Wayfair Sales Tax Case

You may have heard that last month, the U.S. Supreme Court sided with the State of South Dakota against online sellers Wayfair, Overstock.com, and Newegg in a case that is commonly referred to as the “The Wayfair Case”. The primary focus of the case centered around a state’s right to force out-of-state sellers, without a physical presence in the state, to comply with their sales tax collection laws.  

Since a 1992 Supreme Court Decision (The Quill Case), states have not been allowed to force companies, without a physical presence in the state, to comply with their sales tax laws.  Quill is an office supply company, who at the time was selling primarily via catalogs, national ads, and telephone calls. The court ruled that Quill was not subject to the North Dakota sales tax laws, because they lacked a physical presence in the State of North Dakota. 

With the passage of time and the continued development of online retailing, 41 states, two territories, and Washington D.C. have all requested the court to review the standard established under Quill.  The Wayfair case focused around South Dakota’s enactment of a“Kill Quill” bill in which the State forced any company with more than $100,000 in sales revenue or 200 “transactions” of taxable products delivered into the state to collect and remit Sales and Use tax. 

Because most States have already enacted a Use tax provision (or something similar) the Wayfair case shouldn’t change the amount of tax required to be paid to any individual state.  It may, however, change who is responsible for making sure the tax is collected and paid.  Use tax provisions generally require the purchaser to voluntarily report and pay the tax.  Wayfair shifts that burden to the seller, which most states believe will ultimately generate more revenue to the state.  Studies have historically shown that Use tax is greatly underreported by purchasers. 

The Wayfair case could fundamentally change how sales and use tax are collected over state lines. The question is, “How will the rules evolve?”  Some states have already adopted the $100,000 and 200 transaction tests used by South Dakota. Both the opinion of the Quill case and in the dissenting opinion of Wayfair suggested that Congress should resolve this issue. 

It is too early to tell how this may ultimately be resolved.  If your organization has out-of-state retail sales, please contact a FMD representative at your earliest convenience to discuss how Wayfair may affect your organization.

Business deductions for meal, vehicle and travel expenses: Document, document, document

Meal, vehicle and travel expenses are common deductions for businesses. But if you don’t properly document these expenses, you could find your deductions denied by the IRS.

A critical requirement

Subject to various rules and limits, business meal (generally 50%), vehicle and travel expenses may be deductible, whether you pay for the expenses directly or reimburse employees for them. Deductibility depends on a variety of factors, but generally the expenses must be “ordinary and necessary” and directly related to the business.

Proper documentation, however, is one of the most critical requirements. And all too often, when the IRS scrutinizes these deductions, taxpayers don’t have the necessary documentation.

What you need to do

Following some simple steps can help ensure you have documentation that will pass muster with the IRS:

Keep receipts or similar documentation. You generally must have receipts, canceled checks or bills that show amounts and dates of business expenses. If you’re deducting vehicle expenses using the standard mileage rate (54.5 cents for 2018), log business miles driven.

Track business purposes. Be sure to record the business purpose of each expense. This is especially important if on the surface an expense could appear to be a personal one. If the business purpose of an expense is clear from the surrounding circumstances, the IRS might not require a written explanation — but it’s probably better to err on the side of caution and document the business purpose anyway.

Require employees to comply. If you reimburse employees for expenses, make sure they provide you with proper documentation. Also be aware that the reimbursements will be treated as taxable compensation to the employee (and subject to income tax and FICA withholding) unless you make them via an “accountable plan.”

Don’t re-create expense logs at year end or when you receive an IRS deficiency notice. Take a moment to record the details in a log or diary at the time of the event or soon after. The IRS considers timely kept records more reliable, plus it’s easier to track expenses as you go than try to re-create a log later. For expense reimbursements, require employees to submit monthly expense reports (which is also generally a requirement for an accountable plan).

Addressing uncertainty

You’ve probably heard that, under the Tax Cuts and Jobs Act, entertainment expenses are no longer deductible. There’s some debate as to whether this includes business meals with actual or prospective clients. Until there’s more certainty on that issue, it’s a good idea to document these expenses. That way you’ll have what you need to deduct them if Congress or the IRS provides clarification that these expenses are indeed still deductible.

For more information about what meal, vehicle and travel expenses are and aren’t deductible — and how to properly document deductible expenses — please contact us.

© 2018

CLOSE-UP ON THE NEW QBI DEDUCTION’S WAGE LIMIT

The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in.

Full vs. partial phase-in

When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of:

• 50% of the amount of W-2 wages paid to employees during the tax year, or

• The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).

When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows:

1. The difference between taxable income and the applicable threshold is divided by $100,000 for joint filers or $50,000 for other filers.

2. The resulting percentage is multiplied by the difference between the gross deduction and the fully wage-limited deduction.

