Trends – Page 5

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A business plan is not etched in stone and must be reviewed and updated continuously. Likewise, as with any planning, not everything will go according to plan. A business plan may have outlined the heirs that will inherit the business or the leaders in line for succession, but sometimes a company is sold as part of the larger estate plan. The business may be sold because the second generation doesn’t have the passion of the founder or the founder requires the funds as a nest egg upon retirement. As is the case when any business is sold, the retiring founder should properly prepare the company for sale.

The timing of a sale is critical. If the founder sells the company too early, then he or she can lose his/her occupation. Some people cannot imagine themselves being unemployed or no longer the owner of their company. However, if the business owner waits too long to sell the company, then his/her ambition may wane. The founder’s age or health may impact the company’s operations and profits, which will affect the value of the company at the time of sale.

The terms of the sale can also be negotiated to benefit the founder. The business can be sold in an all-cash deal, as part of a seller-financed transaction, and can include an earnout. An all-cash agreement may guarantee the business owner the purchase price of the company – but the due diligence process may be more burdensome. Moreover, the cash infusion should be invested and managed by a capable asset manager so that the funds remain for the duration of the retirement. A seller-financed transaction bears some risk to the seller but allows for a stream of cash flow with a fixed interest rate negotiated at the time of the sale. Finally, an earnout may be the most lucrative if the milestones are met and can provide the seller with an occupation after the sale.

Before deciding to sell the business, the business owner has to determine whether the company is salable. Although a business may be profitable, the company is not valuable if its revenues are generated strictly due to the owner’s creations or personal charm. The business is also not worth much if its processes and technology are obsolete. Business owners may also be unrealistic about the business’s worth. Although the founder may be emotionally attached to the company, sweat equity does not translate into value. The owner’s valuation must be supported by the company’s intrinsic value or cash flows.

Finally, the business owner must be ready to share all the details of the company’s operations and financials with potential buyers, accountants, and banks. A due diligence process may expose transactions that make you uncomfortable. Either tidy it up or get ready to explain its nature.

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Many businesses struggle to turn abstract strategic-planning ideas into concrete, actionable plans. One reason why is simple: ineffective meetings. The ideas are there, lurking in the minds of management and key employees, but the process for hashing them out just doesn’t work. Here are a few ways to run your strategic-planning meetings like they really matter — which, of course, they do.

Build buy-in

Meetings often fail because attendees feel more like spectators than participants. They are less likely to zone out if they have some say in the direction and content of the gathering. So, before the session, touch base with those involved and establish a clear agenda of the strategic-planning initiatives you’ll be discussing.

Another common problem with meetings occurs when someone leads the meeting, but no one owns it. As the meeting leader, be sure to speak with conviction and express positivity (if not passion) for the subject matter. (If others are delivering presentations during the proceedings, encourage them to do the same.)

Fight fatigue

To the extent possible, keep meetings short. Cover what needs to be covered, but ensure you’re concentrating only on what’s important. Go in armed with easy-to-follow notes so you’ll stay on track and won’t forget anything. The latter point is particularly important, because overlooked subjects often lead to hasty follow-up meetings that can frustrate employees.

In addition, if the contingent of attendees is large enough, consider having employees break out into smaller groups to focus on specific points. Then call the meeting back to order to discuss each group’s ideas. By mixing it up in such creative ways, you’ll keep employees more engaged.

Tell a story

There’s so much to distract employees in a meeting. If it’s held in the morning, the busy day ahead may preoccupy their thoughts. If it’s an afternoon meeting, they might grow anxious about their commutes home. If the meeting is a Web conference, there are a variety of distractions that may affect them. And there’s no getting around the ease with which participants can sneak peeks at their smartphones (or smart watches) to check emails, texts and the Internet.

How do you break through? People appreciate storytellers. So, think about how you can use this technique to find a more relaxed and engaging way to speak to everyone in the room. Devise a narrative that will grab attendees’ attention and keep them in suspense for a little bit. Then deliver a conclusion that will inspire them to work toward identifying fully realized, feasible strategic goals.

Make ’em great

Grumbling about meetings can be as much a part of working life as burnt coffee in the bottom of the breakroom pot. But don’t let this occasional negativity sway you from doing the critical strategic planning that every business needs to do. Your meetings can be great ones. We can’t help you run them, but we can assist you in assessing the financial feasibility and ramifications of your strategic plans.

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Failure to collect accounts receivable (AR) in a timely manner can lead to myriad financial problems for your company, including poor cash flow and the inability to pay its own bills. Here are five effective ideas to facilitate more timely collections:

1. Create an AR aging report. This report lets you see at a glance the current payment status of all your customers and how much money they owe. Aging reports typically track the payment status of customers by time periods, such as 0–30 days, 31–60 days, 61–90 days and 91+ days past due.

Armed with this information, you’ll have a better idea of where to focus your efforts. For example, you can concentrate on collecting the largest receivables that are the furthest past due. Or you can zero in on collecting receivables that are between 31 and 60 days outstanding before they become any further behind.

2. Assign collection responsibility to a sole accounting employee. Giving one employee the responsibility for AR collections ensures that the “collection buck” stops with someone. Otherwise, the task of collections could fall by the wayside as accounting employees pick up on other tasks that might seem more urgent.

3. Re-examine your invoices. Your customers prefer bills that are clear, accurate and easy to understand. Sending out invoices that are sloppy, vague or inaccurate will slow down the payment process as customers try to contact you for clarification. Essentially you’re inviting your customers to not pay your invoices promptly.

4. Offer customers multiple ways to pay. The more payment options customers have, the easier it is for them to pay your invoices promptly. These include payment by check, Automated Clearing House, credit or debit card, PayPal or even text message.

5. Be proactive in your billing and collection efforts. Many of your customers may have specific procedures that must be followed by vendors for invoice formatting and submission. Learn these procedures and follow them carefully to avoid payment delays. Also, consider contacting customers a couple of days before payment is due (especially for large payments) to make sure everything is on track.

Lax working capital practices can be a costly mistake. Contact us to help implement these and other strategies to improve collections and boost your revenue and cash flow. We can also help you with strategies for dealing with situations where it’s become clear that a past-due customer won’t (or can’t) pay an invoice.

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If you own an interest in a closely held business, it’s critical to have a well-designed, properly funded buy-sell agreement. Without one, an owner’s death can have a negative effect on the surviving owners.

If one of your co-owners dies, for example, you may be forced to go into business with his or her family or other heirs. And if you die, your family’s financial security may depend on your co-owners’ ability to continue operating the business successfully.

Buy-sell agreement and estate taxes

There’s also the question of estate taxes. With the federal gift and estate tax exemption currently at $11.4 million, estate taxes affect fewer people than they once did. But estate taxes can bring about a forced sale of the business if your estate is large enough and your family lacks liquid assets to satisfy the tax liability.

A buy-sell agreement requires (or permits) the company or the remaining owners to buy the interest of an owner who dies, becomes disabled, retires or otherwise leaves the business. It also establishes a valuation mechanism for setting the price and payment terms. In the case of death, the buyout typically is funded by life insurance, which provides a source of liquid funds to purchase the deceased owner’s shares and cover any estate taxes or other expenses.

3 options

Buy-sell agreements typically are structured as one of the following agreements:

Redemption, which permits or requires the business as a whole to repurchase an owner’s interest,
Cross-purchase, which permits or requires the remaining owners of the company to buy the interest, typically on a pro rata basis, or
Hybrid, which combines the two preceding structures. A hybrid agreement, for example, might require a departing owner to first make a sale offer to the company and, if it declines, sell to the remaining individual owners.

Depending on the structure of your business and other factors, the type of agreement you choose may have significant income tax implications. They’ll differ based on whether your company is a flow-through entity or a C corporation. We can help you design a buy-sell agreement that’s right for your business.

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A company’s mission statement determines the objectives of a company, which impacts its value. To illustrate, when Amazon announced that it was buying Whole Foods, the grocery store stock, including Walmart, Kroger’s and Supervalu, plummeted. However, Costco – who experienced a brief dip in value – and privately-held Trader Joe’s were unfazed. Although Costco and Trader Joe’s compete in the same space, they did not employ the same business objectives as Amazon, Walmart, Kroger’s, or Supervalu.

While Amazon, Walmart, Kroger’s and Supervalu focus on cost leadership, Costco and Trader Joe’s emphasize quality and product differentiation. The market believed that Amazon’s acquisition of Whole Foods Market endangered some companies more than others. However, since then – despite Amazon’s centralization of Whole Food Market’s purchasing, Whole Foods is eating into Trader Joe’s customers because it is, at this point, maintaining its mission and objective of quality over price.

A mission statement merely summarizes the company’s strategic plan, which defines the firm’s goals and objectives.

As part of the company’s strategic plan, the founder or management can establish its company scope, company plan, and operating plan. The company scope defines the lines of business and geographic areas of the business and determines whether the entity specializes in a narrow range of skill or activity or provide a broad number of good or services. A company plan sets forth specific, achievable goals or the company (e.g., cost leadership or product differentiation) and identifies qualitative and quantitative objectives that operating managers are expected to meet. An operating plan includes the product/service development plan, operations plan, organization plan, and marketing plan and provides management with detailed implementation guidance based on the company’s strategy.

An example of a company’s goals includes the management approach to employees. Some companies employ an authoritative style of leadership, while others opt to empower employees and implement a decentralized structure. The United States Steel Corporation was one of the largest corporations in the United States with more than 340,000 employees when Nucor Corporation began manufacturing steel. However, while U.S. Steel maintained the labor policies of its founder, Andrew Carnegie, the management of Nucor Corporation shared the authority and profits with its employees. This strategy resulted in Nucor Corporation becoming the largest steel manufacturer in the United States and the most profitable in its industry.

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You may have heard about a proposal in Washington to cut the taxes paid on investments by indexing capital gains to inflation. Under the proposal, the purchase price of assets would be adjusted so that no tax is paid on the appreciation due to inflation.

While the fate of such a proposal is unknown, the long-term capital gains tax rate is still historically low on appreciated securities that have been held for more than 12 months. And since we’re already in the second half of the year, it’s a good time to review your portfolio for possible tax-saving strategies.

The federal income tax rate on long-term capital gains recognized in 2019 is 15% for most taxpayers. However, the maximum rate of 20% plus the 3.8% net investment income tax (NIIT) can apply at higher income levels. For 2019, the 20% rate applies to single taxpayers with taxable income exceeding $425,800 ($479,000 for joint filers or $452,400 for heads of households).

You also may be able to plan for the NIIT. It can affect taxpayers with modified AGI (MAGI) over $200,000 for singles and heads of households, or $250,000 for joint filers. You may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

What about losing investments that you’d like to sell? Consider selling them and using the resulting capital losses to shelter capital gains, including high-taxed short-term gains, from other sales this year. You may want to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

If your capital losses exceed your capital gains, the result would be a net capital loss for the year. A net capital loss can also be used to shelter up to $3,000 of 2019 ordinary income (or up to $1,500 if you’re married and file separately). Ordinary income includes items including salaries, bonuses, self-employment income, interest income and royalties. Any excess net capital loss from 2019 can be carried forward to 2020 and later years.

Consider gifting to young relatives

While most taxpayers with long-term capital gains pay a 15% rate, those in the 0% federal income tax bracket only pay a 0% federal tax rate on gains from investments that were held for more than a year. Let’s say you’re feeling generous and want to give some money to your children, grandchildren, nieces, nephews, or others. Instead of making cash gifts to young relatives in lower federal tax brackets, give them appreciated investments. That way, they’ll pay less tax than you’d pay if you sold the same shares.

(You can count your ownership period plus the gift recipient’s ownership period for purposes of meeting the more-than-one-year rule.)

Even if the appreciated shares have been held for a year or less before being sold, your relative will probably pay a much lower tax rate on the gain than you would.

Increase your return

Paying capital gains taxes on your investment profits reduces your total return. Look for strategies to grow your portfolio by minimizing the amount you must pay to the federal and state governments. These are only a few strategies that may be available to you. Contact us about your situation.

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Every year, research firm Audit Analytics publishes a study about financial restatement trends. In 2018, the number of public companies that amended their annual reports increased by 18%.

Many of these amendments were due to minor technical issues, however. Of the 400 public companies that amended their returns in 2018, only 30 amended 10-Ks (or 8%) were due to financial restatements. But this was up from 13 amended 10-Ks (or 4%) in 2017. Any time a company restates its financial results, it raises a red flag and prompts stakeholders to dig deeper.

Reasons for restatement

The Financial Accounting Standards Board (FASB) defines a restatement as a revision of a previously issued financial statement to correct an error. Whether they’re publicly traded or privately held, businesses may reissue their financial statements for several “mundane” reasons. Management might have misinterpreted the accounting standards, requiring the company’s external accountant to adjust the numbers. Or they simply may have made minor mistakes and need to correct them.

Leading causes for restatements include:

Recognition errors (for example, when accounting for leases or reporting compensation expense from backdated stock options),
Income statement and balance sheet misclassifications (for instance, a company may need to shift cash flows between investing, financing and operating on the statement of cash flows),
Mistakes reporting equity transactions (such as improper accounting for business combinations and convertible securities),
Valuation errors related to common stock issuances,
Preferred stock errors, and
The complex rules related to acquisitions, investments, revenue recognition and tax accounting.

Often, restatements happen when the company’s financial statements are subjected to a higher level of scrutiny. For example, restatements may occur when a private company converts from compiled financial statements to audited financial statements or decides to file for an initial public offering. They also may be needed when the owner brings in additional internal (or external) accounting expertise, such as a new controller or audit firm.

Audit Analytics reports that “material restatements often go hand-in-hand with material weakness in internal controls over financial reporting.” In rare cases, a financial restatement also can be a sign of incompetence — or even fraud. Such restatements may signal problems that require corrective actions.

Communication is key

The restatement process can be time consuming and costly. Regular communication with interested parties — including lenders and shareholders — can help businesses overcome the negative stigma associated with restatements. Management also needs to reassure employees, customers and suppliers that the company is in sound financial shape to ensure their continued support.

Your in-house accounting team is currently dealing with an unprecedented number of major financial reporting changes, which may, at least partially, explain the recent increase in financial restatements. We can help accounting personnel understand the evolving accounting and tax rules to minimize the risk of restatement, as well as help them effectively manage the restatement process.

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In 2014, Brian Acton and his partner, Jan Koum, sold the popular messaging app WhatsApp to Facebook for approximately $19 billion in cash and stock. However, in 2017, Acton left WhatsApp and thereby left $850 million in unvested options on the table. He paid this price over a dispute he had with Facebook executives regarding users’ privacy. While Facebook understood the need to monetize WhatsApp’s data, its founders did not believe that it was in line with their vision and core values.

Studies show that children are excited about inheriting the family business and taking it to the next level. 75% of the next generation have big plans and energetic ideas on how to grow the family business. However, a founder may often be at odds with the next generation regarding the strategy and goals of the company. Accordingly, to ensure continuity, a business should implement a strategic plan with a company mission and underlying core values to serve as the bedrock of the company for future generations to rely upon. A strategic plan helps determine the long-term goals of a company, its core value, mission, and objectives. Such a plan can safeguard the continuity of a company and maintain the principles and tenets of the original founder.

Core Values

Core values are the underlying beliefs (“credo”) that govern an entity’s operations and relationships with other parties. They represent the fundamental beliefs of what is important to the company, publicize who the company is and what it stands for, and communicate the personal values and beliefs of the founder(s).

The core values are more than just a marketing concept. Instead, it should feed into the vision, purpose, and mission of the company and set the stage for all decisions that will be made as the company grows. Essentially, the core values should be treated as the foundation of the company and used to assist the company in developing and executing its goals and strategies.

For example, Whole Foods Market’s credo states: “We Sell the Highest Quality Natural and Organic Foods.” This will ensure that, although Amazon purchased the grocery chain, Whole Foods will remain a company that focuses on quality and product differentiation rather than cost leadership.

Mission Statement

The mission statement of a company provides an expression of the purpose and range of the entity’s activities, including the overall goals and operational scope and general guidelines for future management actions. A mission statement represents a condensed version of the company’s strategic plan and serves to differentiate the company from its competitors. Effectively, the mission statement ought to provide direction to the company’s executives when deciding on the products or services to offer. Nevertheless, the mission statement should be adjusted to reflect changing business environments and management philosophies.

Conclusion

William Rosenberg opened the first Dunkin’ Donuts store in 1950. Today, there are more than 10,000 Dunkin’ Donuts franchises in 32 countries around the world. In order to ensure uniformity and continuity, Mr. Rosenberg created the following mission statement: “Make and serve the freshest, most delicious coffee and donuts quickly and courteously in modern, well-merchandised stores.” Although Dunkin’ – as it re-branded itself – sells beverages and pastries beyond coffee and donuts, the founder’s mission of providing delicious and fresh baked goods is shared by local, small business franchisees around the world.

A strategic plan along with the core values and mission statement assists company leaders in following the objectives of the company to achieve the desired measurable results, including profitability, growth, market share, innovation, etc. while remaining true to the company’s philosophy and its founder’s vision.

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If you’re a volunteer who works for charity, you may be entitled to some tax breaks if you itemize deductions on your tax return. Unfortunately, they may not amount to as much as you think your generosity is worth.

Because donations to charity of cash or property generally are tax deductible for itemizers, it may seem like donations of something more valuable for many people — their time — would also be deductible. However, no tax deduction is allowed for the value of time you spend volunteering or the services you perform for a charitable organization.

It doesn’t matter if the services you provide require significant skills and experience, such as construction, which a charity would have to pay dearly for if it went out and obtained itself. You still don’t get to deduct the value of your time.

However, you potentially can deduct out-of-pocket costs associated with your volunteer work.

The basic rules

As with any charitable donation, to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can check by using the IRS’s “Tax Exempt Organization Search” tool at irs.gov/charities-non-profits/tax-exempt-organization-search.

If the charity is qualified, you may be able to deduct out-of-pocket costs that are unreimbursed; directly connected with the services you’re providing; incurred only because of your charitable work; and not “personal, living or family” expenses.

Expenses that may qualify

A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. And the cost of a uniform you must wear during the activity may also be deductible (if it’s required and not something you’d wear when not volunteering).

Transportation costs to and from the volunteer activity generally are deductible — either the actual expenses (such as gas costs) or 14 cents per charitable mile driven. The cost of entertaining others (such as potential contributors) on behalf of a charity may also be deductible. However, the cost of your own entertainment or meal isn’t deductible.

Deductions are permitted for away-from-home travel expenses while performing services for a charity. This includes out-of-pocket round-trip travel expenses, taxi fares and other costs of transportation between the airport or station and hotel, plus lodging and meals. However, these expenses aren’t deductible if there’s a significant element of personal pleasure associated with the travel, or if your services for a charity involve lobbying activities.

Record-keeping is important

The IRS may challenge charitable deductions for out-of-pocket costs, so it’s important to keep careful records and receipts. You must meet the other requirements for charitable donations. For example, no charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the organization. The acknowledgment generally must include the amount of cash, a description of any property contributed, and whether you got anything in return for your contribution.

And, in order to get a charitable deduction, you must itemize. Under the Tax Cuts and Jobs Act, fewer people are itemizing because the law significantly increased the standard deduction amounts. So even if you have expenses from volunteering that qualify for a deduction, you may not get any tax benefit if you don’t have enough itemized deductions.

If you have questions about charitable deductions and volunteer expenses, please contact us.

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By definition, an entrepreneur is a creator, a producer, an investor. So, it’s no surprise that no matter the size of their business, entrepreneurs yearn for expansion. While it might seem like today’s market is dominated by the Amazons and Facebooks of the world, the reality is that 99.7 percent of all businesses in the United States are considered “small,” totaling 28.8 million organizations with less than 100 employees. Although they likely all share the dream of growth at some point, expansion is a very risky proposition.

While 20% of small businesses fail in their first year, 50% fail in their fifth and that number rises to 70% in the tenth. These Bureau of Labor Statistics are consistent over time, suggesting that year over year economic factors do not hold outsize significance over business survival. Strategic planning does, according to Crown Sterling Ltd. CEO Robert Grant. That is because our competitors, perhaps more than any other factor, affect our outcomes. To win at business you’ll need skills, but more so you’ll need to out-strategize the other players in the game.

“Expanding a company doesn’t just mean grappling with the same problems on a larger scale,” writes Sharon Nelton in Nation’s Business. “It means understanding, adjusting to, and managing a whole new set of challenges—in essence, a very different business.” For those leaders who identify a need or avenue for growth there are important things to consider. Effective research, long range planning and a flexible budget are necessities.
A strategic plan answers some important questions, namely, what am I going to achieve by expanding and how will I get there? Some goals may include meet existing customer demands, expand into new markets or increase brand recognition. Your plan will ensure you don’t sacrifice the ultimate goal of increasing sales by sacrificing your current ones.

What do I know and not know about this new venture? Venturing into previously untapped markets is sure to unveil the unexpected. Best Buy didn’t catch on in China because big, bright stores just didn’t capture customers the way lower Chinese prices did. Starbucks underestimated its competition in Israel and bowed out of all their stores after two years. Small businesses should bear in mind that doubling the size of your company tends to increase your bills by a factor of six – budget accordingly keeping in mind the soft costs, like upgrading financial and record keeping software and communication systems.
Plan ahead but strike quickly; if you’ve anticipated a good move chances are that your competition has, as well. He who strikes first, has the advantage. Entrepreneurship is all about pushing forward and playing a step ahead of your opponent is often all it takes.
Play to win.

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“Gamification.” It’s perhaps an odd word, but it’s a cool concept that’s become popular among many types of businesses. In its most general sense, the term refers to integrating characteristics of game-playing into business-related tasks to excite and engage the people involved.

Might it have a place in your company?

Internal focus

Sometimes gamification refers to customer interactions. For example, a retailer might award customers points for purchases that they can collect and use toward discounts. Or a company might offer product-related games or contests on its website to generate traffic and visitor engagement.

But, these days, many businesses are also using gamification internally. They’re using it to:

Engage employees in training processes,
Promote friendly competition and camaraderie among employees, and
Ease the recognition and measurement of progress toward shared goals.

