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Member of Russell Bedford International, a global network of independent professional service firms.
“Wayfair” is the new buzzword in sales tax reporting, and for good reason. You have likely heard that the Supreme Court’s decision in South Dakota v. Wayfair, Inc. has resulted in businesses being required to collect and remit sales tax to certain states in which they have no physical presence. Have you wondered how this change affects your requirements for income tax filing?
While the Wayfair decision did not directly impact income tax nexus, the removal of a physical presence requirement for sales tax nexus may encourage more states to enact a sales factor indicator for income tax nexus. In fact, states such as Alabama, California, Colorado, Connecticut, Michigan, New York, and Tennessee already have bright-line tests in place, which consider a business with certain levels of property, payroll or sales in the state to have income tax nexus. Other states, such as Ohio and Washington have enacted gross receipts taxes, which come into play once a business reaches a certain level of activity in the state.
It’s important to note that the Wayfair decision does not overrule P.L. 86-272, which allows businesses to send representatives into a state to solicit orders for personal property without being subject to a tax based on net income. However, a state may still impose a tax not based upon income, such as a minimum tax or a net worth tax.
States are continually enacting changes related to nexus and various types of taxes. As your business becomes active in other states, it’s more important than ever to discuss potential income tax exposure with your CPA. Here are some steps you can take to protect your business:
Cray Kaiser is available to help you navigate through these ever-changing requirements, and to consider potential exposure to income tax reporting as a result. If you are unsure of the requirements of states you sell into, please contact us to discuss.
Financial literacy in today’s economic climate is more than just receiving reconciled accounts in periodic financial statements from your accounting firm. It is the ability to know where you are today, where you are going, and the plan to achieve it. To achieve your goals, you need to invest in a system, process and an advisor who can relay knowledge to you in a way that is easy to understand. This will allow you to change direction, set measurable goals and celebrate your successes.
Business owners often get caught in the weeds and believe the way to solve a problem is by digging deeper into the soil. Have you ever paused to look at the key financial drivers that are causing the problem? Understanding the underlying problem and the impact it is having on your business is key. A skilled accounting firm has the ability to educate you on the meaning behind the numbers reported in your financial statements.
Accounting is based on a double entry system, meaning we must have a debit and credit that are in balance. You can also think of accounting as the study of financial relationships, meaning as we debit one account, we have a corresponding credit in another. To provide meaning we need to understand the relationships. Your financial statements are simply the summation of your transactions for a given period. By taking these financial statements and using ratios or non-financial data, you can begin to unravel the context behind these relationships – allowing you the opportunity to transform your business.
In the restaurant industry the key components of cost of goods sold includes food, beverage, paper goods and labor costs. The summation of these costs is also referred to as the prime costs. Often, your financial statements may report these costs on one line called cost of goods sold. By performing a simple ratio such as cost of goods sold divided by sales, we can determine how efficiently we are utilizing our resources to generate sales. By benchmarking this ratio month after month, we can begin to identify changes in the ratio that may need to be investigated. The benchmarking can be against your own data but should also be compared against industry data to better evaluate how you are performing.
To bring even more meaning to the relationships within cost of goods sold, you will need to investigate costs in more detail. One way to do this is to extract data on your costs individually such as having a food cost percentage to sales along with separate calculations on beverage, paper goods and labor. As these ratios fluctuate over time, you can determine the reason why and how it may affect your future selling prices. The outcome of this analysis may lead you to raise prices, change a supplier or review labor schedules.
You can also track non-financial data such as number of patrons served, number of hours open, and facility square footage. When comparing the non-financial data to sales we can get average sales per patron, per hour and per square foot. These averages can be compared over a period of time to gain an understanding of changes in your business or peak times for your business. This information in turn can be used to schedule your workers, order inventory or even adjust your restaurant hours.
Your accountant can provide significant value by educating you on ratio and non-financial data to help you analyze your financial statements and guide you in discussing the efficiency of your business, forecasting operating results and providing the strategic direction for your business. We often refer to these tools as key performance indicators (KPIs). By tracking KPIs on a regular basis and keeping ongoing communication with your accountant, you can begin to understand the relationships in your financial statements. This understanding will provide you the ability to make decisions in your business that will allow you to track the realization of your strategic goals.
If you are not already having these discussions with your accountant, now is the time to tap into the value they can provide. As you begin the new year, we recommend identifying KPIs to track. Please contact Cray Kaiser today if you would like to discuss your financial reports.
