Small business owners: A SEP may give you one last 2017 tax and retirement saving opportunity
Are you a high-income small-business owner who doesn’t currently have a tax-advantaged retirement plan set up for yourself? A Simplified Employee Pension (SEP) may be just what you need, and now may be a great time to establish one. A SEP has high contribution limits and is simple to set up. Best of all, there’s still time to establish a SEP for 2017 and make contributions to it that you can deduct on your 2017 income tax return.
2018 deadlines for 2017
A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP is to first apply. That means you can establish a SEP for 2017 in 2018 as long as you do it before your 2017 return filing deadline. You have until the same deadline to make 2017 contributions and still claim a potentially hefty deduction on your 2017 return.
Generally, other types of retirement plans would have to have been established by December 31, 2017, in order for 2017 contributions to be made (though many of these plans do allow 2017 contributions to be made in 2018).
High contribution limits
Contributions to SEPs are discretionary. You can decide how much to contribute each year. But be aware that, if your business has employees other than yourself: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and 2) employee accounts are immediately 100% vested. The contributions go into SEP-IRAs established for each eligible employee.
For 2017, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $270,000, subject to a contribution cap of $54,000. (The 2018 limits are $275,000 and $55,000, respectively.)
Simple to set up
A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.
Additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. Contact us to learn more about SEPs and how they might reduce your tax bill for 2017 and beyond.
Many businesses train employees how to do their jobs and only their jobs. But amazing things can happen when you also teach staff members to actively involve themselves in a profitability process — that is, an ongoing, idea-generating system aimed at adding value to your company’s bottom line.
Let’s take a closer look at how to get your workforce involved in coming up with profitable ideas and then putting those concepts into action.
6 steps to implementation
Without a system to discover ideas that originate from the day-in, day-out activities of your business, you’ll likely miss opportunities to truly maximize profitability. What you want to do is put a process in place for gathering profit-generating ideas, picking out the most actionable ones and then turning those ideas into results. Here are six steps to implementing such a system:
1. Share responsibility for profitability with your management team.
2. Instruct managers to challenge their employees to come up with profit-building ideas.
3. Identify the employee-proposed ideas that will most likely increase sales, maximize profit margins or control expenses.
4. Tie each chosen idea to measurable financial goals.
5. Name those accountable for executing each idea.
6. Implement the ideas through a clear, patient and well-monitored process.
For the profitability process to be effective, it must be practical, logical and understandable. All employees — not just management — should be able to use it to turn ideas and opportunities into bottom-line results. As a bonus, a well-constructed process can improve business skills and enhance morale as employees learn about profit-enhancement strategies, come up with their own ideas and, in some cases, see those concepts turned into reality.
A successful business
Most employees want to not only succeed at their own jobs, but also work for a successful business. A strong profitability process can help make this happen. To learn more about this and other ways to build your company’s bottom line, contact us.
Claiming bonus depreciation on your 2017 tax return may be particularly beneficial
With bonus depreciation, a business can recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Tax Cuts and Jobs Act (TCJA), signed into law in December, enhances bonus depreciation.
Typically, taking this break is beneficial. But in certain situations, your business might save more tax long-term by skipping it. That said, claiming bonus depreciation on your 2017 tax return may be particularly beneficial.
Pre- and post-TCJA
Before TCJA, bonus depreciation was 50% and qualified property included new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified improvement property.
The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.
But be aware that, under the TCJA, beginning in 2018 certain types of businesses may no longer be eligible for bonus depreciation. Examples include real estate businesses and auto dealerships, depending on the specific circumstances.
A good tax strategy ? or not?
Generally, if you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation is likely a good tax strategy (though you should also factor in available Section 179 expensing). It will defer tax, which generally is beneficial.
On the other hand, if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax this year, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate.
What to do on your 2017 return
The greater tax-saving power of deductions when rates are higher is why 2017 may be a particularly good year to take bonus depreciation. As you’re probably aware, the TCJA permanently replaces the graduated corporate tax rates of 15% to 35% with a flat corporate rate of 21% beginning with the 2018 tax year. It also reduces most individual rates, which benefits owners of pass-through entities such as S corporations, partnerships and, typically, limited liability companies, for tax years beginning in 2018 through 2025.
If your rate will be lower in 2018, there’s a greater likelihood that taking bonus depreciation for 2017 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years, especially if the asset meets the deadlines for 100% bonus depreciation.
If you’re unsure whether you should take bonus depreciation on your 2017 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.
Business interruption insurance can help some companies
Natural disasters and other calamities can affect any company at any time. Depending on the type of business and its financial stability, a few weeks or months of lost income can leave it struggling to turn a profit indefinitely — or force ownership to sell or close. One way to guard against this predicament is through the purchase of business interruption insurance.
You might say, “But wait! We already have commercial property insurance. Doesn’t that typically pay the costs of a disaster-related disruption?” Not exactly. Your policy may cover some of the individual repairs involved, but it won’t keep you operational.
Business interruption coverage allows you to relocate or temporarily close so you can make the necessary repairs. Essentially, the policy will provide the cash flow to cover revenues lost and expenses incurred while your normal operations are suspended.
2 types of coverage
Generally, business interruption insurance isn’t sold as a separate policy. Instead, it’s added to your existing property coverage. There are two basic types of coverage:
1. Named perils policies. Only specific occurrences listed in the policy are covered, such as fire, water damage and vandalism.
2. All-risk policies. All disasters are covered unless specifically excluded. Many all-risk policies exclude damage from earthquakes and floods, but such coverage can generally be added for an additional fee.
Business interruption insurance usually pays for income that’s lost while operations are suspended. It also covers continuing expenses — including salaries, related payroll costs and other amounts required to restart a business. Depending on the policy, additional expenses might include:
• Relocation to a temporary building (or permanent relocation if necessary), • Replacement of inventory, machinery and parts, • Overtime wages to make up for lost production time, and • Advertising stating that your business is still operating.
Business interruption coverage that insures you against 100% of losses can be costly. Therefore, more common are policies that cover 80% of losses while the business shoulders the remaining 20%.
Pros and cons
As good as business interruption coverage may sound, your company might not need it if you operate in an area where major natural disasters are uncommon and your other business interruption risks are minimal. The decision on whether to buy warrants careful consideration.
First consult with your insurance agent about business interruption coverage options that could be added to your current property coverage. If you’re still interested, perhaps convene a meeting involving your agent, management team and other professional advisors to brainstorm worst-case scenarios and ask “what if” questions. After all, you don’t want to overinsure, but you also don’t want to underemphasize risk management.
Proper insurance coverage is essential for every company. Let us help you run the numbers and assess the potential value of a business interruption policy.
2 tax credits just for small businesses may reduce your 2017 and 2018 tax bills
Tax credits reduce tax liability dollar-for-dollar, potentially making them more valuable than deductions, which reduce only the amount of income subject to tax. Maximizing available credits is especially important now that the Tax Cuts and Jobs Act has reduced or eliminated some tax breaks for businesses. Two still-available tax credits are especially for small businesses that provide certain employee benefits.
1. Credit for paying health care coverage premiums
The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. Despite various congressional attempts to repeal the ACA in 2017, nearly all of its provisions remain intact, including this potentially valuable tax credit.
The maximum credit is 50% of group health coverage premiums paid by the employer, if it contributes at least 50% of the total premium or of a benchmark premium. For 2017, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $26,200 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,400.
The credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.) If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2017 may be a good idea. Why? It’s possible the credit will go away in the future if lawmakers in Washington continue to try to repeal or replace the ACA.
At this point, most likely any ACA repeal or replacement wouldn’t go into effect until 2019 (or possibly later). So if you claim the credit for 2017, you may also be able to claim it on your 2018 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.
2. Credit for starting a retirement plan
Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.
Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.
If you didn’t create a retirement plan in 2017, you might still have time to do so. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions. If you’d like to set up a different type of plan, consider doing so for 2018 so you can potentially take advantage of the retirement plan credit (and other tax benefits) when you file your 2018 return next year.
Keep in mind that additional rules and limits apply to these tax credits. We’d be happy to help you determine whether you’re eligible for these or other credits on your 2017 return and also plan for credits you might be able to claim on your 2018 return if you take appropriate actions this year.
Light a beacon to your business with a mission statement
Every company, big or small, should have a mission statement. Why? When carefully conceived and well written, a mission statement can serve as a beacon to the world — letting everyone know what the business stands for and where it’s headed. It can build customer loyalty and mobilize people behind a common cause. And it can define the company’s collective personality, provide clear direction, and most of all, serve as a starting point for all of your marketing efforts. Here are some elements to consider when writing a mission statement:
Target audience. This starts with customers, of course. But it also includes employees, job candidates, investors, lenders and the community at large. You can focus a mission statement on a combination of these groups or just one of them.
Length. Some mission statements are only a single sentence. Others are long and complex, encompassing philosophies, objectives, plans and strategies. Generally, it’s best to come up with something in the middle that’s concise, easy to understand and actionable — again, a viewpoint from which your company will express itself and make decisions.
Tone. Establishing the correct tone involves a process of intentional word selection. If the language is too flowery and cumbersome, readers may not take a mission statement seriously. Then again, something too short may come off as vague or flippant. Use appropriate language that’s directed at the target audience and reflects your strategic plans.
Endurance. A mission statement should be able to withstand the test of time and, ultimately, have meaning in the long term. By the same token, its language should be current enough to reflect changes in the business and its competitive environment. A statement created years ago may no longer be relevant.
Distinctiveness. Every company is different — even those in the same industry. Customize your mission statement to express what’s different and distinguishing about your business.
An effective mission statement can be a great asset to an organization. Develop yours as part of an overall strategic planning process, starting with an analysis of your company’s culture, development, and prioritization of goals and objectives. Contact our firm to discuss this and other ways to enhance profitability.
You’ve probably heard or read the term “big data” at least once in the past few years. Maybe your response was a sarcastic “big deal!” under the assumption that this high-tech concept applies only to large corporations. But this isn’t necessarily true. With so much software so widely available, companies of all sizes may be able to devise and implement big data strategies all their own.
Trends, patterns, relationships
The term “big data” generally refers to any large set of electronic information that, with the right hardware and software, can be analyzed to identify trends, patterns and relationships.
Most notably for businesses, it can help you better understand and predict customer behavior — specifically buying trends (upward and downward) and what products or services customers might be looking for. But big data can also lend insights to your HR function, helping you better understand employees and potential hires, and enabling you to fine-tune your benefits program.
Think of big data as the product recommendation function on Amazon. When buying anything via the site or app, customers are provided a list of other items they also may be interested in. These recommendations are generated through a patented software process that makes an educated guess, based on historical data, on consumer preferences. These same software tools can make predictions about aspects of your business, too — from sales to marketing return on investment, to employee retention and performance.
Here are a couple of specific areas where big data may help improve your company:
Sales. Many businesses still adhere to the tried-and-true sales funnel that includes the various stages of prospecting, assessment, qualification and closing. Overlaying large proprietary consumer-behavior data sets over your customer database may allow you to reach conclusions about the most effective way to close a deal with your ideal prospects.
Inventory management. If your company has been around for a while, you may think you know your inventory pretty well. But do you, really? Using big data, you may be able to better determine and predict which items tend to disappear too quickly and which ones are taking up too much space.
Planning and optimization
Big data isn’t exactly new anymore. But it continues to evolve with the widespread use of cloud computing, which allows companies of any size to securely store and analyze massive amounts of data online. Our firm can offer assistance in planning and optimizing your technology spending.