It’s not hard to see how creating positive experiences in these areas might improve the morale and productivity of any workplace. As a training tool, games can help employees learn more quickly and easily. Moreover, with the rise of social media, many workers are comfortable sharing with others in a competitive setting. And, from the employer’s perspective, gamification opens all kinds of data-gathering possibilities to track training initiatives and measure employee performance.

Specific applications

In most businesses, employee training is a big opportunity to reap the benefits of gamification. As many industries look to attract Generation Z — the next big demographic to enter the workforce — game-based learning makes perfect sense for individuals who grew up both competing in various electronic ways on their mobile devices and interacting on social media.

For example, safety and sensitivity training are areas that demand constant reinforcement. But it’s also common for workers to tune out these topics. Framing reminders, updates and exercises within game scenarios, in which participants might win or lose ground by following proper or improper work practices, is one way to liven up the process.

Game-style simulations can also help prepare employees for management or leadership roles. Online training simulations, set up as games, can test participants’ decision-making and problem-solving skills — and allow them to see the potential consequences of various actions before granting them such responsibilities in the real-world situations. You might also consider rewards-based games for managers or project leaders based on meeting schedules, staying within budgets, or preventing accidents or other costly mistakes.

Intended effects

Naturally, gamification has its risks. You don’t want to “force fun” or frustrate employees with unreasonably difficult games. Doing so could lower morale, waste time and money, and undercut training effectiveness.

To mitigate the downsides, involve management and employees in gamification initiatives to ensure you’re on the right track. Also consider involving a professional consultant to implement established and tested “gamified” exercises, tasks and contests. We can help you identify and assess the potential costs involved and keep those costs in line.

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Whole Foods Market is now famous as the upscale supermarket chain that was acquired by Amazon for close to $14 billion. However, Whole Foods Market began with humble beginnings. In 1978, John Mackey and Renee Lawson borrowed money from friends and family to open a small natural food store in Austin, Texas. As the store expanded to open more locations and Mackey and Lawson admitted two additional partners and designated specific tasks to each partner, such as finance, human resources, and sales. This process continues today where, although Whole Foods Market is a multinational food chain with 500 locations, each regional manager has the autonomy and flexibility to decide on suppliers and pricing.

The proverb “too many cooks spoil the broth” applies to the management of a business. Thus, establishing the sequence of control as part of a succession plan ensures that the company continues to operate effectively and efficiently – especially if the business is bequeathed to children who do not work in the family business.

The sequence of control of a business succession plan outlines the decision-making process of a closely-held, family business once the owner is determined to be incapacitated or deceased. Although this can be emotionally tolling, the sequence of control is essential for the continuity of the business. The following are questions that arise when planning the sequence of control.

What is the definition of incapacitated?

You undoubtedly know of instances in which the patriarch of a family suffered from dementia or a form of memory loss. You are probably familiar with cases in which people took advantage of individuals suffering from Alzheimer’s disease. Such undue influence can arise if a business owner can no longer exercise prudent business reasoning and judgment. Accordingly, the business succession plan should define “capacity” and specify who makes the determination, which can be a physician or a member of the clergy.

Who assumes control?

It may seem irresponsible to vest absolute control to the child or children who work(s) in the business; however, it may be imprudent to allow children who do not work in the company to be involved in the decision-making process of the business. A business administrator who requires approval for the day-to-day operational decisions in the ordinary course of business may be unable to perform basic administrative duties of the company, especially if consent is needed from an adverse party. Nevertheless, a proper business plan may require a vote of all members for significant business decisions, or decisions that may alter the business structure or significantly impact the business.

How can I secure oversight over the business administrator?

Proper internal controls are always recommended to promote accountability and prevent fraud, but it is even more critical when one heir controls the family business. The business succession plan can provide for a salary and fringe benefits or performance-based compensation, methods for removing or replacing the administrator, an arbitrator to adjudicate disagreements or disputes among family members, and an exit strategy or process of dissolving the business or partnership.

How can I provide for myself and my spouse while incapacitated?

If you are considered an owner of the business during your lifetime or so long that your spouse is alive, your succession plan can stipulate that you receive periodic distributions. However, a fixed withdrawal may prove to be insufficient for your medical needs or general cost of living. Conversely, the business may be dependent on its working capital that is now being distributed and accumulated in your personal checking account.

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Small businesses may find it beneficial to barter for goods and services instead of paying cash for them. If your business engages in bartering, be aware that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

Income is also realized if services are exchanged for property. For example, if a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory.

Barter clubs

Many business owners join barter clubs that facilitate barter exchanges. In general, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

Bartering is generally taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,000 credit units one year, and that each unit is redeemable for $1 in goods and services. In that year, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income at a 24% rate.

Required forms

By January 31 of each year, the barter club will send you a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services, and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

If you don’t contract with a barter exchange but you do trade services, you don’t file Form 1099-B. But you may have to file a form 1099-MISC.

Many benefits

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. Contact us for more information.

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The Tax Cuts and Jobs Act (TCJA) has changed the landscape for business taxpayers. That’s because the law introduced a flat 21% federal income tax rate for C corporations. Under prior law, profitable C corporations paid up to 35%.

The TCJA also cut individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and LLCs (treated as partnerships for tax purposes). However, the top rate dropped from 39.6% to only 37%.

These changes have caused many business owners to ask: What’s the optimal entity choice for me?

Entity tax basics

Before the TCJA, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations. A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level.

Although C corporations are still potentially subject to double taxation, their current 21% tax rate helps make up for it. This issue is further complicated, however, by another tax provision that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, that deduction is available only through 2025.

Many factors to consider

The best entity choice for your business depends on many factors. Keep in mind that one form of doing business might be more appropriate at one time (say, when you’re launching), while another form might be better after you’ve been operating for a few years. Here are a few examples:

Suppose a business consistently generates losses. There’s no tax advantage to operating as a C corporation. C corporation losses can’t be deducted by their owners. A pass-through entity would generally make more sense in this scenario because losses would pass through to the owners’ personal tax returns.
What about a profitable business that pays out all income to the owners? In this case, operating as a pass-through entity would generally be better if significant QBI deductions are available. If not, there’s probably not a clear entity-choice answer in terms of tax liability.
Finally, what about a business that’s profitable but holds on to its profits to fund future projects? In this case, operating as a C corporation generally would be beneficial if the corporation is a qualified small business (QSB). Reason: A 100% gain exclusion may be available for QSB stock sale gains. Even if QSB status isn’t available, C corporation status is still probably preferred — unless significant QBI deductions would be available at the owner level.

As you can see, there are many issues involved and taxes are only one factor.

For example, one often-cited advantage of certain entities is that they allow a business to be treated as an entity separate from the owner. A properly structured corporation can protect you from business debts. But to ensure that the corporation is treated as a separate entity, it’s important to observe various formalities required by the state. These include filing articles of incorporation, adopting by-laws, electing a board of directors, holding organizational meetings and keeping minutes.

The best long-term choice

The TCJA has far-reaching effects on businesses. Contact us to discuss how your business should be set up to lower its tax bill over the long run. But remember that entity choice is easier when starting up a business. Converting from one type of entity to another adds complexity. We can help you examine the ins and outs of making a change.

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Now that most schools are out for the summer, you might be sending your children to day camp. It’s often a significant expense. The good news: You might be eligible for a tax break for the cost.

The value of a credit

Day camp is a qualified expense under the child and dependent care credit, which is worth 20% to 35% of qualifying expenses, subject to a cap. Note: Sleep-away camp does not qualify.

For 2019, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more. Other expenses eligible for the credit include payments to a daycare center, nanny, or nursery school.

Keep in mind that tax credits are especially valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax.

For example, if you’re in the 32% tax bracket, $1 of deduction saves you only $0.32 of taxes. So it’s important to take maximum advantage of all tax credits available to you.

Work-related expenses

For an expense to qualify for the credit, it must be related to employment. In other words, it must enable you to work — or look for work if you’re unemployed. It must also be for the care of your child, stepchild, foster child, or other qualifying relative who is under age 13, lives in your home for more than half the year and meets other requirements.

There’s no age limit if the dependent child is physically or mentally unable to care for him- or herself. Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Credit vs. FSA

If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

If your employer offers a child and dependent care FSA, you may wish to consider participating in the FSA instead of taking the credit. With an FSA for child and dependent care, you can contribute up to $5,000 on a pretax basis. If your marginal tax rate is more than 15%, participating in the FSA is more beneficial than taking the credit. That’s because the exclusion from income under the FSA gives a tax benefit at your highest tax rate, while the credit rate for taxpayers with adjusted gross income over $43,000 is limited to 20%.

Proving your eligibility

On your tax return, you must include the Social Security number of each child who attended the camp or received care. There’s no credit without it. You must also identify the organizations or persons that provided care for your child. So make sure to obtain the name, address and taxpayer identification number of the camp.

Additional rules apply to the child and dependent care credit. Contact us if you have questions. We can help determine your eligibility for the credit and other tax breaks for parents.

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Do you want to control costs and improve delivery of your not-for-profit’s programs and services? It may not be as difficult as you think. First, you need to know how much of your nonprofit’s expenditures go toward programs, as opposed to administrative and fundraising costs. Then you must determine how much you need to fund your budget and weather temporary cash crunches.

4 key numbers

These key ratios can help your organization measure and monitor efficiency:

Percentage spent on program activities. This ratio offers insights into how much of your total budget is used to provide direct services. To calculate this measure, divide your total program service expenses by total expenses. Many watchdog groups are satisfied with 65%.

Percentage spent on fundraising. To calculate this number, divide total fundraising expenses by contributions. The standard benchmark for fundraising and admin expenses is 35%.

Current ratio. This measure represents your nonprofit’s ability to pay its bills. It’s worth monitoring because it provides a snapshot of financial conditions at any given time. To calculate, divide current assets by current liabilities. Generally, this ratio shouldn’t be less than 1:1.

Reserve ratio.Is your organization able to sustain programs and services during temporary revenue and expense fluctuations? The key is having sufficient expendable net assets and related cash or short-term securities.

To calculate the reserve ratio, divide expendable net assets (unrestricted and temporarily restricted net assets less net investment in property and equipment and less any nonexpendable components) by one day’s expenses (total annual expenses divided by 365). For most nonprofits, this number should be between three and six months. Base your target on the nature of your operations, your program commitments and the predictability of funding sources.

Orient toward outcomes

Looking at the right numbers is only the start. To ensure you’re achieving your mission cost-effectively, make sure everyone in your organization is “outcome” focused. This means that you focus on results that relate directly to your mission. Contact us for help calculating financial ratios and using them to evaluate outcomes.

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To help defray health care costs, many people now contribute to, or are thinking about setting up, Health Savings Accounts (HSAs). With these accounts, individuals can pay for certain medical expenses on a tax advantaged basis.

The basics

With HSAs, you take more responsibility for your health care costs. If you’re covered by a qualified high-deductible health plan, you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself.

You own the account, which can bear interest or be invested. It can grow tax-deferred, similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year. So, unlike Flexible Spending Accounts (FSAs), undistributed balances in HSAs aren’t forfeited at year end.

For the 2019 tax year, you can make a tax-deductible HSA contribution of up to $3,500 if you have qualifying self-only coverage or up to $7,000 if you have qualifying family coverage (anything other than self-only coverage). If you’re age 55 or older as of December 31, the maximum contribution increases by $1,000.

To be eligible to contribute to an HSA, you must have a qualifying high deductible health insurance policy and no other general health coverage. For 2019, a high deductible health plan is defined as one with a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage.

For 2019, qualifying policies must have had out-of-pocket maximums of no more than $6,750 for self-only coverage or $13,500 for family coverage.

Account balances

If you still have an HSA balance after reaching Medicare eligibility age (generally age 65), you can empty the account for any reason without a tax penalty. If you don’t use the withdrawal to cover qualified medical expenses, you’ll owe federal income tax and possibly state income tax. But the 20% tax penalty that generally applies to withdrawals not used for medical expenses won’t apply. There’s no tax penalty on withdrawals made after disability or death.

Alternatively, you can use your HSA balance to pay uninsured medical expenses incurred after reaching Medicare eligibility age. If your HSA still has a balance when you die, your surviving spouse can take over the account tax-free and treat it as his or her own HSA, if he or she is named as the beneficiary. In other cases, the date-of-death HSA balance must generally be included in taxable income on that date by the person who inherits the account.

Deadlines and deductions

If you’re eligible to make an HSA contribution, the deadline is April 15 of the following year (adjusted for weekends and holidays) to open an account and make a tax-deductible contribution for the previous year.

So, if you’re eligible, there’s plenty of time to make a deductible contribution for 2019. The deadline for making 2019 contributions is April 15, 2020.

The write-off for HSA contributions is an “above-the-line” deduction. That means you can claim it even if you don’t itemize.

In addition, an HSA contribution isn’t tied to income. Even wealthy people can make deductible HSA contributions if they have qualifying high deductible health insurance coverage and meet the other requirements.

Tax-smart opportunity

HSAs can provide a smart tax-saving opportunity for individuals with qualifying high deductible health plans. Contact us to help you set up an HSA or decide how much to contribute for 2019.

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Every financial transaction your company records generates non-financial data that doesn’t have a dollar value assigned to it. Though auditors may spend most of their time analyzing financial records, non-financial data can also help them analyze your business from multiple angles.

Gathering audit evidence

The purpose of an audit is to determine whether your financial statements are “fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement.” To thoroughly assess these issues, auditors need to expand their procedures beyond the line items recorded in your company’s financial statements.

Non-financial information helps auditors understand your business and how it operates. During planning, inquiry, analytics and testing procedures, auditors will be on the lookout for inconsistencies between financial and non-financial measures. This information also helps auditors test the accuracy and reasonableness of the amounts recorded on your financial statements.

Looking beyond the numbers

A good starting point is a tour of your facilities to observe how and where the company spends its money. The number of machines operating, the amount of inventory in the warehouse, the number of employees and even the overall morale of your staff can help bring to life the amounts shown in your company’s financial statements.

Auditors also may ask questions during fieldwork to help determine the reasonableness of financial measures. For instance, they may ask you for detailed information about a key vendor when analyzing accounts payable. This might include the vendor’s ownership structure, its location, copies of email communications between company personnel and vendor reps, and the name of the person who selected the vendor. Such information can give the auditor insight into the size of the relationship and whether the timing and magnitude of vendor payments appear accurate and appropriate.

Your auditor may even look outside your company for non-financial data. Many websites allow customers and employees to submit reviews of the company. These reviews can provide valuable insight regarding the company’s inner workings. If the reviews uncover consistent themes — such as an unwillingness to honor product guarantees or allegations of illegal business practices — it may signal deep-seated problems that require further analysis.

Facilitating the audit process

Auditors typically ask lots of questions and request specific documentation to test the accuracy and integrity of a company’s financial records. While these procedures may seem probing or superfluous, analyzing non-financial data is critical to issuing a non-qualified audit opinion. Let’s work together to get it right!

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Can your business become more profitable without venturing out of its comfort zone? Of course! However, adding new products or services may not be the best way for your business — or any company — to boost profits. Bottom-line potential may lie undiscovered in your existing operations. How can you find these “hidden” profits? Dig into every facet of your organization.

Develop a profit plan

You’ve probably written and perhaps even recently revised a business plan. And you’ve no doubt developed sales and marketing plans to present to investors and bankers. But have you taken the extra step of developing a profit plan?

A profit plan outlines your company’s profit potential and sets objectives for realizing those bottom-line improvements. Following traditional profit projections based on a previous quarter’s or previous year’s performance can limit you. Why? Because when your company reaches its budgeted sales goals or exceeds them, you may feel inclined to ease up for the rest of the year. Don’t just coast past your sales goals — roar past them and keep going.

Uncover hidden profit potential by developing a profit plan that includes a continuous incentive to improve. Set your sales goals high. Even if you don’t reach them, you’ll have the incentive to continue pushing for more sales right through year end.

Ask the right questions

Among the most effective techniques for creating such a plan is to consider three critical questions. Answer them with, if necessary, brutal honesty to increase your chances of success. And pose the questions to your employees for their input, too. Their answers may reveal options you never considered. Here are the questions:

1. What does our company do best? Involve top management and brainstorm to answer this question. Identifying your core competencies should result in strategies that boost operations and uncover hidden profits.

2. What products or services should we eliminate? Nearly everyone in management has an answer to this question, but usually no one asks for it. When you lay out the tough answers on the table, you can often eliminate unprofitable activities and improve profits by adding or improving profitable ones.

3. Exactly who are our customers? You may be wasting time and money on marketing that doesn’t reach your most profitable customers. Analyzing your customers and prospects to better focus your marketing activities is a powerful way to cut waste and increase profits.

Get that shovel ready

Every business owner wishes his or her company could be more profitable, but how many undertake a concerted effort to uncover hidden profits? By pulling out that figurative shovel and digging into every aspect of your company, you may very well unearth profit opportunities your competitors are missing. We can help you conduct this self-examination, gather the data and crunch the resulting numbers.

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No matter what products or services your business offers, profit is the overriding goal. No profit, no business – that is why it’s the bottom line. Nothing is more essential to that objective than creating and following a good budget.

Some components of a good budget are universal.

A good budget is conservative. As one senior manager put it, “You don’t know what you don’t know, but always know that you don’t know something.” Expect the unexpected and account for it in your budget.

A good budget should be adaptable. Revisit your budget often to compare your actual results to the budget. If certain line items are in danger of going over budget, look for other line items that are coming in below budget and borrow from those. Aim to maintain the bottom-line goal you started with.

A good budget is realistic. Employees are not likely to buy in to a budget plan that is designed toward an unattainable target number. Targets keep people motivated and inspired, they provide a vision and sense of purpose, but that must be linked to realistic revenue or the opposite effect is likely. Careful analysis from up to five years of financial results will help you develop a solid budget based on past results and future projections.

Build the right team to create your budget. Anyone who will be held accountable for the budget, should have some influence on its creation. Include people who understand the distinct risks of your organization and industry. Be aware of pending changes in regulations, such as overtime rules, health care changes and the new tax law. You should also compare your organization to industry standards using professional tools and resources.

Smart goals are specific, measurable, attainable, realistic and timely. That doesn’t mean there’s no room for creative out of the box thinking. The right budgeting team may incorporate people who fall outside the conventional box and bring fresh perspectives to the table. For example, your factory employee may be best able to identify when equipment will need to be replaced or overhauled.

Instilling an ownership mentality in employees can impact every level of operations from budgeting to product quality, efficiency and loyalty. Radical successes have been documented recently in businesses both large and small who chose to reconfigure their business structure as an Employee Stock Ownership Plan (ESOP). Mass Bay, a forerunner of the current craft beer industry, is an example. CEO Dan Kenary says, “There’s a tremendous sense that we’re in this together, and that didn’t exist before the ESOP.” Though his industry has grown far more competitive, employee ownership gives his company an edge, he says.

Regardless of how you structure your business, your organization’s budget is a useful tool. Consider increasing who you share your budget with; it inevitably leads to better feedback, beneficial communication and employees who are motivated to meet your goals.

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Is your business hiring this summer? If the employees come from certain “targeted groups,” you may be eligible for the Work Opportunity Tax Credit (WOTC). This includes youth whom you bring in this summer for two or three months. The maximum credit employers can claim is $2,400 to $9,600 for each eligible employee.

10 targeted groups

An employer is generally eligible for the credit only for qualified wages paid to members of 10 targeted groups:

Qualified members of families receiving assistance under the Temporary Assistance for Needy Families program,
Qualified veterans,
Designated community residents who live in Empowerment Zones or rural renewal counties,
Qualified ex-felons,
Vocational rehabilitation referrals,
Qualified summer youth employees,
Qualified members of families in the Supplemental Nutrition Assistance Program,
Qualified Supplemental Security Income recipients,
Long-term family assistance recipients, and
Qualified individuals who have been unemployed for 27 weeks or longer.

For each employee, there’s also a minimum requirement that the employee have completed at least 120 hours of service for the employer, and that employment begin before January 1, 2020.

Also, the credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (for example, working as a house cleaner in the employer’s home). And it generally isn’t available for employees who have previously worked for the employer.

Calculate the savings

For employees other than summer youth employees, the credit amount is calculated under the following rules. The employer can take into account up to $6,000 of first-year wages per employee ($10,000 for “long-term family assistance recipients” and/or $12,000, $14,000 or $24,000 for certain veterans). If the employee completed at least 120 hours but less than 400 hours of service for the employer, the wages taken into account are multiplied by 25%. If the employee completed 400 or more hours, all of the wages taken into account are multiplied by 40%.

Therefore, the maximum credit available for the first-year wages is $2,400 ($6,000 × 40%) per employee. It is $4,000 [$10,000 × 40%] for “long-term family assistance recipients”; $4,800, $5,600 or $9,600 [$12,000, $14,000 or $24,000 × 40%] for certain veterans. In order to claim a $9,600 credit, a veteran must be certified as being entitled to compensation for a service-connected disability and be unemployed for at least six months during the one-year period ending on the hiring date.

Additionally, for “long-term family assistance recipients,” there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000 [$10,000 × 40% plus $10,000 × 50%].

The “first year” described above is the year-long period which begins with the employee’s first day of work. The “second year” is the year that immediately follows.

For summer youth employees, the rules described above apply, except that you can only take into account up to $3,000 of wages, and the wages must be paid for services performed during any 90-day period between May 1 and September 15. That means that, for summer youth employees, the maximum credit available is $1,200 ($3,000 × 40%) per employee. Summer youth employees are defined as those who are at least 16 years old, but under 18 on the hiring date or May 1 (whichever is later), and reside in an Empowerment Zone, enterprise community or renewal community.

We can help

The WOTC can offset the cost of hiring qualified new employees. There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of the credit. And you must fill out and submit paperwork to the government. Contact us for assistance or more information about your situation.

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If federal income tax and employment taxes (including Social Security) are withheld from employees’ paychecks and not handed over to the IRS, a harsh penalty can be imposed. To make matters worse, the penalty can be assessed personally against a “responsible individual.”

