The Inventory Balancing Act
Inventory is a critical component of most businesses’ Balance Sheet, but managing inventory effectively is often a challenging balancing act. A business needs to keep enough inventory on hand to meet its customers’ needs – but holding on to too much inventory can be costly. What are some smart ways to manage inventory more efficiently, without compromising revenue and customer service?
Reliable counts
Effective inventory management starts with a physical inventory count. An accurate count of inventory provides a snapshot of how much your company has on hand at any one point in time. This is easier said than done. The value of inventory is always in flux, as work is performed and items are delivered or shipped. To capture a static value as of the reporting day, companies may “freeze” business operations while counting inventory. For larger organizations with multiple locations, it may not be possible to count everything at once; so, they often break down their counts by physical location.
Accuracy is essential to calculating cost of goods sold, and to identify and remedy discrepancies between a physical count and inventory records. And there are always discrepancies. Errors made in data entry, shipping errors, inaccurately labeled products, theft, and sometimes even intentional misstatements are all common factors that can throw off an accurate inventory count.
Benchmarking studies
After a business has calculated its inventory as accurately as possible it can compare its inventory costs to those of other companies in its industry. Benchmarking is the process of measuring key business metrics and comparing them against other companies in the industry to see how the business is faring and how to improve performance. Trade associations often publish benchmarks for gross margin, net profit margin, or days in inventory, and a business should strive to meet — or beat — industry standards.
Efficiency measures
What can you do to improve your inventory metrics? The composition of your company’s cost of goods will guide you as to where to cut and what to modify. Consider the carrying costs of inventory, such as storage, insurance, obsolescence, and pilferage. You may be able to improve margins by negotiating a net lease for your warehouse, installing antitheft devices, or opting for less expensive insurance coverage.
To cut your days-in-inventory ratio, compute product-by-product margins. You might stock more products with high margins and high demand — and less of everything else. Consider returning excessive supplies of slow-moving materials or products to your suppliers, whenever possible. In today’s tight labor market, it may be difficult to reduce labor costs. But it may be possible to renegotiate prices with suppliers.
Inventorying your inventory
Management usually directs its greatest efforts into the growth of its business, which is appropriate; but this focus often puts inventory management on the back burner. This can be a costly mistake. Speak to your accounting professional for help in researching industry benchmarks and calculating inventory ratios to help minimize the guesswork in managing your inventory.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
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A Look at Some of This Year’s Dirty Dozen
The IRS’ annual “Dirty Dozen” list informs taxpayers about current tax scams, schemes, and dodges that could put their money, personal data, and security at risk. The purpose of the IRS’ Dirty Dozen is to warn taxpayers away from tax traps designed for them by corrupt promoters and shifty tax practitioners.
What schemes made the list for 2024? Here are some areas of impropriety that the IRS wants you to know about:
Social media: Not the ideal place for solid tax advice
Want some bad tax advice? There’s a lot to be found on social media. Scouring social media for answers to your tax problems could lead to identity theft and onerous tax debts.
Two of the recent schemes circulating online relate to the misuse of your W-2 wage information. One scheme involves encouraging people to use Form 7202 (Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals) to claim a credit based on income earned as an employee and not as a self-employed individual. This credit was valid for Covid years 2020 and 2021 but is no longer operative. The second scheme encourages the invention of fictional household employees and the filing of Schedule H’s (Form 1040), Household Employment Taxes, to claim a refund based on false sick and family medical leave wages that they never paid. The IRS is on the lookout for these deceptions and will work with payroll companies, employers, and the Social Security Administration to verify W-2 information.
Beware of ghost preparers
“Ghost preparers” are a common scourge that emerges during tax season. These are unqualified, and sometimes unscrupulous preparers, without valid preparer tax identification numbers (PTINs), who offer filing services. They will often encourage taxpayers to take advantage of tax credits and benefits for which they do not qualify.
“By trying to make a fast buck, these scammers prey on seniors and underserved communities, enticing them with bigger refunds by including bogus tax credit claims or making up income or deductions,” says IRS Commissioner Danny Werfel. “But after the tax return is filed, these ghost preparers disappear, leaving the taxpayer to deal with consequences ranging from a stolen refund to follow-up action from the IRS.”