3. The result is subtracted from the gross deduction to determine the final deduction.

Some examples

Let’s say Chris and Leslie have taxable income of $600,000. This includes $300,000 of QBI from Chris’s pass-through business, which pays $100,000 in wages and has $200,000 of QBP. The gross deduction would be $60,000 (20% of $300,000), but the wage limit applies in full because the married couple’s taxable income exceeds the $415,000 top of the phase-in range for joint filers. Computing the deduction is fairly straightforward in this situation.

The first option for the wage limit calculation is $50,000 (50% of $100,000). The second option is $30,000 (25% of $100,000 + 2.5% of $200,000). So the wage limit — and the deduction — is $50,000.

What if Chris and Leslie’s taxable income falls within the phase-in range? The calculation is a bit more complicated. Let’s say their taxable income is $400,000. The full wage limit is still $50,000, but only 85% of the full limit applies:

($400,000 taxable income - $315,000 threshold)/$100,000 = 85%

To calculate the amount of their deduction, the couple must first calculate 85% of the difference between the gross deduction of $60,000 and the fully wage-limited deduction of $50,000:

($60,000 - $50,000) × 85% = $8,500

That amount is subtracted from the $60,000 gross deduction for a final deduction of $51,500.

That’s not all

Be aware that another restriction may apply: For income from “specified service businesses,” the QBI deduction is reduced if an owner’s taxable income falls within the applicable income range and eliminated if income exceeds it. Please contact us to learn whether your business is a specified service business or if you have other questions about the QBI deduction.

© 2018

Education as a small-business fringe benefit

As reported in previous issues of the CPA Client Bulletin this year, the Tax Cuts and Jobs Act of 2017 dramatically reduced taxpayers’ ability to itemize deductions. Among the tax deduction opportunities that have vanished, from 2018–2025, are miscellaneous itemized deductions that exceed 2% of the taxpayer’s gross income. Such deductions included unreimbursed employee business expenses.

            Drilling down, those no-longer-deductible employee expenses included education outlays that were related to someone’s work at your company.

            Example 1: Heidi Larson is a supervisor at ABC Corp., where she is responsible for a small group of workers. Heidi is paying for online courses that will ultimately lead to an MBA and help her in her current job. Under prior law, Heidi may have been able to deduct her costs for the MBA program, but that’s not the case now.

Filling the gap

Many people will be in Heidi’s situation, unable to offset the cost of paying for education that will bolster their careers. In this environment, your small business can provide valuable education-related assistance. Offering help in this area may allow your company to attract and retain high-quality workers, in addition to improving your employees’ on-the-job performance.

            In 2018, the IRS released an updated Employer’s Tax Guide to Fringe Benefits, which reflects the new tax law. This guide mentions some ways that employers can offer education benefits that receive favorable tax treatment.

Educational assistance programs

An educational assistance program (EAP) must be a written plan created specifically to benefit your company’s employees. Under such a plan, you can exclude from taxable compensation up to $5,250 of educational assistance provided to each covered employee per year.

            Example 2: Suppose that DEF Corp. has an EAP. Ken Matthews, a supervisor there, is taking courses in a local MBA program. DEF provides $5,000 to help Ken pay for his courses this year. DEF can deduct its $5,000 outlay, whereas Ken does not report that $5,000 as taxable income. It makes no difference whether DEF pays the bills directly or reimburses Ken for his outlay.

            Some formality is required when setting up an EAP and certain requirements must be met. The plan can’t favor highly compensated employees or company owners, for example, and it can’t offer cash to employees instead of educational assistance. Our office can help you create an EAP that complies with IRS requirements.

Working-condition fringe benefit

The benefits in this category don’t require a formal plan, there is no limit on the amount of educational assistance involved, and no explicit limit on highly compensated employees or owners. However, there are rules that must be followed to earn tax breaks.  

            The education must be required, by the company or by law, in order for the employee to maintain his or her present position, salary, or status at the firm, and the learning must have a valid business purpose for the employer. If those conditions can’t be met, tax breaks still may be available if the education helps to maintain or improves job-related skills.

            Regardless of the previous paragraph, tax benefits will be denied if the education is needed to meet the minimum educational requirements of the employee's current job or if the course will qualify the employee for a new trade or business.

            Example 3: Nora Pearson, a supervisor at GHI Corp., is going to law school at night. Even if learning the law will help Nora do her job better, company funding for her courses won’t qualify for favorable taxation because the education could enable Nora to become an attorney, a new trade for her. Any assistance from GHI will be treated as taxable compensation.

            Note that it is possible to have an EAP and provide over $5,250 to an eligible employee. Assuming that all conditions are met, assistance over $5,250 might be deductible for the employer and excluded from the employee’s taxable compensation as a working-condition fringe benefit.