If a business makes payroll tax payments late, there are escalating penalties. And if an employer fails to make them, the IRS will crack down hard. With the “Trust Fund Recovery Penalty,” also known as the “100% Penalty,” the IRS can assess the entire unpaid amount against a responsible person who willfully fails to comply with the law.

Some business owners and executives facing a cash flow crunch may be tempted to dip into the payroll taxes withheld from employees. They may think, “I’ll send the money in later when it comes in from another source.” Bad idea!

No corporate protection

The corporate veil won’t shield corporate officers in these cases. Unlike some other liability protections that a corporation or limited liability company may have, business owners and executives can’t escape personal liability for payroll tax debts.

Once the IRS asserts the penalty, it can file a lien or take levy or seizure action against a responsible individual’s personal assets.

Who’s responsible?

The penalty can be assessed against a shareholder, owner, director, officer, or employee. In some cases, it can be assessed against a third party. The IRS can also go after more than one person. To be liable, an individual or party must:

Be responsible for collecting, accounting for, and paying over withheld federal taxes, and willfully fail to pay over those taxes. That means intentionally, deliberately, voluntarily and knowingly disregarding the requirements of the law.
The easiest way out of a delinquent payroll tax mess is to avoid getting into one in the first place. If you’re involved in a small or medium-size business, make sure the federal taxes that have been withheld from employees’ paychecks are paid over to the government on time. Don’t ever allow “borrowing” from withheld amounts.

Consider hiring an outside service to handle payroll duties. A good payroll service provider relieves you of the burden of paying employees, making the deductions, taking care of the tax payments and handling record keeping. Contact us for more information.

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Summer is just around the corner, so you might be thinking about getting some vacation time. If you’re self-employed or a business owner, you have a golden opportunity to combine a business trip with a few extra days of vacation and offset some of the cost with a tax deduction. But be careful, or you might not qualify for the write-offs you’re expecting.

Basic rules

Business travel expenses can potentially be deducted if the travel is within the United States and the expenses are:

“Ordinary and necessary” and
Directly related to the business.
Note: The tax rules for foreign business travel are different from those for domestic travel.

Business owners and the self-employed are generally eligible to deduct business travel expenses if they meet the tests described above. However, under the Tax Cuts and Jobs Act, employees can no longer deduct such expenses. The potential deductions discussed in this article assume that you’re a business owner or self-employed.

A business-vacation trip

Transportation costs to and from the location of your business activity may be 100% deductible if the primary reason for the trip is business rather than pleasure. But if vacation is the primary reason for your travel, generally no transportation costs are deductible. These costs include plane or train tickets, the cost of getting to and from the airport, luggage handling tips and car expenses if you drive. Costs for driving your personal car are also eligible.

The key factor in determining whether the primary reason for domestic travel is business is the number of days you spend conducting business vs. enjoying vacation days. Any day principally devoted to business activities during normal business hours counts as a business day. In addition:

Your travel days count as business days, as do weekends and holidays — if they fall between days devoted to business and it wouldn’t be practical to return home.
Standby days (days when your physical presence might be required) also count as business days, even if you aren’t ultimately called upon to work on those days.
Bottom line: If your business days exceed your personal days, you should be able to claim business was the primary reason for a domestic trip and deduct your transportation costs.

What else can you deduct?

Once at the destination, your out-of-pocket expenses for business days are fully deductible. Examples of these expenses include lodging, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days aren’t deductible.

Keep in mind that only expenses for yourself are deductible. You can’t deduct expenses for family members traveling with you, including your spouse — unless they’re employees of your business and traveling for a bona fide business purpose.

Keep good records

Be sure to retain proof of the business nature of your trip. You must properly substantiate all of the expenses you’re deducting. If you get audited, the IRS will want to see records during travel you claim was for business. Good records are your best defense. Additional rules and limits apply to travel expense deductions. Please contact us if you have questions.

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Companies tend to spend considerable time and resources training and upskilling their sales staff on how to handle existing customers. And this is, no doubt, a critical task. But don’t overlook the vast pool of individuals or entities that want to buy from you but just don’t know it yet. We’re talking about prospects.

Identifying and winning over a steady flow of new buyers can safeguard your business against sudden sales drops or, better yet, push its profitability to new heights. Here are some ideas for better targeting and converting your company’s sales prospects:

Continually improve lead generation. Does your marketing department help you generate leads by doing things such as creating customer profiles for your products or services? If not, it’s probably time to create a database of prospects who may benefit from your products or services. Customer relationship management software can be of great help. When salespeople have a clear picture of a likely buyer, they’ll be able to better focus their efforts.

Use qualifications to avoid wasted sales calls. The most valuable nonrecurring asset that any company possesses is time. Effective salespeople spend their time with prospects who are the most likely to buy from them. Four aspects of a worthy prospect include having:

Clearly discernible and fulfillable needs,
A readily available decision maker,
Definitively assured creditworthiness, and
A timely desire to buy.

Apply these qualifications, and perhaps others that you develop, to any person or entity with whom you’re considering doing business. If a sale appears highly unlikely, move on.

Develop effective questions. When talking with prospects, your sales staff must know what draws buyers to your company. Sales staffers who make great presentations but don’t ask effective questions to find out about prospects’ needs are doomed to mediocrity.

They say the most effective salespeople spend 20% of their time talking and 80% listening. Whether these percentages are completely accurate is hard to say but, after making their initial pitch, good salespeople use their talking time to ask intelligent, insightful questions based on solid research into the prospect. Otherwise, they listen.

Devise solutions. It may seem next to impossible to solve the challenges of someone you’ve never met. But that’s the ultimate challenge of targeting and winning over prospects. Your sales staff needs the ability to know — going in — how your product or service can solve a prospect’s problem or help him, her or that organization accomplish a goal. Without a clear offer of a solution, what motivation does a prospect have to spend money?

Customers are important — and it would be foolish to suggest they’re not. But remember, at one time, every one of your customers was a prospect that you won over. You’ve got to keep that up. Contact us for help quantifying your sales process so you can get a better idea of how to improve it.

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Few businesses today can afford to let potential buyers slip through the cracks. Customer relationship management (CRM) software can help you build long-term relationships with those most likely to buy your products or services. But to maximize your return on investment in one of these solutions, you and your employees must have a realistic grasp on its purpose and functionality.

Putting it all together

CRM software is designed to:

Gather every bit and byte of data related to your customers,
Organize that information in a clear, meaningful format, and
Integrate itself with other systems and platforms (including social media).

Every time a customer contacts your company — or you follow up with that customer — the CRM system can record that interaction. This input enables business owners to track leads, forecast and record sales, assess the effectiveness of marketing campaigns, and evaluate other important data. It also helps companies retain valuable customer contact information, preventing confusion following staff turnover or if someone happens to be out of the office.

Furthermore, most CRM systems can remind salespeople when to make follow-up calls and prompt other employees to contact customers. For instance, an industrial cleaning company could set up its system to automatically transmit customer reminders regarding upcoming service dates.

Categorizing your contacts

Customers can be categorized by purchase history, future product or service interests, desired methods of contact, and other data points. This helps businesses reach out to customers at a good time, in the right way. When companies flood customers with too many impersonal calls, direct mail pieces or e-mails, their messaging is much more likely to be ignored.

Naturally, an important part of maintaining any CRM system is keeping customers’ contact data up to date. So, you’ll need to instruct sales or customer service staff to gently touch base on this issue at least once a year. To avoid appearing pushy, some businesses ask customers to fill out contact info cards (or request business cards) that are then entered into a drawing for a free product or service — or even just a free lunch!

Encouraging buy-in

A properly implemented CRM system can improve sales, lower marketing costs and build customer loyalty. But, as mentioned, you’ll need to train employees how to use the software to get these benefits. And buy-in must occur throughout the organization — a “silo approach” to CRM that focuses only on one business area won’t optimize results.

Establish thorough use of the system as an annual performance objective for sales, marketing and customer service employees. Some business owners even offer monthly prizes or bonuses to employees who consistently enter data into their CRM systems.

Making the right choice

There are many CRM solutions available today at a wide variety of price points. We can help you conduct a cost-benefit analysis of this type of software — based on your company’s size, needs and budget — to assist you in choosing whether to buy a product or, if you already have one, how best to upgrade it.

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Roth&Co is proud to announce the launch of its new Outsourced CFO Services, which provides a full suite of CFO services managed by an experienced and knowledgeable Controller.

Roth & Company prides itself on providing the personalized services of a boutique firm, combined with the experience and expertise of a large organization, and through this new addition, clients will be better equipped to achieve their desired results and reach their business and financial goals.

As part of Roth&Co’s Outsourced CFO Services, a CFO/Controller will work directly with the business, in order to review the accuracy of their financial statements, assist in creating and implementing internal controls and policies and procedures, help them with financial planning, and manage the financial risk of their businesses.

Yona Strimber has joined the Roth&Co team as the lead Controller for this new service. Mr. Strimber has experience managing large client bases within many industries and providing tax and accounting consulting.

“While we are always focused on the numbers, when it comes to taking care of our clients and their businesses, we don’t believe in putting a cap on that,” said Zacharia Waxler, Co-Managing Partner. He continued, “It’s difficult to find someone with the necessary skills who also exhibits the enthusiasm we look for in our team members. When we met Yona though, it was clear that he had the experience and attitude to help our clients grow”.

Carefully guiding businesses through the financial world for over 40 years, Roth & Company continually looks for ways to provide additional resources for its clients, and is excited to offer Outsourced CFO Services to its new and existing clients.

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Your not-for-profit’s ability to pursue its mission depends greatly on its financial health and integrity. If your nonprofit is growing and your executives are struggling to juggle financial responsibilities, it may be time to hire a chief financial officer (CFO).

Core responsibilities

Generally, the nonprofit CFO (also known as the director of finance) is a senior-level position charged with oversight of accounting and finances. He or she works closely with the executive director, finance committee and treasurer and serves as a business partner to your program heads. A CFO reports to the executive director or board of directors on the organization’s finances. He or she analyzes investments and capital, develops budgets and devises financial strategies.

The CFO’s role and responsibilities vary significantly based on the organization’s size, as well as the complexity of its revenue sources. In smaller nonprofits, CFOs often have wide responsibilities — possibly for accounting, human resources, facilities, legal affairs, administration and IT. In larger nonprofits, CFOs usually have a narrower focus. They train their attention on accounting and finance issues, including risk management, investments and financial reporting.

Making the decision

How do you know if you need a CFO? Weigh the following factors:

Size of your organization,
Complexity and types of revenue sources,
Number of programs that require funding, and
Strategic growth plans.

Static organizations are less likely to need a CFO than not-for-profits with evolving programs and long-term plans that rely on investment growth, financing and major capital expenditures.

The right candidate

At a minimum, you want a CFO with in-depth knowledge of the finance, accounting and tax rules particular to nonprofits. Someone who has worked only in the for-profit sector may find the differences difficult to navigate. Nonprofit CFOs also need a familiarity with funding sources, grant management and, if your nonprofit expends $750,000 or more of federal assistance, single audit requirements. The ideal candidate should have a certified public accountant (CPA) designation and, optimally, an MBA.

In addition, the position requires strong communication skills, strategic thinking, financial reporting expertise and the creativity to deal with resource restraints. Finally, you’d probably like the CFO to have a genuine passion for your mission — nothing motivates employees like a belief in the cause.

Consider outsourcing

If your budget is growing and financial matters are becoming more complicated, you may want to add a CFO to the mix. Otherwise, consider outsourcing CFO responsibilities to a CPA firm. Contact us for more information.

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Most not-for-profits are intensely focused on present needs, not the possibility that disaster will strike sometime in the distant future. But because a fire, flood or other natural or man-made disaster could strike at any time, the time to plan for it is now.

You likely already have many of the necessary processes in place — such as evacuating your office. A disaster or continuity plan simply organizes and documents your processes.

Identify specific risks

No organization can anticipate or eliminate all possible risks, but you can limit the damage of potential risks specific to your nonprofit. The first step in creating a disaster plan is to identify the specific threats you face when it comes to your people, processes and technology. For example, if you work with vulnerable populations such as children and the disabled, you may need to take extra precautions to protect your clients.

Also assess what the damages would be if your operations were interrupted. For example, if you had an office fire — or even a long-lasting power outage — what would be the possible outcomes regarding property damage and financial losses?

Make your plan

Designate a lead person to oversee the creation and implementation of your continuity plan. Then assemble teams to handle different duties. For example, a communications team could be responsible for contacting and updating staff, volunteers and other stakeholders, and updating your website and social media accounts. Other teams might focus on:

Safety and evacuation procedures,
IT issues, including backing up data offsite,
Insurance and financial needs, and
Recovery — getting your office and services back up and running.

Planning pays off

All organizations — nonprofit and for-profit alike — need to think about potential disasters. But plans are critical for some nonprofits. If you provide basic human services (such as medical care and food) or are a disaster-related charity, you must be ready to support victims and their families. This could mean mobilizing quickly, perhaps without full staffing, working computers or safe facilities. You don’t want to be caught without a plan. Contact us for more information.

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There are many ways for employers to conduct annual performance reviews. So many, in fact, that owners of small to midsize businesses may find the prospect of implementing a state-of-the-art review process overwhelming.

The simple truth is that smaller companies may not need to exert a lot of effort on a complex approach. Sometimes a simple conversation between supervisor and employee — or even owner and employee — can do the job, as long as mutual understanding is achieved and clear objectives are set.

Remember why it matters

If your commitment to this often-stressful ritual ever starts to falter, remind yourself of why it matters. A well-designed performance review process is valuable because it can:

Provide feedback and counseling to employees about how the company perceives their respective job performances,
Set objectives for the upcoming year and assist in determining any developmental needs, and
Create a written record of performance and assist in allocating rewards and opportunities, as well as justifying disciplinary actions or termination.

Conversely, giving annual reviews short shrift by only orally praising or reprimanding an employee leaves a big gap in that worker’s written history. The most secure companies, legally speaking, document employees’ shortcomings — and achievements — as they occur. They fully discuss performance at least once annually.

Don’t do this!

To ensure your company’s annual reviews are as productive as possible, make sure your supervisors aren’t:

Winging it. Establish clear standards and procedures for annual reviews. For example, supervisors should prepare for the meetings by filling out the same documentation for every employee.

Failing to consult others. If a team member works regularly with other departments or outside vendors, his or her supervisor should contact individuals in those other areas for feedback before the review. You can learn some surprising things this way, both good and bad.

Keeping employees in the dark. Nothing in a performance review should come as a major surprise to an employee. Be sure supervisors are communicating with workers about their performance throughout the year. An employee should know in advance what will be discussed, how much time to set aside for the meeting and how to prepare for it.

Failing to follow through. Make sure supervisors identify key objectives for each employee for the coming year. It’s also a good idea to establish checkpoints in the months ahead to assess the employee’s progress toward the goals in question.

Put something in place

As a business grows, it may very well need to upgrade and expand its performance evaluation process. But the bottom line is that every company needs to have something in place, no matter how basic, to evaluate and document how well employees are performing. Our firm can help determine how your employees’ performance is affecting profitability and suggest ways to cost-effectively improve productivity.

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Roth 401(k) accounts have been around for 13 years now. Studies show that more employers are offering them each year. A recent study by the Plan Sponsor Council of America (PSCA) found that Roth 401(k)s are now available at 70% of employer plans, up from 55.6% of plans in 2016.

However, despite the prevalence of employers offering Roth 401(k)s, most employees aren’t choosing to contribute to them. The PSCA found that only 20% of participants who have access to a Roth 401(k) made contributions to one in 2017. Perhaps it’s because they don’t understand them.

If you offer a Roth 401(k) or you’re considering one, educate your employees about the accounts to boost participation.

A 401(k) with a twist

As the name implies, these plans are a hybrid — taking some characteristics from Roth IRAs and some from employer-sponsored 401(k)s.

An employer with a 401(k), 403(b) or governmental 457(b) plan can offer designated Roth 401(k) accounts.

As with traditional 401(k)s, eligible employees can elect to defer part of their salaries to Roth 401(k)s, subject to annual limits. The employer may choose to provide matching contributions. For 2019, a participating employee can contribute up to $19,000 ($25,000 if he or she is age 50 or older) to a Roth 401(k). The most you can contribute to a Roth IRA for 2019 is $6,000 ($7,000 for those age 50 or older).

Note: The ability to contribute to a Roth IRA is phased out for upper-income taxpayers, but there’s no such restriction for a Roth 401(k).

The pros and cons

Unlike with traditional 401(k)s, contributions to employees’ accounts are made with after-tax dollars, instead of pretax dollars. Therefore, employees forfeit a key 401(k) tax benefit. On the plus side, after an initial period of five years, “qualified distributions” are 100% exempt from federal income tax, just like qualified distributions from a Roth IRA. In contrast, regular 401(k) distributions are taxed at ordinary-income rates, which are currently up to 37%.

In general, qualified distributions are those:

Made after a participant reaches age 59½, or
Made due to death or disability.

Therefore, you can take qualified Roth 401(k) distributions in retirement after age 59½ and pay no tax, as opposed to the hefty tax bill that may be due from traditional 401(k) payouts. And unlike traditional 401(k)s, which currently require retirees to begin taking required minimum distributions after age 70½, Roth 401(k)s have no mandate to take withdrawals.

Not for everyone

A Roth 401(k) is more beneficial than a traditional 401(k) for some participants, but not all. For example, it may be valuable for employees who expect to be in higher federal and state tax brackets in retirement. Contact us if you have questions about adding a Roth 401(k) to your benefits lineup.

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Businesses use two types of audits to gauge financial results: internal and external. Here’s a closer look at how they measure up.

Focus

Internal auditors go beyond traditional financial reporting. They focus on a company’s internal controls, accounting processes and ability to mitigate risk. Internal auditors also evaluate whether the company’s activities comply with its strategy, and they may consult on a variety of financial issues as they arise within the company.

In contrast, external auditors focus solely on the financial statements. Specifically, external auditors evaluate the statements’ accuracy and completeness, whether they comply with applicable accounting standards and practices, and whether they present a true and accurate presentation of the company’s financial performance. Accounting rules prohibit external audit firms from providing their audit clients with ancillary services that extend beyond the scope of the audit.

The audit “client”

Internal auditors are employees of the company they audit. They report to the chief audit executive and issue reports for management to use internally.

External auditors work for an independent accounting firm. The company’s shareholders or board of directors hires a third-party auditing firm to serve as its external auditor. The external audit team delivers reports directly to the company’s shareholders or audit committee, not to management.

Qualifications

Internal auditors don’t need to be certified public accountants (CPAs), although many have earned this qualification. Often, internal auditors earn a certified internal auditor (CIA) qualification, which requires them to follow standards issued by the Institute of Internal Auditors (IIA).

Conversely, the partner directing an external audit must be a CPA. Most midlevel and senior auditors earn their CPA license at some point in their career. External auditors must follow U.S. Generally Accepted Auditing Standards (GAAS), which are issued by the American Institute of Certified Public Accountants (AICPA).

Reporting format

Internal auditors issue reports throughout the year. The format may vary depending on the preferences of management or the internal audit team.

External auditors issue financial statements quarterly for most public companies and at least annually for private ones. In general, external audit reports must conform to U.S. Generally Accepted Accounting Principles (GAAP) or another basis of accounting (such as tax or cash basis reporting). If needed, external auditing procedures may be performed more frequently. For example, a lender may require a private company that fails to meet its loan covenants at year end to undergo a midyear audit by an external audit firm.

Common ground

Sometimes the work of internal and external auditors overlaps. Though internal auditors have a broader focus, both teams have the same goal: to help the company report financial data that people can count on. So, it makes sense for internal and external auditors to meet frequently to understand the other team’s focus and avoid duplication of effort. Contact us to map out an auditing strategy that fits the needs of your company.

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Life presents us with many choices: paper or plastic, chocolate or vanilla, regular or decaf. For businesses, a common conundrum is buy or lease. You’ve probably faced this decision when considering office space or a location for your company’s production facilities. But the buy vs. lease quandary also comes into play with equipment.

Pride of ownership

Some business owners approach buying equipment like purchasing a car: “It’s mine; I’m committed to it and I’m going to do everything I can to familiarize myself with this asset and keep it in tip-top shape.” Yes, pride of ownership is still a thing.

If this is your philosophy, work to pass along that pride to employees. When you get staff members to buy in to the idea that this is your equipment and the success of the company depends on using and maintaining each asset properly, the business can obtain a great deal of long-term value from assets that are bought and paid for.

Of course, no “buy vs. lease” discussion is complete without mentioning taxes. The Tax Cuts and Jobs Act dramatically enhanced Section 179 expensing and first-year bonus depreciation for asset purchases. In fact, many businesses may be able to write off the full cost of most equipment in the year it’s purchased. On the downside, you’ll take a cash flow hit when buying an asset, and the tax benefits may be mitigated somewhat if you finance.

Fine things about flexibility

Many businesses lease their equipment for one simple reason: flexibility. From a cash flow perspective, you’re not laying down a major purchase amount or even a substantial down payment in most cases. And you’re not committed to an asset for an indefinite period — if you don’t like it, at least there’s an end date in sight.

Leasing also may be the better option if your company uses technologically advanced equipment that will get outdated relatively quickly. Think about the future of your business, too. If you’re planning to explore an expansion, merger or business transformation, you may be better off leasing equipment so you’ll have the flexibility to adapt it to your changing circumstances.

Last, leasing does have some tax breaks. Lease payments generally are tax deductible as “ordinary and necessary” business expenses, though annual deduction limits may apply.

Pros and cons

On a parting note, if you do lease assets this year and your company follows Generally Accepted Accounting Principles (GAAP), new accounting rules for leases take effect in 2020 for calendar-year private companies. Contact us for further information, as well as for any assistance you might need in weighing the pros and cons of buying vs. leasing business equipment.

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As the old saying goes, success is going from failure to failure without losing your enthusiasm. The world is teeming with information and advice meant to help you take your great idea to business startup and onward to prosperity, but in the end success goes to those who don’t tire of tackling obstacles and confronting the inevitable predicaments.

Some mistakes are easier to avoid than others are, and they often involve the expertise of other professionals. The largest percentage of failed businesses have stumbled blindly into the financial abyss. Miscalculating and underestimating just how much money a startup needs is common; being hit with a hefty and unexpected tax bill at year’s end is another.