Meals, entertainment and transportation may cost businesses more under the TCJA
Along with tax rate reductions and a new deduction for pass-through qualified business income, the new tax law brings the reduction or elimination of tax deductions for certain business expenses. Two expense areas where the Tax Cuts and Jobs Act (TCJA) changes the rules — and not to businesses’ benefit — are meals/entertainment and transportation. In effect, the reduced tax benefits will mean these expenses are more costly to a business’s bottom line.
Meals and entertainment
Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.
Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed.
Meal expenses incurred while traveling on business are still 50% deductible, but the 50% limit now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will no longer be deductible.
The TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.
The new law also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits. Examples include parking allowances, mass transit passes and van pooling. These benefits are, however, still tax-free to recipient employees.
Transportation expenses for employee work-related travel away from home are still deductible (and tax-free to the employee), as long as they otherwise qualify for such tax treatment. (Note that, for 2018 through 2025, employees can’t deduct unreimbursed employee business expenses, such as travel expenses, as a miscellaneous itemized deduction.)
Assessing the impact
The TCJA’s changes to deductions for meals, entertainment and transportation expenses may affect your business’s budget. Depending on how much you typically spend on such expenses, you may want to consider changing some of your policies and/or benefits offerings in these areas. We’d be pleased to help you assess the impact on your business.
Your 2017 tax return may be your last chance to take the “manufacturers’ deduction”
While many provisions of the Tax Cuts and Jobs Act (TCJA) will save businesses tax, the new law also reduces or eliminates some tax breaks for businesses. One break it eliminates is the Section 199 deduction, commonly referred to as the “manufacturers’ deduction.” When it’s available, this potentially valuable tax break can be claimed by many types of businesses beyond just manufacturing companies. Under the TCJA, 2017 is the last tax year noncorporate taxpayers can take the deduction (2018 for C corporation taxpayers).
The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts (DPGR).
Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.
The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.
To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of DPGR exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t ? unless less than 5% of receipts aren’t attributable to DPGR.
DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as tangible personal property (for example, machinery and office equipment), computer software, and master copies of sound recordings.
The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.
Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2017 return. We can also help address any questions you may have about other business tax breaks that have been reduced or eliminated by the TCJA.
For many years, owners of small and midsize businesses looked at outsourcing much like some homeowners viewed hiring a cleaning person. That is, they saw it as a luxury. But no more — in today’s increasingly specialized economy, outsourcing has become a common way to cut costs and obtain expert assistance.
Why would you?
Outsourcing certain tasks that your company has been handling all along offers many benefits. Let’s begin with cost savings. Outsourcing a function effectively could save you a substantial percentage of in-house management expenses by reducing overhead, staffing and training costs. And thanks to the abundant number of independent contractors and providers of outsourced services, you may be able to bargain for competitive pricing.
Outsourcing also allows you to leave administration and support tasks to someone else, freeing up staff members to focus on your company’s core purpose. Plus, the firms that perform these functions are specialists, offering much higher service quality and greater innovations and efficiencies than you could likely muster.
Last, think about accountability — in many cases, vendors will be much more familiar with the laws, regulations and processes behind their specialties and therefore be in a better position to help ensure tasks are done in compliance with any applicable laws and regulations.
What’s the catch?
Of course, potential disadvantages exist as well. Outsourcing a business function obviously means surrendering some control of your personal management style in that area. Some business owners and executives have a tough time with this.
Another issue: integration. Every provider may not mesh with your company’s culture. A bad fit may lead to communication breakdowns and other problems.
Also, in rare cases, you may risk negative publicity from a vendor’s actions. There have been many stories over the years of companies suffering PR damage because of poor working conditions or employment practices at an outsourced facility. You’ve got to research any potential vendor thoroughly to ensure its actions won’t reflect poorly on your business.
To further protect yourself, stipulate your needs carefully in the contract. Pinpoint milestones you can use to ensure deliverables produced up to that point are complete, correct, on time and within budget. And don’t hesitate to tie partial payments to these milestones and assess penalties or even reserve the right to terminate if service falls below a specified level.
Last, build in clauses giving you intellectual property rights to any software or other items a provider develops. After all, you paid for it.
Need more time?
Outsourcing may not be the right solution every time. But it could help your business find more time to flourish and grow. We can help you assess the costs, benefits and risks.
New tax law gives pass-through businesses a valuable deduction
Although the drop of the corporate tax rate from a top rate of 35% to a flat rate of 21% may be one of the most talked about provisions of the Tax Cuts and Jobs Act (TCJA), C corporations aren’t the only type of entity significantly benefiting from the new law. Owners of noncorporate “pass-through” entities may see some major — albeit temporary — relief in the form of a new deduction for a portion of qualified business income (QBI).
A 20% deduction
For tax years beginning after December 31, 2017, and before January 1, 2026, the new deduction is available to individuals, estates and trusts that own interests in pass-through business entities. Such entities include sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). The deduction generally equals 20% of QBI, subject to restrictions that can apply if taxable income exceeds the applicable threshold — $157,500 or, if married filing jointly, $315,000.
QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.
The QBI deduction isn’t allowed in calculating the owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.
For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of:
50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.
Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income.
Another restriction is that the QBI deduction generally isn’t available for income from specified service businesses. Examples include businesses that involve investment-type services and most professional practices (other than engineering and architecture).
The W-2 wage limitation and the service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.
Careful planning required
Additional rules and limits apply to the QBI deduction, and careful planning will be necessary to gain maximum benefit. Please contact us for more details.
The Tax Cuts and Jobs Act (TCJA) enhances some tax breaks for businesses while reducing or eliminating others. One break it enhances — temporarily — is bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you might be able to benefit from the bonus depreciation enhancements when you file your 2017 tax return.
Pre-TCJA bonus depreciation
Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50% first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture, etc.
In addition, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.
The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.
The new law also allows 100% bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.
Beginning in 2023, bonus depreciation is scheduled to be reduced 20 percentage points each year. So, for example, it would be 80% for property placed in service in 2023, 60% in 2024, etc., until it would be fully eliminated in 2027.
For certain property with longer production periods, the reductions are delayed by one year. For example, 80% bonus depreciation would apply to long-production-period property placed in service in 2024.
Bonus depreciation is only one of the business tax breaks that have changed under the TCJA. Contact us for more information on this and other changes that will impact your business.
For many companies, there comes a time when owners must decide whether to renew a lease, move on to a different one or buy new (or pre-existing) space. In some cases, it’s a relatively easy decision. Maybe you’re happy where you are and feel like such a part of the local community that moving isn’t an option.
But, in other cases, a move can be an important step forward. For example, if a business is looking to cut costs, reducing office space and signing a less expensive lease can generally help the bottom line. Conversely, a growing company might decide to buy property and build new to increase its prestige and visibility. Making the right choice is critical.
Buying office space is clearly a major undertaking. But owning your own building can give you flexibility and tax advantages a lease can’t offer. For instance, you can:
Control how to configure and use the property,
Sublet some of the space if you so choose, and
Decorate, landscape and maintain it as you wish.
You’ll also benefit from mortgage interest and depreciation deductions at tax time.
Naturally, there are risks to ownership. For one, you won’t be able to easily pick up and move on. And if you’re structured as a flow-through entity, you’ll need to decide how the owners will share the cost of buying and maintaining the building. Keep in mind that the building need not be owned in the same proportion as the business itself.
There are other matters to consider as well. You’ll have to delegate responsibility for arranging and overseeing activities such as exterior maintenance, cleaning, and paying taxes and insurance. Plus, if you decide to sublet some of your space, you’ll need to wear one more hat — that of a landlord.
Lessees look out
Of course, as you may well know from doing it for a number of years, leasing business space has its downsides, too. Perhaps you’ve dealt with a particularly unresponsive landlord or property management company. You may also have less freedom to change or rearrange space — not to mention ever-increasing rent and the loss of mortgage interest and depreciation tax deductions. If you decide to move, though, it’s easier to leave a rented office than to sell one you own.
Ultimately, it’s a question of net present values. Will the present value of the capital appreciation you ultimately gain when the property is sold be greater than the current cash flow advantage you’d likely have under a lease?
Consider your options
These are just a few of the issues to study as you consider your company’s location and office space heading into a new year. Remember, there may be tax issues not mentioned here or other factors affecting the right decision. Contact us for a full assessment of your options.
As a business owner, you know that it’s easy to spend nearly every working hour on the multitude of day-to-day tasks and crises that never seem to end. It’s essential to your company’s survival, however, to find time for strategic planning.
Lost in the weeds
Business owners put off strategic planning for many reasons. New initiatives, for example, usually don’t begin to show tangible results for some time, which can prove frustrating. But perhaps the most significant hurdle is the view that strategic planning is a time-sucking luxury that takes one’s focus off of the challenges directly in front of you.
Although operational activities are obviously essential to keeping your company running, they’re not enough to keep it moving forward and evolving. Accomplishing the latter requires strategic planning. Without it, you can get lost in the weeds, working constantly yet blindly, only to look up one day to find your business teetering on the edge of a cliff — whether because of a tough new competitor, imminent product or service obsolescence, or some other development that you didn’t see coming.
Quality vs. quantity
So how much time should you and your management team devote to strategic planning? There’s no universal answer. Some experts say a CEO should spend only 50% of his or her time on daily operations, with the other half going to strategy — a breakdown that could be unrealistic for some.
The emphasis is better put on quality rather than quantity. However many hours you decide to spend on strategic planning, use that time solely for plotting the future of your company. Block off your schedule, choose a designated and private place (such as a conference room), and give it your undivided attention. Make time for strategic planning just as you would for tending to an important customer relationship.
Time well spent
Effective strategic planning calls for not only identifying the right business-growing initiatives, but also regularly re-evaluating and adjusting them as circumstances change. Thus, strategizing should be part of your weekly or monthly routine — not just a “once in a while, as is convenient” activity. You may need to delegate some of your current operational tasks to make that happen but, in the long run, it will be time well spent. Please let us know how we can help.
Tax Cuts and Jobs Act: Key provisions affecting businesses
The recently passed tax reform bill, commonly referred to as the “Tax Cuts and Jobs Act” (TCJA), is the most expansive federal tax legislation since 1986. It includes a multitude of provisions that will have a major impact on businesses.
Here’s a look at some of the most significant changes. They generally apply to tax years beginning after December 31, 2017, except where noted.
Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
Repeal of the 20% corporate alternative minimum tax (AMT)
New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
Other enhancements to depreciation-related deductions
New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
New limits on net operating loss (NOL) deductions
Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
New rule limiting like-kind exchanges to real property that is not held primarily for sale
New tax credit for employer-paid family and medical leave — through 2019
New limitations on excessive employee compensation
New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
Keep in mind that additional rules and limits apply to what we’ve covered here, and there are other TCJA provisions that may affect your business. Contact us for more details and to discuss what your business needs to do in light of these changes.
7 steps to choosing a successor for your family business
There’s an old saying regarding family-owned businesses: “Shirtsleeves to shirtsleeves in three generations.” It means the first-generation owner started in shirtsleeves and built the company up from nothing but, by the third generation, the would-be owner is back in shirtsleeves with nothing because the business failed or was sold.
Although you can’t guarantee your company will buck this trend, you can take extra care when choosing a successor to give your family business a fighting chance. Here are seven steps to consider:
1. Make no assumptions. Many business owners assume their son or daughter wants to run the company or that a particular child is right for the role. But such an assumption can doom the company.