How the new tax law affects 529 plans

For many years, 529 college savings plans have offered a tax-favored way to save for higher education. These plans, officially qualified tuition programs, are named for the IRC section that provides their advantages.

            In brief, 529 plans are funded with after-tax dollars. In college savings plans, account owners choose from a menu of investments, and any earnings are untaxed. Distributions are also tax-free if they do not exceed the qualifying educational expenses of the account beneficiary: payments of tuition, fees, supplies, and certain housing expenses for the account beneficiary’s study at an eligible educational institution. Before 2018, eligible educational institutions included only post-secondary institutions.

Youth movement

 Under the new tax law, the benefits mentioned previously (tax-free investment earnings, potentially tax-free distributions) remain as they were. The difference is that for tax years beginning after December 31, 2017, 529 plans are no longer limited to higher education at a post-secondary institution. Now they can be used for elementary and secondary education, as well. That includes learning in public, private, and religious schools.

            There is one key caveat: Tax-free distributions for elementary and secondary education are capped at $10,000 per student per year. As before, there is no annual limit on qualified distributions from 529 plans for higher education.

            Example 1: Bill and Claire Dawson open a 529 account for their newborn son Noah. Over the years, they invest thousands of dollars there. When Noah is age 10, in the fifth grade, he goes to a private school where the tuition is $15,000. The Dawsons take $10,000 from Noah’s 529 account to pay part of his tuition with a tax-free distribution. A larger distribution could lead to an income tax obligation and possibly an additional 10% tax on the amount of the taxable distribution.

Sooner than later

For families like the Dawsons, using 529 money for pre-college costs might not be an ideal strategy. The earlier money is withdrawn, the less time there will be for compounding earnings. Extending untaxed investment buildup, which eventually may come out as a tax-free distribution, is a prime benefit of 529 plans.

            Even so, the new law can prove beneficial in some situations. When cash is short and private school costs are high, a $10,000 tax-free distribution from a 529 plan may be welcome. If students are now attending an expensive high school but are expected to attend an inexpensive college, it may make sense to use the $10,000 529 distribution each year.

            Moreover, even though the new 529 provision applies to federal tax, substantial benefits might come from state taxes. Nearly every state offers a 529 plan, and most of them provide state income tax credits or state tax deductions to residents who invest in the home state’s plan. (Some states have tax benefits for investing in any 529 plan.)

            So far, states have differed on how they’ll treat 529 plan distributions for K-12 distributions. Assuming your state goes along with the new federal law, using $10,000 a year for pre-college costs may become especially attractive.

            Example 2: Suppose Ted and Sarah Raymond live in a state that offers a 10% tax credit for 529 contributions. They invest $10,000 in their state’s plan this year, getting a $1,000 credit against state tax. Then, they use that $10,000 to pay part of their daughter Gina’s private high school tuition. With the $1,000 state tax saving, the Raymonds effectively reduce Gina’s school cost by $1,000 by streaming their cash through their state’s 529 plan.

Our office can inform you of your state’s tax treatment of 529 contributions and how the state is dealing with the new rules on 529 distributions.

Trusted advice

Eligible schools

·      For qualified tuition program tax benefits, an eligible educational institution now can be either an elementary, a secondary, or a post-secondary school.

·      Among post-secondary schools, eligible schools are generally any accredited public, nonprofit, or privately owned profit-making college, university, vocational school, or other post-secondary educational institution.

·      A post-secondary school also must be eligible to participate in a student aid program administered by the U.S. Department of Education.

·      Eligible elementary and secondary schools include any public, private, or religious school that provides elementary or secondary education (Kindergarten through grade 12 classes).

3 keys to a successful accounting system upgrade

Technology is tricky. Much of today’s software is engineered so well that it will perform adequately for years. But new and better features are being created all the time. And if you’re not getting as much out of your financial data as your competitors are, you could be at a disadvantage.

For these reasons, it can be hard to decide when to upgrade your company’s accounting software. Here are three keys to consider:

1. Your users are ready. When making a major change to your accounting software, the sophistication of the system needs to align with the technological savvy of its primary users. Sometimes companies buy expensive software only to have many of its features gather virtual dust because the employees who use it are resistant to change.

But if your users are well trained and adaptable, they may be able to extract added value from a more sophisticated accounting system. For instance, they could track key performance indicators to generate more meaningful financial reports.

2. The price is right. You’ll of course need to consider the costs involved. As holds true for any technology purchase, project leaders must set a budget and focus the search on products and vendors offering only the functions your company needs.

But don’t stop there. Explore add-on services such as free trials, initial training and ongoing support. You want to get the most value from the software, which goes beyond the new and improved features themselves.

3. You need to integrate. This is the concept of networking your accounting system with your other mission-critical systems such as sales, inventory and production.

