suggested tax strategy can be quantified in cash required and cash saved.

To a non-accountant, this stuff is daunting.  I am convinced that one  reason some businesses can never “break through” to that proverbial “next level” is because they fail to make full use of their financial data.  By meeting regularly, even on a quarterly basis, for the sole purpose of assessing the performance of the business, clients tend to be more engaged, execute strategies more consistently, and frankly, make a heck of a lot more money!  In the final analysis, we are helping them keep themselves accountable by orchestrating  the reading of the scorecard.

At this time of year when we “resolve”  to improve, it’s a great time to develop tools to measure business performance and get very intentional about the way we run our companies!  How’s this for a New Year’s resolution…call your accountant and ask him or her how they can help you better measure your performance.  You might be amazed at the untapped resource on your team!

All $250,000 taxpayers may be the Wrong Target…Too important for such a broad brush.

All $250,000 taxpayers will often be the wrong target if the goal is to rebuild the economy with private sector jobs.

I have served small and medium sized private companies for over 35 years. The proposed tax increase on those so called “wealthiest Americans” is one of those broad brush solutions that will turn out to be counter-productive.

We know that employment is driven primarily by small to medium size privately held companies.  This makes sense.  These are usually owned by someone who lives in the U.S., works in the U.S. and does business primarily in the U.S.  Simply put, most small businesses exist to create a job for their owners and employees.  Contrast this “business purpose” with the purpose of a public company.  Public companies strive to build shareholder value.  Ever increasing pressure to create earnings tends to push labor intensive processes overseas and eliminate jobs through automation.

A study of most business classes will indicate that profit margin (net profit) generally runs between 5% and 10% if the business is profitable.  This category called “small to medium” size will have revenues somewhere between $2 million and $200 million.

Most of these businesses report their income and pay their taxes on the owner’s tax return.  Most of these business owners will tend to take salaries in the low 6 figures….say between $100,000 and $300,000.  Now let’s say that a typical “expanding” business grosses $5 million and nets 5%.  That net is $250,000.  When you add that to the say, $200,000 in salary, you are right in the cross hairs of the president’s proposed tax increase.  What may not be understood is that the $250,000 in profit is not in the owner’s hands.  It is in the business.  These earnings pay for things like new equipment, additional employees, debt principal and owner draws for taxes which are not deductible. 

In the accounting business, we call the $250,000 in my example “pass through” income.  The taxable income is passed to the shareholder’s or partner’s tax return, but the cash generally, is not.  When you tax it, the money has to come out of the company’s working capital leaving fewer dollars for expansion, hiring new employees, etc.

Also, when this “pass through” income is added to the owner’s salary, it is taxed at the owner’s highest rate which will be higher than the corporate rate if the President’s proposal is accepted by Congress.  It should not be taxed at a higher rate than the large corporations pay.  To do so will further cripple our economy.

An Individual who makes $200,000 per year in salary or a couple that makes $250,000 without adding any jobs to the economy probably ought to pay more tax.  But a business that employs people should not be subject to the same level of tax.  Fairness is not at issue here.  Our struggling economy is the issue!  There should probably be some sort of exemption or maximum rate of tax (like the current treatment of capital gains) for business pass through income that will help stimulate job growth in the economy.

Whistleblower gets a Payday

According to the National Whistleblowers Center, the Internal Revenue Service (IRS) has awarded former UBS banker Bradley Birkenfeld a whistleblower reward of $104 million which is believed to be the largest reward ever given to an individual whistleblower in the US.

The IRS is authorized to pay rewards from 15% to 30% of the collected proceeds if information provided by a whistleblower substantially contributes to the detection and recovery of taxes, penalties and interest. While the IRS was aware of the compliance issues and the illegal offshore banking scheme, it was Mr. Birkenfeld’s disclosures that “formed the basis for unprecedented actions against UBS” and resulted in a fine paid to the US by UBS bank for $780,000,000 (that’s a lot of zeros!). The IRS also launched the amnesty program for taxpayers to voluntarily disclose their offshore accounts which resulted in 35,000 taxpayers participating and paying over $5 billion in back taxes, fines and penalties.

