Click the image below to watch our video on Retirement Planning
Did you know there are changes to the Meals & Entertainment Rules for business?
Under the new TCJA tax law, entertainment, amusement, or recreation expenses for clients and business associates are no longer allowed as a business deduction?
The TCJA has changed the rules for deductions relating to entertainment expenses for clients. Starting January 1, 2018 entertainment, amusement, or recreation expenses for clients and business associates will no longer be a deductible expense. For example, monies spent to bring a client to a sporting event, concert, golf outing, etc. are no longer deductible, although the food and beverage costs that are separately stated from the entertainment are still entitled to the 50% deduction. The TCJA did not change the rule relating to expenses for recreational activities
primarily for the benefit of their employees (i.e. Holiday parties, annual picnic, etc.). These expenses are exempt from the entertainment disallowance rules, and are still 100% deductible. The rules regarding business meals are unchanged as well, and are still entitled to the 50% deduction. Because of this change in the law, there is now a great need to track meals separate from entertainment on your chart of accounts. The generic “Meals & Entertainment” account will now need to be broken out in order to receive the correct deduction.
If you have any tax questions, contact our office today.
How do you determine the value of your business?
If you had to sell your business today, would you know how much it is worth? Would you know how much your business is worth if you needed a loan? How about the value of your business so you can take on a partner?
Talk to the Experts
Understanding the dollar value of a company is crucial to business owners, who may have an outsized portion of total wealth tied up in their companies. But the process can seem daunting to the uninitiated. Begin by talking to a tax professional who is experienced in this area, or consider hiring a valuation expert with credentials from the American Society of Appraisers, the Institute of Business Appraisers or the National Association of Certified Valuators and Analysts.
While there are a variety of valuation approaches, they all quantify tangible assets. This is basically a company’s net worth, which includes ownership of physical assets such as machinery, equipment and work space. As with personal net worth, you would also subtract liabilities, including outstanding loan balances and depreciation.
While calculating the value of tangible assets is relatively straightforward, determining the value of intangible assets might take more doing. Intangible assets include things like copyrights, patents, licensing, franchise agreements, and goodwill and are important when valuing your business.
Ultimately, reputation can make or break a company’s long-term prospects, and goodwill includes the components that affect that reputation. Goodwill includes your company’s standing among customers and peer firms. It can include the quality and experience of your workforce and relationships with suppliers.
Add both tangible and intangible assets to your firm’s balance sheet, which lenders, partners and future buyers may use to determine its value. It can show you areas like inventory purchases where you can increase value, or it can identify areas such as liquidity ratios that might detract from value. Talk to us to learn more.
Client Line Newsletter Original Article is here
Business owners are generally more concerned with day to day business matters and may not realize some of the opportunities that may arise from solving problems. You may be concerned about the loss of key employees, vendors or major clients, legal expenses, or a myriad other concerns. All of these can result in a catastrophic loss if they occur and are the types of items that can keep you up at night. When dealing with all of this it isn’t often that a single solution can be found to solve multiple problems facing business owners, but there is such a solution available in the tax law.
One potential solution is known as a Captive Insurance Company (CIC).
The key difference with the insurance to be discussed here and insurance you obtain from your local insurance carrier is you own the insurance company. The Internal Revenue Code Section 831(b) effectively allows a business to claim a deduction of up to $2,200,000 in a calendar year and have that premium go to an insurance company that is owned by the business owner. The added benefit of the self owned insurance company is you do not pay any tax on the receipt of the insurance premium. Yes, you read that correctly, you deduct the premium from one company you own and exclude the income in another company you own.
So how can a Captive Insurance Company help your business?
Specifically, there are risks in your business that are uninsured or under insured. First you will need to determine the risks, the actuarial cost of the risk and determine a premium that an operating company will pay to the Captive Insurance Company. The operating company pays the premium to the Captive Insurance Company to cover those risks that are needed. It is important to note that the risks must be real, as an example you could not insure your local business facility against a tidal wave because no such risk of a tidal wave exists in upstate New York. As long as the annual premium paid to the Captive Insurance Company is under $2,200,000 the CIC will pay no tax on the receipt of the premiums. The Captive Insurance Company has certain obligations and liquidity needs to pay any claims that arise but it is also allowed to invest its assets. The income from its earnings is taxable.
What is this worth to you and your company?
Assume after doing the analysis we determine a premium for the series of risks is $1,000,000. Your company pays and deducts the $1,000,000 business income thereby reducing your taxes. If you had not deducted the $1,000,000 then your business would have an additional $1,000,000 of income. Therefore, you would be in the highest tax bracket for Federal purposes which is 39.6% (not including the effective rate increase from various phase outs) or an effective rate as high as 43.592% after taking into account the effective costs of phaseouts plus New York Taxes of anywhere from 6.85% to even 8.82%. These make an effective combined tax rate with federal and NYS taxes of 50% or greater. That $1,000,000 deduction results in a savings of $500,000. Remember that your CIC does NOT pay tax on the $1,000,000 of revenue as illustrated n the example. At this point you have saved $500,000 or more in tax. Furthermore you have protected yourself against claims and liabilities which, up to this point, have not been covered.