For most companies today, integration is essential to maximizing the return on investment in accounting software. So, if you haven’t yet implemented this functionality, an upgrade may be highly advisable. Just be aware that a successful companywide integration will call for buy-in from every nook and cranny of your business.

Typically, if a company doesn’t need any major accounting process changes, it probably doesn’t need a major accounting software change either. But if upgrading both will help grow your business, it’s absolutely a step worth considering. We can provide further guidance and info.

© 2018

How to avoid getting hit with payroll tax penalties

For small businesses, managing payroll can be one of the most arduous tasks. Adding to the burden earlier this year was adjusting income tax withholding based on the new tables issued by the IRS. (Those tables account for changes under the Tax Cuts and Jobs Act.) But it’s crucial not only to withhold the appropriate taxes — including both income tax and employment taxes — but also to remitthem on time to the federal government.

If you don’t, you, personally, could face harsh penalties. This is true even if your business is an entity that normally shields owners from personal liability, such as a corporation or limited liability company.

The 100% penalty

Employers must withhold federal income and employment taxes (such as Social Security) as well as applicable state and local taxes on wages paid to their employees. The federal taxes must then be remitted to the federal government according to a deposit schedule.

If a business makes payments late, there are escalating penalties. And if it fails to make them, the Trust Fund Recovery Penalty could apply. Under this penalty, also known as the 100% penalty, the IRS can assess the entire unpaid amount against a “responsible person.”

The corporate veil won’t shield corporate owners in this instance. The liability protections that owners of corporations — and limited liability companies — typically have don’t apply to payroll tax debts.

When the IRS assesses the 100% penalty, it can file a lien or take levy or seizure action against personal assets of a responsible person.

“Responsible person,” defined

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:

1. Be responsible for collecting, accounting for and remitting withheld federal taxes, and

2. Willfully fail to remit those taxes. That means intentionally, deliberately, voluntarily and knowingly disregarding the requirements of the law.

Prevention is the best medicine

When it comes to the 100% penalty, prevention is the best medicine. So make sure that federal taxes are being properly withheld from employees’ paychecks and are being timely remitted to the federal government. (It’s a good idea to also check state and local requirements and potential penalties.)

If you aren’t already using a payroll service, consider hiring one. A good payroll service provider relieves you of the burden of withholding the proper amounts, taking care of the tax payments and handling recordkeeping. Contact us for more information.

© 2018

Is your inventory getting the better of you?

On one level, every company’s inventory is a carefully curated collection of inanimate objects ready for sale. But, on another, it can be a confounding, slippery and unpredictable creature that can shrink too small or grow too big — despite your best efforts to keep it contained. If your inventory has been getting the better of you lately, don’t give up on showing it who’s boss.

Check your math

Getting the upper hand on inventory is essentially one part mathematics and another part strategic planning. You need to have accurate inventory counts as well as the controls in place to regulate quality and keep things moving.

As is true for so much in business, timing is everything. Companies need raw materials and key components in place before starting a production run, but they don’t want to bring them in too soon and suffer excess costs. The same holds true for finished products — you need enough on hand to fulfill sales without over- or understocking.

If you’re struggling in this area, re-evaluate your counting process. One alternative to consider is cycle counting. This process involves taking a weekly or monthly physical count of part of your warehoused inventory. These physical counts are then compared against the levels shown on your inventory management system.

The goal is to pinpoint as many inventory discrepancies as possible. By identifying the source of accuracy problems, you can figure out the best solutions. Of course, you can’t conduct cycle counting once and expect a cure-all. You’ll need to use it regularly.

Use technology

With all this data flying around, you need the right tools to gather, process and store it. So, investing in a good inventory software system (or upgrading the one you have) is key. As the saying goes, “garbage in, garbage out” — imprecise information coming from your current system could be leading to all those write-offs, inflated costs, missed sales and lost profits.

As always, you get what you pay for: Investing in a new software system and then paying ongoing maintenance fees (which are usually recommended to keep it running smoothly) could seem like a bitter pill to swallow. But, in the long run, strong inventory management can pay for itself.

Another way to use technology for inventory purposes is as a communication tool. Knowing which products are hot and which are not will go a long way toward developing correct purchasing and stocking levels. Consider using online surveys, email contests and even social networking (such as a Facebook page) to keep in touch with customers and gather this info.

Show some tough love

In an ideal world, every company’s inventory would be its best friend. But don’t be surprised if you have to regularly show yours some tough love to keep it from making a mess of your bottom line. Let us help you identify the best metrics and methods for managing your inventory.

© 2018

Does your business have to begin collecting sales tax on all out-of-state online sales?

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.

But for businesses with out-of-state online sales that haven’t had to collect sales tax from out-of-state customers in the past, the decision brings many questions and concerns.