One of the interesting items coming out of the Tax Cut and Jobs Act of 2017 (TCJA) was the inclusion of specified tax breaks for taxpayers investing in low-income communities. Known as Opportunity Zones, the idea is to encourage long-term investments in low-income communities nationwide through property (real estate or equipment) or business operations.
Where Are the Opportunity Zones?
Over the last few months, the Department of the Treasury has worked with governors to designate qualified Opportunity Zones in each state. Investing in these specific areas will have tax advantages. For example, in Illinois, there are 1,305 tracts, 327 of which (25%) have been designated for Opportunity Zones. A list of the Opportunity Zones can be found here.
What Are the Tax Benefits of Opportunity Zones?
The crux of the program is to allow investors an option to reinvest their realized capital gains into opportunity funds and provide a deferral of at least a portion of the tax on the realized gain. A qualified reinvestment is primarily invested in qualified Opportunity Zones that retain their designation for at least 10 years. In order to qualify for deferral, the reinvestment into an Opportunity Zone must occur within 180 days from the date of the original sale.
For example, a capital gain that was reinvested in an Opportunity Zone and held greater than 5 years in the Opportunity Zone, 10% of the original gain will be excluded from taxes. If held in an Opportunity Zone greater than 7 years, another 5% (for total of 15%) will be excluded. In addition, if the reinvestment in an Opportunity Zone is held greater than 10 years, then not only is the original taxable capital gain reduced by 15%, but any gains from the Opportunity Zone will be excluded from capital gain tax.
For investors, this could be a great time to review any large capital gain tax exposure in order to assess whether the Opportunity Zone deferral is a good investment option given the potential to defer gains. In addition to the deferral of the original gain, the appreciation from the Opportunity Zone investment would not be subject to capital gains when disposed after 10 years. Because there are pending regulations and other requirements that need to be met in order to for Opportunity Zone designation, please contact us for more information.
The CK team recently attended the QuickBooks Connect conference in San Jose, CA. We learned valuable information on how we can better help our clients leverage technology to more efficiently manage their day-to-day accounting. We’re excited to share some of these insights with you below.
The theme of this year’s conference was “Anything Is Possible,” and when you are running a business, this is indeed the case. You may not know what lies on the road ahead but understanding your business’ finances and managing them efficiently can allow you to make things happen that you may not have known were possible. We want to help you cut down on the day-to-day accounting tasks you do as a business owner and spend more time concentrating on what matters so that you have the tools you need to scale your business.
In order to help you take your business to the next level, here are five apps we recommend using with QuickBooks Online for efficiency and productivity:
Expensify is a top-rated expense reporting system that tracks receipts and mileage with ease. The best part is that it streamlines your process by automatically syncing all your expenses into QuickBooks.
Tsheets is the best app for employee management. It allows you to track timesheets, manage your employees’ time and create timesheet reports. The user-friendly interface makes it easy for staff to use and you can even accomplish true job costing with labor using the Tsheets app.
QuickBooks Online is great at a lot of things, but if there was one thing it could improve it would be its inventory and manufacturing functionality. SOS solves these problems by integrating directly with QuickBooks to save you time and money by reducing duplicate data entry. SOS allows you to do total inventory and manufacturing workflow and management and even integrates with your shipping provider.
Have you ever wished you could have a digital file cabinet for all of your bills, receipts, and bank statements? Hubdoc has the ability to link your online banking and vendor accounts to its system, allowing the program to automatically retrieve and organize new bills and documents as they become available each month. Documents are secured by bank-level protection and bills and statements can be sent directly from the program into QuickBooks Online.
An all-in-one CRM and project management app, Method can help you stay on top of your projects at every stage. Easily track customer payments against project milestones and manage contacts, tasks, projects, events and emails.
For more information on any of these apps or QuickBooks Online, please contact us today.
Click here to learn more about CK’s QuickBooks services.
The new Qualified Business Income (QBI) deduction is an income tax game changer for owners of flow through entities. But there are many rules and nuances to getting the most out of the deduction. Whether your business is a Specified Service Trade or Business (SSTB), pays employee wages, has qualified property, or generates taxable income over certain thresholds can create many opportunities or obstacles for maximizing the deduction. Here is how non-SSTB owners with small employee workforces can determine the minimum amount of wages to be paid in order to maximize the QBI deduction.