The IRS encourages taxpayers to check their tax preparer’s credentials and qualifications. A qualified preparer will always ask for the taxpayer’s receipts, records, and tax forms to determine his or her total income, and proper deductions and tax credits. Stay on top of your own data; an unethical tax preparer may try to boost your refund by taking false deductions or creating bogus income to claim more tax credits. E-filing a tax return using a pay stub instead of a Form W-2 is against IRS e-file rules and should serve as a bright red flag to the taxpayer.
The IRS warns taxpayers to beware of preparers that utilize shady payment terms like ‘cash-only’ payments or fees based on a percentage of the taxpayer’s refund. Taxpayers should also be suspicious if a tax preparer encourages them to have their refund deposited with them, instead of depositing it directly into their own personal bank account.
Beware of offer in compromise “mills”
Internal Revenue Service also renewed its warning to taxpayers regarding Offer in Compromise (OIC) “mills”. These are the unscrupulous preparers you’ve heard all over the media promising to make your tax debts disappear.
“These mills try to pull in steep fees while raising false expectations and exploiting vulnerable individuals with promises that tax debt can magically disappear,” says IRS Commissioner Danny Werfel.
The IRS’ Offer in Compromise is a viable option for the taxpayer who can’t meet his tax obligations, provided that he is able to justify financial hardship. The IRS evaluates every OIC application on a case-by-case basis and considers each taxpayer’s unique circumstances, factoring in the taxpayer’s income, expenses, asset equity, future earning potential and ability to pay. Taxpayers must be able to support and document their claim and pay an application fee to start the process. To confirm eligibility and prepare a preliminary proposal, taxpayers can use the IRS’ online OIC Pre-Qualifier Tool found here: https://irs.treasury.gov/oic_pre_qualifier/
While the OIC offers a chance for negotiation with the IRS, allowing taxpayers to present reasons for their inability to pay their full tax debt, it is a complex and time-consuming procedure governed by IRS guidelines. Aggressively marketed OIC mills that promise to resolve outstanding tax debts for pennies on the dollar are deceptive. Taxpayers who fall victim to these schemes may find themselves in even worse financial situations, facing increased debt and legal repercussions.
If you need to reduce your tax liability, reach out to your accounting professional and steer clear of predatory OIC mills.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
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How Investors Look to Score Sweet Deals on Distressed Properties
If you’re a confident investor, this might be your moment. High interest rates, tighter financing options and general economic uncertainty have banks worried. Defaults and distressed properties are on the horizon, but surprisingly, banks seem more inclined to sell off their loan portfolios rather than dive into the real estate game. This may be the time for investors to move in and take advantage of bargains and buy-offs.
As the Federal Reserve continues to battle inflation, the resultant high rates have become worrisome to a broad range of investment sectors. The commercial real estate (CRE) industry’s $4.5 trillion of outstanding mortgage debt means that there’s what to worry about. According to research conducted by Ernst & Young LLP , the average reported mortgage rate exceeded the average reported property cap rate in Q4 2022 and Q2 2023. The last time this occurred was during the 2008 financial crisis.
The market’s high volume of distressed debt that is approaching maturity leaves investors operating in loss positions. According to Trepp, a financial data and analytics company that provides information, analytics, and technology solutions to the real estate industry, approximately $2.81 trillion of debt is coming due by 2028. It is likely that banks will be looking to generate workouts with needy borrowers to unload that debt.
Higher interest rates, stiffer financing options and high and rising operating costs have created a sluggish CRE market, negatively affecting real estate valuations. Despite the market’s uncertainty, experts agree that confident buyers, looking for long term results, may find worthwhile opportunities by buying out bank debt.