What the requirements used to be

Even before Wayfair, a state could require an out-of-state business to collect sales tax from its residents on online sales if the business had a “substantial nexus” — or connection — with the state. The nexus requirement is part of the Commerce Clause of the U.S. Constitution.

Previous Supreme Court rulings had found that a physical presence in a state (such as retail outlets, employees or property) was necessary to establish substantial nexus. As a result, some online retailers have already been collecting tax from out-of-state customers, while others have not had to.

What has changed

In Wayfair, South Dakota had enacted a law requiring out-of-state retailers that made at least 200 sales or sales totaling at least $100,000 in the state to collect and remit sales tax. The Supreme Court found that the physical presence rule is “unsound and incorrect,” and that the South Dakota tax satisfies the substantial nexus requirement.

The Court said that the physical presence rule puts businesses with a physical presence at a competitive disadvantage compared with remote sellers that needn’t charge customers for taxes.

In addition, the Court found that the physical presence rule treats sellers differently for arbitrary reasons. A business with a few items of inventory in a small warehouse in a state is subject to sales tax on all of its sales in the state, while a business with a pervasive online presence but no physical presence isn’t subject to the same tax for the sales of the same items.

What the decision means

Wayfair doesn’t necessarily mean that you must immediately begin collecting sales tax on online sales to all of your out-of-state customers. You’ll be required to collect such taxes only if the particular state requires it. Some states already have laws on the books similar to South Dakota’s, but many states will need to revise or enact legislation.

Also keep in mind that the substantial nexus requirement isn’t the only principle in the Commerce Clause doctrine that can invalidate a state tax. The others weren’t argued in Wayfair, but the Court observed that South Dakota’s tax system included several features that seem designed to prevent discrimination against or undue burdens on interstate commerce, such as a prohibition against retroactive application and a safe harbor for taxpayers who do only limited business in the state.

Please contact us with any questions you have about sales tax collection requirements.

© 2018

Finding a 401(k) that’s right for your business

By and large, today’s employees expect employers to offer a tax-advantaged retirement plan. A 401(k) is an obvious choice to consider, but you may not be aware that there are a variety of types to choose from. Let’s check out some of the most popular options:

Traditional. Employees contribute on a pretax basis, with the employer matching all or a percentage of their contributions if it so chooses. Traditional 401(k)s are subject to rigorous testing requirements to ensure the plan is offered equitably to all employees and doesn’t favor highly compensated employees (HCEs).

In 2018, employees can defer a total amount of $18,500 through salary reductions. Those age 50 or older by year end can defer an additional $6,000.

Roth. Employees contribute after-tax dollars but take tax-free withdrawals (subject to certain limitations). Other rules apply, including that employer contributions can go into only traditional 401(k) accounts, not Roth 401(k)s. Usually a Roth 401(k) is offered as an option to employees in addition to a traditional 401(k), not instead of the traditional plan.

The Roth 401(k) contribution limits are the same as those for traditional 401(k)s. But this applies on a combined basis for total contributions to both types of plans.

Safe harbor. For businesses that may encounter difficulties meeting 401(k) testing requirements, this could be a solution. Employers must make certain contributions, which must vest immediately. But owners and HCEs can maximize contributions without worrying about part of their contributions being returned to them because rank-and-file employees haven’t been contributing enough.

To qualify for the safe harbor election, the employer needs to either contribute 3% of compensation for all eligible employees, even those who don’t make their own contributions, or match 100% of employee deferrals up to the first 3% of compensation and 50% of deferrals up to the next 2% of compensation. The contribution limits for these plans are the same as those for traditional 401(k)s.

Savings Incentive Match Plan for Employees (SIMPLE). If your business has 100 or fewer employees, consider one of these. As with a Safe Harbor 401(k), the employer must make certain, immediately vested contributions, and there’s no rigorous testing.

So, how is the SIMPLE 401(k) different from a safe harbor 401(k)? Both the required employer contributions and the limits on participant deferrals are lower: The employer generally needs to either contribute 2% of compensation for all eligible employees or match employee contributions up to 3% of compensation. The employee deferral limits are $12,500 in 2018, with a $3,000 catch-up contribution for those age 50 or older.

This has been but a brief look at these types of 401(k)s. Our firm can provide you with more information on each, as well as guidance on finding the right one for your business.

© 2018

Choosing the best business entity structure post-TCJA

For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) created a flat 21% federal income tax rate for C corporations. Under prior law, C corporations were taxed at rates as high as 35%. The TCJA also reduced individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and, typically, limited liability companies (LLCs). The top rate, however, dropped only slightly, from 39.6% to 37%.

On the surface, that may make choosing C corporation structure seem like a no-brainer. But there are many other considerations involved.

Conventional wisdom

Under prior tax law, 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 under the TCJA, their new 21% tax rate helps make up for it. This issue is further complicated, however, by another provision of the TCJA 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, the break is available only for tax years beginning in 2018 through 2025.