Confer with an attorney before going into business to decide upon the most appropriate legal structure and set up the appropriate filings, licenses or registrations. Make sure you are aware of all your legal responsibilities and liabilities and you will avoid costly errors and ethical issues down the road.

Sounds obvious, but sometimes it is not our instincts that get us in trouble, but our attachment to them, our belief that we know it all, can do it all and will always be right. Honesty and transparency are recent buzzwords in business marketing and PR, but being honest with yourself about your strengths and weaknesses and the risks your business faces is an imperative precursor. To be honest with the world, start by being fiercely honest with yourself then your top management. That’s the way to map out a plan, whether it’s your first business plan, or your tenth. Without proper planning, reality will certainly complicate the fantasy.

Some companies and organizations that are still thriving have made the most monumental and infamous mistakes of all time. Others were not as lucky with their blunders.

In 1977, Kodak filed a patent for one of the first digital camera technologies, but never brought it to market. Blinded by the success of their film business they simply failed to keep pace with the trend. Had Kodak only trusted that instinct and acted on it they might still be a leader in their field. Did they lose sight of their vision to be the means by which people capture their memories? Did they run out of steam to take on a major transition?

When the pressure to make money eases, what will motivate you to keep doing all the things you did to become profitable in the first place? The answer requires honesty.

In 1999, NASA and Lockheed Martin, a global aerospace and security company, collaborated on the design and production of a Mars Orbitor. Due to a simple error, that could have (should have!) been caught numerous times, engineers at Lockheed used English measurements while NASA used metric, a 125 million dollar probe malfunctioned and was lost in space. Both continued on to great achievements. Not without some difficult reckoning, certainly. But when you’re faced with your next failure, remember that your next success still lies ahead.

Roth&Co provides that much needed professional and experienced support to set a course for success and keep you on track.

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If you read the Internal Revenue Code (and you probably don’t want to!), you may be surprised to find that most business deductions aren’t specifically listed. It doesn’t explicitly state that you can deduct office supplies and certain other expenses.

Some expenses are detailed in the tax code, but the general rule is contained in the first sentence of Section 162, which states you can write off “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”

Basic definitions

In general, an expense is ordinary if it’s considered common or customary in the particular trade or business. For example, insurance premiums to protect a store would be an ordinary business expense in the retail industry.

A necessary expense is defined as one that’s helpful or appropriate. For example, let’s say a car dealership purchases an automatic defibrillator. It may not be necessary for the operation of the business, but it might be helpful and appropriate if an employee or customer suffers a heart attack.

It’s possible for an ordinary expense to be unnecessary — but, in order to be deductible, an expense must be ordinary and necessary.

In addition, a deductible amount must be reasonable in relation to the benefit expected. For example, if you’re attempting to land a $3,000 deal, a $65 lunch with a potential client should be OK with the IRS. (Keep in mind that the Tax Cuts and Jobs Act eliminated most deductions for entertainment expenses but retains the 50% deduction for business meals.)

Examples of not ordinary and unnecessary

Not surprisingly, the IRS and courts don’t always agree with taxpayers about what qualifies as ordinary and necessary expenditures.

In one case, a man engaged in a business with his brother was denied deductions for his private airplane expenses. The U.S. Tax Court noted that the taxpayer had failed to prove the expenses were ordinary and necessary to the business. In addition, only one brother used the plane and the flights were to places that the taxpayer could have driven to or flown to on a commercial airline. And, in any event, the stated expenses including depreciation expenses, weren’t adequately substantiated, the court added. (TC Memo 2018-108)

In another case, the Tax Court ruled that a business owner wasn’t entitled to deduct legal and professional fees he’d incurred in divorce proceedings defending his ex-wife’s claims to his interest in, or portion of, distributions he received from his LLC. The IRS and the court ruled the divorce legal fees were nondeductible personal expenses and weren’t ordinary and necessary. (TC Memo 2018-80)

Proceed with caution

The deductibility of some expenses is clear. But for other expenses, it can get more complicated. Generally, if an expense seems like it’s not normal in your industry — or if it could be considered fun, personal or extravagant in nature — you should proceed with caution. And keep records to substantiate the expenses you’re deducting. Consult with us for guidance.

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Many employers prefer to classify workers as independent contractors to lower costs, even if it means having less control over a worker’s day-to-day activities. But the government is on the lookout for businesses that classify workers as independent contractors simply to reduce taxes or avoid their employee benefit obligations.

Why it matters

When your business classifies a worker as an employee, you generally must withhold federal income tax and the employee’s share of Social Security and Medicare taxes from his or her wages. Your business must then pay the employer’s share of these taxes, pay federal unemployment tax, file federal payroll tax returns and follow other burdensome IRS and U.S. Department of Labor rules.

You may also have to pay state and local unemployment and workers’ compensation taxes and comply with more rules. Dealing with all this can cost a bundle each year.

On the other hand, with independent contractor status, you don’t have to worry about employment tax issues. You also don’t have to provide fringe benefits like health insurance, retirement plans and paid vacations. If you pay $600 or more to an independent contractor during the year, you must file a Form 1099-MISC with the IRS and send a copy to the worker to report what you paid. That’s basically the extent of your bureaucratic responsibilities.

But if you incorrectly treat a worker as an independent contractor — and the IRS decides the worker is actually an employee — your business could be assessed unpaid payroll taxes plus interest and penalties. You also could be liable for employee benefits that should have been provided but weren’t, including penalties under federal laws.

Filing an IRS form

To find out if a worker is an employee or an independent contractor, you can file optional IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” Then, the IRS will let you know how to classify a worker. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.

It can be better to simply treat independent contractors so the relationships comply with the tax rules. This generally includes not controlling how the workers perform their duties, ensuring that you’re not the workers’ only customer, providing annual Forms 1099 and, basically, not treating the workers like employees.

Workers can also ask for a determination

Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

Defending your position

If your business properly handles independent contractors, don’t panic if a worker files a Form SS-8. Contact us before replying to the IRS. With a proper response, you may be able to continue to classify the worker as a contractor. We also can assist you in setting up independent contractor relationships that stand up to IRS scrutiny.

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While the number of plug-in electric vehicles (EVs) is still small compared with other cars on the road, it’s growing — especially in certain parts of the country. If you’re interested in purchasing an electric or hybrid vehicle, you may be eligible for a federal income tax credit of up to $7,500. (Depending on where you live, there may also be state tax breaks and other incentives.)

However, the federal tax credit is subject to a complex phaseout rule that may reduce or eliminate the tax break based on how many sales are made by a given manufacturer. The vehicles of two manufacturers have already begun to be phased out, which means they now qualify for only a partial tax credit.

Tax credit basics

You can claim the federal tax credit for buying a qualifying new (not used) plug-in EV. The credit can be worth up to $7,500. There are no income restrictions, so even wealthy people can qualify.

A qualifying vehicle can be either fully electric or a plug-in electric-gasoline hybrid. In addition, the vehicle must be purchased rather than leased, because the credit for a leased vehicle belongs to the manufacturer.

The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount.

How the phaseout rule works

The credit begins phasing out for a manufacturer over four calendar quarters once it sells more than 200,000 qualifying vehicles for use in the United States. The IRS recently announced that GM had sold more than 200,000 qualifying vehicles through the fourth quarter of 2018. So, the phaseout rule has been triggered for GM vehicles, as of April 1, 2019. The credit for GM vehicles purchased between April 1, 2019, and September 30, 2019, is reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between October 1, 2019, and March 31, 2020, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020.

The IRS previously announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phaseout rule was triggered for Tesla vehicles, effective as of January 1, 2019. The credit for Tesla vehicles purchased between January 1, 2019, and June 30, 2019, is reduced to 50% of the otherwise allowable amount. For Tesla vehicles purchased between July 1, 2019, and December 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after December 31, 2019.

Powering forward

Despite the phaseout kicking in for GM and Tesla vehicles, there are still many other EVs on the market if you’re interested in purchasing one. For an index of manufacturers and credit amounts, visit this IRS Web page: target=”_blank”>https://bit.ly/2vqC8vM. Contact us if you want more information about the tax breaks that may be available for these vehicles.

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Many businesses have a life cycle that, as life cycles tend to do, concludes with a period of decline and failure. Often, the demise of a company is driven by internal factors — such as weak financial oversight, lack of management consensus or one-person rule.

External factors typically contribute, as well. These may include disruptive competitors; local, national or global economic changes; or a more restrictive regulatory environment.

But just because bad things happen doesn’t mean they have to happen to your company. To prepare for the worst, identify a business turnaround strategy that you can implement if a severe decline suddenly becomes imminent.

Warning signs

When a company is drifting toward serious trouble, there are usually warning signs. Examples include:

Serious deterioration in the accuracy or usage of financial measurements,
Poor results of key performance indicators — including working capital to assets, sales and retained earnings to assets, and book value to debt,
Adverse trends, such as lower margins, market share or working capital,
Rapid increase in debt and employee turnover, and
Drastic reduction in assessed business value.

Not every predicament that arises will threaten the very existence of your business. But when missteps and misfortune build up, the only thing that may save the company is a well-planned turnaround strategy.

5 stages of a turnaround

No two turnarounds are exactly alike, but they generally occur in five basic stages:

Rapid assessment of the decline by external advisors,
Re-evaluation of management and staffing,
Emergency intervention to stabilize the business,
Operational restoration to pursue or achieve profitability, and
Full recovery and growth.

Each of these stages calls for a detailed action plan. Identify the advisors or even a dedicated turnaround consultant who can help you assess the damage and execute immediate moves. Prepare for the possibility that you’ll need to replace some managers and even lay off staff to reduce employment costs.

In the emergency intervention stage, a business does whatever is necessary to survive — including consolidating debt, closing locations and selling off assets. Next, restoring operations and pursuing profitability usually means scaling back to only those business segments that have achieved, or can achieve, decent gross margins.

Last, you’ll need to establish a baseline of profitability that equates to full recovery. From there, you can choose reasonable growth strategies that will move the company forward without leading it over another cliff.

In case of emergency

If your business is doing fine, there’s no need to create a minutely detailed turnaround plan. But, as part of your strategic planning efforts, it’s still a good idea to outline a general turnaround strategy to keep on hand in case of emergency. Our firm can help you devise either strategy. We can also assist you in generating financial statements and monitoring key performance indicators that help enable you to avoid crises altogether.

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In the course of operating your business, you probably spend time and money “wining and dining” current or potential customers, vendors and employees. What can you deduct on your tax return for these expenses? The rules changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs.

No more entertainment deductions

One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater productions, golf outings and fishing trips.

Meal deductions still allowed

You can still deduct 50% of the cost of food and beverages for meals conducted with business associates. However, you need to follow three basic rules in order to prove that your expenses are business related:

The expenses must be “ordinary and necessary” in carrying on your business. This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.
The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. You can’t go out with a group of friends for the evening, discuss business with one of them for a few minutes, and then write off the check.
You must be able to substantiate the expenses. There are requirements for proving that meal and beverage expenses qualify for a deduction. You must be able to establish the amount spent, the date and place where the meals took place, the business purpose and the business relationship of the people involved.

Set up detailed recordkeeping procedures to keep track of business meal costs. That way, you can prove them and the business connection in the event of an IRS audit.

Other considerations

What if you spend money on food and beverages at an entertainment event? The IRS clarified in guidance (Notice 2018-76) that taxpayers can still deduct 50% of food and drink expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after. The food-and-drink expenses should also be “stated separately from the cost of the entertainment on one or more bills, invoices or receipts,” according to the guidance.

Another related tax law change involves meals provided to employees on the business premises. Before the TCJA, these meals provided to an employee for the convenience of the employer were 100% deductible by the employer. Beginning in 2018, meals provided for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50% deductible. After 2025, these meals won’t be deductible at all.

Plan ahead

As you can see, the treatment of meal and entertainment expenses became more complicated after the TCJA. Reach out to your Roth&Co advisor with any questions on how to get the biggest tax-saving bang for your business meal bucks.

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Once your 2018 tax return has been successfully filed with the IRS, you may still have some questions. Here are brief answers to three questions that we’re frequently asked at this time of year.

Question #1: What tax records can I throw away now?
At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2015 and earlier years. (If you filed an extension for your 2015 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

Question #2: Where’s my refund?
The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.

Question #3: Can I still collect a refund if I forgot to report something?
In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2018 tax return that you filed on April 15 of 2019, you can generally file an amended return until April 15, 2022.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We can help
Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re available all year long — not just at tax filing time!

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It’s every business owner’s nightmare. Should hackers gain access to your customers’ or employees’ sensitive data, the very reputation of your company could be compromised. And lawsuits might soon follow.

No business owner wants to think about such a crisis, yet it’s imperative that you do. Suffering a data breach without an emergency response plan leaves you vulnerable to not only the damage of the attack itself, but also the potential fallout from your own panicked decisions.

5 steps to take

A comprehensive plan generally follows five steps once a data breach occurs:

1. Call your attorney. He or she should be able to advise you on the potential legal ramifications of the incident and what you should do or not do (or say) in response. Involve your attorney in the creation of your response plan, so all this won’t come out of the blue.

2. Engage a digital forensics investigator. Contact us for help identifying a forensic investigator that you can turn to in the event of a data breach. The preliminary goal will be to answer two fundamental questions: How were the systems breached? What data did the hackers access? Once these questions have been answered, experts can evaluate the extent of the damage.

3. Fortify your IT systems. While investigative and response procedures are underway, you need to proactively prevent another breach and strengthen controls. Doing so will obviously involve changing passwords, but you may also need to add firewalls, create deeper layers of user authentication or restrict some employees from certain systems.

4. Communicate strategically. No matter the size of the company, the communications goal following a data breach is essentially the same: Provide accurate information about the incident in a reasonably timely manner that preserves the trust of customers, employees, investors, creditors and other stakeholders.

Note that “in a reasonably timely manner” doesn’t mean “immediately.” Often, it’s best to acknowledge an incident occurred but hold off on a detailed statement until you know precisely what happened and can reassure those affected that you’re taking specific measures to control the damage.

5. Activate or adjust credit and IT monitoring services. You may want to initiate an early warning system against future breaches by setting up a credit monitoring service and engaging an IT consultant to periodically check your systems for unauthorized or suspicious activity. Of course, you don’t have to wait for a breach to do these things, but you could increase their intensity or frequency following an incident.

Inevitable risk

Data breaches are an inevitable risk of running a business in today’s networked, technology-driven world. Should this nightmare become a reality, a well-conceived emergency response plan can preserve your company’s goodwill and minimize the negative impact on profitability. We can help you budget for such a plan and establish internal controls to prevent and detect fraud related to (and not related to) data breaches.

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Americans who are 65 and older qualify for basic Medicare insurance, and they may need to pay additional premiums to get the level of coverage they desire. The premiums can be expensive, especially if you’re married and both you and your spouse are paying them. But one aspect of paying premiums might be positive: If you qualify, they may help lower your tax bill.

Medicare premium tax deductions
Premiums for Medicare health insurance can be combined with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your individual tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, co-insurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.

Fewer people now itemize
Qualifying for a medical expense deduction can be difficult for a couple of reasons. For 2019, you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying expenses exceeded 10% of AGI. (This threshold was 7.5% for the 2018 tax year.)

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For 2019, the standard deduction amounts are $12,200 for single filers, $24,400 for married joint-filing couples and $18,350 for heads of households. So, fewer individuals are claiming itemized deductions.

However, if you have significant medical expenses (including Medicare health insurance premiums), you may itemize and collect some tax savings.

Important note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.

Other deductible medical expenses
In addition to Medicare premiums, you can deduct a variety of medical expenses, including those for ambulance services, dental treatment, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long-term care services, prescription medicines and others.

Keep in mind that many items that Medicare doesn’t cover can be written off for tax purposes, if you qualify. You can also deduct transportation expenses to get to medical appointments. If you go by car, you can deduct a flat 20-cents-per-mile rate for 2019, or you can keep track of your actual out-of-pocket expenses for gas, oil and repairs.

Need more information?
Contact us if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. Your advisor can help determine the optimal overall tax-planning strategy based on your personal circumstances.

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A maxim of business is that a company’s hiring and staffing policies will be what make it or break it in the long run. The right people are any company’s greatest asset. Executives and managers go to great lengths to find, hire, train, motivate and retain the best employees. The expense of a good employee is the cost of business and avoiding employee turnover is priceless.

An emerging business trend is poised to revolutionize how businesses hire and employ the right people. According to GlobalWorkplaceAnalytics.com, work-from-home, among the non-self-employed, has grown by 140% since 2005, nearly 10x faster than the rest of the workforce. In the largest year over year growth since 2008, the telecommuter population grew by 11.7%, with 4.3 million employees (3.2% of the workforce) now working from home at least half the time. Feeding or following the trend, forty percent more U.S. employers now offer flexible workplace options than they did five years ago.

Studies are showing numerous benefits to employers. A 2014 Stanford study showed that call center employees increased productivity by 13% when they worked from home. A similar study by the University of Texas found that telecommuters worked on average 5-to-7 hours longer than their in-office counterparts.

Telecommuting employees tend to be much happier than their in-office counterparts, and happy employees are more likely to stay in their position, decreasing turnover. Work quality and loyalty are positively impacted by improved work life balance. With an estimated savings between $2,000 and $7,000 a year, happier telecommuting employees are the result of less stress and more money.

Employers’ bottom lines stand to benefit as well. It is projected that companies would save approximately $11,000 annually on each employee who telecommutes. So what is the potential bottom line impact? If people with compatible work chose to work from home just half the time the savings to businesses nationally would total over $700 Billion a year.

The policy isn’t without its potential pitfalls, and companies considering it should prepare appropriately. Direct oversight needs to be replaced with clear guidelines, performance benchmarks and strong communication tools to keep telework employees connected to supervisors, team members and clients. Remote access also means security concerns have to be assessed and addressed.

Private sector companies aren’t the only ones supporting telework. The State of Tennessee has instituted a telecommuting program. Governing Magazine reports that productivity is up 80% and the state has saved $6.5 million this year alone with an expected $40-60 million in profits next year from the related sale of real estate. Folks, if it’s possible in government, it’s possible anywhere!

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Merger and acquisition activity has been brisk in recent years. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.

Stocks vs. assets

From a tax standpoint, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The now-permanent 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The TCJA’s reduced individual federal tax rates may also make ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and, depending on future changes in Washington, they could be eliminated earlier or extended.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask your tax advisor for details.

Buyer vs. seller preferences

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Keep in mind that other issues, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Professional advice is critical

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results. Contact us for the best way to proceed in your situation.

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It’s a well-known truism in the corporate world: Organizations that don’t evolve run the risk of becoming obsolete. But instead of anticipating and reacting to market demands like their for-profit counterparts, many not-for-profits hold on to old ideas about how their organizations should be run. Here are a few things your nonprofit can learn from the business world.

Thinking strategically

The strategic plan — a map of near- and long-term goals and how to reach them — lies at the core of most for-profit companies. If your nonprofit doesn’t have a strategic plan or has been lax about revisiting and revising an existing plan, this should be a top priority.

Although the scope of your plan will be specific to the size and nature of your organization, basic principles apply to most. For example, you should set objectives for several time periods, such as one year, five years and 10 years out. Pay particular attention to each strategic goal’s return on investment. For example, consider the resources required to implement a new contact database relative to the time and money you’ll save in the future.

Spending differently

You probably already develop an annual budget, but how closely does it follow your strategic plan? For-profit businesses use budgets to support strategic priorities, putting greater resources behind higher priority projects.

Businesses also routinely carry debt on their balance sheets in the belief that it takes money to make money. Nonprofits, by contrast, typically avoid operating deficits. Unfortunately, it’s possible to operate so lean that you no longer meet your mission. Applying for a loan or even creating a for-profit subsidiary could provide your nonprofit with the funds to grow. Building up your endowment also may help provide the discretionary cash essential to pursue strategic opportunities.

Promoting transparency

Although nonprofits must disclose financial, operational and governance-related information on their Form 990s, public companies subject to the Sarbanes-Oxley Act and other regulations are held to higher standards. Consider going the extra mile to promote transparency.

If you don’t already, engage an outside expert to perform annual audits, and make your audited financial statements available upon request. Outside audits help assure stakeholders that your financial data is accurate and that you’re following correct accounting practices and internal controls.

We can help with your audit needs and assist you in adopting for-profit business practices that make sense given your organization’s needs. Reach out to learn more.

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Competition is as fierce as it has ever been for private and public grants to not-for-profits. If your funding model depends on receiving adequate grant money, you can’t afford to submit sloppy, unprofessional grant proposals. Here are some tips on writing a winner.

Do your research

Just as you’d research potential employers before applying for a job, you should get to know grant-making organizations before asking for their support. Familiarize yourself with the grant-maker’s primary goals and objectives, the types of projects it has funded in the past, and its grant-making processes and procedures.

Performing research enables you to determine whether your programs are a good fit with the grant-maker’s mission. If they aren’t, you’ll save yourself time and effort in preparing a proposal. If they are, you’ll be better able to tailor your proposal to your audience.

Support your request

Every grant proposal has several essential elements, starting with a single-page executive summary. Your summary should be succinct, using only the number of words necessary to define your organization and its needs. You also should include a short statement of need that provides an overview of the program you’re seeking to fund and explains why you need the money for your program. Other pieces include a detailed project description and budget, an explanation of your organization’s unique ability to run this program, and a conclusion that briefly restates your case.

Support your proposal with facts and figures but don’t forget to include a human touch by telling the story behind the numbers. Augment statistics with a glimpse of the population you serve, including descriptions of typical clients or community testimonials.

Follow the rules

Review the grant-maker’s guidelines as soon as you receive them so that if you have any questions you can contact the organization in advance of the submission deadline. Then, be sure to follow application instructions to the letter. This includes submitting all required documentation on time and error-free. Double-check your proposal for common mistakes such as:

Excessive length,
Math errors,
Overuse of industry jargon, and
Missing signatures.

Take the time

To produce a winning proposal, you need to give yourself a generous time budget. Researching the grant-maker, collecting current facts and statistics about your organization, composing a compelling story about your work and proofreading your proposal all take more time than you probably think they do. Above all, don’t leave grant proposal writing to the last minute.