The 2/7 Rule
Remember, once your taxable income exceeds $364,200 (married couples filing jointly) or $182,100 (single filers) a wage limitation is phased in. Once the threshold is breached the calculation for QBI deduction is limited to the lesser of 20% of income or 50% of wages. Therefore, the amount of wages you pay yourself or your employees can become a major factor in the QBI deduction generated. The 2/7 rule can help you determine how to adjust your wages in order to maximize your QBI deduction.
Note that there is an additional computation considering company assets, but that calculation is beyond the scope of this article and will not be considered in the following examples.
Example 1
ABC, Inc. is an S-Corp with a net taxable income of $1,000,000 before wages paid for the 2023 tax year. ABC is not an SSTB and has one owner and one employee, John Smith. John takes a modest salary from his company of only $50,000. The QBI Deduction before taking into consideration the wage limitation would be $190,000 (net income of $950,000 x 20%). However, because the company generates income that will put John over the taxable income thresholds, his QBI deduction is now limited to $25,000 (50% of $50,000).
So what should John have paid himself to maximize the QBI deduction? That’s where the 2/7 rule comes into play. Wages paid should equal 2/7 of business income. Therefore, John should pay himself a wage of $285,714 ($1,000,000*2/7). That means his net Income would be $714,286 – 20% of the net income is $142,857 which would be the same as 50% of the $285,714 of wages. The 2/7 rule generated an additional QBI deduction of $117,857. This would equate to tax savings of $43,607 ($117,857 x the 37% tax bracket).
Example 2
What if you are a small business owner that has more employees than just yourself? In that case you would take into consideration the employees’ wages along with yours.
Let’s use the same facts as example 1 except this time ABC, Inc. has employee wages of $200,000 outside of John Smith’s wages. Business income would be $800,000 before John’s wage to himself. Using the 2/7 rule, John would only need to pay himself $85,714 ($285,714-$200,000) to maximize his QBI deduction.
Additional Considerations
With the fourth quarter coming to a close, it is crucial to discuss your expected income and wages with your tax advisors to make sure you are getting the most out of your potential QBI deduction. Please contact Cray Kaiser if you’d like to discuss the QBI deduction and fourth quarter planning.
The Tax Cuts and Jobs Act of 2017 – with its many changes impacting the 2018 tax year and beyond – brought the Qualified Business Income deduction (sometimes called the QBI deduction or 199A deduction). This new deduction can be up to 20% of the net income of a qualified business, meaning only 80% of your QBI is taxed on the federal level. But, if you are a real estate investor you are probably wondering if this deduction will apply to you. The answer is, of course, not so simple.
Defining a Qualified Trade or Business
The biggest limitation of the QBI deduction is that it only applies to a “qualified trade or business”. There is not a lot of clarity within IRS regulations in determining what exactly is a trade or business in the real estate arena and there are many unique situations concerning real estate.
The IRS cites “key factual elements” that are relevant to whether an activity is a trade or business: (a) the type of property (commercial versus residential versus personal); (b) number of properties rented; (c) day to day involvement of the owner or agent; and (d) type of lease (triple-net versus traditional). Therefore, due to the large number of actual combinations that exist in determining whether a rental activity rises to the level of a trade or business, the IRS says bright-line definitions are impractical.
Below are a few example situations that demonstrate when real estate investments would likely or likely not pass as a qualified trade or business.
We can help you determine if your rental activity facts and circumstances can give rise to a trade or business and thus allow you to be eligible for QBI. If you are not eligible, we can develop some operational strategies which can allow you to qualify for the deduction. Please contact us today at 630-953-4900.
Fraud. The dreaded word that none of us are comfortable addressing or discussing, especially when it comes to how it may impact you or your business. But it’s important not to avoid conversations about fraud. Why? Because several studies and statistics support that businesses may lose approximately 5% of their revenues every year due to fraud. And when fraud is concealed, it may continue for years before being discovered. Further, fraud remains a strong indicator as to the failure of a business. Although attempts are made to recover, many businesses cannot overcome the negative impacts both financially and reputationally and are ultimately forced to close their doors within a few years.
So, what can you do to prevent fraud?
First, it’s important to remember that no controls or systems are perfect. Due to limited resources and personnel, opportunity for fraud will always exist. Thus, as technology and the ways of doing business continue to evolve, so too must your control processes and procedures. Periodic and systematic evaluations and assessments of your controls should be designed to mitigate or detect misstatements or misappropriations in a timely manner. So, while a control may not prevent fraud, it will at least detect it quickly so that you can take appropriate action.