There’s no one-size-fits-all answer when deciding how to structure a business. The best choice depends on your business’s unique situation and your situation as an owner.

3 common scenarios

Here are three common scenarios and the entity-choice implications:

1. Business generates tax losses. For a business that consistently generates losses, there’s no tax advantage to operating as a C corporation. Losses from C corporations can’t be deducted by their owners. A pass-through entity will generally make more sense because losses pass through to the owners’ personal tax returns.

2. Business distributes all profits to owners. For a profitable business that pays out all income to the owners, operating as a pass-through entity generally will be better if significant QBI deductions are available. If not, it’s probably a toss-up in terms of tax liability.

3. Business retains all profits to finance growth. For a business that’s profitable but holds on to its profits to fund future growth strategies, operating as a C corporation generally will be advantageous if the corporation is a qualified small business (QSB). Why? A 100% gain exclusion may be available for QSB stock sale gains. If QSB status is unavailable, operating as a C corporation is still probably preferred — unless significant QBI deductions would be available at the owner level.

Many considerations

These are only some of the issues to consider when making the C corporation vs. pass-through entity choice. We can help you evaluate your options.

© 2018

Run The Numbers Before You Extend Customer Credit

Funny thing about customers: They can keep you in business — but they can also put you out of it. The latter circumstance often arises when a company overly relies on a few customers that abuse their credit to the point where the company’s cash flow is dramatically impacted.
 
To guard against this, you need to diligently assess every customer’s creditworthiness before getting too deeply involved. And this includes running the numbers on entities you do business with, just as lenders and investors do with you.
 
Information, please
 
A first step is to ask new customers to complete a credit application. The application should request the company’s:
 
  *   Name, address, phone number and website address,
  *   Tax identification number,
  *   General history (number of years in existence),
  *   Legal entity type and parent company (if one exists), and
  *   A bank reference and several trade references.
 
Depending on which industry or industries you serve, there may be other important data points to gather, as well. If you haven’t updated your credit application form in a while, consider doing so — especially if you’ve gotten burned on the same type of credit failure multiple times.

Financial data

When dealing with private companies, consider asking for an income statement and balance sheet. You’ll want to analyze financial data such as profit margin, or net income divided by net sales. Ideally, this will have remained steady or increased during the past few years. The profit margin also should be like those of other companies in the customer’s industry.
 
From the balance sheet, you can calculate the current ratio, or the customer’s current assets divided by its current liabilities. The higher this is, the more likely the customer will be able to cover its bills. Generally, a current ratio of 2:1 is considered acceptable. Again, there may be other metrics that are particularly important for the types of businesses you work with.
 
An Evolving Challenge

Reviewing financials is only one key step in determining whether a customer is creditworthy. It’s also important to contact the references the customer provided, and you may want to purchase a credit report. Finally, be sure to look at coverage of the customer both by traditional media and on social media. Doing so could reveal information that will impact your decision on whether to extend credit.

When competing to win and keep customers, it’s easy to get carried away with credit. Approach this task carefully and bear in mind that, for most businesses, extending customer credit is a learning process and an evolving challenge. For further help and info on assessing customers’ creditworthiness, please contact our firm.

© 2018

Infographic: Tools to help you reach major financial goals

Infographic: Tools to help you reach major financial goals. 

A midyear review should go beyond financials

Every year is a journey for a business. You begin with a set of objectives for the months ahead, probably encounter a few bumps along the way and, hopefully, reach your destination with some success and a few lessons learned.

The middle of the year is the perfect time to stop for a breather. A midyear review can help you and your management team determine which objectives are still “meetable” and which ones may need tweaking or perhaps even elimination.

Naturally, this will involve looking at your financials. There are various metrics that can tell you whether your cash flow is strong and debt load manageable, and if your profitability goals are within reach. But don’t stop there.

3 key areas

Here are three other key areas of your business to review at midyear:

1. HR. Your people are your most valuable asset. So, how is your employee turnover rate trending compared with last year or previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.

2. Sales and marketing. Are you meeting your monthly goals for new sales, in terms of both sales volume and number of new customers? Are you generating an adequate return on investment (ROI) for your marketing dollars? If you can’t answer this last question, enhance your tracking of existing marketing efforts so you can gauge marketing ROI going forward.

3. Production. If you manufacture products, what’s your unit reject rate so far this year? Or if yours is a service business, how satisfied are your customers with the level of service being provided? Again, you may need to tighten up your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals.

Necessary adjustments

Don’t wait until the end of the year to assess the progress of your 2018 strategic plan. Conduct a midyear review and get the information you need to make any adjustments necessary to help ensure success. Let us know how we can help.