It’s Your Money Not Theirs

Clients, Friends and Fans,
Sunday night Don and Paul were guests on the radio show “It’s your money not theirs” hosted by our good friend and former partner, Richard Muscio.  The show airs every Sunday at 7 p.m. on 760 KFMB.

We talked about entity selection and borrowing from traditional lenders like banks.

We have added some of the material to our website under articles of interest you can download the pdf here “Choice of Entity

Enjoy!

Listen to

 

B is for Bad Debt (Business)

In some instances bad debts may be written off.  Here we’ll look at what factors must be present in order to take a deduction.

For Accrual Method Taxpayers:

When using the accrual accounting method, management estimates an allowance for bad debts based on several factors such as prior experience, industry comparisons, the debtor’s ability to pay and/or appraisals of current economic conditions.  This is known as the allowance method.  Keep in mind; this is an estimate of an event that has not yet occurred.  When it comes to tax, the IRS does not allow you to make this estimate.  As you can imagine, it would be abused as a “tax planning” strategy.  Therefore, for tax purposes, we can only deduct actual bad debts.  The following factors must exist in order to deduct a bad debt:

  1. It must be a creditor-debtor relationship
  2. There must be a legal obligation to pay a fixed sum of money
  3. There must be an actual loss of money (loss of time spent rendering services is not a loss of money unless the uncollected fee has already been included in taxable revenues on the accrual method)
  4. Proof that the debt is and will remain uncollectible
  5. A business purpose for the debt

When using the specific charge-off method to deduct bad debt (unlike the allowance method previously discussed), management has to prove that the debt is uncollectible to expense it.

Recovery of previously written off bad debts in subsequent years is recognized as other income in the year received.  As always, see your tax preparer when determining what your business can deduct for bad debt expense.

For Cash Method Taxpayers:

Cash basis businesses cannot deduct bad debt since the related revenue was never recognized.  There would only be bad debt for actual cash lost, i.e. because it was paid in cash to a vendor, etc.

Year-End Tax Planning, Part 2

I previously compiled a list of year-end tax planning strategies for individuals.

Here is a list of year-end strategies for businesses and business owners:

1.   Businesses should consider making expenditures that qualify for the business property expensing option.

Code sec. 179 expense: For tax years beginning in 2010 and 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000, and a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax year beginning 2012, the dollar limit will drop to $125,000 and $500,000 (both indexed for inflation) respectively, and expensing won’t available for qualified real property. Keep in mind, Sec. 179 deductions are limited by net income, thus, they cannot be used to create a tax loss.

Bonus depreciation: Property that does not qualify for an immediate tax write off under the Sec. 179 may qualify for bonus depreciation. Unlike the Sec. 179 deduction, there are no restrictions on the amount of qualifying property and there is no taxable income limit. The deduction is 100% of the cost for qualified property purchased and placed in service during 2011. This first year write off won’t be available next year (2012) unless Congress acts to extend it.

2.   Businesses that hire qualifying workers (such as certain veterans) before the end of 2011 can claim a credit up to 40% of the first $6,000 in wages paid to each such employee.

3.   Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post 2011 expenditures unless Congress extends the credit.

4.   If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

5.   If you own an interest in a partnership or S corporation, and the business incurs a loss in 2011, you may need to plan ahead to be sure you can take advantage of that loss. These rules can be complicated,  and you should consult with your tax adviser.

6. Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.

Again, we recommend that you always, see a professional when considering tax planning strategies for your situation. There are very important details underlying each of these strategies which must be thoroughly understood before you employ them!

QuickBooks ventures into the world of Customer Relations Management

Jodi Coppens of AdvantEdge Accounting Solutions is a consultant we have worked with for years.  Jodi is an expert with the MAS 90/200 software family of products and the QuickBooks software line of business software.

Our clients really appreciate Jodi’s expertise in helping them maximize their investment in software.  Jodi was telling me about some significant features being added to QuickBooks for the 2012 releases.

I asked Jodi to write this blog for our readers:

By the way, if you are interested in contributing to our blog, email Mary for more information. mmm@politoeppich.com

QuickBooks takes baby steps into the world of CRM with the release of its 2012 product line!