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As an individual, you’ve no doubt been urged to regularly check your credit score. Most people nowadays know that, with a subpar personal credit score, they’ll have trouble buying a home or car, or just getting a reasonable-rate credit card.

But how about your business credit score? It’s important for much the same reason — you’ll have difficulty obtaining financing or procuring the assets you need to operate competitively without a solid score. So, you’ve got to be vigilant about it.

Algorithms and data
Business credit scores come from various reporting agencies, such as Experian, Equifax and Dun & Bradstreet. Each agency has its own algorithm for calculating credit scores. Like personal credit scores, higher business credit scores equate with lower risk (and vice versa).

Credit agencies track your business by its employer identification number (EIN). They compile data from your EIN, including the company’s address, phone number, owners’ names and industry classification code. Agencies may also search the Internet and public records for bankruptcies, judgments and tax liens. Suppliers, landlords, leasing companies and other creditors may also report payment experiences with the company to credit agencies.

Important factors
Timely bill payment is the biggest factor affecting your business credit score. But other important ones include:

Level of success.
Higher net worth or annual revenues generally increase your credit score.

Structure.
Corporations and limited liability companies tend to receive higher scores than sole proprietorships and partnerships because these entities’ financial identities are separate from those of their owners.

Industry.
Some agencies keep track of the percentage of companies under the company’s industry classification code that have filed for bankruptcy. Participation in high-risk industries tends to lower a business credit score.

Track record.
Credit agencies also look at the length and frequency of your company’s credit history. Once you establish credit, your business should periodically borrow additional money and then repay it on time to avoid the risk of being downgraded.

Best practices
Business credit scores help lenders decide whether to approve your loan request, as well as the loan’s interest rate, duration and other terms. Unfortunately, some small businesses and start-ups may have little to no credit history.

Build your company’s credit history by applying for a company credit card and paying the balance off each month. Also put utilities and leases in your company’s name, so the business is on the radar of the credit reporting agencies.

Sometimes, credit agencies base their ratings on incomplete, false or outdated information. Monitor your credit score regularly and note any downgrades. In some cases, the agency may be willing to change your score if you contact them and successfully prove that a rating is inaccurate.

Central role
Maintaining a healthy business credit score should play a central role in how you manage your company’s finances.
Contact us for help in using credit to help maintain your cash flow and build the bottom line.

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In recent years, external auditors have focused more attention on related party transactions. Although related party transactions aren’t necessarily bad, they do raise some concerns about the risk of misstatement or omission in financial reporting.

3 focal points
Issues with related parties played a prominent role in the scandals that surfaced nearly two decades ago at Enron, Tyco International and Refco. Public outrage about these scandals led Congress to pass the Sarbanes-Oxley Act of 2002 and establish the Public Company Accounting Oversight Board (PCAOB). Similar problems have arisen in more recent financial reporting fraud cases, prompting the PCAOB to enact tougher standards on related-party transactions and financial relationships.

PCAOB Auditing Standard No. 2410 (AS 2410), Related Parties, requires auditors of public companies to beef up their efforts in financial statement matters that pose increased risk of fraud. Specifically, auditors must focus on three critical areas:

1. Related-party transactions, such as those involving directors, executives and their family members,
2. Significant unusual transactions (SUTs) that are outside the company’s normal course of business or that otherwise appear to be unusual due to their timing, size or nature, and
3. Other financial relationships with the company’s executive officers and directors.

Subjecting these transactions and financial relationships to enhanced auditor scrutiny may help avert corporate failures. The PCAOB also hopes that enhanced auditor scrutiny will lead to improvements in accounting transparency and disclosures, which will help investors to more clearly gauge financial performance and fraud risks.

From start to finish
AS 2410 requires auditors to obtain a more in-depth understanding of every related-party financial relationship and transaction, including their nature, terms and business purpose (or lack thereof). Tougher related-party audit procedures must be performed in conjunction with the auditor’s risk assessment procedures, which occur in the planning phase of an audit.

In addition, auditors are expected to communicate with the audit committee throughout the audit process regarding the auditor’s evaluation of the company’s identification of, accounting for and disclosure of its related-party relationships and transactions. They can’t wait until the end of the engagement to communicate on these matters.

During fieldwork, expect auditors to be on the hunt for undisclosed related parties and unusual transactions. Examples of information that may be gathered during the audit that could reveal undisclosed related parties include information contained on the company’s website, tax filings, corporate life insurance policies, contracts and organizational charts.

Certain types of questionable transactions — such as contracts for below-market goods or services, bill-and-hold arrangements, uncollateralized loans and subsequent repurchase of goods sold — also might signal that a company is engaged in unusual or undisclosed related-party transactions.

To facilitate the audit process, management should be up-front with auditors about all related party transactions, even if they’re not required to be disclosed or consolidated on the company’s financial statements.

Let’s be honest
Private companies also engage in numerous related party transactions, and they may experience spillover effects of the tougher PCAOB auditing standard, which applies only to audits of public companies. Regardless of whether you’re publicly traded or privately held, it’s important to identify, evaluate and disclose all related parties. We can help you present related party relationships and transactions, openly and completely.

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In the broadest sense, strategic planning comprises two primary tasks: establishing goals and achieving them. Many business owners would probably say the first part, coming up with objectives, is relatively easy. It’s that second part — accomplishing those goals — that can really challenge a company. The key to turning your strategic objectives into a reality is a solid implementation plan.

Start with people
After clearly identifying short- and long-range goals under a viable strategic planning process, you need to establish a formal plan for carrying it out. The most important aspect of this plan is getting the right people involved.

First, appoint an implementation leader and give him or her the authority, responsibility and accountability to communicate and champion your stated objectives. (If yours is a smaller business, you could oversee implementation yourself.)

Next, establish teams of carefully selected employees with specific duties and timelines under which to complete goal-related projects. Choose employees with the experience, will and energy to implement the plan. These teams should deliver regular progress reports to you and the implementation leader.

Watch out for roadblocks
On the surface, these steps may seem logical and foolproof. But let’s delve into what could go wrong with such a clearly defined process.

One typical problem arises when an implementation team is composed of employees wholly or largely from one department. Often, they’ll (inadvertently or intentionally) execute an objective in such a way that mostly benefits their department but ultimately hinders the company from meeting the intended goal.

To avoid this, create teams with a diversity of employees from across various departments. For example, an objective related to expanding your company’s customer base will naturally need to include members of the sales and marketing departments. But also invite administrative, production and IT staff to ensure the team’s actions are operationally practical and sustainable.

Another common roadblock is running into money problems. Ensure your implementation plan is feasible based on your company’s budget, revenue projections, and local and national economic forecasts. Ask teams to include expense reports and financial projections in their regular reports. If you determine that you can’t (or shouldn’t) implement the plan as written, don’t hesitate to revise or eliminate some goals.

Succeed at the important part
Strategic planning may seem to be “all about the ideas,” but implementing the specific goals related to your strategic plan is really the most important part of the process. Of course, it’s also the most difficult and most affected by outside forces. We can help you assess the financial feasibility of your objectives and design an implementation plan with the highest odds of success.

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If you think that, once your not-for-profit receives its official tax-exempt status from the IRS, you don’t have to revisit it again, think again. Whether your organization is a Section 501(c)(3), Sec. 501(c)(7) or other type, be careful. The activities you conduct, the ways you generate revenue and how you use that revenue could potentially threaten your exempt status. It’s worth reviewing the IRS’s exempt-status rules to make sure your organization is operating within them.

Hot buttons

There are many categories of tax exemption — each with its own rules. But certain hot-button issues apply to most tax-exempt entities. These include:

Lobbying. Having a Sec. 501(c)(3) status limits the amount of lobbying a charitable organization can undertake. This doesn’t mean lobbying is totally prohibited. But according to the IRS, your organization shouldn’t devote “a substantial part of its activities” trying to influence legislation.

For nonprofits that are exempt under other categories of Sec. 501(c), there are fewer restrictions on lobbying activities. Lobbying activities these groups undertake must relate to the accomplishment of the group’s purpose. For instance, an association of teachers can lobby for education reform without risking its tax exemption.

Campaign activities. The IRS considers lobbying to be different from campaign activities, which are completely off limits to Sec. 501(c)(3) organizations. This means they can’t participate or intervene in any political campaign for or against a candidate for public office. If you’re not a 501(c)(3) organization, campaign restrictions vary.

Excess profit and private inurement. The cardinal rule about profits is that a nonprofit can’t be operated to benefit private interests. If your fundraising is successful and you have extra income, you must put it back into the organization through additional services or by creating a reserve or an endowment. You can’t use extra income to reward an individual or a person’s related entities.

Unrelated revenue. If you’re generating income through a trade or business you conduct regularly and it’s outside the scope of your mission, you may be subject to unrelated business income tax (UBIT). Examples include a university that rents performance halls to nonuniversity users or a charity selling advertising in its newsletter.

Almost all nonprofits are subject to this provision of the tax code, and, if you ignore it, you could risk your exempt status. That said, losing an exempt status from unrelated business income is rare.

Know the rules
IRS Publication 557, Tax-Exempt Status for Your Organization, outlines the rules for all nonprofits that qualify for exempt status. We can help your nonprofit interpret and apply the information based on its specific situation.

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“I could sell water to a whale.”

Indeed, most salespeople possess an abundance of confidence. One could say it’s a prerequisite for the job. Because of their remarkable self-assurance, sales staffers might appear to be largely autonomous. Hand them something to sell, tell them a bit about it and let them do their thing — right?

Not necessarily. The sales department needs support just like any other part of a company. And we’re not just talking about office supplies and working phone lines. Here are five ways that your business can give its sales staff the support they really need:

1. Show them the data. Virtually every aspect of business is driven by analytics these days, but sales has been all about the data for decades. To keep up with the competition, provide your sales team with the most cutting-edge metrics. The right ones vary depending on your industry and customer base, but consider analytics such as lead conversion rate and quote-to-close.

2. Invest in sales training and upskilling. If you don’t train salespeople properly, they’ll face an uphill climb to success and may not stick around to get there with you. (This is often partly why sales staffs tend to have high turnover.) Once a salesperson is trained, offer continuing education — now commonly referred to as “upskilling” — to continue to enhance his or her talents.

3. Effectively evaluate employee performance. For sales staff, annual job reviews can boil down to a numbers game whereby it was either a good year or a bad one. Make sure your performance evaluations for salespeople are as comprehensive and productive as they are for any other type of employee. Sales goals should obviously play a role, but look for other professional development objectives as well.

4. Promote positivity, ethics and high morale. Sales is often a frustrating grind. It’s not uncommon for sales staff members to fall prey to negativity. This can manifest itself in various ways: bad interactions with customers, plummeting morale and, in worst cases, even unethical or fraudulent activities. Urge your supervisors to interact regularly with salespeople to combat pessimism and find ways to keep spirits high.

5. Regularly re-evaluate your compensation model. Finding the right way to compensate sales staff has challenged, if not perplexed, companies for years. Some businesses opt for commission only, others provide a salary plus commission. There are additional options as well, such as profit margin plans that compensate salespeople based on how well the company is doing.

If your compensation model is working well, you may not want to rock the boat. But re-evaluate its efficacy at least annually and don’t hesitate to explore other approaches. Here at Roth&Co, we can help you analyze the numbers related to compensation as well as the metrics you’re using to track and assess sales.

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In 2017, Fearless Girl, the statue that mysteriously appeared the night before International Women’s Day on Wall Street, reportedly generated close to $7.5 million in free marketing across TV, social media and radio, for State Street Global Advisors (SSGA), a financial advisory firm.

The image of the young girl with her hands on her hips facing down Wall Street’s iconic Charging Bull went viral. Within the first 12 hours, the image was tweeted more than 1 billion times. Over the next 12 weeks, that number quadrupled as it garnered over 200,000 Instagram posts, as well.

Sounds like a big win for a company that happens to be the third largest asset manager globally. But, was it really? Before the campaign, there was little understanding of the company in the consumer space. Did this campaign change that for the better? Did SSGA achieve growth in the market?

One of the company’s values is promoting gender diversity. The campaign was intended to promote its SHE Fund, which invests in companies that have women in top leadership positions. The campaign picked up numerous awards, generated plenty of buzz and was ranked one of the most successful ever. Fearless Girl became an icon. From a financial standpoint, the reported investment of a rather modest $250,000 for a well timed marketing strategy that touched millions of hearts sounds like a big win. However, looks can be deceiving!

John Hegarty, himself a creator of classic Hall of Fame work for Levi’s, Volkswagen and Audi said this about the campaign, “Fearless Girl did what for the brand? I don’t know what brand it was associated with. Do you? Everybody got hugely excited… but we’ve lost connection…If I say to you “Rolls Royce,” you say, “Ooh!” You’re probably not going to buy one, but by talking to a broad audience who understands what your brand is about, you become part of culture.”
A year later, the conversation warranted a look back in the trade papers. SSGA was still working to stay true to their stated values, but they encountered many hurdles. Facing litigation, the company agreed to a $5 million settlement with the Dept. of Labor for discriminatory gender pay practices. Moreover, selling change to a market still unsure they want or need it is proving difficult. Asked about the results to date, an executive responded, “It was aspirational.”

Aspirational indeed!

Aspiring toward growth and improvement is a noble endeavor. But, for optimal growth, company values should be consistent, evocative and closely aligned with your product. Sharing that openly and honestly with your customers builds trust and loyalty. Marketing a vision that lacks integrity and reads as a ploy is bound to fall short of building consumer confidence or increasing your bottom line.

At Roth and Co, they don’t just aspire, they inspire…

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As the old saying goes, “Knowledge is power.” This certainly rings true in business, as those who best understand their industries and markets tend to have a knack for staying on top. If that person is a company’s owner, however, great knowledge can turn into a vulnerability when he or she decides to retire or otherwise leave the business.

As you develop your succession plan, consider how to mitigate the loss of pure know-how that will occur when you step down. One way to tackle this risk is to implement a knowledge management strategy.

Two types of knowledge

Knowledge management is a formal process of recognizing and treating knowledge as an asset that your company can identify, maintain and share. Generally, a business can subdivide knowledge into two types:

1. Explicit knowledge. This exists in the tangible world and typically includes company reports, financial statements and databases. These items are usually easy to access, extrapolate from and append. For your succession plan, however, you may need to dig deeper into your own confidential files, memos or emails.

2. Tacit knowledge. This is information that resides solely between the ears of a business’s leadership, employees and perhaps even service providers. As such, it’s not easily retrievable. In terms of succession planning, this may be the stuff that you haven’t written down or even talked about much.

Typical categories

Typical knowledge management categories include:

Taxes and accounting,
Financial management,
Strategic planning,
HR, payroll and employment practices,
Sales and marketing,
Customers,
Production, and
Technology.

In addition, knowledge management should account for your company’s intellectual property —trade secrets, for example. Many business owners keep such details close to their vests and even managers may not know the full value of the company’s intellectual property. This could put your business at risk following your departure.

A comprehensive knowledge management effort related to your succession plan will call on you to undertake a full inventory of every category listed above and perhaps others. Gathering your explicit knowledge may entail compiling years’, even decades’, worth of documents, files and writings. This may not be an easy task, but it’s still a matter of straight research.

You’ll likely find capturing your tacit knowledge somewhat more challenging. One idea is to ask a suitable employee or engage an outside consultant to interview you regarding all the pertinent categories. Many business owners find these conversations arduous at first but eventually enlightening and enjoyable.

A legacy preserved

A solid succession plan is imperative to maintaining the future stability and success of your company. Knowledge management can strengthen that plan and help preserve the legacy you’ve worked so hard to build.

Contact us for further information and for help identifying knowledge related to your tax filings, accounting methods and other financial matters.

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Recent changes to federal tax law and accounting rules could affect whether you decide to lease or buy equipment or other fixed assets. Although there’s no universal “right” choice, many businesses that formerly leased assets are now deciding to buy them.

Pros and cons of leasing

From a cash flow perspective, leasing can be more attractive than buying. And leasing does provide some tax benefits: Lease payments generally are tax deductible as “ordinary and necessary” business expenses. (Annual deduction limits may apply.)

Leasing used to be advantageous from a financial reporting standpoint. But new accounting rules that bring leases to the lessee’s balance sheet go into effect in 2020 for calendar-year private companies. So, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans.

Leasing also has some potential drawbacks. Over the long run, leasing an asset may cost you more than buying it, and leasing doesn’t provide any buildup of equity. What’s more, you’re generally locked in for the entire lease term. So, you’re obligated to keep making lease payments even if you stop using the equipment. If the lease allows you to opt out before the term expires, you may have to pay an early-termination fee.

Pros and cons of buying

Historically, the primary advantage of buying over leasing has been that you’re free to use the assets as you see fit. But an advantage that has now come to the forefront is that Section 179 expensing and first-year bonus depreciation can provide big tax savings in the first year an asset is placed in service.

These two tax breaks were dramatically enhanced by the Tax Cuts and Jobs Act (TCJA) — enough so that you may be convinced to buy assets that your business might have leased in the past. Many businesses will be able to write off the full cost of most equipment in the year it’s purchased. Any remainder is eligible for regular depreciation deductions over IRS-prescribed schedules.

The primary downside of buying fixed assets is that you’re generally required to pay the full cost upfront or in installments, although the Sec. 179 and bonus depreciation tax benefits are still available for property that’s financed. If you finance a purchase through a bank, a down payment of at least 20% of the cost is usually required. This could tie up funds and affect your credit rating. If you decide to finance fixed asset purchases, be aware that the TCJA limits interest expense deductions (for businesses with more than $25 million in average annual gross receipts) to 30% of adjusted taxable income.

Decision time

When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, including tax implications. We can help you determine the approach that best suits your circumstances.

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The IRS has recently provided clarity for owners of rental properties on how they can qualify for the new 20% pass through deduction.

As per the IRS, in order to qualify for the new 20% pass through deduction, an activity must raise to the level of being a trade or business. An activity is generally considered to be a trade or business if it is regular, continuous, and considerable.

Determining whether a rental real estate enterprise meets these criteria can be difficult. The IRS has therefore provided a safe harbor whereby an enterprise will be treated as a trade or business for the purposes of the 20% pass through deduction if certain conditions are met.

Under the safe harbor, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year:

(1) Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.

(2) 250 or more hours of rental services are performed per year with respect to the rental enterprise. Note that these hours of service do not have to be performed by you personally.

(3) The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement does not apply to the 2018 tax year.

For purposes of the safe harbor, rental services include:

Advertising to rent or lease the real estate
Negotiating and executing leases
Verifying information contained in prospective tenant applications
Collection of rent
Daily operation, maintenance, and repair of the property
Management of the real estate
Purchase of materials
Supervision of employees and independent contractors.

Some types of rental real estate are not eligible for the safe harbor.

Accordingly, it is very important to maintain contemporaneous records to qualify for the 20% pass through deduction.

Please contact a Roth&Co adviser for further information or discussion about the new safe harbor rule.

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If you run your business from your home or perform certain functions at home that are related to your business, you might be able to claim a home office deduction against your business income on your 2018 income tax return. Thanks to a tax law change back in 2013, there are now two methods for claiming this deduction: the actual expenses method and the simplified method.

Basics of the deduction

In general, you’ll qualify for a home office deduction if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if 1) you physically meet with patients, clients or customers on your premises, or 2) you use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for your business.

Actual expenses

Traditionally, taxpayers have deducted actual expenses when they claim a home office deduction. Deductible home office expenses may include:

Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
A proportionate share of indirect expenses, such as mortgage interest, property taxes, utilities, repairs and insurance, and
A depreciation allowance.

But keeping track of actual expenses can be time consuming.

The simplified method

Fortunately, there’s a simplified method that’s been available since 2013: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.

For example, if you’ve converted a 300-square-foot bedroom to an office you use exclusively and regularly for business, you can write off $1,500 under the simplified method (300 square feet x $5). However, if your business is located in a 600-square-foot finished basement, the deduction will still be only $1,500 because of the cap on the deduction under this method.

As you can see, the cap can make the simplified method less beneficial for larger home office spaces. But even for spaces of 300 square feet or less, taxpayers may qualify for a bigger deduction using the actual expense method. So, tracking your actual expenses can be worth the extra hassle.

Flexibility in filing

When claiming the home office deduction, you’re not locked into a particular method. For instance, you might choose the actual expense method on your 2018 return, use the simplified method when you file your 2019 return next year and then switch back to the actual expense method thereafter. The choice is yours.

Unsure whether you qualify for the home office deduction? Or wondering whether you should deduct actual expenses or use the simplified method? Contact us. We can help you determine what’s right for your specific situation.

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Directors and officers (D&O) liability insurance enables board members to make decisions without fear that they’ll be personally responsible for any related litigation costs. Such coverage is common in the business world, but fewer not-for-profits carry it. Nonprofits may assume that their charitable mission and the good intentions of volunteer board members protect them from litigation. These assumptions can be wrong.

Asked and answered

Here are several FAQs to help you determine whether your board needs D&O insurance:

Whom does it cover? A policy can help protect both your organization and its key individuals: directors, officers, employees and even volunteers and committee members.

What does it cover? Normally, D&O insurance covers allegations of wrongful acts, errors, misleading statements, neglect or breaches of duty connected with a person’s performance of duties. Examples include:

Mismanagement of funds or investments,
Employment issues such as harassment and discrimination,
Self-dealing,
Failure to provide services, and
Failure to fulfill fiduciary duties.

Are there coverage limitations? D&O policies are claims-made, meaning that the insurer pays for claims filed during the policy period even if the alleged wrongful act occurred outside of the policy period. The flip side of this is that D&O insurance provides no coverage for lawsuits filed after a policyholder cancels — even if the alleged act happened when the policy was still in place.

What if we need to make a claim after our policy has been canceled or expired? You might still be covered if you bought extended reporting period (ERP) coverage. It generally covers newly filed claims on actions that allegedly occurred during the regular policy period.

How do we file a claim? When a legal complaint is filed against your nonprofit, contact your insurer to determine whether the matter is insurable and includes defense costs. Most policies reimburse the insured for reasonable defense costs, in addition to covering judgments against the insured.