2. Decide which family members are viable candidates, if any. External parties such as professional advisors or an advisory board can provide invaluable input. Outsiders are more likely to be impartial and have no vested interest in your decision. They might help you realize that someone who’s not in your family is the best choice.
3. Look at skills and temperament. Once you’ve settled on a few candidates, hold private meetings with each to discuss the leadership role. Get a feel for whether anyone you’re considering may lack the skills or temperament to run the business.
4. If there are multiple candidates, give each a fair shot. This is no different from what happens in publicly held companies and larger private businesses. Allow each qualified candidate to fill a position at the company and move up the management ladder.
5. Rotate the jobs each candidate performs, if possible. Let them gain experience in many areas of the business, gradually increasing their responsibilities and setting more rigorous goals. You’ll not only groom a better leader, but also potentially create a deeper management team.
6. Clearly communicate your decision. After a reasonable period of time, pick your successor. Meet with the chosen candidate to discuss a transition time line, compensation and other important issues. Also sit down with those not selected and explain your choice. Ideally, these individuals can stay on to provide the aforementioned management depth. Some, however, may choose to leave or be better off working elsewhere. Be forewarned: This can be a difficult, emotional time for family members.
7. Work with your successor on a well-communicated transition of power. Once you’ve picked a successor, he or she effectively becomes a business partner. It’s up to the two of you to gradually shift power from one generation to the next (assuming the business is staying in the family). Don’t underestimate the human element and how much time and effort will be required to make the succession work. Let us help you meet and overcome this critical challenge.
This year’s company holiday party is probably tax deductible, but next year’s may not be
Many businesses are hosting holiday parties for employees this time of year. It’s a great way to reward your staff for their hard work and have a little fun. And you can probably deduct 100% of your 2017 party’s cost as a meal and entertainment (M&E) expense. Next year may be a different story.
The 100% deduction
For 2017, businesses generally are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:
For recreational or social activities for employees, such as holiday parties and summer picnics,
For food and beverages furnished at the workplace primarily for employees, and
That are excludable from employees’ income as de minimis fringe benefits.
There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.
Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses.
If your company has substantial meal and entertainment expenses, you can reduce your 2017 tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.
Possible changes for 2018
It appears the M&E deduction for employee parties — along with deductions for many other M&E expenses — will be eliminated beginning in 2018 under the reconciled version of the Tax Cuts and Jobs Act. For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction when you file your 2017 return, please contact us.
Make New Year’s resolutions to improve profitability
Many people scoff at New Year’s resolutions. It’s no mystery why — these self-directed promises to visit the gym regularly or read a book a month tend to quickly fade once the unavoidable busyness of life sets in.
But, for business owners, the phrase “New Year’s resolutions” is just a different way of saying “strategic plans.” And these are nothing to scoff at. In fact, now is the perfect time to take a critical look at your company and make some earnest promises about improving profitability in 2018.
Ask tough questions
Begin by asking some tough questions. For example: How satisfied are you with the status quo of your business? Are you happy with your profitability or had you anticipated a much stronger bottom line at this point in your company’s existence? If you were to sell tomorrow, would you get a fair return based on what you’ve invested in effort and money?
If your answers to these questions leave you more dissatisfied than pleased, your New Year’s resolutions may have to be bold. This doesn’t mean you should do something rash. But there’s no harm in envisioning next year as the greatest 12 months in the history of your business and then trying to figure out how you might get there.
Rate your profitability
To assess your company’s financial status, begin by honestly gauging your current performance. Rate your profitability on a scale of 1 to 10, where adequate working capital, long-term employees and customers, consistent growth in revenues and profit, and smooth operations equal a 10.
Many business owners will apply numbers somewhere between a 5 and a 7 to these categories. If you rate your business a 6, for example, this means your company isn’t tapping into 40% of its profit-generating capacity. Consider the level of improvement you would realize by moving up just one notch — to a 7.
Identify areas for improvement
One way to discover your company’s unrealized profit enhancement opportunities is to ask your customers and employees. They know firsthand what you are good at, as well as what needs improvement.
For instance, years ago, when the American auto industry was taking its biggest hits from foreign imports, one of the Big Three manufacturers was experiencing significant customer complaints about poor paint jobs. An upper-level executive visited the paint shop in one of its factories and asked an employee about the source of the problem. The worker replied, “I thought you’d never ask,” and proceeded to explain in detail what was wrong and how to solve it.
Get ready for change
If you have a few New Year’s resolutions in mind but aren’t sure how to implement these ideas or how financially feasible they might be, please contact our firm. We can work with you to identify areas of your business ready for change and help you attain a higher level of success next year.
Should you buy a business vehicle before year end?
One way to reduce your 2017 tax bill is to buy a business vehicle before year end. But don’t make a purchase without first looking at what your 2017 deduction would be and whether tax reform legislation could affect the tax benefit of a 2017 vs. 2018 purchase.
Your 2017 deduction
Business-related purchases of new or used vehicles may be eligible for Section 179 expensing, which allows you to immediately deduct, rather than depreciate over a period of years, some or all of the vehicle’s cost. But the size of your 2017 deduction will depend on several factors. One is the gross vehicle weight rating.
The normal Sec. 179 expensing limit generally applies to vehicles with a gross vehicle weight rating of more than 14,000 pounds. The limit for 2017 is $510,000, and the break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $2.03 million.
But a $25,000 limit applies to SUVs rated at more than 6,000 pounds but no more than 14,000 pounds. Vehicles rated at 6,000 pounds or less are subject to the passenger automobile limits. For 2017, under current law, the depreciation limit is $3,160. And the amount that may be deducted under the combination of Modified Accelerated Cost Recovery System (MACRS) depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160.
In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use. The depreciation limit is reduced if the business use is less than 100%. If the business use is 50% or less, you can’t use Sec. 179 expensing or the accelerated regular MACRS; you must use the straight-line method.
Factoring in tax reform
If tax reform legislation is signed into law and it will cause your marginal rate to go down in 2018, then purchasing a vehicle by December 31, 2017, could save you more tax than waiting until 2018. Why? Tax deductions are more powerful when rates are higher. But if your 2017 Sec. 179 expense deduction would be reduced or eliminated because of the asset acquisition phaseout, then you might be better off waiting until 2018 to buy.
Also be aware that tax reform legislation could affect the depreciation limits for passenger vehicles, even if purchased in 2017.
These are just a few factors to look at. Many additional rules and limits apply to these breaks. So if you’re considering a business vehicle purchase, contact us to discuss whether it would make more tax sense to buy this year or next.
The artificial intelligence (AI) revolution isn’t coming — it’s here. While AI’s potential for your company might not seem immediately obvious, this technology is capable of helping businesses of all shapes and sizes “get smart.”
AI generally refers to the use of computer systems to perform tasks commonly thought to require human intelligence. Examples include image perception, voice recognition, problem solving and decision making. AI includes machine learning, an iterative process where machines improve their performance over time based on examples and structured feedback rather than explicit programming.
3 applications to consider
Businesses can use AI to improve a variety of functions. Three specific applications to consider are:
1. Sales and marketing. You might already use a customer relationship management (CRM) system, but introducing AI to it can really put the pedal to the metal. AI can go much further — and much faster — than traditional CRM.
For example, AI is able to analyze buyer behavior and consumer sentiments across a range of media, including recorded phone conversations, email, social media and reviews. AI also can, in a relative blink of the eye, process consumer and market data from a far wider range of sources than previously thought possible. And it can automate the repetitive tasks that eat up your sales or marketing team’s time.
All of this results in quicker generation of qualified leads. With AI, you can deploy your sales force and marketing resources more efficiently and effectively, reducing your cost of customer acquisition along the way.
2. Customer service. Keeping customers satisfied is the key to retaining them. But customers don’t always tell you when they’re unhappy. AI can pick up on negative signals and find correlations to behavior in customer data, empowering you to save important relationships.
You can integrate AI into your customer support function, too. By leaving tasks such as classifying tickets and routing calls to AI, you’ll reduce wait times and free up representatives to focus on customers who need the human touch.
3. Competitive intelligence. Imagine knowing your competitors’ strategies and moves almost as well as your own. AI-based competitive analysis tools will track other companies’ activities across different channels, noting pricing and product changes and subtle shifts in messaging. They can highlight competitors’ strengths and weaknesses that will help you plot your own course. The future is now
AI isn’t a fad; it’s becoming more and more entrenched in our business and personal lives. Companies that recognize this sea change and jump on board now can save time, cut costs and develop a clear competitive edge. We can assist you in determining how technology investments like AI should fit into your overall plans for investing in your business.
2018 Q1 tax calendar: Key deadlines for businesses and other employers
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
File 2017 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
Provide copies of 2017 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
File 2017 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2017. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 12 to file the return.
File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2017. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 12 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)
File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2017 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.
File 2017 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 2.)
If a calendar-year partnership or S corporation, file or extend your 2017 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.
Year end can’t get here soon enough for some business owners — especially those whose companies have exceeded their annual budgets. If you find yourself in this unenviable position, you can still cut costs to either improve this year’s financial picture or put yourself in a better position for next year.
Tackle staffing issues
It’s easy to put off tough staffing decisions, but those issues may represent an unnecessary drain on your finances. If you have employees who don’t have enough work to keep busy, think about restructuring jobs so everyone’s productive. You might let go of extra staff, or, alternatively, offer mostly idle workers unpaid time off during slow periods.
You also need to face the hard facts about underperforming workers. Few business owners enjoy firing anyone, but it makes little sense to continue to pay poor performers.
Take control of purchasing
Are you getting the most out of your company’s combined purchasing power? You may have different departments independently buying the same supplies or services (for example, paper, computers, photocopying). By consolidating such purchases, you might be able to negotiate reduced prices.
To strengthen your bargaining power with suppliers when seeking discounts, pay your bills promptly. Even if it doesn’t help you land reduced prices, you’ll avoid late payment fees and credit card interest charges.
But don’t just continue to pay bills mindlessly. Review all of your service invoices — especially those that are automatically deducted from your bank accounts or charged to credit cards — to confirm you’re actually using the services. Consider canceling any services you haven’t used in 90 days.
Redirect your marketing efforts
Advertising costs can take a significant bite out of your budget, and the priciest efforts often have the lowest returns on investment. Cut programs and initiatives that haven’t clearly paid off, and move your marketing to social media and other more cost-efficient avenues — at least temporarily. A single, positively received tweet may reach exponentially more people than a costly directory listing, print ad or trade show booth.
Resist the urge to solve your budget shortfalls with one dramatic cut — the risks are simply too high. The better approach is to execute a combination of incremental actions that will add up to savings. Contact us for a full assessment of your company’s budget.
Practice the fine art of inclusion at your holiday gatherings
It’s that time of year, business owners — a time when you’re not only trying to wind down the calendar in profitable fashion, but also preparing year-end financials and contemplating next year’s budget.
And amidst all this, you likely have a holiday employee gathering to plan. This seemingly innocuous task can be just as tricky as the rest. It’s imperative to practice the fine art of inclusion at holiday parties so everyone feels engaged and rewarded for their hard work. Here are some ways to do so:
Involve staff in the planning. Have workers of different faiths and cultures serve on your holiday party committee. Be sure to incorporate as much of their personal holiday traditions as possible or employees may feel like they wasted their time participating on this task. By sharing family customs, workers will get to know one another better.