Introducing the Lead Center:  moving towards a mini-CRM functionality, a new “Center” has been added to manage Leads.  You have basic support for tracking your interactions with potential customer.  You can add lead information one entry at a time, or cut and paste multiple entries from an Excel spreadsheet (after moving columns to conform to the mapping that QuickBooks requires). Once a lead becomes a customer, you can easily move the lead data to your customer database with a single click, and the best thing is, they don’t clutter up the customer list until that time.

Users who desire more-robust CRM functionality now have the option of integrating this software with Salesforce.com through the new Salesforce for QuickBooks add-on.

Also introducing the Calendar View:  You can now access an organized and automatically populated calendar view of appointments, your To Do’s list, and invoices and bills coming due or past due.

You can also use this view to see what transactions you entered on any given date. I think I’m going to find this very useful!!

For more preliminary information on new and improved features in the 2012 product line check our Blog!

Jodi M. Coppens 760-722-6839

www.AdvantEdgeOnline.com

Jodi@AdvantEdgeOnline.com 

IRS Requesting Small Business Databases (i.e. QuickBooks & Peachtree)

Do you own a small business using QuickBooks or Peachtree as your accounting software?  Most likely you have stored critical unrelated financial information within the framework of the software.  By unrelated financial information we are referring to customer/client lists, personnel data, confidential client information, and other information used for business purposes.

Jump forward a few months from now and imagine receiving a letter from the IRS giving your business an examination notice (meaning you’re under audit).  How concerned would you be, or your clients for that matter, if the IRS requested your software database containing all this unrelated financial data?  Unfortunately this request is occurring more frequently and is being explained as the IRS’ attempt to modernize.  The IRS has purchased copies of various small-business accounting software to accomplish this task.  Requesting the electronic files is now standard operating procedure.

In recent years the IRS has ramped up efforts to more aggressively collect taxes from small businesses.  Statistics show that small businesses are one of the largest contributors to the “tax gap” (taxes owed but not paid or reported).  What better way to close the gap than to increase audits on small businesses where non-compliance is an issue?  Let’s face it…large corporations have their own accounting armada to keep everything straight with laws, regulations, and the taxes they pay.  Small businesses don’t have that luxury.

The main concern we have in providing IRS access to an accounting database is whether the auditor will stay within the scope of the requested information.  Do you want to IRS potentially contacting one of your clients?  Seeing what they purchase from you? Seeing what you purchase from vendors?  The fact that you are being audited is not something to brag about, but client relationships could be affected if some of their private information is handed over.  How would you feel if your personal information was handed over to IRS?  What would you do if you found out?  Another concern would be your reputation if  word got out that your business was under audit.  Questions could arise regarding the circumstances of the audit (randomly selected as opposed to improper filing). 

If a company turns over complete electronic records, there is no way of knowing what the IRS will do with that information.  The IRS has not addressed this issue except to say “privacy of return information” is of utmost importance to the agency.  Virtually all professional organizations in our industry are vehemently opposing this policy.

In subsequent posts we will discuss ways to approach this dilemma if you are audited and IRS requests your data base.

What type of entity should I choose? Part 6

Our Firm previously posted a five part series discussing the advantages and disadvantages for the type of entity you choose for your business: Sole proprietor, Partnership, Limited Liability Company, S Corporation, and C Corporation. In a business group I attend, members of the group wanted to see an example of the potential tax savings between the various types of entities. Below is a comparative analysis of an Insurance Agent as a sole proprietor, S-Corp, or C- Corp to illustrate how a taxpayer can reduce FICA tax. A taxpayer can reduce the FICA tax vs. a Sole Proprietor by paying low officer wages reducing FICA tax (in this example) by $17,854. In a C-Corp, the income does not pass-through to the shareholder; therefore, the income would be taxed at the entity level and individual level if the Company pays dividends. The S-Corp appears to have the smallest potential liability of the three, but taxpayers should be aware of the additional compliance costs such as: annual meetings, entity tax return, annual state filings, and bookkeeping.