Here are a few suggestions we recommend when it comes to preventing fraud:
If you have any questions or would like to know how Cray Kaiser can help you develop and implement internal controls, please contact us today.
A lot of change has come with the 2017 Tax Reform. As we adjust to the new provisions, we’re constantly learning about ways that we can shift tax planning strategies in the future to benefit and lessen tax burdens. One way to potentially minimize your taxes is with a strategy called “bunching”.
What is “Bunching”?
The near doubling of the standard deduction amount to $12,000 for single filers and $24,000 for joint filers produced the bunching strategy. With tax bunching, you move two or three years of deductible expenses into the one year you intend to itemize. For the other years, in lieu of itemizing deductions, you can claim the new higher standard deduction.
Assess Your Bunching Option
Using the bunching strategy requires some planning. First, you need to know how close you are to the standard deduction limit by reviewing your 2017 tax return. Because of the many new limits on qualified itemized deductions, you will need to estimate how close you are to the new standard deduction thresholds. Remember to limit your state and local tax deduction to $10,000 and eliminate any miscellaneous itemized deductions.
The closer your total itemized deduction total gets to the standard deduction amount for your filing status, the more the bunching strategy makes sense.
For example, John and Mary’s new itemized deduction total is about $22,000, which includes $10,000 of state taxes paid and $12,000 of charitable deductions every year. Since their itemized deductions are less than the new $24,000 standard deduction, they are losing the benefit of their itemized deductions.
Instead, John and Mary can choose to “bunch” three years of charitable contributions into one year. Using this strategy, the couple have itemized deductions of $46,000 in year one ($10,000 of state taxes and $36,000 of charitable contributions). In years two and three, John and Mary would claim the standard deduction. Here are the deduction results:
By bunching, John and Mary are able to shift their itemized deductions to maximize the tax benefit.
If you determine that bunching is the best strategy for you, here are a few ways you can bunch your itemized deductions:
1. Review your medical and dental expenses. This is a potential bunching expense group if you project these expenses will surpass 7.5% of your income. Schedule non-emergency expenses, such as medical exams and dental cleanings, in the year you plan to clear the deduction threshold. Plan other procedures such as crowns and braces in one year instead of over many years. You can even move up health insurance premium payments.
2. Consider charitable donations as bunching options. This is the largest potential bunching area. Make all your gifts in the year you plan to surpass the standard deduction threshold. But keep an eye on the 60% of adjusted gross income (AGI) annual limit.
Alternatively, consider postponing contributions to January of the following year if you aren’t going to itemize.
3. Use mortgage interest as another bunching tool. The deduction for interest paid on new acquisition debt of up to $750,000 (or $1,000,000 if the loan was made prior to Dec. 15, 2017) is still available. Consider pre-paying the next month’s mortgage payment at the end of the year to increase the deductible interest in the year you wish to itemize.
We recommend speaking with your accountant to determine if the bunching option is best for you. Please don’t hesitate to contact Cray Kaiser with any questions.
Your business partner(s) should balance your strengths and support you through the good times and the bad. They should also be willing to communicate with you freely and often. And while you and your partner may agree about everything now, disagreements and unexpected events are inevitable. That’s why a written partnership agreement is so valuable. Do you and your partner(s) have one?
The need for a partnership agreement can be summed up in two words: things change. It’s important to sit down now and hammer out potential scenarios and solutions in a written agreement. You never know what the future may hold for you, your partner(s) or your business. Your agreement will make sure that you have a plan ready no matter what may come your way.
A partnership agreement should anticipate major business changes and spell out how to deal with them. The agreement should also indicate what initial capital contributions (or services) will be made when additional capital contributions will be required, and how profits and losses will be shared.
Questions to discuss include:
A partnership agreement can’t address every possible contingency, so consider an arbitration clause to handle disputes that you and your partner aren’t able to resolve on your own. Without such a clause, your only alternative could be costly litigation.
With a carefully designed partnership agreement, your business will run more smoothly and provide you and your partner(s) with peace of mind. Your attorney can assist you with the legal aspects of the agreement and you can contact Cray Kaiser with questions regarding your finance and tax-related aspects.
It is critical for 401(k) plan administrators to be aware of the various provisions found within the plan document, as well as regulations affecting the plan. Although each plan is unique, and many errors can occur in plan administration, there are five common errors to avoid when administering your company’s 401(k) plan.