How can we keep costs down? Think seriously about the people and actions that should be covered and the amount of protection you need — and don’t need. For example, you probably don’t need coverage of bodily injury or property damage because these claims usually are covered by general liability and workers’ compensation insurance. As with most insurance coverage, D&O premiums are likely to be lower if you opt for higher deductibles.

Making the decision

Not every organization needs D&O insurance. In some states, volunteer immunity statutes provide limited protection for negligence. Such protection, however, doesn’t extend to federal statutes. If you’re unsure, contact us.

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While the Tax Cuts and Jobs Act (TCJA) reduces most income tax rates and expands some tax breaks, it limits or eliminates several itemized deductions that have been valuable to many individual taxpayers. Here are five deductions you may see shrink or disappear when you file your 2018 income tax return:

1. State and local tax deduction. For 2018 through 2025, your total itemized deduction for all state and local taxes combined — including property tax — is limited to $10,000 ($5,000 if you’re married and filing separately). You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.

2. Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. For 2018 through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after Dec. 15, 2017, with some limited exceptions.

3. Home equity debt interest deduction. Before the TCJA, an itemized deduction could be claimed for interest on up to $100,000 of home equity debt used for any purpose, such as to pay off credit cards (for which interest isn’t deductible). The TCJA effectively limits the home equity interest deduction for 2018 through 2025 to debt that would qualify for the home mortgage interest deduction.

4. Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018 through 2025. If you’re an employee and work from home, this includes the home office deduction. (Business owners and the self-employed may still be able to claim a home office deduction against their business or self-employment income.)

5. Personal casualty and theft loss deduction. For 2018 through 2025, this itemized deduction is suspended except if the loss was due to an event officially declared a disaster by the President.

Be aware that additional rules and limits apply to many of these deductions. Also keep in mind that the TCJA nearly doubles the standard deduction. The combination of a much larger standard deduction and the reduction or elimination of many itemized deductions means that, even if itemizing has typically benefited you in the past, you might be better off taking the standard deduction when you file your 2018 return. Please contact us with any questions you have.

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Limited liability company (LLC) members commonly claim that their distributive shares of LLC income — after deducting compensation for services in the form of guaranteed payments — aren’t subject to self-employment (SE) tax. But the IRS has been cracking down on LLC members it claims have underreported SE income, with some success in court.

SE tax background

Self-employment income is subject to a 12.4% Social Security tax (up to the wage base) and a 2.9% Medicare tax. Generally, if you’re a member of a partnership — including an LLC taxed as a partnership — that conducts a trade or business, you’re considered self-employed.

General partners pay SE tax on all their business income from the partnership, whether it’s distributed or not. Limited partners, however, are subject to SE tax only on any guaranteed payments for services they provide to the partnership. The rationale is that limited partners, who have no management authority, are more akin to passive investors.

(Note, however, that “service partners” in service partnerships, such as law firms, medical practices, and architecture and engineering firms, generally may not claim limited partner status regardless of their level of participation.)

LLC uncertainty

Over the years, many LLC members have taken the position that they’re equivalent to limited partners and, therefore, exempt from SE tax (except on guaranteed payments for services). But there’s a big difference between limited partners and LLC members. Both enjoy limited personal liability, but, unlike limited partners, LLC members can actively participate in management without jeopardizing their liability protection.

Arguably, LLC members who are active in management or perform substantial services related to the LLC’s business are subject to SE tax, while those who more closely resemble passive investors should be treated like limited partners. The IRS issued proposed regulations to that effect in 1997, but hasn’t finalized them — although it follows them as a matter of internal policy.

Some LLC members have argued that the IRS’s failure to finalize the regulations supports the claim that their distributive shares aren’t subject to SE tax. But the IRS routinely rejects this argument and has successfully litigated its position. The courts generally have imposed SE tax on LLC members unless, like traditional limited partners, they lack management authority and don’t provide significant services to the business.

Review your situation

The law in this area remains uncertain, particularly with regard to capital-intensive businesses. But given the IRS’s aggressiveness in collecting SE taxes from LLCs, LLC members should assess whether the IRS might claim that they’ve underpaid SE taxes.

Those who wish to avoid or reduce these taxes in the future may have some options, including converting to an S corporation or limited partnership, or restructuring their ownership interests. When evaluating these strategies, there are issues to consider beyond taxes. Contact us to discuss your specific situation.

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Ask many entrepreneurs and small business owners to show you their financial statements and they’ll likely open a laptop and show you their bookkeeping software. Although tracking financial transactions is critical, spreadsheets aren’t financial statements.

In short, financial statements are detailed and carefully organized reports about the financial activities and overall position of a business. As any company evolves, it will likely encounter an increasing need to properly generate these reports to build credibility with outside parties, such as investors and lenders, and to make well-informed strategic decisions.

These are the typical components of financial statements:

Income statement. Also known as a profit and loss statement, the income statement shows revenues and expenses for a specified period. To help show which parts of the business are profitable (or not), it should carefully match revenues and expenses.

Balance sheet. This provides a snapshot of a company’s assets and liabilities. Assets are items of value, such as cash, accounts receivable, equipment and intellectual property. Liabilities are debts, such as accounts payable, payroll and lines of credit. The balance sheet also states the company’s net worth, which is calculated by subtracting total liabilities from total assets.

Cash flow statement. This shows how much cash a company generates for a particular period, which is a good indicator of how easily it can pay its bills. The statement details the net increase or decrease in cash as a result of operations, investment activities (such as property or equipment sales or purchases) and financing activities (such as taking out or repaying a loan).

Retained earnings/equity statement. Not always included, this statement shows how much a company’s net worth grew during a specified period. If the business is a corporation, the statement details what percentage of profits for that period the company distributed as dividends to its shareholders and what percentage it retained internally.

Notes to financial statements. Many if not most financial statements contain a supplementary report to provide additional details about the other sections. Some of these notes may take the form of disclosures that are required under Generally Accepted Accounting Principles — the most widely used set of accounting rules and standards. Others might include supporting calculations or written clarifications.

Financial statements tell the ongoing narrative of your company’s finances and profitability. Without them, you really can’t tell anyone — including yourself — precisely how well you’re doing. We can help you generate these reports to the highest standards and then use them to your best advantage.

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Signs of financial distress in a not-for-profit can be subtle. But board members have a responsibility to recognize them and do everything in their power to avert potential disaster. Pay particular attention to:

1. Budget bellwethers. Confirm that proposed budgets are in line with strategies already developed and approved. Once your board has signed off on the budget, monitor it for unexplained variances.

Some variances are to be expected, but staff must provide reasonable explanations — such as funding changes or macroeconomic factors — for significant discrepancies. Where necessary, direct management to mitigate negative variances by, for example, implementing cost-saving measures.

Also make sure management isn’t overspending in one program and funding it by another, dipping into operational reserves, raiding an endowment or engaging in unplanned borrowing. Such moves might mark the beginning of a financially unsustainable cycle.

2. Financial statement flaws. Untimely, inconsistent financial statements or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) can lead to poor decision-making and undermine your nonprofit’s reputation. They also can make it difficult to obtain funding or financing if deemed necessary.

Insist on professionally prepared statements as well as annual audits. Members of your audit committee should communicate directly with auditors before and during the process, and all board members should have the opportunity to review and question the audit report.

Require management to provide your board with financial statements within 30 days of the close of a period. Late or inconsistent financials could signal understaffing, poor internal controls, an indifference to proper accounting practices or efforts to conceal.

3. Donor doubts. If you start hearing from long-standing supporters that they’re losing confidence in your organization’s finances, investigate. Ask supporters what they’re seeing or hearing that prompts their concerns. Also note when development staff hits up major donors outside of the usual fundraising cycle. These contacts could mean the organization is scrambling for cash.

4. Excessive executive power. Even if you have complete faith in your nonprofit’s executive director, don’t cede too many responsibilities to him or her. Step in if this executive tries to:

• Choose a new auditor,
• Add board members,
• Ignore expense limits, or
• Make strategic decisions without board input and guidance.

Proceed with caution

The mere existence of a financial warning sign doesn’t necessarily merit a dramatic response from your nonprofit’s board. Some problems are correctable by, for example, outsourcing accounting functions if the staff is overworked. But multiple or chronic issues could call for significant changes.

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A wise man will make more options than he finds. Case in point…

In 2008 Audi hadn’t yet made its mark in the US. For all their success in other markets they couldn’t break in to the largest car market in the world where major players were well entrenched. Though their quality surpassed many of their competitors they failed to connect with the American consumer in a meaningful way.

Audi’s marketers believed their best chance was a super bowl commercial. In one minute during the most widely watched sports event of the year they could break in, convey their story and position themselves for growth. One problem – the 4.5 million dollar price tag would decimate their marketing budget.

In a forward thinking move Audi launched a social media campaign engaging customers with personal and touching content. The commercials featured real people answering the question, who do you appreciate? Viewers and followers were then asked to post their own responses to Audi’s social media pages every time a car commercial came on during the super bowl for a chance to gift that person a free Audi.

The campaign was a huge success that leveraged the power of the Super Bowl (which they couldn’t afford) disrupted industry giants (who could), and forged direct connections to their consumers through personal engagement.

Today’s businesses have tools available to help them connect with their consumers in ways Audi could only have only dreamed of. But the proliferation of web content has caused some backlash in the form of decreased engagement. Highly customizable data analytics from first party data help streamline the process and deliver personalized content directly to your prime customer base who are more likely to click back and further drive business.

The sheer volume of online competition means consumer expectations have risen as well. Companies are fostering their relationship with potential customers from the point of awareness to initial contact all the way through the funnel to conversion. Tracking the process improves efficiency and ROI.

Today’s consumer doesn’t just want your product, they want your story. They want your story to speak to them through shared values and authenticity, and they want you to pull them in. Like Audi did.

Every business will have do or die decisions to make. Moments when what has to be done seems impossible and the consequences of inaction seem to signal the end of the line. Some encounter the end of the road and accept that they have gone as far they can go. Others create more options.

Create your opportunity… with Roth&Co.

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As you likely know by now, the Tax Cuts and Jobs Act (TCJA) reduced or eliminated many deductions for individuals. One itemized deduction the TCJA kept intact is for investment interest expense. This is interest on debt used to buy assets held for investment, such as margin debt used to buy securities. But if you have investment interest expense, you can’t count on benefiting from the deduction.

3 hurdles

There are a few hurdles you must pass to benefit from the investment interest deduction even if you have investment interest expense:

1. You must itemize deductions. In the past this might not have been a hurdle, because you may have typically had enough itemized deductions to easily exceed the standard deduction. But the TCJA nearly doubled the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018. Plus, some of your other itemized deductions, such as your state and local tax deduction, might be smaller on your 2018 return because of TCJA changes. So you might not have enough itemized deductions to exceed your standard deduction and benefit from itemizing.

2. You can’t have incurred the interest to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.

3. You must have sufficient “net investment income.” The investment interest deduction is limited to your net investment income. For the purposes of this deduction, net investment income generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included. However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.
You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

Will interest expense save you tax?

As you can see, the answer to the question depends on multiple factors. We can review your situation and help you determine whether you can benefit from the investment interest expense deduction on your 2018 tax return.

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With the year underway, your business probably has a strategic plan in place for the months ahead. Or maybe you’ve created a general outline but haven’t quite put the finishing touches on it yet. In either case, there’s a time-tested approach to refining your strategic plan that you should consider: a SWOT analysis. Let’s take a closer look at what each of the letters in that abbreviation stands for:

Strengths. A SWOT analysis starts by identifying your company’s core competencies and competitive advantages. These are how you can boost revenues and build value. Examples may include an easily identifiable brand, a loyal customer base or exceptional customer service.

Unearth the source of each strength. A loyal customer base, for instance, may be tied to a star employee or executive — say a CEO with a high regional profile and multitude of community contacts. In such a case, it’s important to consider what you’d do if that person suddenly left the business.

Weaknesses. Next the analysis looks at the opposite of strengths: potential risks to profitability and long-term viability. These might include high employee turnover, weak internal controls, unreliable quality or a location that’s no longer advantageous.

You can evaluate weaknesses relative to your competitors as well. Let’s say metrics indicate customer recognition of your brand is increasing, but you’re still up against a name-brand competitor. Is that a battle you can win? Every business has its Achilles’ heel — some have several. Identify yours so you can correct them.

Opportunities. From here, a SWOT analysis looks externally at what’s happening in your industry, local economy or regulatory environment. Opportunities are favorable external conditions that could allow you to build your bottom line if your company acts on them before competitors do.

For example, imagine a transportation service that notices a growing demand for food deliveries in its operational area. The company could allocate vehicles and hire drivers to deliver food, thereby gaining an entirely new revenue stream.

Threats. The last step in the analysis is spotting unfavorable conditions that might prevent your business from achieving its goals. Threats might come from a decline in the economy, adverse technological changes, increased competition or tougher regulation.

Going back to our previous example, that transportation service would have to consider whether its technological infrastructure could support the rigorous demands of the app-based food-delivery industry. It would also need to assess the risk of regulatory challenges of engaging independent contractors to serve as drivers.

Typically presented as a matrix (see accompanying image), a SWOT analysis provides a logical framework for better understanding how your business runs and for improving (or formulating) a strategic plan for the year ahead. Our firm can help you gather and assess the financial data associated with the analysis.

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While the Tax Cuts and Jobs Act (TCJA) generally reduced individual tax rates for 2018 through 2025, some taxpayers could see their taxes go up due to reductions or eliminations of certain tax breaks — and, in some cases, due to their filing status. But some may see additional tax savings due to their filing status. (more…)

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A variety of tax-related limits affecting businesses are annually indexed for inflation, and many have gone up for 2019. Here’s a look at some that may affect you and your business. (more…)

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Is your not-for-profit overpaying unemployment tax? Many employers are and don’t know it. Here’s how to find out and possibly reduce unemployment costs. (more…)

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If you’re like many Americans, letters from your favorite charities have been appearing in your mailbox in recent weeks acknowledging your 2018 year-end donations. But what happens if you haven’t received such a letter — can you still claim an itemized deduction for the gift on your 2018 income tax return? It depends. (more…)

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This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018. (more…)

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Traditionally, Americans have supported charities not only for tax breaks and a vague sense of “giving back,” but also for a variety of other financial, emotional and social reasons. Understanding what motivates donors and how their motivations vary across demographic groups can help your not-for-profit more effectively reach and engage potential supporters. (more…)

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While most provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018 and either apply through 2025 or are permanent, there are two major changes under the act for 2019. Here’s a closer look. (more…)

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One thing in plentiful supply in today’s business world is help. Orbiting every industry are providers, consultancies and independent contractors offering a wide array of support services. Simply put, it’s never been easier to outsource certain business functions so you can better focus on fulfilling your company’s mission and growing its bottom line. Here are four such functions to consider:

1. Information technology. This is the most obvious and time-tested choice. Bringing in an outside firm or consultant to handle your IT systems can provide the benefits we’ve mentioned — particularly in the sense of enabling you to stay on task and not get diverted by technology’s constant changes. A competent provider will stay on top of the latest, optimal hardware and software for your business, as well as help you better access, store and protect your data.

2. Payroll and other HR functions. These areas are subject to many complex regulations and laws that change frequently — as does the software needed to track and respond to the revisions. A worthy vendor will be able to not only adjust to these changes, but also give you and your staff online access to payroll and HR data that allows employees to get immediate answers to their questions.

3. Customer service. This may seem an unlikely candidate because you might believe that, for someone to represent your company, he or she must work for it. But this isn’t necessarily so — internal customer service departments often have a high turnover rate, which drives up the costs of maintaining them and drives down customer satisfaction. Outsourcing to a provider with a more stable, loyal staff can make everyone happier.

4. Accounting. You could bring in an outside expert to handle your accounting and financial reporting. A reputable provider can manage your books, collect payments, pay invoices and keep your accounting technology up to date. The right provider can also help generate financial statements that will meet the desired standards of management, investors and lenders.

Naturally, there are potential downsides to outsourcing these or other functions. You’ll incur a substantial and regular cost in engaging a provider. It will be critical to get an acceptable return on that investment. You’ll also have to place considerable trust in any vendor — there’s always a chance that trust could be misplaced. Last, even a good outsourcing arrangement will entail some time and energy on your part to maintain the relationship.

Is this the year your business dips its toe in the vast waters of outsourced services? Maybe. Our firm can help you answer this question, choose the right function to outsource (if the answer is yes) and identify a provider likely to offer the best value.

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Beginnings are challenging. Anyone who has traveled the path to success knows it is paved in uncertainty. As 2019 begins on the heels of a decade of strong economic growth, and a rapidly evolving marketplace, potential economic slow-down has become a subject of speculation, and shifts to meet customer needs are being anticipated.

The pros and cons and financial ramifications will be studied and debated. What is certain at this point, from a business and managerial perspective, is that constant change, regulatory or otherwise, takes a toll on any workforce. Focusing on fiscal strategies to shore up profit margins to the neglect of the human relational aspect negatively impacts success in the long run.

A 2014 Mayo Clinic study found that 54.5% of physicians reported at least one symptom of burnout. A recent Forbes article by Dr. Sachin Jain explained, “While the causes of physician burnout are many and varied – poorly designed electronic health records, the treadmill of modern medical practice, the growing load of student debt – I believe strongly that a significant solution to the physician burnout problem will lie in more gratitude and a greater appreciation of the people delivering care. Too many people who deliver care feel like they are a number.” An interesting perspective, since so many patients would describe their experience similarly.

CEOs and managers who understand the importance of their employees’ well-being and build a supportive workplace environment, promote good will within their organization and are rewarded with a dedicated, capable and loyal work force that will meet the needs of their clients. To underscore the importance of this objective, in healthcare those outcomes are directly related to patient health, recovery and longevity.

A supportive environment begins with good communication. In health care, as in business, effective communication is not only necessary, but critical. The words we use and the way we deliver them determine how or if the message is received. A 2016 Crico Strategies report found that nearly 2,000 patient deaths might have been avoided — and $1.7 billion in malpractice costs — if medical staff and patients communicated better. To facilitate that, upper level management must develop a team culture where multi-level personnel feel respected, are comfortable speaking up and asking questions and ideally have the time to do so. Patients would then be spoken to in a way that addressed their concerns as well, compounding benefits.

When attempting to grow or modify any business or service delivery system, strategic planning is vital to plotting a course and staying on track. Employees’ varied needs and goals must be assessed and aligned with the overriding organizational goal so that the two organically support each other. Outside forces, such as direct competition, economic or political concerns must be analyzed, along with the possible impact of cultural or demographic trends. A solid strategic plan will identify personalized strategic goals, prioritize initiatives, improve supportive infrastructure and outline an implementation and monitoring plan.

To collaborate with effective communicators and experienced professionals across a range of specialties on your comprehensive strategic plan- Roth&Co

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There aren’t too many things businesses can do after a year ends to reduce tax liability for that year. However, you might be able to pay employee bonuses for 2018 in 2019 and still deduct them on your 2018 tax return. In certain circumstances, businesses can deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company).

Basic requirements

First, only accrual-basis taxpayers can take advantage of the 2½ month rule. Cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned.

Second, even for accrual-basis taxpayers, the 2½ month rule isn’t automatic. The bonuses can be deducted on the tax return for the year they’re earned only if the business’s bonus liability was fixed by the end of the year.

Passing the test

For accrual-basis taxpayers, a liability (such as a bonus) is deductible when it is incurred. To determine this, the IRS applies the “all-events test.” Under this test, a liability is incurred when:

All events have occurred that establish the taxpayer’s liability,
The amount of the liability can be determined with reasonable accuracy, and
Economic performance has occurred.

Generally, the last requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.

For example, many bonus plans require an employee to still be an employee on the payment date to receive the bonus. Even when the amount of each employee’s bonus is fixed at the end of the tax year, if employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Why? The business’s liability for bonuses isn’t fixed until then.

Diving into a bonus pool

Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement. According to the IRS, employers may deduct bonuses in the year they’re earned — even if there’s a risk of forfeiture — as long as any forfeited bonuses are reallocated among the remaining employees in the bonus pool rather than retained by the employer.

Under such a plan, an employer satisfies the all-events test because the aggregate bonus amount is fixed at the end of the year. It doesn’t matter that amounts allocated to specific employees aren’t determined until the payment date.

When you can deduct bonuses

So does your current bonus plan allow you to take 2018 deductions for bonuses paid in early 2019? If you’re not sure, contact us. We can review your situation and determine when you can deduct your bonus payments.

If you’re an accrual taxpayer but don’t qualify to accelerate your bonus deductions this time, we can help you design a bonus plan for 2019 that will allow you to accelerate deductions when you file your 2019 return next year.

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Turn on your computer or mobile device, scroll through Facebook or Twitter, or skim a business-oriented website, and you’ll likely come across the term “emerging technologies.” It has become so ubiquitous that you might be tempted to ignore it and move on to something else. That would be a mistake.

In today’s competitive business landscape, your ability to stay up to date — or, better yet, get ahead of the curve — on the emerging technologies in your industry could make or break your company.

Watch the competition

There’s a good chance that some of your competitors already are trying to adapt emerging technologies such as these:

Machine learning. A form of artificial intelligence, machine learning refers to the ability of machines to learn and improve at a specific task with little or no programming or human intervention. For instance, you could use machine learning to search through large amounts of consumer data and make predictions about future purchase patterns. Think of Amazon’s suggested products or Netflix’s recommended viewing.

Natural language processing (NLP). This technology employs algorithms to analyze unstructured human language in emails, texts, documents, conversation or otherwise. It could be used to find specific information in a document based on the other words around that information.

Internet of Things (IoT). The IoT is the networking of objects (for example, vehicles, building systems and household appliances) embedded with electronics, software, sensors and Internet connectivity. It allows the collection, sending and receiving of data about users and their interactions with their environments.

Robotic process automation (RPA). You can use RPA to automate repetitive manual tasks that eat up a lot of staff time but don’t require decision making. Relying on business rules and structured inputs, RPA can perform such tasks with greater speed and accuracy than any human possibly could.