© 2018

Could a long-term deal ease your succession planning woes?

Some business owners — particularly those who founded their companies — may find it hard to give up control to a successor. Maybe you just can’t identify the right person internally to fill your shoes. While retirement isn’t in your immediate future, you know you must eventually step down.

One potential solution is to find an outside buyer for your company and undertake a long-term deal to gradually cede control to them. Going this route can enable a transition to proceed at a more manageable pace.

Time and capital

For privately held businesses, long-term deals typically begin with the business owner selling a minority stake to a potential buyer. This initiates a tryout period to assess the two companies’ compatibility. The parties may sign an agreement in which the minority stakeholder has the option to offer a takeover bid after a specified period.

Beyond clearing a path for your succession plan, the deal also may provide needed capital. You can use the cash infusion from selling a minority stake to fund improvements such as:

Hiring additional staff,Paying down debt,Conducting research and development, orExpanding your facilities.

Any or all of these things can help grow your company’s market share and improve profitability. In turn, you’ll feel more comfortable in retirement knowing your business is doing well and in good hands.

Benefits for the buyer

You may be wondering what’s in it for the buyer. A minority-stake purchase requires less cash than a full acquisition, helping buyers avoid finding outside deal financing. It’s also less risky than a full purchase. Buyers can, for example, push for the company to achieve certain performance objectives before committing to buying it.

Integration may also be easier because buyers have time to coordinate with sellers to implement changes — an advantage when their IT, accounting or other major systems are dissimilar. In addition, in a typical M&A transaction, decisions must be made quickly. But under a long-term deal, the parties can debate and negotiate options, which may improve the arrangement for everyone.

What’s right for you

There are, of course, a wide variety of other strategies for creating and executing a succession plan. But if you’re leaning toward finding a buyer and are in no rush to complete a sale, a long-term deal might be for you. Our firm can provide further information.

© 2018

What businesses need to know about the tax treatment of bitcoin and other virtual currencies

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.

While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges.

Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

Tax impact

Questions about the tax impact of virtual currency abound. And the IRS has yet to offer much guidance.

The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.

When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee.

When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients.

Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.

Deciding whether to go virtual

Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective.

To learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors or other service providers — contact us.

© 2018

Bookings vs. shippings: A sales flash report primer

Do bad sales months often take you by surprise? If so, don’t forget the power of flash reports — that is, snapshots of critical data for quick, timely viewing every day or week.

One specific way to use them is to track bookings vs. shippings. Doing so can help you determine what percentage of volume for certain months should be booked by specific dates. These reports are particularly useful if more than 30 days elapse between these activities.

Get super specific

Here’s how your flash report might work: Every workday, record the new orders taken (bookings) and the orders filled (shippings).

Sort the flash report by order date and subtotal the sales amounts at various points in time before the last day of the month.

Look at how many of the month’s shipped orders are booked 60, 45, 30 and 15 days before the end of the month. If you don’t have this historical data, start recording it for at least three months to establish meaningful trends.

Once you know the timeframes of your bookings and shippings, expand this activity to your sales staff by displaying the totals of bookings and shippings by salesperson on the flash report. Use the percentage of business that ideally should be booked at certain time intervals to establish individual sales goals and compare your progress with these goals.

See the future

Don’t wait until month’s end to discover that your sales weren’t up to your desired results. With flash reports, you can tell in advance that sales performance is lagging and have enough time to take corrective action. What’s more, today’s business dashboard software can enable you to generate this data more quickly than ever. For further information about flash reports, and help developing your own that are specific to your company’s needs, please contact us.

© 2018

Putting your child on your business’s payroll for the summer may make more tax sense than ever

If you own a business and have a child in high school or college, hiring him or her for the summer can provide a multitude of benefits, including tax savings. And hiring your child may make more sense than ever due to changes under the Tax Cuts and Jobs Act (TCJA).

How it works

By shifting some of your business earnings to a child as wages for services performed, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done must be legitimate and the child’s wages must be reasonable.

Here’s an example: A sole proprietor is in the 37% tax bracket. He hires his 20-year-old daughter, who’s majoring in marketing, to work as a marketing coordinator full-time during the summer. She earns $12,000 and doesn’t have any other earnings.

The father saves $4,440 (37% of $12,000) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction (for 2018) to completely shelter her earnings. This is nearly twice as much as would have been sheltered last year, pre-TCJA, when the standard deduction was only $6,350.

The father can save an additional $2,035 in taxes if he keeps his daughter on the payroll as a part-time employee into the fall and pays her an additional $5,500. She can shelter the additional income from tax by making a tax-deductible contribution to her own traditional IRA.