In an effort to minimize risk and avoid exposure banks are taking a more restrained approach and avoiding foreclosing and repossessions. They are opting instead to unload troubled assets by selling debt. This makes it a good time for the knowledgeable investor to step in. Because banks are looking to dispose of loan books, investors need to be prepared to act quickly. “Investors need to begin planning in advance for transactions in terms of how they plan to mobilize, how they get data, how they are going to underwrite the property cash flows and loan cash flows and ultimately arrive at a price for the portfolio,” says EY’s Kevin Hanrahan
How can the investor take up Hanrahan’s advice? Robust tech capabilities can ensure that the investor is able to pull data, and process and aggregate it swiftly, leaving a clear path for the underwriting process. An investor that can access his or her information efficiently will be able to jump into negotiations quickly with realistic pricing and valuation data.
The continued uncertainty in the real estate industry will be felt uniquely by banks, borrowers, and investors. Experts agree that, as banks make more moves to unload debt, and more loan books enter the marketplace, investors should make sure to be prepared to respond quickly to win deals.
Investors who’ve had the foresight to build relationships with banks, who are able to effectively rely on their technology to access data, and who have the know-how to use their data to calculate realistic pricing, will be in the driver’s seat when an opportunity presents itself. Do your homework and be there with them.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
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Maximize the QBI Deduction Before It’s Gone
The Qualified Business Income (QBI) deduction is a tax deduction that allows eligible self-employed individuals and small-business owners to deduct up to 20% of their qualified business income on their taxes. Eligible taxpayers can claim the deduction for tax years beginning after December 31, 2017, and ending on or before December 31, 2025 – so be sure to take advantage of this big tax saver while it’s around.
Deduction basics
Pass-through business entities report their federal income tax items to their owners, who then take them into account on their owner-level returns. So the QBI is written off at the owner level. It can be up to 20% of:
- QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, and
- QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation.
QBI is calculated by taking income and gains and reducing it by the following related deductions.
- deductible contributions to a self-employed retirement plan,
- the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums.
Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals.
Limitations
At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively.
If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.
The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business.
Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).
Unfavorable rules for certain businesses
For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB.
Other factors
There are other rules that apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately.
There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result.
Use it or potentially lose it
Time is running out for self-employed and business owners to take advantage of the QBI; and while Congress could extend it, it’s doubtful that they will. Maximizing the deduction for 2024 and 2025 is a goal worth pursuing. Speak to your accounting professional to find out more.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
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IRS Focuses on High-Income Non-Filers to Recover Millions in Unpaid Taxes
High-income earners who have not been filing their tax returns are in the crosshairs. A recent IRS news release announced an extensive plan to root out high-income taxpayers who have failed to file federal income tax returns in more than 125,000 instances since 2017. The agency estimates that this campaign will involve hundreds of millions of dollars in unpaid taxes.
The IRS hasn’t had the funds to pursue non-filers since 2016, but with the new Inflation Reduction Act, passed into law in 2022, and a directive from Treasury Secretary Janet Yellen, the IRS now has the resources to address this pervasive compliance issue – and it’s pulling out the stops.
At the start of March 2024, the IRS began its campaign by sending noncompliance letters to more than 25,000 people who earned more than $1 million per year, and 100,000 people with incomes falling between $400,000 and $1 million, who have failed to pay their taxes between 2017 and 2021. All of these cases have shown up on the IRS’ radar through third party sources – like Forms W-2 and 1099s – which show they have earned income but haven’t followed up with a filing. Since the IRS is not aware of any possible credits or deductions these filers may have, they have no clear estimate of the potential revenue that they hope to earn through this initiative. However, the third party information points to financial activity of more than $100 billion and the IRS estimates that hundreds of millions of dollars of unpaid taxes are in question. Conversely, because the IRS does not have all the details of the potential filings in hand, some of these non-filers may not owe the IRS anything at all and may even be due a refund.
The IRS expects taxpayers to take immediate action upon receipt of its compliance letter, formally known as the CP59 notice. Ignoring them means additional follow-up notices, higher penalties, and the potential for stronger enforcement measures. The IRS also advises non-compliant taxpayers to consult with their tax professionals for help filing late tax returns and paying delinquent tax, interest, and penalties. The failure-to-file penalty amounts to 5% of the amount owed every month – up to 25% of the tax bill.
For high-end non-filers, your time may be up. If the IRS’ manhunt applies to you, be sure to reach out to a tax professionals to refile, address your tax balance, and regroup.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
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