Celebrate differences. Rather than prohibiting all holiday-specific ornamentation in your office or at your holiday party, allow an assortment of decorations that reflect your staff’s varying traditions. And encourage employees to bring in their favorite holiday treats for all to sample. This is a great opportunity for workers to learn more about other cultures.
Say thank you to everyone. Food, drinks and bonus checks have become a holiday party focal point for many businesses. But, remember, there’s real power in explicitly saying thanks to workers. Doing so can range from passing out holiday cards with handwritten messages (from ownership or a direct supervisor) to having each department head give a presentation remarking on everyone’s individual achievements.
Pay attention to details. Like most work matters, details count — especially when planning a party. Here are some questions to ask when setting up your event:
• Does the space or facility accommodate disabled people? • Are you serving nonalcoholic drinks and food for vegetarians or others with special dietary needs? • Could anyone find “funny” speeches or “roasting” of certain employees offensive? • Does the party’s date conflict with any worker’s religious beliefs?
In worst cases, a poorly planned holiday party can end up hurting morale and even triggering legal expenses if someone feels particularly excluded or offended. On the brighter side, a fun and inclusive gathering can conclude the year on a wonderful note. Let us help you manage the cost-effectiveness (and just plain effectiveness) of your company’s employee engagement activities.
Accrual-basis taxpayers: These year-end tips could save you tax
With the possibility that tax law changes could go into effect next year that would significantly reduce income tax rates for many businesses, 2017 may be an especially good year to accelerate deductible expenses. Why? Deductions save more tax when rates are higher.
Timing income and expenses can be a little more challenging for accrual-basis taxpayers than for cash-basis ones. But being an accrual-basis taxpayer also offers valuable year-end tax planning opportunities when it comes to deductions.
Tracking incurred expenses
The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2018. This will enable you to deduct those expenses on your 2017 federal tax return. Common examples of such expenses include:
Commissions, salaries and wages,
You can also accelerate deductions into 2017 without actually paying for the expenses in 2017 by charging them on a credit card. (This works for cash-basis taxpayers, too.)
As noted, accelerating deductible expenses into 2017 may be especially beneficial if tax rates go down for 2018.
Also review all prepaid expense accounts. Then write off any items that have been used up before the end of the year.
If you prepay insurance for a period of time beginning in 2017, you can expense the entire amount this year rather than spreading it between 2017 and 2018, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.
And there’s more . . .
Here are a few more year-end tax tips to consider:
Review your outstanding receivables and write off any receivables you can establish as uncollectible.
Pay interest on all shareholder loans to or from the company.
Update your corporate record book to record decisions and be better prepared for an audit.
To learn more about how these and other year-end tax strategies may help your business reduce its 2017 tax bill, contact us.
Getting around the $25 deduction limit for business gifts
At this time of year, it’s common for businesses to make thank-you gifts to customers, clients, employees and other business entities and associates. Unfortunately, the tax rules limit the deduction for business gifts to $25 per person per year, a limitation that has remained the same since it was added into law back in 1962. Fifty-five years later, the $25 limit is unrealistically small in many business gift-giving situations. Fortunately, there are a few exceptions.
Here’s a quick rundown of the major exceptions to the $25 limit:
Gifts to a business entity. The $25 limit applies only to gifts directly or indirectly given to an individual. Gifts given to a company for use in the business aren’t subject to the limit. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business.
Gifts to a married couple. If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50.
Incidental costs of making a gift. Such costs aren’t subject to the limit. For example, the costs of custom engraving on jewelry or of packing, insuring and mailing a gift are deductible over and above the $25 limit for the gift itself.
Gifts to employees. Although employee gifts have their own limitations and may be treated as taxable compensation, an employer is generally allowed to deduct the full cost of gifts made to employees.
Gifts vs. entertainment expenses
In some situations related to gifts of tickets to sporting or other events, a taxpayer may choose whether to claim the deduction as a gift or as entertainment. Under current law, entertainment expenses are normally 50% deductible, so the gift deduction is a better deal for lower-priced tickets. But once the combined price of the gifted tickets exceeds $50, claiming them as an entertainment expense is more beneficial.
Be aware, however, that the elimination of the entertainment expense deduction has been included in proposed tax reform legislation. If legislation with such a provision is signed into law, it likely won’t go into effect until 2018.
Track and document
To the extent your business qualifies for any of these exceptions, be sure to track the qualifying expenses separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.
In addition, you must retain documentation of the following:
A description of the gift,
The gift’s cost,
The date the gift was made,
The business purpose of the gift, and
The business relationship to the taxpayer of the person receiving the gift.
If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please contact us.
Could an FSA offer the benefits flexibility you need?
Business owners have to make tough choices when it comes to providing benefits to their employees. Many companies, especially newer or smaller ones, may understandably prioritize flexibility. No one wants to get locked into a benefits offering that’s cumbersome to administer and expensive to maintain.
Well, there’s one possibility that has the word “flexible” built right into its name: the health care Flexible Spending Account (FSA). And these arrangements certainly offer that.
No HDHP required, employee contributions allowed
You’ve probably heard about Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs). These increasingly popular benefits options allow employees to pay for qualifying health care costs with pretax dollars. But each one comes with a critical catch: You must offer HSAs in conjunction with a high-deductible health plan (HDHP), and your business can be the only contributor to an HRA.
These limitations don’t apply to FSAs. An HDHP isn’t required, and both employees and the business itself can contribute to the account. Employee contributions are made pretax directly from their compensation, and any contributions you make as an employer aren’t included in your company’s taxable income. (Note: For employees who have an HSA, their FSA would be limited to funding certain “permitted” expenses.)
So there’s that flexibility we mentioned. You can establish an FSA relatively quickly without having to commit to an HDHP, and both you and your employees can contribute. Now the drawback: FSAs are “use it or lose it” accounts. In other words, a participant generally must forfeit any unused balance remaining in his or her account after year end.
There is, however, a way to soften this downside. Employers can include in their FSAs either a grace period of up to 2½ months or a $500 carryover amount. Doing so can add even more flexibility to the FSA concept.
If you decide to establish a health care FSA, be prepared to regularly communicate with employees about it throughout the year. When funding their accounts, participants will need to carefully estimate how much money they’re likely to spend over the course of the year. And around the end of the year you’ll need to remind them that, if funds remain in their FSAs, employees will need to incur reimbursable expenses by Dec. 31 to use up those dollars (again, assuming you don’t have a grace period or carryover amount).
No easy answers
There are no easy answers when it comes to employee benefits these days. But FSAs can be a relatively simple to administer benefit that’s appealing to employees. Let us help you assess your options and make the best choice for your business.
Reduce your 2017 tax bill by buying business assets
Two valuable depreciation-related tax breaks can potentially reduce your 2017 taxes if you acquire and place in service qualifying assets by the end of the tax year. Tax reform could enhance these breaks, so you’ll want to keep an eye on legislative developments as you plan your asset purchases.
Section 179 expensing
Sec. 179 expensing allows businesses to deduct up to 100% of the cost of qualifying assets (new or used) in Year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and real property improvements.
The Sec. 179 expensing limit for 2017 is $510,000. The break begins to phase out dollar-for-dollar for 2017 when total asset acquisitions for the tax year exceed $2.03 million. Under current law, both limits are indexed for inflation annually.
Under the initial version of the House bill, the limit on Section 179 expensing would rise to $5 million, with the phaseout threshold increasing to $20 million. These higher amounts would be adjusted for inflation, and the definition of qualifying assets would be expanded slightly. The higher limits generally would apply for 2018 through 2022.
The initial version of the Senate bill also would increase the Sec. 179 expensing limit, but only to $1 million, and would increase the phaseout threshold, but only to $2.5 million. The higher limits would be indexed for inflation and generally apply beginning in 2018. Significantly, unlike under the House bill, the higher limits would be permanent under the Senate bill. There would also be some small differences in which assets would qualify under the Senate bill vs. the House bill.
First-year bonus depreciation
For qualified new assets (including software) that your business places in service in 2017, you can claim 50% first-year bonus depreciation. Examples of qualifying assets include computer systems, software, machinery, equipment, office furniture and qualified improvement property. Currently, bonus depreciation is scheduled to drop to 40% for 2018 and 30% for 2019 and then disappear for 2020.
The initial House bill would boost bonus depreciation to 100% for qualifying assets (which would be expanded to include certain used assets) acquired and placed in service after September 27, 2017, and before January 1, 2023 (with an additional year for certain property with a longer production period).
The initial Senate bill would allow 100% bonus depreciation for qualifying assets acquired and placed in service during the same period as under the House bill, though there would be some differences in which assets would qualify.
If you’ve been thinking about buying business assets, consider doing it before year end to reduce your 2017 tax bill. If, however, you could save more taxes under tax reform legislation, for now you might want to limit your asset investments to the maximum 179 expense election currently available to you, and then consider additional investments depending on what happens with tax reform. It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. Contact us to discuss the best strategy for your particular situation.
No business owner wants to send out spam. Even the term “email blast,” the practice of launching a flurry of targeted messages at customers and prospects, has mixed connotations these days.
Yet email remains a viable and even necessary communications channel. Here are four tips on making your marketing emails a blast (in the fun and informative sense) and keeping them out of recipients’ spam folders:
1. Craft a catchy subject line. It should be no longer than eight words and shouldn’t be in all caps. Put yourself in the customer’s place, particularly considering his or her demographic, and ask yourself whether you would open the email. Also, clearly indicate the message’s content.
2. Write a compelling headline. The first thing readers see upon opening an email is the headline, so make it:
Different from the subject line,
Short (four or five words),
A larger font size than the body of the message, and
Example: Rock Your Stockroom Now
3. Make it quick, keep it simple. Most people will read very little text and may not wait for slow-loading images. So think of each marketing email as an “elevator speech,” a quick and concise pitch for specific products or services. And keep images relatively small and easy to download.
Customers want to fulfill their needs at a reasonable price. Don’t expect them to search for answers about whether you can meet these expectations. Tell them why they should buy.
Example: Buying office supplies in bulk now will save you time and money throughout next year.
4. Close with a “call to action.” Instill a sense of urgency in readers by setting a deadline and telling them precisely what to do. Otherwise, they may interpret the email as merely informational and file it away for reference or simply delete it. Be sure to include clear, “clickable” contact info.
Example: Offer expires November 30. Call or visit our website now!
Speaking of calls to action, please contact our firm for help ensuring your marketing initiatives are cost effective.
2017 might be your last chance to hire veterans and claim a tax credit
With Veterans Day on November 11, it’s an especially good time to think about the sacrifices veterans have made for us and how we can support them. One way businesses can support veterans is to hire them. The Work Opportunity tax credit (WOTC) can help businesses do just that, but it may not be available for hires made after this year.
As released by the Ways and Means Committee of the U.S. House of Representatives on November 2, the Tax Cuts and Jobs Act would eliminate the WOTC for hires after December 31, 2017. So you may want to consider hiring qualifying veterans before year end.
The WOTC up close
You can claim the WOTC for a portion of wages paid to a new hire from a qualifying target group. Among the target groups are eligible veterans who receive benefits under the Supplemental Nutrition Assistance Program (commonly known as “food stamps”), who have a service-related disability or who have been unemployed for at least four weeks. The maximum credit depends in part on which of these factors apply:
Food stamp recipient or short-term unemployed (at least 4 weeks but less than 6 months): $2,400
Long-term unemployed (at least 6 months): $5,600
Disabled and long-term unemployed: $9,600
The amount of the credit also depends on the wages paid to the veteran and the number of hours the veteran worked during the first year of employment.