Family taxes will be cut even if an employee-child’s earnings exceed his or her standard deduction and IRA deduction. Why? The unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Avoiding the “kiddie tax”

TCJA changes to the “kiddie tax” also make income-shifting through hiring your child (rather than, say, giving him or her income-producing investments) more appealing. The kiddie tax generally applies to children under age 19 and to full-time students under age 24. Before 2018, the unearned income of a child subject to the kiddie tax was generally taxed at the parents’ tax rate.

The TCJA makes the kiddie tax harsher. For 2018-2025, a child’s unearned income will be taxed according to the tax brackets used for trusts and estates, which for 2018 are taxed at the highest rate of 37% once taxable income reaches $12,500. In contrast, for a married couple filing jointly, the 37% rate doesn’t kick in until their taxable income tops $600,000. In other words, children’s unearned income often will be taxed at higher rates than their parents’ income.

But the kiddie tax doesn’t apply to earned income.

Other tax considerations

If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Contact us to learn more about the tax rules surrounding hiring your child, how the kiddie tax works or other family-related tax-saving strategies.

© 2018

Ask the right questions about your IT strategy

Most businesses approach technology as an evolving challenge. You don’t want to overspend on bells and whistles you’ll never fully use, but you also don’t want to get left behind as competitors use the latest tech tools to operate more nimbly.

To refine your IT strategy over time, you’ve got to regularly reassess your operations and ask the right questions. Here are a few to consider:

Are we bogged down by outdated tech? More advanced analytical software can eliminate many time-consuming, repeatable tasks. Systems based on paper files and handwritten notes are obviously ripe for an upgrade, but even traditional digital spreadsheets aren’t as powerful as they used to be.

Do we have information silos? Most companies today use multiple applications. But if these solutions can’t “talk” to each other, you may suffer from information silos. This is when different people and teams keep important data to themselves, slowing communication. Determine whether this is occurring and, if so, how to integrate your key systems.

Do we have a digital asset-sharing policy? Businesses tend to generate tremendous amounts of paperwork, but hard copies can get misfiled or lost. Sharing documents electronically can speed distribution and enable real-time collaboration. A digital asset-sharing policy could help define how to grant system access, share documents and track communications.

Do we have a training program? Mandatory training and ongoing refresher sessions ensure that all users are taking full advantage of available technology and following proper protocols. If you don’t feel like you can provide this in-house, you could shop for vendors that provide training and resources matching your needs.

Do we have a security policy? A security policy is the first line of defense against hackers, viruses and other threats. It also helps protect customers’ sensitive data. Every business needs to establish a policy for regularly changing passwords, removing inactive users and providing ongoing security training.

Do we evaluate user feedback? A successful IT strategy is built on user feedback. Talk to your employees who use your technology and find out what works, what doesn’t and why.

Answering questions such as these is a good first step toward crafting a total IT strategy. Doing so can also help you better control expenses by eliminating redundancies and lowering the risk of costly mistakes and data losses. Let us know how we can help.

© 2018

4 ways to encourage innovation in customer service

When business people speak of innovation, the focus is usually on a pioneering product or state-of-the-art service that will “revolutionize the industry.” But innovation can apply to any aspect of your company — including customer service.

Many business owners perceive customer service as a fairly cut-and-dried affair. Customers call, you answer their questions or solve their problems — and life goes on. Yet there are ways to transform this function and, when companies do, word gets around. People want to do business with organizations that are easy to interact with.

Here are four ways to encourage innovation in your customer service department:

1. Welcome failure. Providing world-class customer service involves risk, and inevitably you’ll sometimes fail. For example, many businesses have jumped at the chance to use “big data” to develop automated systems to direct customers to answers and solutions. But the impersonality of these systems can frustrate the buying public until you establish the right balance of machine and human interaction. Remember, every failure opens the door to better strategies for serving your customers.

2. Link compensation to employees’ contributions. Companies that fail to reward innovation aren’t likely to retain their best customers or establish a good reputation. Because customer service employees tend to be paid hourly or relatively nominal salaries, consider a cash bonus program for the “most innovative idea of the year.” Or you could hold semiannual or even quarterly innovation challenges with prizes such as gift cards or additional time off.

3. Praise the groundbreakers. Employees who challenge customer-service tradition may find themselves at odds with management. But don’t be too quick to reprimand those with new ideas or methods. Fresh language and modes of communication enter the public consciousness regularly. Give companywide recognition to those who find ways to adapt — even if their initial efforts bend the rules a bit.

4. Be the customer. Among the most simple and practical ways to innovate your customer service is to simply pretend you’re a customer to get a firsthand view on how your employees treat those who contact your business. Business owners can make these calls themselves or, if your voice is too recognizable, find someone who’s less familiar but capable of taking detailed notes of the interaction.

Finding new ways to improve your company’s customer service isn’t easy. But innovations are always just one bright idea away. If you’d like more information and ideas about building your bottom line, contact our firm.

© 2018