Not so difficult

If you fall behind on these or other emerging technologies that your competitors may already be incorporating, you run the risk of never catching up. But how can you stay informed and know when to begin seriously pursuing an emerging technology? It’s not as difficult as you might think:

Schedule time to study emerging technologies, just as you would schedule time for doing market research or attending an industry convention.
Join relevant online communities. Follow and try to connect with the thought leaders in your industry, whether authors and writers, successful CEOs, bloggers or otherwise.
Check industry-focused publications and websites regularly.

Taking the time for these steps will reduce the odds that you’ll be caught by surprise and unable to catch up or break ahead.

When you’re ready to undertake the process of integrating an emerging technology into your business operation, forecasting both the implementation and maintenance costs will be critical. We can help you create a reasonable budget and manage the financial impact.

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A technician at a mobility equipment supplier was servicing the motorized wheelchair of a long-time customer and noticed it was a brand-new model. “Where did you buy the chair?” he asked the customer. “At the health care supply store on the other side of town,” the customer replied. The technician paused and then asked, “Well, why didn’t you buy the chair from us?” The customer replied, “I didn’t know you sold wheelchairs.”

Look deeper

Most business owners would likely agree that selling to existing customers is much easier than finding new ones. Yet many companies continue to squander potential sales to long-term, satisfied customers simply because they don’t create awareness of all their products and services.

It seems puzzling that the long-time customer in our example wouldn’t know that his wheelchair service provider also sold wheelchairs. But when you look a little deeper, it’s easy to understand why.

The repair customer always visited the repair shop, which had a separate entrance. While the customer’s chair was being repaired, he sat in the waiting area, which provided a variety of magazines but no product brochures or other promotional materials. The customer had no idea that a new sales facility was on the other side of the building until the technician asked about the new wheelchair.

Be inquisitive

Are you losing business from long-term customers because of a similar disconnect? To find out, ask yourself two fundamental questions:

1. Are your customers buying everything they need from you? To find the answer, you must thoroughly understand your customers’ needs. Identify your top tier of customers — say, the 20% who provide 80% of your revenue. What do they buy from you? What else might they need? Don’t just take orders from them; learn everything you can about their missions, strategic plans and operations.

2. Are your customers aware of everything you offer? The quickest way to learn this is, simply, to ask. Instruct your salespeople to regularly inquire about whether customers would be interested in products or services they’ve never bought. Also, add flyers, brochures or catalogs to orders when you fulfill them. Consider building greater awareness by hosting free lunches or festive corporate events to educate your customers on the existence and value of your products and services.

Raise awareness

If you have long-term customers, you must be doing something right — and that’s to your company’s credit. But, remember, it’s not out of the question that you could lose any one of those customers if they’re unaware of your full spectrum of products and services. That’s an open opportunity for a competitor.

By taking steps to raise awareness of your products and services, you’ll put yourself in a better position to increase sales and profitability. Our firm can help you identify your strongest revenue sources and provide further ideas for enhancing them.

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Nearly one year later, tax reform is still making headlines and we continue to learn more about its broad implications. Whether your previous tax filing posture was straightforward or complex, you will be impacted by the myriad of changes to the tax code. Now more than ever, it is imperative to thoughtfully consider year-end tax planning opportunities and ensure you are positioned to be in compliance with the new rules.

To support year-end tax planning and help you plan for the year ahead, Roth&Co offers you a 2018 Year-End Tax Planning guide. The guide provides valuable information about the new changes to the tax laws while providing corresponding planning tips.

Please download our complimentary year end tax planning guide for individuals

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You’ve probably heard about the recent U.S. Supreme Court decision allowing state and local governments to impose sales taxes on more out-of-state online sales. The ruling in South Dakota v. Wayfair, Inc. is welcome news for brick-and-mortar retailers, who felt previous rulings gave an unfair advantage to their online competitors., and state and local governments are pleased to potentially be able to collect more sales tax.

Below please find an up to date list on current rulings by state:

Hover over your state for current updated tax change information, and click a state to be directed to their website for more information (when available)

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Now that 2019 has begun, there isn’t too much you can do to reduce your 2018 income tax liability. But it’s smart to begin preparing for filing your 2018 return. Because the Tax Cuts and Jobs Act (TCJA), which was signed into law at the end of 2017, likely will have a major impact on your 2018 taxes, it’s a good time to review the most significant provisions impacting individual taxpayers.

Rates and exemptions

Generally, taxpayers will be subject to lower tax rates for 2018. But a couple of rates stay the same, and changes to some of the brackets for certain types of filers (individuals and heads of households) could cause them to be subject to higher rates. Some exemptions are eliminated, while others increase. Here are some of the specific changes:

Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
Elimination of personal and dependent exemptions
AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers for 2018
Approximate doubling of the gift and estate tax exemption, to $11.18 million for 2018

Credits and deductions

Generally, tax breaks are reduced for 2018. However, a few are enhanced. Here’s a closer look:

Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
Near doubling of the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018
Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes
New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income or sales taxes; $5,000 for separate filers)
Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions
Elimination of the deduction for interest on home equity debt
Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
Elimination of the AGI-based reduction of certain itemized deductions
Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year

How are you affected?

As you can see, the TCJA changes for individuals are dramatic. Many rules and limits apply, so contact us to find out exactly how you’re affected. We can also tell you if any other provisions affect you, and help you begin preparing for your 2018 tax return filing and 2019 tax planning.

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The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly.

With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.

Taxation of pass-through entities

These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors:

Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
A new 20% qualified business income deduction for eligible owners (the Section 199A deduction)
Changes to many other tax breaks for individuals that will impact owners’ overall tax liability

Taxation of corporations

These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:

Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
Replacement of the flat PSC rate of 35% with a flat rate of 21%
Repeal of the 20% corporate alternative minimum tax (AMT)

Tax break positives

These changes generally apply to both pass-through entities and corporations:

A 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 (not to be confused with the new Sec.199A deduction), which was for qualified domestic production activities and commonly referred to as the “manufacturers’ deduction”
A new rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Preparing for 2018 filing

Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes; you and your business could be affected by other changes as well. Contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for 2019, too.

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Roth & Company LLP, who this year celebrated 40 years as a top-tier accounting firm, announced the appointments of Rachel Stein and Hershy Donath as new partners to the firm.

As of 2019, Mrs. Stein will be promoted from Senior Manager, the position she currently holds in the firm’s Brooklyn office. Mr. Donath will be transitioning to Partner in Roth&Co’s Lakewood location. He comes from Ernst and Young, where he’s been operating as Executive Director in the firm’s audit practice.

Speaking on behalf of the firm’s existing Partners, Co-Managing Partner Mr. Zacharia Waxler says, ‘we constantly seek to acknowledge the dedication of our team members and reward them when appropriate. We are delighted to promote Rachel to Partner in the firm. She has been a valuable asset to Roth&Co over the last ten years, and continues to demonstrate an outstanding commitment to the firm’s growth and values, as well as consistently excelling in her work with clients.’

Mr. Waxler continues, ‘Hershy is a talented accountant with extensive experience, we are excited to have him on board, and look forward to his future contributions positively impacting the firm and our clients.’

About Rachel
Mrs. Stein is a skilled accountant with extensive experience advising a variety of real estate, hospitality and wholesale distribution clients. She has developed close relationships with leading real estate owners and investors, and has been instrumental in generating effective solutions to critical tax issues in real estate transactions.
Rachel is also the firm’s expert advisor for foreign investors seeking to invest in the US, skillfully guiding them through the complexities of US tax compliance. She is proficient in coordinating US tax laws with foreign tax laws to create an optimal worldwide tax approach. In her role as partner, Rachel will continue to grow this area of the firm, working to extend the expertise and services clients will receive.

About Hershy
Mr. Donath is an accomplished accountant with 15 years of public accounting experience. He has most recently been working with large publicly traded REITs and privately held Real Estate Funds. Hershy also has valuable experience across a variety of industries, including, hospitality, media and entertainment, consumer products and alternative energy.

At Ernst and Young, Hershy was a member of the Northeast Region Quality Network, responsible for audit teams across the region. Hershy advised engagement teams on audit methodology and supported quality initiatives in response to the Public Accounting Oversight Board and internal quality reviews.

When asked about joining Roth&Co, Mr. Donath says, ‘I look forward to bringing big firm know-how, experience, and quality to the intimate setting of a community-based firm, providing our clients with the best of both worlds.’

About Roth & Company LLP
Roth & Company was established over 40 years ago in Brooklyn, New York by Mr. Abraham Roth. The firm has since expanded to four locations, with relationships that span more than four decades, and over one hundred fifty specialized employees serving as trusted guides through the financial world.

Roth & Company is proud to be a purpose driven company, providing the personalized services of a small firm with the expertise of a large organization. The firm operates according to its ethos ‘Beyond Business,’ implementing practices that maximize benefit over profit, and putting people before the bottom line.
For more information or to speak with an expert, visit www.rothcocpa.com or call 718-236-1600.

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Do you have investments outside of tax-advantaged retirement plans? If so, you might still have time to shrink your 2018 tax bill by selling some investments ― you just need to carefully select which investments you sell.

Try balancing gains and losses

If you’ve sold investments at a gain this year, consider selling some losing investments to absorb the gains. This is commonly referred to as “harvesting” losses.

If, however, you’ve sold investments at a loss this year, consider selling other investments in your portfolio that have appreciated, to the extent the gains will be absorbed by the losses. If you believe those appreciated investments have peaked in value, essentially you’ll lock in the peak value and avoid tax on your gains.

Review your potential tax rates

At the federal level, long-term capital gains (on investments held more than one year) are taxed at lower rates than short-term capital gains (on investments held one year or less). The Tax Cuts and Jobs Act (TCJA) retains the 0%, 15% and 20% rates on long-term capital gains. But, for 2018 through 2025, these rates have their own brackets, instead of aligning with various ordinary-income brackets.

For example, these are the thresholds for the top long-term gains rate for 2018:

Singles: $425,800
Heads of households: $452,400
Married couples filing jointly: $479,000

But the top ordinary-income rate of 37%, which also applies to short-term capital gains, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. The TCJA also retains the 3.8% net investment income tax (NIIT) and its $200,000 and $250,000 thresholds.

Don’t forget the netting rules

Before selling investments, consider the netting rules for gains and losses, which depend on whether gains and losses are long term or short term. To determine your net gain or loss for the year, long-term capital losses offset long-term capital gains before they offset short-term capital gains. In the same way, short-term capital losses offset short-term capital gains before they offset long-term capital gains.

You may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income. Any remaining net losses are carried forward to future years.

Time is running out

By reviewing your investment activity year-to-date and selling certain investments by year end, you may be able to substantially reduce your 2018 taxes. But act soon, because time is running out.

Keep in mind that tax considerations shouldn’t drive your investment decisions. You also need to consider other factors, such as your risk tolerance and investment goals.

We can help you determine what makes sense for you. Please contact us.

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Tax planning is a year-round activity, but there are still some year-end strategies you can use to lower your 2018 tax bill. Here are six last-minute tax moves business owners should consider:

Postpone invoices. If your business uses the cash method of accounting, and it would benefit from deferring income to next year, wait until early 2019 to send invoices. Accrual-basis businesses can defer recognition of certain advance payments for products to be delivered or services to be provided next year.
Prepay expenses. A cash-basis business may be able to reduce its 2018 taxes by prepaying certain expenses — such as lease payments, insurance premiums, utility bills, office supplies and taxes — before the end of the year. Many expenses can be deducted up to 12 months in advance.
Buy equipment. Take advantage of 100% bonus depreciation and Section 179 expensing to deduct the full cost of qualifying equipment or other fixed assets. Under the Tax Cuts and Jobs Act, bonus depreciation, like Sec. 179 expensing, is now available for both new and used assets. Keep in mind that, to deduct the expense on your 2018 return, the assets must be placed in service — not just purchased — by the end of the year.
Use credit cards. What if you’d like to prepay expenses or buy equipment before the end of the year, but you don’t have the cash? Consider using your business credit card. Generally, expenses paid by credit card are deductible when charged, even if you don’t pay the credit card bill until next year.
Use credit cards. What if you’d like to prepay expenses or buy equipment before the end of the year, but you don’t have the cash? Consider using your business credit card. Generally, expenses paid by credit card are deductible when charged, even if you don’t pay the credit card bill until next year.
Contribute to retirement plans. If you’re self-employed or own a pass-through business — such as a partnership, limited liability company or S corporation — one of the best ways to reduce your 2018 tax bill is to increase deductible contributions to retirement plans. Usually, these contributions must be made by year-end. But certain plans — such as SEP IRAs — allow your business to make 2018 contributions up until its tax return due date (including extensions).
Qualify for the pass-through deduction. If your business is a sole proprietorship or pass-through entity, you may qualify for the new pass-through deduction of up to 20% of qualified business income. But if your taxable income exceeds $157,500 ($315,000 for joint filers), certain limitations kick in that can reduce or even eliminate the deduction. One way to avoid these limitations is to reduce your income below the threshold — for example, by having your business increase its retirement plan contributions.

Most of these strategies are subject to various limitations and restrictions beyond what we’ve covered here, so please consult us before you implement them. We can also offer more ideas for reducing your taxes this year and next.

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Roth&Co Partners and staff reflect on the firm’s journey over the last 40 years.

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Churches, synagogues, mosques and other religious congregations aren’t required to file tax returns, so they might not regularly hire independent accountants. But regardless of size, religious organizations often are subject to other requirements, such as paying unrelated business income tax (UBIT) and properly classifying employees.

Without the oversight of tax authorities or outside accountants, religious leaders may not be aware of all requirements to which they’re subject. This can leave their organizations vulnerable to fraud and its trustees and employees subject to liabilities.

Common vulnerabilities

To effectively prevent financial and other critical mistakes, make sure your religious congregation complies with IRS rules and federal and state laws. In particular, pay attention to:

Employee classification. Determine which workers in your organization are full-time employees and which are independent contractors. Depending on many factors, such as the amount of control your organization has over them, their responsibilities, and their form of compensation, individuals you consider independent contractors may need to be reclassified as employees.

Clergy wages. Most clergy should be treated as employees and receive W-2 forms. Typically, they’re exempt from Social Security taxes, Medicare taxes and federal withholding but are subject to self-employment tax on wages. A parsonage (or rental) allowance can reduce income tax, but not self-employment tax.

UBIT. If your organization regularly engages in any type of business activity that’s unrelated to its religious mission, be aware of certain tax and reporting rules. Income from such activities could be subject to UBIT.

Lobbying. Your organization shouldn’t devote a substantial part of its activities in attempting to influence legislation. Otherwise you might risk your tax-exempt status and face potential penalties.

Trust and protect

Faith groups can be particularly vulnerable to fraud because they generally foster an environment of trust. Also, their leaders may be reluctant to punish offenders. Just keep in mind that even the most devout and long-standing members of your congregation are capable of embezzlement when faced with extreme circumstances.

To ensure employees and volunteers can’t help themselves to collections, require that at least two people handle all contributions. They should count cash in a secure area and verify the contents of offering envelopes. Next, they should document their collection activity in a signed report. For greater security, encourage your members to make electronic payments on your website or sign up for automatic bank account deductions.

Seek expertise

Although your congregation is subject to less IRS scrutiny than even your fellow nonprofit organizations, that doesn’t mean you can afford to ignore financial best practices. Contact us for help.

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As the year winds to a close, most businesses see employees taking a lot of vacation time. After all, it’s the holiday season, and workers want to enjoy it. Some businesses, however, find themselves particularly short-staffed in December because they don’t allow unused paid time off (PTO) to be rolled over to the new year, or they allow only very limited rollovers.

There are good business reasons to limit PTO rollovers. Fortunately, there’s a way to reduce the year-end PTO vortex without having to allow unlimited rollovers: a PTO contribution arrangement.

Retirement saving with a twist

A PTO contribution arrangement allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.

This can be appealing to any employees who end up with a lot of PTO left at the end of the year and don’t want to lose it. But it can be especially valued by employees who are concerned about their level of retirement saving or who simply value money more than time off of work.

Good for the business

Of course the biggest benefit to your business may simply be that it’s easier to ensure you have sufficient staffing at the end of the year. But you could reap that same benefit by allowing PTO rollovers (or, if you allow some rollover, increasing the rollover limit).

A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.

Also, a PTO contribution arrangement might help you improve recruiting and retention, because of its appeal to employees who want to save more for retirement or don’t care about having a lot of PTO.

Set-up is simple

To offer a PTO contribution arrangement, simply amend your retirement plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.

Have questions about PTO contribution arrangements? Contact us. We can help you assess whether such an arrangement would make sense for your business.

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Businesses of all sizes, across all industries, have been impacted by the monumental changes to the federal tax code. To maximize tax savings and ensure compliance with the new rules, businesses need to engage in year-end planning conversations now. Certain tax savings opportunities may apply regardless of how your business is structured, while others may apply only to a particular type of business organization. No matter the type of business entity you operate, year-end tax planning should consider all possibilities to effectively lower your total tax liability.

To support year-end tax planning and help you plan for the year ahead, Roth&Co offers you a guide to 2018 Year-End Tax Planning for Businesses. The guide provides valuable information about the new changes to the tax laws while providing corresponding planning tips.

Please download our complimentary year end tax planning guide for businesses

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The holiday season is a great time for businesses to show their appreciation for employees and customers by giving them gifts or hosting holiday parties. Before you begin shopping or sending out invitations, though, it’s a good idea to find out whether the expense is tax deductible and whether it’s taxable to the recipient. Here’s a brief review of the rules.

Gifts to customers

When you make gifts to customers, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you need not include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift-wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as pens or stress balls imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (a gift basket for all to share, for example) as long as they’re “reasonable.”

Gifts to employees

Generally anything of value that you transfer to an employee is included in the employee’s taxable income (and, therefore, subject to income and payroll taxes) and deductible by you. But there’s an exception for noncash gifts that constitute “de minimis fringe benefits.”

These are items so small in value and given so infrequently that it would be administratively impracticable to account for them. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.

De minimis fringe benefits are not included in an employee’s taxable income yet are still deductible by you. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.

Keep in mind that cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.

Holiday parties

The Tax Cuts and Jobs Act reduced certain deductions for business-related meals and eliminated the deduction for business entertainment altogether. There’s an exception, however, for certain recreational activities, including holiday parties.

Holiday parties are fully deductible (and excludible from recipients’ income) provided they’re primarily for the benefit of non-highly-compensated employees and their families. If customers also attend, holiday parties may be partially deductible.

Gifts that give back

If you’re thinking about giving holiday gifts to employees or customers or throwing a holiday party, contact us. With a little tax planning, you may receive a gift of your own from Uncle Sam.

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The marketing playbook is being rewritten by the explosion of direct to consumer businesses, like Warby Parker, who have inspired expansion in this new market trend.

Warby encouraged customers to post photos of themselves wearing their trial frames on social media and get style advice from friends, which then gets liked, shared and commented on. Warby Parker found a veritable army of brand advocates lining up to share content on their behalf.

Welcome beauty brand Glossier, whose President and COO, Henry Davis, “doesn’t go by the rules.” The old rules.

Over the past four years, Glossier has carved out a niche in the billion-dollar global beauty market with an e-commerce operation selling its range of 26 skincare and make-up products and retail stores in key locations across the US.

“The company is considered innovative,” said Davis, “because it owns the bottom part of the sales funnel.” Unlike traditional beauty brands that rely on third party sellers, it doesn’t rely on any other players to make the sale to customers on its behalf.

The importance of influencer marketing has steadily increased over the past few years in online markets. In a new report out of the UK, based on the responses of 385 marketing specialists, 80% of respondents agree or strongly agree that influencers are critical to engaging younger consumers and encouraging them to buy.

Still, rather than working with influencers, Glossier reports having much more success engaging its hardcore fans directly, in the style of Warby Parker. In its most successful launch to date the brand deliberately did not send any products to influencers. Instead the company chose to gift the products to 500 super-fans who had bought the most products or were the most engaged.

Engagement is the key factor in developing the essential one-to-one relationships that fuel direct to consumer brands’ loyal customer base. Brands and companies of all sizes can learn from upstarts changing the game. By pivoting their marketing strategy and building sharing seamlessly into their products, controlling brand content and taking ownership of critical first-party data, any brand can learn to thrive in today’s digitized world.
“Customer is at the heart of product development, customer is at the heart of strategy and customer is at the heart of the sale,” Davis says, and to the brands that can’t keep up, “good riddance.”

To start up or stay relevant… Roth&Co.

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When you purchase property, such as furniture or machinery for business uses, you may be eligible for a tax deduction for the purchase and use of the property. Here’s how Section 179 deduction works.

Section 179 Deduction Explained

The Section 179 deduction allows businesses to deduct the full cost of qualified business assets in the year that the assets are purchased. The new Tax Cuts and Jobs Act has increased the assets that qualify under the Section 179 Deduction, and removed some limitations. The deduction was generally used for tangible personal property, such as equipment, furniture and fixtures, and computer software. As of the start of the 2018 tax year the following improvements made to nonresidential real property are also eligible for the deduction.

• Qualified improvement property, referring to any improvement to a building’s interior. Improvements do not qualify if they are attributable to:
o the enlargement of the building,
o any elevator or escalator or
o the internal structural framework of the building
• Roofs, HVAC, fire protection systems, alarm systems and security systems.

In the past, businesses were unable to use the deduction for personal property used in residential real estate businesses. This restriction was removed for tax years beginning in 2018, so landlords can now use the Section 179 deduction.

The deduction is limited to one million dollars a year. That means that only equipment of up to $1 million can be deducted in any given year. It is also limited to $2.5 million of asset purchases per year. Following that, there is a dollar for dollar limitation on the deduction.
This means that if a business purchased $3 million of tangible personal property in 2018, their section 179 deduction will only be $500,000. Since the business went over the limit of $2.5 million by $500,000, the section 179 deduction was reduced by that amount ($1,000,000 – $500,000). Therefore, if a business purchases $3.5 of assets in 2018 they will not be eligible to take the deduction. Another limit on the deduction is that it can only be used in an entity that does not have a net loss for the year.