You aren’t subject to a limit on the number of eligible veterans you can hire. For example, if you hire 10 disabled long-term-unemployed veterans, the credit can be as much as $96,000.
Before claiming the WOTC, you generally must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you.
Also be aware that veterans aren’t the only target groups from which you can hire and claim the WOTC. But in many cases hiring a veteran will provided the biggest credit. Plus, research assembled by the Institute for Veterans and Military Families at Syracuse University suggests that the skills and traits of people with a successful military employment track record make for particularly good civilian employees.
It’s still uncertain whether the WOTC will be repealed. The House bill likely will be revised as lawmakers negotiate on tax reform, and it’s also possible Congress will be unable to pass tax legislation this year. Under current law, the WOTC is scheduled to be available through 2019.
But if you’re looking to hire this year, hiring veterans is worth considering for both tax and nontax reasons. Contact us for more information on the WOTC or on other year-end tax planning strategies in light of possible tax law changes.
Fortifying your business with enterprise risk management
Hundreds of years ago, prosperous towns managed the various risks of foreign invaders, thieves and wild animals by fortifying their entire communities with walls and towers. Today’s business owners can take a similar approach with enterprise risk management (ERM).
In short, ERM is an integrated, companywide system of identifying and planning for risk. Many larger companies have entire departments devoted to it. If your business is ready to implement an ERM program, be prepared for a lengthy building process.
This isn’t an undertaking most business owners will be able to complete themselves. You’ll need to sell your managers and employees on ERM from the top down. After you’ve gained commitment from key players, spend time assessing the risks your business may face. Typical examples include:
• Financial perils, • Information technology attacks or crashes, • Weather-related disasters, • Regulatory compliance debacles, and • Supplier/customer relationship mishaps.
Because every business is different, you’ll likely need to add other risks distinctive to your company and industry.
Developing the program
Recognizing risks is only the first phase. To truly address threats under your ERM program, you’ll need to clarify what your company’s appetite and capacity for each risk is, and develop a cohesive philosophy and plan for how they should be handled. Say you’re about to release a new product. The program would need to address risks such as:
• Potential liability, • Protecting intellectual property, • Shortage of raw materials, • Lack of manufacturing capacity, and • Safety regulation compliance.
Again, the key to success in the planning stage is conducting a detailed risk analysis of your business. Gather as much information as possible from each department and employee.
Depending on your company’s size, engage workers in brainstorming sessions and workshops to help you analyze how specific events could alter your company’s landscape. You may also want to designate an “ERM champion” in each department who will develop and administer the program.
Yes, just as medieval soldiers looked out from their battlements across field and forest to spot incoming dangers, you and your employees must maintain a constant gaze for developing risks. An ERM program, while an ambitious undertaking, can provide the structure for doing so. We can assist you in managing risks to your business in a financially sound manner.
Research credit can offset a small business’s payroll taxes
Does your small business engage in qualified research activities? If so, you may be eligible for a research tax credit that you can use to offset your federal payroll tax bill.
This relatively new privilege allows the research credit to benefit small businesses that may not generate enough taxable income to use the credit to offset their federal income tax bills, such as those that are still in the unprofitable start-up phase where they owe little or no federal income tax.
Under the Protecting Americans from Tax Hikes Act of 2015, a qualified small business (QSB) can elect to use up to $250,000 of its research credits to reduce the Social Security tax portion of its federal payroll tax bills. Under the old rules, QSBs could use the credit to offset only their federal income tax bills. However, many small businesses owe little or no federal income tax, especially small start-ups that tend to incur significant research expenses.
For the purposes of the research credit, a QSB is generally defined as a business with:
Gross receipts of less than $5 million for the current tax year, and
No gross receipts for any taxable year preceding the five-taxable-year period ending with the current tax year.
The allowable payroll tax reduction credit can’t exceed the employer portion of the Social Security tax liability imposed for any calendar quarter. Any excess credit can be carried forward to the next calendar quarter, subject to the Social Security tax limitation for that quarter.
Research activities that qualify
To be eligible for the research credit, a business must have engaged in “qualified” research activities. To be considered “qualified,” activities must meet the following four-factor test:
1. The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business. 2. There must be an intention to eliminate uncertainty. 3. There must be a process of experimentation. In other words, there must be a trial-and-error process. 4. The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science.
Expenses that qualify for the credit include wages for time spent engaging in supporting, supervising or performing qualified research, supplies consumed in the process of experimentation, and 65% of any contracted outside research expenses.
The ability to use the research credit to reduce payroll tax is a welcome change for eligible small businesses, but the rules are complex and we’ve only touched on the basics here. We can help you determine whether you qualify and, if you do, assist you with making the election for your business and filing payroll tax returns to take advantage of the new privilege.
Minimize inventory, services to make your financials shine
Your business financials — where they stand currently and where they might be going next year — are incredibly important. Obviously, sales and expenses play enormous roles in the strength of your position. But a fundamental and often-overlooked way of making your cash flow statement shine is to minimize inventory or services so you have just enough to fulfill demand.
Carrying too much inventory can devastate a budget as the value of the surplus items drops throughout the year. In turn, your financial statements simply won’t look as good as they could. Taking stock and perhaps cutting back on excess inventory:
• Reduces interest and storage costs, • Improves your ability to prevent fraud and theft, and • Increases your capacity to track what’s in stock.
One item to perhaps budget for here: upgraded inventory tracking and ordering software. Newer applications can help you better forecast demand, minimize overstocking, and even share data with suppliers to improve accuracy and efficiency.
If yours is a more service-oriented business, you can apply a similar approach. Check into whether you’re “overstocking” on services that just aren’t adding enough revenue to the bottom line. Keeping infrastructure and, yes, even employees in place that aren’t improving profitability is much like leaving items on the shelves that aren’t selling.
Making improvements may require some tough calls. You might have long-time customers to whom you provide certain services that just aren’t substantially profitable anymore. If it’s getting to the point where your company might start losing money on these customers, you may have to discontinue the services and sacrifice their business.
You can ease difficult transitions like this by referring customers to another, reputable service provider. Meanwhile, of course, your business should be looking to either find new service areas to generate revenue or expand existing services.
Brightening the future
A variety of threats can cast a dark shadow on your company’s financial statements. Keeping your inventory or service selection in tip-top shape can help ensure that the numbers ― and your business’s future ― look bright. Contact our firm for help specific to your situation.
Choosing the best way to reimburse employee travel expenses
If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. But to secure tax-advantaged treatment for your business and your employees, it’s critical to comply with IRS rules.
Reasons to reimburse
While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees won’t be able to benefit from the deduction. Why?
It’s likely that some of your employees don’t itemize. Even those who do may not have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income floor. And only expenses in excess of the floor can actually be deducted.
On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements (also subject to a 50% limit for meals and entertainment), and they’re excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan.
Per diem method
The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)
The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.
You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:
It must pay expenses that would otherwise be deductible by the employee.
Payments must be for “ordinary and necessary” business expenses.
Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.
If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).
Whether you have questions about which reimbursement option is right for your business or the additional rules and limits that apply to each, contact us. We’d be pleased to help.
3 breaks for business charitable donations you may not know about
Donating to charity is more than good business citizenship; it can also save tax. Here are three lesser-known federal income tax breaks for charitable donations by businesses.
1. Food donations
Charitable write-offs for donated food (such as by restaurants and grocery stores) are normally limited to the lower of the taxpayer’s basis in the food (generally cost) or fair market value (FMV), but an enhanced deduction equals the lesser of:
The food’s basis plus one-half the FMV in excess of basis, or
Two times the basis.
To qualify, the food must be apparently wholesome at the time it’s donated. Your total charitable write-off for food donations under the enhanced deduction provision can’t exceed:
15% of your net income for the year (before considering the enhanced deduction) from all sole proprietorships, S corporations and partnership businesses (including limited liability companies treated as partnerships for tax purposes) from which food donations were made, or
For a C corporation taxpayer, 15% of taxable income for the year (before considering the enhanced deduction).
2. Qualified conservation contributions
Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. For qualified C corporation farming and ranching operations, the maximum write-off for qualified conservation contributions is increased from the normal 10% of adjusted taxable income to 100% of adjusted taxable income.
Qualified conservation contributions in excess of what can be written off in the year of the donation can be carried forward for 15 years.
3. S corporation stock donations
A favorable tax basis rule is available to shareholders of S corporations that make charitable donations of appreciated property. For such donations, each shareholder’s basis in the S corporation stock is reduced by only the shareholder’s pro-rata percentage of the company’s tax basis in the donated asset.
Without this provision, a shareholder’s basis reduction would equal the passed-through write-off for the donation (a larger amount than the shareholder’s pro-rata percentage of the company’s basis in the donated asset). This provision is generally beneficial to shareholders, because it leaves them with higher tax basis in their S corporation shares.
If you believe you may be eligible to claim one or more of these tax breaks, contact us. We can help you determine eligibility, prepare the required documentation and plan for charitable donations in future years.
How to maximize deductions for business real estate
Currently, a valuable income tax deduction related to real estate is for depreciation, but the depreciation period for such property is long and land itself isn’t depreciable. Whether real estate is occupied by your business or rented out, here’s how you can maximize your deductions.
Segregate personal property from buildings
Generally, buildings and improvements to them must be depreciated over 39 years (27.5 years for residential rental real estate and certain other types of buildings or improvements). But personal property, such as furniture and equipment, generally can be depreciated over much shorter periods. Plus, for the tax year such assets are acquired and put into service, they may qualify for 50% bonus depreciation or Section 179 expensing (up to $510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax year exceed $2.03 million).
If you can identify and document the items that are personal property, the depreciation deductions for those items generally can be taken more quickly. In some cases, items you’d expect to be considered parts of the building actually can qualify as personal property. For example, depending on the circumstances, lighting, wall and floor coverings, and even plumbing and electrical systems, may qualify.
Carve out improvements from land
As noted above, the cost of land isn’t depreciable. But the cost of improvements to land is depreciable. Separating out land improvement costs from the land itself by identifying and documenting those improvements can provide depreciation deductions. Common examples include landscaping, roads, and, in some cases, grading and clearing.
Convert land into a deductible asset
Because land isn’t depreciable, you may want to consider real estate investment alternatives that don’t involve traditional ownership. Such options can allow you to enjoy tax deductions for land costs that provide a similar tax benefit to depreciation deductions. For example, you can lease land long-term. Rent you pay under such a “ground lease” is deductible.
Another option is to purchase an “estate-for-years,” under which you own the land for a set period and an unrelated party owns the interest in the land that begins when your estate-for-years ends. You can deduct the cost of the estate-for-years over its duration.
More limits and considerations
There are additional limits and considerations involved in these strategies. Also keep in mind that tax reform legislation could affect these techniques. For example, immediate deductions could become more widely available for many costs that currently must be depreciated. If you’d like to learn more about saving income taxes with business real estate, please contact us.
Valuation often affects succession plans in hard-to-see ways
Any business owner developing a succession plan should rightfully assume that regular business valuations are a must. When envisioning the valuation process, you’re likely to focus on its end result: a reasonable, defensible value estimate of your business as of a certain date. But lurking beneath this number is a variety of often hard-to-see issues.