Sample Insurance Agent
2010 Tax Rate
         
     Sole Proprietor   S-Corp  C-Corp
 Business Income:        
 Commissions $  425,000  425,000   425,000
 Wages     (50,000) (50,000)
 Business Expenses   (110,000) (110,000) (110,000)
 CA Corp. Tax Deduction     (3,860) (22,749)
 Payroll Tax Deduction     (3,825) (3,825)
 State Payroll Tax Deduction     (838) (838)
 Net Taxable Income- Business    315,500 256,477 237,588
 Business Taxes:         
 SS/FICA INC W/H   21,679 3,825 3,825
 Federal Corporate Tax       75,909
 CA (S and C) Corp Tax     3,905 23,014
 Total: Business SS and Corp. Taxes   21,679 7,730 102,748
 Total: Individual FED and STATE Taxes   95,503 100,666 8,497
 Total Taxes Paid  $ 117,182 108,396 111,245
 Assumptions for this Illustration:        
 FICA Tax – ER (7.65%) and EE (7.65%)        
         
 Corporate Tax Rate – 15% to 39%        
 CA S-Corp Tax Rate – 1.5%        
 CA Corporate Tax Rate – 8.84%        
 Individual FED Marginal Tax Rate  – 15% and 33%        
 Individual CA Marginal Tax Rate – 4.3% and 9.6%        
         
         

 Please note, these are simplified illustrations and when preparing actual tax Forms (1120, 1120S, and 1040) there are potential complex transactions involving basis, distributions, alternative minimum tax, etc. Please see your tax professional when considering your personal situation.

2010 Tax Relief Act – Bonus Depreciation and Section 179 Expense

Bonus depreciation: 2010 Tax relief Act extended bonus depreciation through December 31, 2012. The Act also increases 50% bonus depreciation to 100% for qualified assets (must be new property) acquired and placed in service after September 8, 2010, and before January 1, 2012. Unlike Code Sec. 179 expense, it is not limited to use by smaller business or capped at a certain dollar level.

BONUS DEPRECIATION-Effective dates and limitations
Asset placed in service Bonus amount
January 1, 2008-September 8, 2010   50%
September 9, 2010-December 31,2011 100%
January 1,2012-December 31,2012   50%

 Code Sec. 179 expense: Congress has repeatedly increased the dollar and investment limits under Code Sec. 179 to encourage business spending. The 2010 Small Business Jobs Act increased the Code Sec. 179 deduction  limits to $500,000 for businesses with total asset purchases of $2 million or less for tax years beginning in 2010 and 2011. The 2010 Tax relief act sets the maximum Sec. 179 expense for 2012 at $125,000 for companies purchasing up to $500,000 in eligible assets. Both amounts are indexed for inflation. For tax years beginning after 2012, the Act resets Sec. 179 expense amounts at $25,000 with a $200,000 total acquisition limitation, and the reset amounts are not adjusted for inflation.

§179 Expense
For Taxable years beginning in Deduction Limit Total Acquisition Limit
2009 $250,000 $800,000
2010 $500,000 $2,000,000
2012 $125,000* $500,000*
2013 $25,000 $200,000
*Indexed for inflation    

 Other important issues relating to bonus depreciation and Code Section 179 deduction:

Section 179 deductions are limited by net income, thus, it cannot be used to create a tax loss.  Used equipment qualifies for Section 179, but is not eligible for bonus depreciation.  Bonus depreciation can be used to create a tax loss.  Section 179 and bonus depreciation can be used in tandem when circumstances permit.

To see more examples of qualified property eligible for bonus depreciation, see my blog from October in the Archives which discusses qualified leasehold improvement, restaurant and retail properties

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It's Your Money, Not Theirs

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April 21, 2013–Richard and Joe discuss the more than 800 celebrity interviews and his techniques with Entertainment Reporter, Fred Saxon.

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December 16, 2012–Richard and Joe welcomed Don Eppich of Polito Eppich. (Commercial free. 42 minutes.)

August 19th, 2012–Richard and Joe discuss tax policy and accounting services with Paul Polito, CPA and Don Eppich, CPA.

March 25th, 2012-Richard and Joe discuss the best accounting practices and strategic advice for businesses with Paul Polito, CPA and Don Eppich, CPA of www.PolitoEppich.com

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