Bonus Depreciation Explained

Bonus depreciation allows business owners to deduct a certain percentage of the cost of qualified assets in the year of purchase. Under the TCJA the percentage for all assets purchased from September 27, 2017 – December 31, 2022 is 100%. Qualified property includes tangible property depreciated under MACRS with a recovery period of 20 years or less. This deduction does not have any dollar limitations, and can lower income to a net loss.

Why would a business elect to use the section 179 deduction instead of bonus depreciation?

1. Since the definition of qualifying property was expanded to include certain improvements to real property, these assets are not eligible for bonus depreciation.
2. Bonus depreciation is usually an add back on state returns, while the section 179 deduction is allowable in NY.

One final consideration to keep in mind is that trusts cannot take the section 179 deduction. Therefore, if a trust is going to be receiving a K‐1 from a partnership they will not be able to make use of the 179 deduction.

For more information on how Section 179 deduction pertains to your business, consult with your trusted Roth&Co advisor.

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Many factors go into the success of a company. You’ve got to offer high-quality products or services, provide outstanding customer service, and manage your inventory or supply chain. But there’s at least one other success factor that many business owners often overlook: internal leadership training and development.

Even if all your executive and management positions are filled with seasoned leaders right now, there’s still a major benefit to continually training, coaching and mentoring employees for leadership responsibilities. After all, even someone who doesn’t work in management can champion a given initiative or project that brings in revenue or elevates the company’s public image.

Ideas to consider

Internal leadership development is practiced when owners and executives devote time to helping current managers as well as employees who might one day be promoted to positions of leadership.

To do this, shift your mindset from being only “the boss” to being someone who holds an important responsibility to share leadership knowledge with others. Here are a few tips to consider:

Contribute to performance development. Most employees’ performance reviews will reveal both strengths and weaknesses. Sit down with current and potential leaders and generously share your knowledge and experience to bolster strong points and shore up shortcomings.

Invite current and potential leaders to meetings. Give them the opportunity to participate in important meetings they might not otherwise attend, and solicit their input during these gatherings. This includes both internal meetings and interactions with external vendors, customers and prospects. Again, look to reinforce positive behaviors and offer guidance on areas of growth.

Introduce them to the wider community. Get current and potential leaders involved with an industry trade association or a local chamber of commerce. By meeting and networking with others in your industry, these individuals can get a broader perspective on the challenges that your company faces — as well as its opportunities.

Give them real decision-making authority. Probably not right away but, at some point, put a new leader to the test. Give them control of a project and then step back and observe the results. Don’t be afraid to let them fail if their decisions don’t pan out. This can help your most promising employees learn real-world lessons now that can prove invaluable in the future.

Benefits beyond

Dedicating some time and energy to internal leadership development can pay off in ways beyond having well-trained managers. You’ll likely boost retention by strengthening relationships with your best employees. Furthermore, you may discover potential problems and avail yourself of new ideas that, otherwise, may have never reached you. Our firm can provide further information and other ideas.

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Prepaying property taxes related to the current year but due the following year has long been one of the most popular and effective year-end tax-planning strategies. But does it still make sense in 2018?

The answer, for some people, is yes — accelerating this expense will increase their itemized deductions, reducing their tax bills. But for many, particularly those in high-tax states, changes made by the Tax Cuts and Jobs Act (TCJA) eliminate the benefits.

What’s changed?

The TCJA made two changes that affect the viability of this strategy. First, it nearly doubled the standard deduction to $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for singles and married couples filing separately, so fewer taxpayers will itemize. Second, it placed a $10,000 cap on state and local tax (SALT) deductions, including property taxes plus income or sales taxes.

For property tax prepayment to make sense, two things must happen:

1. You must itemize (that is, your itemized deductions must exceed the standard deduction), and

2. Your other SALT expenses for the year must be less than $10,000.

If you don’t itemize, or you’ve already used up your $10,000 limit (on income or sales taxes or on previous property tax installments), accelerating your next property tax installment will provide no benefit.

Example

Joe and Mary, a married couple filing jointly, have incurred $5,000 in state income taxes, $5,000 in property taxes, $18,000 in qualified mortgage interest, and $4,000 in charitable donations, for itemized deductions totaling $32,000. Their next installment of 2018 property taxes, $5,000, is due in the spring of 2019. They’ve already reached the $10,000 SALT limit, so prepaying property taxes won’t reduce their tax bill.

Now suppose they live in a state with no income tax. In that case, prepayment would potentially make sense because it would be within the SALT limit and would increase their 2018 itemized deductions.

Look before you leap

Before you prepay property taxes, review your situation carefully to be sure it will provide a tax benefit. And keep in mind that, just because prepayment will increase your 2018 itemized deductions, it doesn’t necessarily mean that’s the best strategy. For example, if you expect to be in a higher tax bracket in 2019, paying property taxes when due will likely produce a greater benefit over the two-year period.

For help determining whether prepaying property taxes makes sense for you this year, contact us. We can also suggest other year-end tips for reducing your taxes.

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The commerciality doctrine was created along with the operational test to address concerns over not-for-profits competing at an unfair tax advantage with for-profit businesses. But even business activities related to your exempt purpose could fall prey to the commerciality doctrine, resulting in the potential loss of your organization’s exempt status.

Several factors considered

The operational test generally requires that a nonprofit be both organized and operating exclusively to accomplish its exempt purpose. It also requires that no more than an “insubstantial part” of its activities further a nonexempt purpose. Your organization can operate a business as a substantial part of its activities as long as the business furthers your exempt purpose.

But under the commerciality doctrine, courts have ruled that some organizations’ otherwise exempt activities are substantially the same as those of commercial entities. They consider several factors when evaluating commerciality, including:

• Whether an organization has set prices to maximize profits,• The degree to which it provides below-cost services, • Whether it accumulates unreasonable reserves,• The use of commercial promotional methods such as advertising,• Whether the business is staffed by volunteers or paid employees,• Whether it sells to the general public, and• The extent to which the nonprofit relies on charitable donations. (They should be a significant percentage of total support.)
No single factor is decisive for courts or the IRS.

Possible UBIT issues

There’s another risk for nonprofits operating a business. You could pass muster under the commerciality doctrine but end up liable for unrelated business income tax (UBIT).

Revenue that a nonprofit generates from a regularly conducted trade or business that isn’t substantially related to furthering the organization’s tax-exempt purpose may be subject to UBIT. Much depends on how significant the business activities are to your organization as a whole. There are also several exceptions.

Seek advice first

If you’re thinking about launching a new business to drum up additional revenues, consult us first. We can help reduce the risk that your organization will run into potential exemption or UBIT issues.

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Under the Tax Cuts and Jobs Act (TCJA), many more businesses are now eligible to use the cash method of accounting for federal tax purposes. The cash method offers greater tax-planning flexibility, allowing some businesses to defer taxable income. Newly eligible businesses should determine whether the cash method would be advantageous and, if so, consider switching methods.

What’s changed?

Previously, the cash method was unavailable to certain businesses, including:

C corporations — as well as partnerships (or limited liability companies taxed as partnerships) with C corporation partners — whose average annual gross receipts for the previous three tax years exceeded $5 million, and
Businesses required to account for inventories, whose average annual gross receipts for the previous three tax years exceeded $1 million ($10 million for certain industries).

In addition, construction companies whose average annual gross receipts for the previous three tax years exceeded $10 million were required to use the percentage-of-completion method (PCM) to account for taxable income from long-term contracts (except for certain home construction contracts). Generally, the PCM method is less favorable, from a tax perspective, than the completed-contract method.

The TCJA raised all of these thresholds to $25 million, beginning with the 2018 tax year. In other words, if your business’s average gross receipts for the previous three tax years is $25 million or less, you generally now will be eligible for the cash method, regardless of how your business is structured, your industry or whether you have inventories. And construction firms under the threshold need not use PCM for jobs expected to be completed within two years.

You’re also eligible for streamlined inventory accounting rules. And you’re exempt from the complex uniform capitalization rules, which require certain expenses to be capitalized as inventory costs.

Should you switch?

If you’re eligible to switch to the cash method, you need to determine whether it’s the right method for you. Usually, if a business’s receivables exceed its payables, the cash method will allow more income to be deferred than will the accrual method. (Note, however, that the TCJA has a provision that limits the cash method’s advantages for businesses that prepare audited financial statements or file their financial statements with certain government entities.) It’s also important to consider the costs of switching, which may include maintaining two sets of books.

The IRS has established procedures for obtaining automatic consent to such a change, beginning with the 2018 tax year, by filing Form 3115 with your tax return. Contact us to learn more.

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For several years now, cloud computing has been touted as the perfect way for companies large and small to meet their software and data storage needs. But, when it comes to choosing and deploying a solution, one size doesn’t fit all.

Many businesses have found it difficult to fully commit to the cloud for a variety of reasons — including complexity of choices and security concerns. If your company has struggled to make a decision in this area, a hybrid cloud might provide the answer.

Public vs. private

The “cloud” in cloud computing is generally categorized as public or private. A public cloud — such as Amazon Web Services, Google Cloud or Microsoft Azure — is shared by many users. Private clouds, meanwhile, are created for and restricted to one business or individual.

Not surprisingly, public clouds generally are considered less secure than private ones. Public clouds also require Internet access to use whatever is stored on them. A private cloud may be accessible via a company’s local network.

Potential advantages

Hybrid computing, as the name suggests, combines public and private clouds. The clouds remain separate and distinct, but data and applications can be shared between them. This approach offers several potential advantages, including:

Scalability. For less sensitive data, public clouds give businesses access to enormous storage capabilities. As your needs expand or shrink — whether temporarily or for the long term — you can easily adjust the size of a public cloud without incurring significant costs for additional on-site or remote private servers.

Security. When it comes to more sensitive data, you can use a private cloud to avoid the vulnerabilities associated with publicly available options. For even greater security, procure multiple private clouds — this way, if one is breached, your company won’t lose access or suffer damage to all of its data.

Accessibility. Public clouds generally are easier for remote workers to access than private clouds. So, your business could use these for productivity-related apps while confidential data is stored on a private cloud.

Risks and costs

Using a blended computer infrastructure like this isn’t without risks and costs. For example, it requires more sophisticated technological expertise to manage and support compared to a straight public cloud approach. You’ll likely have to invest more dollars in procuring multiple public and private cloud solutions, as well as in the IT talent to maintain and support the infrastructure.

Overall, though, many businesses that have been reluctant to solely rely on either a public or private cloud may find that hybrid cloud computing brings the best of both worlds. Our firm can help you assess the financial considerations involved.

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Classifying a worker as an independent contractor frees a business from payroll tax liability and allows it to forgo providing overtime pay, unemployment compensation and other employee benefits. It also frees the business from responsibility for withholding income taxes and the worker’s share of payroll taxes.

For these reasons, the federal government views misclassifying a bona fide employee as an independent contractor unfavorably. If the IRS reclassifies a worker as an employee, your business could be hit with back taxes, interest and penalties.

Key factors

When assessing worker classification, the IRS typically looks at the:

Level of behavioral control. This means the extent to which the company instructs a worker on when and where to do the work, what tools or equipment to use, whom to hire, where to purchase supplies and so on. Also, control typically involves providing training and evaluating the worker’s performance. The more control the company exercises, the more likely the worker is an employee.

Level of financial control. Independent contractors are more likely to invest in their own equipment or facilities, incur unreimbursed business expenses, and market their services to other customers. Employees are more likely to be paid by the hour or week or some other time period; independent contractors are more likely to receive a flat fee.

Relationship of the parties. Independent contractors are often engaged for a discrete project, while employees are typically hired permanently (or at least for an indefinite period). Also, workers who serve a key business function are more likely to be classified as employees.

The IRS examines a variety of factors within each category. You need to consider all of the facts and circumstances surrounding each worker relationship.

Protective measures

Once you’ve completed your review, there are several strategies you can use to minimize your exposure. When in doubt, reclassify questionable independent contractors as employees. This may increase your tax and benefit costs, but it will eliminate reclassification risk.

From there, modify your relationships with independent contractors to better ensure compliance. For example, you might exercise less behavioral control by reducing your level of supervision or allowing workers to set their own hours or work from home.

Also, consider using an employee-leasing company. Workers leased from these firms are employees of the leasing company, which is responsible for taxes, benefits and other employer obligations.

Handle with care

Keep in mind that taxes, interest and penalties aren’t the only possible negative consequences of a worker being reclassified as an employee. In addition, your business could be liable for employee benefits that should have been provided but weren’t. Fortunately, careful handling of contractors can help ensure that independent contractor status will pass IRS scrutiny. Contact us if you have questions about worker classification.

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Done well, delegation allows not-for-profit executives to focus on their most important tasks, helps to build bench strength and gets staffers out of the office before midnight. But done poorly, it can create more burdens than it eases. Here are five practices all nonprofit leaders should adopt.

1. Choose tasks wisely

Always try to devote your time to the projects that are the most valuable to your organization and can best benefit from your talents. On the other hand, delegate tasks that frequently reoccur, such as sending membership renewal notices, or tasks that require a specific skill in which you have minimal or no expertise, such as reconciling bank accounts.

2. Pick the right person

Before you delegate a task, consider the person’s main job responsibilities and experience and how those correlate with the project. However, keep in mind that employees may welcome opportunities to test their wings in a new area or take on greater responsibility. Be sure to consider staffers’ schedules and whether they actually have time to do the job well.

3. Perfect the hand-off

When handing off a task, be clear about the goals, expectations, deadlines and details. Explain why you chose the individual and what the project means to the organization as a whole. Also let the employee know if he or she has any latitude to bring his or her own methods and processes to the task. A fresh pair of eyes might see a new and better way of accomplishing it.

4. Keep in touch — to an extent

Delegation doesn’t mean dumping a project on someone else and then washing your hands of it. Ultimately, you’re responsible for the task’s completion, even if you assign it to someone else. So stay involved by monitoring the employee’s progress and providing coaching and feedback as necessary. Remember, however, there’s a fine line between remaining available for questions and micromanaging.

5. Acknowledge the help

A good delegator never takes credit for someone else’s work. Be sure you generously — and publicly — give credit where credit is due. This could mean verbal praise in a meeting, a note of thanks in a newsletter or a letter to the person’s manager. If the project’s size and scope warrant it, consider offering extra time off or a special gift.

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Currently operating across more than 280 locations in over 70 cities worldwide, WeWork is the largest private-sector occupier of office space in central London and the second largest in Manhattan. It is poised to become the world’s second most valuable startup after Uber following a funding round in June valuing the business at $35 billion.

The co-working phenomenon began in the wake of the 2008 recession as people found themselves out of work or pursuing freelance opportunities, but the sector has risen to prominence thanks in large part to the high-profile success of property startups like WeWork.

Sales at WeWork more than doubled in the first quarter of 2018 to $342 million according to reports in the Financial Times, with gross earnings rocketing 137% in three months to the end of March.
The business model is tricky. Co-working spaces are low margin businesses that don’t really have economies of scale. So how we can we understand the economics for success in the sector?

Here’s a few options:
• Become non-profit, and profit isn’t important anymore (but subsidies are)
• Increase your margins, and make more money
• Vertically integrate, and make more money

Co-working spaces can be a function for the public good. Like libraries, street lighting and public transportation.
Empty spaces in areas in need of economic development could be bought up and inexpensively renovated into basic co-working spaces. This could have economic benefits. Imagine small town talent working remotely for a company in a big city. They wouldn’t have to live in the city, and they could spend their salary locally.

Another option is to simply make your co-working space a higher margin business by upselling with complementary services.
Coffee, lunch, mail and shipping services, in-house legal or personal assistants… The more you ascertain your clients’ needs, the better.

Of course, most co-working customers are quite frugal. For real growth, you may have to go where the money is.
With more regularity than ever, large corporations, established tech companies and other businesses offer remote work either as a perk, to lure great talent, or to inspire creativity amongst a team. Why not set up satellite offices? Or make offers to remote companies that gather for team building or meetings.

Capturing a share of that market may lead the truly entrepreneurial to vertical integration. After all, any products or services you can help supply to your customers is now potential for more coverage. Sleep space, leisure activities, grooming/beauty, fine dining, shopping… the possibilities are only limited by your imagination.

With the world watching, co-working spaces are certain to further evolve as they grow, making attention to detail more crucial than ever. At Roth&Co, focusing on the details is what they do best.

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If most of your money is tied up in your business, retirement can be a challenge. So if you haven’t already set up a tax-advantaged retirement plan, consider doing so this year. There’s still time to set one up and make contributions that will be deductible on your 2018 tax return!

More benefits

Not only are contributions tax deductible, but retirement plan funds can grow tax-deferred. If you might be subject to the 3.8% net investment income tax (NIIT), setting up and contributing to a retirement plan may be particularly beneficial because retirement plan contributions can reduce your modified adjusted gross income and thus help you reduce or avoid the NIIT.

If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements. But this can help you attract and retain good employees.

And if you have 100 or fewer employees, you may be eligible for a credit for setting up a plan. The credit is for 50% of start-up costs, up to $500. Remember, credits reduce your tax liability dollar-for-dollar, unlike deductions, which only reduce the amount of income subject to tax.

3 options to consider

Many types of retirement plans are available, but here are three of the most attractive to business owners trying to build up their own retirement savings:

1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2018 contributions as late as the due date of your 2018 tax return, including extensions — provided your plan exists on Dec. 31, 2018. For 2018, the maximum contribution is $55,000, or $61,000 if you are age 50 or older and your plan includes a 401(k) arrangement.

2. Simplified Employee Pension (SEP). This is also a defined contribution plan, and it provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2019 and still make deductible 2018 contributions as late as the due date of your 2018 income tax return, including extensions. In addition, a SEP is easy to administer. For 2018, the maximum SEP contribution is $55,000.

3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2018 is generally $220,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit.

You can make deductible 2018 defined benefit plan contributions until your tax return due date, including extensions, provided your plan exists on Dec. 31, 2018. Be aware that employer contributions generally are required.

Sound good?

If the benefits of setting up a retirement plan sound good, contact us. We can provide more information and help you choose the best retirement plan for your particular situation.

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How do you report revenue and expenses from long-term contracts? Some companies that were required to use the percentage of completion method (PCM) under prior tax law may qualify for an exception that was expanded by the Tax Cuts and Jobs Act (TCJA). This could, in turn, have spillover effects on some companies’ financial statements.

Applying the PCM

Certain businesses — such as homebuilders, real estate developers, engineering firms and creative agencies — routinely enter into contracts that last for more than one calendar year. In general, under accrual-basis accounting, long-term contracts can be reported using either 1) the completed contract method, which records revenues and expenses upon completion of the contract terms, or 2) the PCM, which ties revenue recognition to the incurrence of job costs.

The latter method is generally prescribed by U.S. Generally Accepted Accounting Principles (GAAP), as long as you can make estimates that are “sufficiently dependable.” Under the PCM, the actual costs incurred are compared to expected total costs to estimate percentage complete. Alternatively, the percentage complete may be estimated using an annual completion factor. The application of the PCM is further complicated by job cost allocation policies, change orders and changes in estimates.

In addition to reporting income earlier under the PCM than under the completed contract method, the PCM can affect your balance sheet. If you underbill customers based on the percentage of costs incurred, you’ll report an asset for costs in excess of billings. Conversely, if you overbill based on the costs incurred, you’ll report a liability for billings in excess of costs.

Syncing financial statements and tax records

Starting in 2018, the TCJA modifies Section 451 of the Internal Revenue Code so that a business recognizes revenue for tax purposes no later than when it’s recognized for financial reporting purposes. Under Sec. 451(b), taxpayers that use the accrual method of accounting will meet the “all events test” no later than the taxable year in which the item is taken into account as revenue in a taxpayer’s “applicable financial statement.”

So, if your business uses the PCM for financial reporting purposes, you’ll generally need to follow suit for tax purposes (and vice versa).

In general, for federal income tax purposes, taxable income from long-term contracts is determined under the PCM. However, there’s an exception for smaller companies that enter into contracts to construct or improve real property.

Under the TCJA, for tax years beginning in 2017 and beyond, construction firms with average annual gross receipts of $25 million or less won’t be required to use the PCM for contracts expected to be completed within two years. Before the TCJA, the gross receipts test limit for the small construction contract exception was $10 million.

Got contracts?

Compared to the completed contract method, the PCM is significantly more complicated. But it can provide more current insight into financial performance on long-term contracts, if your estimates are reliable. We can help determine the appropriate method for reporting revenue and expenses, based on the nature of your operations and your company’s size.

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Do you prepare internal financial statements for your board of directors on a monthly, quarterly or other periodic basis? Later, at year end, do your auditors always propose adjustments? What’s going on? Most likely, the differences are due to cash basis vs. accrual basis financial statements, as well as reasonable estimates proposed by your auditors during the year end audit.

Simplicity of cash

Under cash basis accounting, you recognize income when you receive payments and you recognize expenses when you pay them. The cash “ins” and “outs” are totaled by your accounting software to produce the internal financial statements and trial balance you use to prepare periodic statements. Cash basis financial statements are useful because they’re quick and easy to prepare and they can alert you to any immediate cash flow problems.

The simplicity of this accounting method comes at a price, however: Accounts receivable (income you’re owed but haven’t yet received, such as pledges) and accounts payable and accrued expenses (expenses you’ve incurred but haven’t yet paid) don’t exist.

Value of accruals

With accrual accounting, accounts receivable, accounts payable and other accrued expenses are recognized, allowing your financial statements to be a truer picture of your organization at any point in time. If a donor pledges money to you this fiscal year, you recognize it when it is pledged rather than waiting until you receive the money.

Generally Accepted Accounting Principles (GAAP) require the use of accrual accounting and recognition of contributions as income when promised. Often, year end audited financial statements are prepared on the GAAP basis.

Need for estimates

Internal and year end statements also may differ because your auditors proposed adjusting certain entries for reasonable estimates. This could include a reserve for accounts receivable that may be ultimately uncollectible.

Another common estimate is for litigation settlement. Your organization may be the party or counterparty to a lawsuit for which there is a reasonable estimate of the amount to be received or paid.

Minimizing differences

Ultimately, you want to try to minimize the differences between internal and year end audited financial statements. We can help you do this by, for example, maximizing your accounting software’s capabilities and improving the accuracy of estimates.

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