Estate tax liability
One sometimes blurry issue is the valuation implications of whether you intend to transfer the business to the next generation during your lifetime, at your death or upon your spouse’s death. If, for example, you decide to bequeath the company to your spouse, no estate tax will be due upon your death because of the marital deduction (as long as your spouse is a U.S. citizen). But estate tax may be due on your spouse’s death, depending on the business’s value and estate tax laws at the time.
Speaking of which, President Trump and congressional Republicans have called for an estate tax repeal under the “Unified Framework for Fixing Our Broken Tax Code” issued in late September. But there’s no guarantee such a provision will pass and, even if it does, the repeal might be only temporary.
So an owner may be tempted to minimize the company’s value to reduce the future estate tax liability on the spouse’s death. But be aware that businesses that appear to have been undervalued in an effort to minimize taxes will raise a red flag with the IRS.
Inactive heirs and retirement
Bear in mind, too, that your heirs may have different views of the business’s proper value. This is particularly true of “inactive heirs” ― those who won’t inherit the business and whose share, therefore, may need to be “equalized” with other assets, such as insurance proceeds or real estate. Your appraiser will need to clearly understand the valuation’s purpose and your estate plan.
When (or if) you plan to retire is another major issue to be resolved. If you want your children to take over, but you need to free up cash for retirement, you may be able to sell shares to successors. Several methods (such as using trusts) can provide tax advantages as well as help the children fund a business purchase.
Obtaining a valuation in relation to your succession plan involves much more than establishing a sale price, transitioning ownership (or selling the company), and sauntering off to retirement. The details are many and potential conflicts abundant. Let us help you anticipate and manage these complexities to ensure a smooth succession.
Which tax-advantaged health account should be part of your benefits package?
On October 12, an executive order was signed that, among other things, seeks to expand Health Reimbursement Arrangements (HRAs). HRAs are just one type of tax-advantaged account you can provide your employees to help fund their health care expenses. Also available are Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). Which one should you include in your benefits package? Here’s a look at the similarities and differences:
HRA. An HRA is an employer-sponsored account that reimburses employees for medical expenses. Contributions are excluded from taxable income and there’s no government-set limit on their annual amount. But only you as the employer can contribute to an HRA; employees aren’t allowed to contribute.
Also, the Affordable Care Act puts some limits on how HRAs can be offered. The October 12 executive order directs the Secretaries of the Treasury, Labor, and Health and Human Services to consider proposing regs or revising guidance to “increase the usability of HRAs,” expand the ability of employers to offer HRAs to their employees, and “allow HRAs to be used in conjunction with nongroup coverage.”
HSA. If you provide employees a qualified high-deductible health plan (HDHP), you can also sponsor HSAs for them. Pretax contributions can be made by both you and the employee. The 2017 contribution limits (employer and employee combined) are $3,400 for self-only coverage and $6,750 for family coverage. The 2018 limits are $3,450 and $6,900, respectively. Plus, for employees age 55 or older, an additional $1,000 can be contributed.
The employee owns the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and employees can carry over a balance from year to year.
FSA. Regardless of whether you provide an HDHP, you can sponsor FSAs that allow employees to redirect pretax income up to a limit you set (not to exceed $2,600 in 2017 and expected to remain the same for 2018). You, as the employer, can make additional contributions, generally either by matching employer contributions up to 100% or by contributing up to $500. The plan pays or reimburses employees for qualified medical expenses.
What employees don’t use by the plan year’s end, they generally lose — though you can choose to have your plan allow employees to roll over up to $500 to the next year or give them a 2 1/2-month grace period to incur expenses to use up the previous year’s contribution. If employees have an HSA, their FSA must be limited to funding certain “permitted” expenses.
If you’d like to offer your employees a tax-advantaged way to fund health care costs but are unsure which type of account is best for your business and your employees, please contact us. We can provide the additional details you need to make a sound decision.
4 ways to get (and keep) your business data in order
With so much data flying around these days, it’s easy for a company of any size to get overwhelmed. If something important falls through the cracks, say a contract renewal or outstanding bill, your financial standing and reputation could suffer. Here are four ways to get — and keep — your business data in order:
1. Simplify, simplify, simplify. Look at your data in broad categories and see whether and how you can simplify things. Sometimes refiling documents under basic designations such as “vendors,” “leases” and “employee contracts” can help you get better perspective on your information. In other cases, you may need to realign your network or file storage to more closely follow how your company operates today.
2. Implement a data storage policy. A formal effort toward getting organized can help you target what’s wrong and determine what to do about it. In creating this policy, spell out which information you must back up, how much money you’ll spend on this effort, how often backups must occur and where you’ll store backups.
3. Reconsider the cloud. Web-based data storage, now commonly known as “the cloud,” has been around for years. It allows you to store files and even access software on a secure remote server. Your company may already use the cloud to some extent. If so, review how you’re using the cloud, whether your security measures are adequate, and if now might be a good time to renegotiate with your vendor or find a new one.
4. Don’t forget about email. Much of your company’s precious data may not be in files or spreadsheets but in emails. Although it’s been around for decades, this medium has grown in significance recently as email continues to play a starring role in many legal proceedings. If you haven’t already, establish an email retention policy to specify everyone’s responsibilities when it comes to creating, organizing and deleting (or not deleting) emails.
Virtually every company operating today depends on data, big and small, to compete in its marketplace and achieve profitability. Please contact us regarding cost-effective ways to store, organize and deploy your company’s mission-critical information.
Accelerate your retirement savings with a cash balance plan
Business owners may not be able to set aside as much as they’d like in tax-advantaged retirement plans. Typically, they’re older and more highly compensated than their employees, but restrictions on contributions to 401(k) and profit-sharing plans can hamper retirement-planning efforts. One solution may be a cash balance plan.
Defined benefit plan with a twist
The two most popular qualified retirement plans — 401(k) and profit-sharing plans — are defined contribution plans. These plans specify the amount that goes into an employee’s retirement account today, typically a percentage of compensation or a specific dollar amount.
In contrast, a cash balance plan is a defined benefit plan, which specifies the amount a participant will receive in retirement. But unlike traditional defined benefit plans, such as pensions, cash balance plans express those benefits in the form of a 401(k)-style account balance, rather than a formula tied to years of service and salary history.
The plan allocates annual “pay credits” and “interest credits” to hypothetical employee accounts. This allows participants to earn benefits more uniformly over their careers, and provides a clearer picture of benefits than a traditional pension plan.
Greater savings for owners
A cash balance plan offers significant advantages for business owners — particularly those who are behind on their retirement saving and whose employees are younger and lower-paid. In 2017, the IRS limits employer contributions and employee deferrals to defined contribution plans to $54,000 ($60,000 for employees age 50 or older). And nondiscrimination rules, which prevent a plan from unfairly favoring highly compensated employees (HCEs), can reduce an owner’s contributions even further.
But cash balance plans aren’t bound by these limits. Instead, as defined benefit plans, they’re subject to a cap on annual benefit payouts in retirement (currently, $216,000), and the nondiscrimination rules require that only benefits for HCEs and non-HCEs be comparable.
Contributions may be as high as necessary to fund those benefits. Therefore, a company may make sizable contributions on behalf of owner/employees approaching retirement (often as much as three or four times defined contribution limits), and relatively smaller contributions on behalf of younger, lower-paid employees.
There are some potential risks. The most notable one is that, unlike with profit-sharing plans, you can’t reduce or suspend contributions during difficult years. So, before implementing a cash balance plan, it’s critical to ensure that your company’s cash flow will be steady enough to meet its funding obligations.
Right for you?
Although cash balance plans can be more expensive than defined contribution plans, they’re a great way to turbocharge your retirement savings. We can help you decide whether one might be right for you.
As we head toward year end, your company may be reviewing its business strategy for 2017 or devising plans for 2018. As you do so, be sure to give some attention to the prices you’re asking for your existing products and services, as well as those you plan to launch in the near future.
The cost of production is a logical starting point. After all, if your prices don’t exceed costs over the long run, your business will fail. This critical connection demands regular re-evaluation.
One simple way to assess costs is to apply a desired “markup” percentage to your expected costs. For example, if it costs $1 to produce a widget and you want to achieve a 10% return, your selling price should be $1.10.
Of course, you’ve got to factor more than just direct materials and labor into the equation. You should consider all of the costs of producing, marketing and distributing your products, including overhead expenses. Some indirect costs, such as sales commissions and shipping, vary based on the number of units you sell. But most are fixed in the current accounting period, including rent, research and development, depreciation, insurance, and selling and administrative salaries.
“Product costing” refers to the process of spreading these variable and fixed costs over the units you expect to sell. The trick to getting this allocation right is to accurately predict demand.
Deliberate over demand
Changing demand is an important factor to consider. Incurring higher costs in the short term may be worth it if you reasonably believe that rising customer demand will eventually enable you to cover expenses and turn a profit. In other words, rising demand can reduce per-unit costs and increase margin.
Determining the number of units people will buy is generally easier when you’re:
• Re-evaluating the prices of existing products that have a predictable sales history, or • Setting the price for a new product that’s similar to your existing products.
Forecasting demand for a new product that’s a lot different from your current product line can be extremely challenging — especially if there’s nothing like it in the marketplace. But if you don’t factor customer and market considerations into your pricing decisions, you could be missing out on money-making opportunities.
Check your wiring
Like an electrical outlet and plug, the connection between costs and pricing can grow loose over time and sometimes short out completely. Don’t risk operating in the dark. Our firm can help you make pricing decisions that balance ambitiousness and reason.
Timing strategies could become more powerful in 2017, depending on what happens with tax reform
Projecting your business income and expenses for this year and next can allow you to time when you recognize income and incur deductible expenses to your tax advantage. Typically, it’s better to defer tax. This might end up being especially true this year, if tax reform legislation is signed into law.
Timing strategies for businesses
Here are two timing strategies that can help businesses defer taxes:
1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.
Potential impact of tax reform
These deferral strategies could be particularly powerful if tax legislation is signed into law this year that reflects the nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27.
Among other things, the framework calls for reduced tax rates for corporations and flow-through entities as well as the elimination of many business deductions. If such changes were to go into effect in 2018, there could be a significant incentive for businesses to defer income to 2018 and accelerate deductible expenses into 2017.
But if you think you’ll be in a higher tax bracket next year (such as if your business is having a bad year in 2017 but the outlook is much brighter for 2018 and you don’t expect that tax rates will go down), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but might save you tax over the two-year period.
Because of tax law uncertainty, in 2017 you may want to wait until closer to the end of the year to implement some of your year-end tax planning strategies. But you need to be ready to act quickly if tax legislation is signed into law. So keep an eye on developments in Washington and contact us to discuss the best strategies for you this year based on your particular situation.
From the baseball field to the boardroom, statistical analysis has changed various industries nationwide. With proper preparation and guidance, business owners can have at their fingertips a wealth of stats-based insight into how their companies are performing — far beyond the bottom line on an income statement.
The metrics in question are commonly referred to as key performance indicators (KPIs). These formula-based measurements reveal the trends underlying a company’s operations. And seeing those trends can help you find the right path forward and give you fair warning when you’re headed in the wrong direction.
A good place to start is with some of the KPIs that apply to most businesses. For example, take current ratio (current assets / current liabilities). It can help you determine your capacity to meet your short-term liabilities with cash and other relatively liquid assets.
Another KPI to regularly calculate is working capital turnover ratio (revenue / average working capital). Many companies struggle with temperamental cash flows that can wax and wane based on buying trends or seasonal fluctuations. This ratio shows the amount of revenue supported by each dollar of net working capital used.
Debt is also an issue for many businesses. You can monitor your debt-to-equity (total debt / net worth) ratio to measure your degree of leverage. The higher the ratio, the greater the risk that creditors are assuming and the tougher it may be to obtain financing.
There are many other KPIs we could discuss. The exact ones you should look at depend on the size of your company and the nature of its work. Please contact our firm for help choosing the right KPIs and calculating them accurately.
Hire your children to save taxes for your business and your family
It can be difficult in the current job market for students and recent graduates to find summer or full-time jobs. If you’re a business owner with children in this situation, you may be able to provide them with valuable experience and income while generating tax savings for both your business and your family overall.
By shifting some of your business earnings to a child as wages for services performed by him or her, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s wages must be reasonable.
Here’s an example of how this works: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old son to help with office work full-time during the summer and part-time into the fall. The son earns $6,100 during the year and doesn’t have any other earnings.
The business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his son, who can use his $6,350 standard deduction (for 2017) to completely shelter his earnings. The business owner can save an additional $2,178 in taxes if he keeps his son on the payroll longer and pays him an additional $5,500. The son can shelter the additional income from tax by making a tax-deductible contribution to his own IRA.
Family taxes will be cut even if the employee-child’s earnings exceed his or her standard deduction and IRA deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.
Saving employment taxes
If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes. And a similar exemption applies for federal unemployment tax (FUTA) purposes. It exempts earnings paid to a child under age 21 while employed by his or her parent.
If you have questions about how these rules apply in your particular situation or would like to learn about other family-related tax-saving strategies, contact us.
From the time a business opens its doors, the owner is told “cash is king.” It may seem to follow that having a very large amount of cash could never be a bad thing. But, the truth is, a company that’s hoarding excessive cash may be doing itself more harm than good.
What’s the harm in stockpiling cash? Granted, an extra cushion helps weather downturns or fund unexpected repairs and maintenance. But cash has a carrying cost — the difference between the return companies earn on their cash and the price they pay to obtain cash.
For instance, checking accounts often earn no interest, and savings accounts typically generate returns below 2% and in many cases well below 1%. Most cash hoarders simultaneously carry debt on their balance sheets, such as equipment loans, mortgages and credit lines. Borrowers are paying higher interest rates on loans than they’re earning from their bank accounts. This spread represents the carrying cost of cash.
A variety of possibilities
What opportunities might you be missing out on by neglecting to reinvest a cash surplus to earn a higher return? There are a variety of possibilities. You could:
Acquire a competitor (or its assets). You may be in a position to profit from a competitor’s failure. When expanding via acquisition, formal due diligence is key to avoiding impulsive, unsustainable projects.
Invest in marketable securities. As mentioned, cash accounts provide nominal return. More aggressive businesses might consider mutual funds or diversified stock and bond portfolios. A financial planner can help you choose securities. Some companies also use surplus cash to repurchase stock — especially when minority shareholders routinely challenge the owner’s decisions.
Repay debt. This reduces the carrying cost of cash reserves. And lenders look favorably upon borrowers who reduce their debt-to-equity ratios.
Optimal cash balance
Taking a conservative approach to saving up cash isn’t necessarily wrong. But every company has an optimal cash balance that will help safeguard cash flow while allocating dollars for smart spending. Our firm can assist you in identifying and maintaining this mission-critical amount.
Don’t let “founder’s syndrome” impede your succession plan
Are you the founder of your company? If so, congratulations — you’ve created something truly amazing! And it’s more than understandable that you’d want to protect your legacy: the company you created.
But, as time goes on, it becomes increasingly important that you give serious thought to a succession plan. When this topic comes up, many business owners show signs of suffering from an all-too-common affliction.
In the nonprofit sphere, they call it “founder’s syndrome.” The term refers to a set of “symptoms” indicating that an organization’s founder maintains a disproportionate amount of power and influence over operations. Although founder’s syndrome is usually associated with not-for-profits, it can give business owners much to think about as well. Common symptoms include:
• Continually making important decision without input from others, • Recruiting or promoting employees who will act primarily out of loyalty to the founder, • Failing to mentor others in leadership matters, and • Being unwilling to begin creating a succession plan.
It’s worth noting that a founder’s reluctance to loosen his or her grip isn’t necessarily because of a power-hungry need to control. Many founders simply fear that the organization — whether nonprofit or business — would falter without their intensive oversight.
The good news is that founder’s syndrome is treatable. The first step is to address whether you yourself are either at risk for the affliction or already suffering from it. Doing so can be uncomfortable, but it’s critical. Here are some advisable actions:
Form a succession plan. This is a vital measure toward preserving the longevity of any company. If you’d prefer not to involve anyone in your business just yet, consider a professional advisor or consultant.
Prepare for the transition, no matter how far away. Remember that a succession plan doesn’t necessarily spell out the end of your involvement in the company. It’s simply a transformation of role. Your vast knowledge and experience needs to be documented so the business can continue to benefit from it.
Ask for help. Your management team may need to step up its accountability as the succession plan becomes more fully formed. Managers must educate themselves about the organization in any areas where they’re lacking.
In addition to transferring leadership responsibilities, there’s the issue of transferring your ownership interests, which is also complex and requires careful planning.
Blood, sweat and tears
You’ve no doubt invested the proverbial blood, sweat and tears into launching your business and overseeing its growth. But planning for the next generation of leadership is, in its own way, just as important as the company itself. Let us help you develop a succession plan that will help ensure the long-term well-being of your business.
“We love our customers!” Every business owner says it. But all customers aren’t created equal, and it’s in your strategic interest to know which customers are really strengthening your bottom line and by how much.
Sorting out the data
If your business systems track individual customer purchases, and your accounting system has good cost accounting or decision support capabilities, determining individual customer profitability will be simple. If you have cost data for individual products, but not at the customer level, you can manually “marry” product-specific purchase history with the cost data to determine individual customer value.
For example, if a customer purchased 10 units of Product 1 and five units of Product 2 last year, and Product 1 had a margin of $100 and Product 2 had a margin of $500, the total margin generated by the customer would be $3,500. Be sure to include data from enough years to even out normal fluctuations in purchases.
Don’t maintain cost data? No worries; you can sort the good from the bad by reviewing customer purchase volume and average sale price. Often, such data can be supplemented by general knowledge of the relative profitability of different products. Be sure that sales are net of any returns.
Incorporating indirect costs
High marketing, handling, service or billing costs for individual customers or segments of customers can have a significant effect on their profitability even if they purchase high-margin products. If you use activity-based costing, your company will already have this information allocated accurately.
If you don’t track individual customers, you can still generalize this analysis to customer segments or products. For instance, if a group of customers is served by the same distributor, you can estimate the resources used to support that channel and their associated costs. Or, you can have individual departments track employees’ time by customer or product for a specific period.
Knowing their value
There’s nothing wrong with loving your customers. But it’s even more important to know them and how much value they’re contributing to your profitability from operating period to operating period. Contact us for help breaking down the numbers.
4 tough questions to ask before expanding to a new location
Is business going so well that you’re thinking about adding another location? If this is the case, congratulations! But before you start planning the ribbon-cutting ceremony, take a step back and ask yourself some tough questions about whether a new location will grow your company — or stretch it too thin. Here are four to get you started:
1. What’s driving your interest in another location? It’s important to articulate specifically how the new location will help your business move toward its long-term goals. Expanding simply because the time seems right isn’t a compelling enough reason to take on the risk.
2. How solidly is your current location performing? Your time and attention will be diverted while you get the second location up and running. Yet you’ll need to maintain the revenue your first location is generating — especially until the second one is earning enough to support itself. So your original operation needs to be able to operate well with minimal management guidance.
3. How strong is the location you’re considering? Just as you presumably did with your first location, ensure the surrounding market is strong enough to support your company. The setting should complement your business, not pose potentially insurmountable challenges.
Also consider proximity to competitors. In some cases, such as a cluster of restaurants in a small downtown, proximity can help. The area becomes known as a destination for those seeking a night out. But too many competitors could leave you fighting with multiple other businesses for the same small group of customers.
4. Can you expand in other ways that are less costly and risky? You might be able to boost sales by adding inventory or extending hours at your current location. Another option is to revamp your website or mobile app to encourage more online sales.
Investments such as these would likely require a fraction of the dollars needed to open another physical location. Then again, a successful new site could mean a substantial inflow of revenue and additional market visibility. Let us help you crunch the numbers that will lead you to the right decision.
2 ways spouse-owned businesses can reduce their self-employment tax bill
If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)
For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2017. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250.
Fortunately, there are ways spouse-owned businesses can lower their combined SE tax hit. Here are two.
1. Establish that you don’t have a spouse-owned partnership
While the IRS creates the impression that involvement by both spouses in an unincorporated business automatically creates a partnership for federal tax purposes, in many cases, it will have a tough time making the argument — especially when:
The spouses have no discernible partnership agreement, and
The business hasn’t been represented as a partnership to third parties, such as banks and customers.
If you can establish that your business is a sole proprietorship (or a single-member LLC treated as a sole proprietorship for tax purposes), only the spouse who is considered the proprietor owes SE tax.
Let’s assume the same facts as in the previous example, except that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2017, the SE tax bill is $23,023 [($127,200 × 15.3%) + ($122,800 × 2.9%)]. That’s much less than the combined SE tax bill from the first example ($38,250).
2. Establish that you don’t have a 50/50 spouse-owned partnership
Even if you do have a spouse-owned partnership, it’s not a given that it’s a 50/50 one. Your business might more properly be characterized as owned, say, 80% by one spouse and 20% by the other spouse, because one spouse does much more work than the other.
Let’s assume the same facts as in the first example, except that your business is an 80/20 spouse-owned partnership. In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000. For 2017, the SE tax bill for the 80% spouse is $21,573 [($127,200 × 15.3%) + ($72,800 × 2.9%)], and the SE tax bill for the 20% spouse is $7,650 ($50,000 × 15.3%). The combined total SE tax bill is only $29,223 ($21,573 + $7,650).
More-complicated strategies are also available. Contact us to learn more about how you can reduce your spouse-owned business’s SE taxes.
2017 Q4 tax calendar: Key deadlines for businesses and other employers
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
If a calendar-year C corporation that filed an automatic six-month extension:
File a 2016 income tax return (Form 1120) and pay any tax, interest and penalties due.
Make contributions for 2016 to certain employer-sponsored retirement plans.
Report income tax withholding and FICA taxes for third quarter 2017 (Form 941) and pay any tax due. (See exception below.)
Report income tax withholding and FICA taxes for third quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.
If a calendar-year C corporation, pay the fourth installment of 2017 estimated income taxes.
Listening to your customers by tracking lost sales
“Sorry, we don’t carry that item.” Or perhaps, “No, that’s not part of our service package.” How many times a year do your salespeople utter these words or ones like them? The specific number is critical because, if you don’t know it, you could be losing out on profit potential.
Although you have to focus on your strengths and not get too far afield, your customers may be crying out for a new product or service. And among the best ways to hear them is to track lost sales data and decipher the message.
3 steps to success
A successful lost sales tracking effort generally involves three steps:
1. Get the data. Ask your sales associates to log every customer request and to question customers further to get at the heart of what they need. Train sales associates to record information such as the date of request, item requested and the reason the item was unavailable.
2. Crunch the numbers. Calculate how much you could sell if you had the new items in stock or offered the additional service. Naturally, you’ll need to bear in mind that meeting customer demand might involve spending money on equipment or personnel to expand your product or service line. Key data points to examine include:
• Estimated potential purchases,
• Potential sales losses, and
• Estimated gross profit losses.
Develop a report that lays out this and other information, so you can see it in black and white.
3. Talk about it. Run a lost sales report monthly and discuss the results with your management team. Seek to establish consensus on where your best strategic opportunities lie. Sometimes you’ll want to be patient and let trends develop before acting. Other times, you might want to strike early to seize an underdeveloped market.
A better grip
Lost sales are lost opportunities. By getting a better grip on your customers’ needs, you can build a stronger bottom line. Please contact us for help creating and maintaining a lost sales tracking system that best suits your company’s distinctive needs.
As a business evolves, so must its compensation strategy. Hopefully, your company is growing — perhaps adding employees or promoting staff members who are key to your success. But other things can spur the need to fine-tune your compensation strategy as well, such as economic changes or the rise of an intense competitor. A goal for many businesses is to provide equitable compensation.
Do your research
One aspect of equitable compensation is external equity; in other words, making sure compensation is in alignment with industry or regional norms. The U.S. Department of Labor and Bureau of Labor Statistics have a wealth of comparable data on their Web sites (dol.gov and stats.bls.gov, respectively). You might also consult with a professional recruiting firm, some of which offer free or low-cost compensation data.
Granted, job roles within smaller companies make it difficult to directly compare position responsibilities in the market and get reliable salary comparison data. A company’s degree of competitiveness and ability to pay what the market bears can also be challenging.
Yet, to achieve and maintain external equity, you must consider the going market rate. Especially in a business where employees believe they can receive better pay for doing the same job elsewhere, workers have little incentive to remain with an employer — therefore, you must be concerned with external equity.
Pinpoint a range
From both a marketplace perspective and an internal company viewpoint, it’s important to group together jobs of similar value. This also gets at the concept of internal equity, which essentially means that employees feel they’re being paid fairly in terms of the value of their work as well as compared to what others in the company who have equivalent responsibilities are paid.
Once you’ve grouped jobs together, develop competitive salaries around the market rates for those positions. A typical salary range consists of a minimum, a maximum and a midpoint (or control point).
The minimum is the lowest competitive rate for jobs within that range and normally applies to less experienced staff. The maximum represents the highest competitive rate for jobs in a given range. This is typically a premium rate for “star” employees and industry veterans.
The midpoint represents the competitive market rate for fully performing workers in jobs assigned to that range. Think of it as a guideline for slotting various positions and individuals in appropriate salary ranges.
Find the right approach
These are just a few concepts involved with establishing the right approach to compensation. Please contact us for help with your company’s specific needs.
Make sure your company is prepared for any disaster
What could stop your company from operating for a day, a month or a year? A flood or fire? Perhaps a key supplier shuts down temporarily or permanently. Or maybe a hacker or technical problem crashes your website or you suddenly lose power. Whatever the potential cause might be, every business needs a disaster recovery plan.
Get started by brainstorming as many scenarios as possible that could devastate your business. The operative word there is “your.” Every company faces distinctive threats related to its size, location(s), and products or services.
There are some constants to consider, however. Seek out alternative suppliers who could fill in for your current ones if necessary. Moreover, identify a strong IT consulting firm with disaster recovery capabilities and have them a phone call away.
The right voice
Another critical factor during and after a crisis is communication, both internal and external. You and most of your management team will need to concentrate on restoring operations, so appoint one manager or other employee with the necessary skills to keep stakeholders abreast of your recovery progress. These parties include:
• Staff members and their families,
• Banks and other financial stakeholders, and
• Local authorities and community leaders (as appropriate).
He or she should be prepared to spread the word through channels such as your company’s voice mail, email, website, and even traditional and social media.
Whatever you do, don’t expect to create a disaster recovery plan and then toss it on a shelf. Revisit the plan at least annually, looking for shortcomings.
You’ll also want to keep your plan fresh in the minds of your employees. Be sure that everyone — including new hires — knows exactly what to do by holding regular meetings on the subject or even conducting an occasional surprise drill. And be prepared to coordinate with fire, police and government officials who might be able to offer assistance during a catastrophe.
Thoughts and concepts
These are just a few thoughts and concepts to consider when designing, implementing and updating your company’s disaster recovery plan. Our firm can help you identify both risks and cost-effective ways to safeguard your employees and assets.
Every business has some degree of ups and downs during the year. But cash flow fluctuations are much more intense for seasonal businesses. So, if your company defines itself as such, it’s important to optimize your operating cycle to anticipate and minimize shortfalls.
A high-growth example
To illustrate: Consider a manufacturer and distributor of lawn-and-garden products such as topsoil, potting soil and ground cover. Its customers are lawn-and-garden retailers, hardware stores and mass merchants.
The company’s operating cycle starts when customers place orders in the fall — nine months ahead of its peak selling season. So the business begins amassing product in the fall, but curtails operations in the winter. In late February, product accumulation continues, with most shipments going out in April.
At this point, a lot of cash has flowed out of the company to pay operating expenses, such as utilities, salaries, raw materials costs and shipping expenses. But cash doesn’t start flowing into the company until customers pay their bills around June. Then, the company counts inventory, pays remaining expenses and starts preparing for the next year. Its strategic selling window — which will determine whether the business succeeds or fails — lasts a mere eight weeks.
The power of projections
Sound familiar? Ideally, a seasonal business such as this should stockpile cash received at the end of its operating cycle, and then use those cash reserves to finance the next operating cycle. But cash reserves may not be enough — especially for high-growth companies.
So, like many seasonal businesses, you might want to apply for a line of credit to avert potential shortfalls. To increase the chances of loan approval, compile a comprehensive loan package, including historical financial statements and tax returns, as well as marketing materials and supplier affidavits (if available).
More important, draft a formal business plan that includes financial projections for next year. Some companies even project financial results for three to five years into the future. Seasonal business owners can’t rely on gut instinct. You need to develop budgets, systems, processes and procedures ahead of the peak season to effectively manage your operating cycle.
Seasonal businesses face many distinctive challenges. Please contact our firm for assistance overcoming these obstacles and strengthening your bottom line.
Many business owners and executives would like to save more money for retirement than they’re allowed to sock away in their 401(k) plan. For 2017, the annual elective deferral contribution limit for a 401(k) is just $18,000, or $24,000 if you’re 50 years of age or older.
This represents a significantly lower percentage of the typical owner-employee’s or executive’s salary than the percentage of the average employee’s salary. Therefore, it can be difficult for these highly compensated employees to save enough money to maintain their current lifestyle in retirement. That’s where a nonqualified deferred compensation (NQDC) plan comes in.
NQDC plans enable owner-employees, executives and other highly paid key employees to significantly boost their retirement savings without running afoul of the nondiscrimination rules under the Employee Retirement Income Security Act of 1974 (ERISA). These rules apply to qualified plans, such as 401(k)s, and prevent highly compensated employees from benefiting disproportionately in comparison to rank-and-file employees.
NQDC plans are essentially agreements that the business will pay out at some future time, such as at retirement, compensation that participants earn now. Not only do such plans not have to comply with ERISA nondiscrimination rules, but they aren’t subject to the IRS contribution limits and distribution rules that apply to qualified retirement plans. So businesses can tailor benefit amounts, payment terms and conditions to the participants’ specific needs.
There are several types of NQDC plans. Among the most common are:
The key to an NQDC plan: Because the promised compensation hasn’t been transferred to the participants, it’s not yet counted as earned income — and therefore it isn’t currently taxed. This allows the compensation to grow tax-deferred.
Naturally, there are challenges to consider. NQDC plans are subject to strict rules under Internal Revenue Code Sections 409A and 451, and plan loans generally aren’t allowed. But attracting and retaining top executive talent is a business imperative, and an NQDC plan can help you win the talent race with a powerful benefits package. Please contact our firm for further details.
You don’t have to take business insurance costs sitting down
Adequate insurance coverage is, in many cases, a legal requirement for a business. Even if it’s not for your company, proper coverage remains a risk management imperative. But that doesn’t mean you have to take high insurance costs sitting down.
There are a wide variety of ways you can decrease insurance costs. Just two examples are staying on top of facilities maintenance and improving the safety of those who work there.
For starters, have an electrician check your facility. Can the building’s electrical system handle the load at peak times? Are there circuits at risk of being overloaded?
Also look at installing a sprinkler system (or upgrading your existing system if needed). Some insurance carriers provide premium discounts for installing fire prevention equipment such as sprinklers. And check your fire extinguishers. Are they well maintained and the right type? The type of extinguisher you need for an electrical fire isn’t the one you need for a kitchen grease fire.
Many municipalities offer free or low-cost fire safety inspection services. Your local fire department may be able to recommend steps that not only reduce hazards, but also reduce insurance premiums.
And don’t forget to consider how much maintenance you’re actually obligated to perform. Renting or leasing real estate, rather than owning it directly, is often less costly because the property owner may be responsible for much of the upkeep. Ownership has its advantages, of course, but it also brings potential liability with it that has to be insured against.
Employee injuries can drive up insurance and workers’ compensation expenses. Inspect your floors and other high-traffic areas for slippery spots, lack of nonslip surfacing, ice buildup or other hazards. Also eliminate clutter, poor carpet installation, loose steps and handrails, and anything else that could potentially generate a slip and fall claim.
Additionally, consider asking the Occupational Safety and Health Administration (OSHA) for a courtesy inspection. Doing so may help you avoid potential penalties as well as prevent injuries and other incidents that would raise your premiums.
Opportunities for savings
Yes, buying the right array of insurance policies is a cost of doing business. But you may have more control over these expenses than you think. We can help you assess your insurance costs and identify opportunities for savings.
Why business owners should regularly upgrade their accounting software
Many business owners buy accounting software and, even if the installation goes well, eventually grow frustrated when they don’t get the return on investment they’d expected. There’s a simple reason for this: Stuff changes.
Technological improvements are occurring at a breakneck speed. So yesterday’s cutting-edge system can quickly become today’s sluggishly performing albatross. And this isn’t the only reason to regularly upgrade your accounting software. Here are two more to consider.
1. Cleaning up
You’ve probably heard that old tech adage, “garbage in, garbage out.” The “garbage” referred to is bad data. If inaccurate or garbled information goes into your system, the reports coming out of it will be flawed. And this is a particular danger as software ages.
For example, you may be working off of inaccurate inventory counts or struggling with duplicate vendor entries. On a more serious level, your database may store information that reflects improperly closed quarters or unbalanced accounts because of data entry errors.
A regular implementation of upgraded software should uncover some or, one hopes, all of such problems. You can then clean up the bad data and adjust entries to tighten the accuracy of your accounting records and, thereby, improve your financial reporting.
2. Getting better
Neglecting to regularly upgrade or even replace your accounting software can also put you at risk of missing a major business-improvement opportunity. When implementing a new system, you’ll have the chance to enhance your accounting procedures. You may be able to, for instance, add new code groups that allow you to manage expenses much more efficiently and closely.
Other opportunities for improvement include optimizing your chart of accounts and strengthening your internal controls. Again, to obtain these benefits, you’ll need to take a slow, patient approach to the software implementation and do it often enough to prevent outdated ways of doing things from getting the better of your company.
Choosing the best
These days, every business bigger than a lemonade stand needs the best accounting software it can afford to buy. Our firm can help you set a budget and choose the product that best fits your current needs.