As you fast forward a few years and insure your risks, pay claims from your CIC as claims arise and after a few years the company has sufficient reserves on hand to pay claims. At this point the Captive Insurance Company can distribute the funds as long as it does not jeopardize its reserves. These distributions would be taxable to the individual owners at the long term capital gains rate as a qualifying dividend. Currently the qualifying dividend rate ranges from 0% to 20% plus the 3.8% ACA tax. So the tax cost of receiving the dividend in current law may be 23.8% for a qualifying dividend (exclusive of effective tax costs of phaseouts) or 24.592% with effective costs of phaseouts plus the NYS rate of anywhere from 6.85% to even 8.82%. Therefore the tax paid on receiving the qualifying dividend is approximately 30%. A business can deduct the premium in one year, save taxes at perhaps at rates of 50% or higher and then several years later receive earnings back from the CIC and pay taxes at a rate of closer to 30%. This is a 20 percentage point benefit to the owner.
The CIC needs to be properly structured, designed for risk transfer, and managed as an insurance company to be acceptable. The CIC may be owned by the owners of the operating company or may be owned by others as well. CICs have expenses separate from the current operating company to maintain and operate on an annual basis. It is safe to assume the operating costs of the CIC can be $50,000 to $70,000 annually but if you have saved $500,000 in taxes you are still ahead $430,000, this I argue is an expense well worth having.
Hedley & Co Certified Public Accountants can help you determine if the Captive Insurance Company is right for you and help you protect your business, solve the problems that concern you and even save money.
How hard can it be to run a family business? It should be easy since presumably all the key people are on the same page and they all share the same goals. Unfortunately, that’s not always the case. Running a family business is anything but easy when what’s good for the business is different from what’s good for the family.
COMMUNICATE CLEARLY AND OFTEN
There are two controlling forces in a family business — the family and the business. Successful family businesses find an effective way of separating the two so that family problems don’t spill over into the business and vice versa. Keeping the lines of communication open on all levels and holding regular business meetings to address and resolve business issues will help establish the necessary boundaries.
FOCUS ON PROFESSIONALISM
Professionalism is another best practice for family businesses. Standardizing operations and procedures and establishing policies can help your family business be successful. If you have nonfamily employees, pay particular attention to personnel issues (such as hiring and promoting on merit and paying market-based salaries). Allowing “special” benefits for family members can be a real morale killer. Providing equal benefits and establishing a family code of conduct will show you’re committed to leveling the playing field.
PAY ATTENTION TO FINANCES
One big reason family businesses sink is poor financial management. All businesses can benefit from establishing proper accounting procedures. Having accurate data allows you to generate monthly statements and keep tabs on your current financial situation. You can also spot trends as they develop and be proactive instead of reactive.
The odds of a family-run business making it to the next generation are generally low. You can boost the likelihood of beating the odds if you make succession planning a top priority. Just don’t wait until the last minute.
Like most business owners, you probably have high hopes for your company’s future. You want to expand, to add employees, and, perhaps, to open up other locations. You know that to turn these hopes into reality, you’ll need financing. But you also know that obtaining a small business loan is never a slam dunk.
How you approach the process of securing business financing can determine whether you get the money you need. Here are some ideas that may help make a difference.
FIND THE IDEAL MATCH
Not all banks lend to small businesses. And not all of those that do lend to small businesses lend to all small businesses. The ideal match for you is a banker who’s familiar with your industry and can discuss potential risks and make informed decisions.
LAY THE GROUNDWORK CAREFULLY
If you walk in off the street and ask for a loan, you may not be successful. If possible, build a relationship with a potential lender. If your plans call for borrowing a substantial amount in a few years, you can establish your creditworthiness ahead of time by setting up a line of credit or taking out a small loan.
SUBMIT YOUR BUSINESS PLAN
Regardless of whether you have a relationship with a prospective lender, you’ll need to submit a business plan along with your loan application. Be prepared to answer questions about the assumptions you’ve used to create your plan. You might want to take things one step further by projecting how your plan might play out in three different scenarios: best case, most likely, and worst case.
Another proactive planning move is to line up some secondary repayment sources (business or personal collateral, for example) ahead of time. It shows the lender that you acknowledge the risk your loan represents and that you already have a backup plan.
PROVIDE FINANCIAL INFORMATION
Potential lenders will want to verify your background and confirm that you have the necessary experience. They will also require extensive financial information, including both your personal and business credit histories. Be prepared to provide personal and business financial statements as well as cash flow projections for a year (or more, depending on what the lender requires).
Spring may still be weeks away, but if your business is seasonal — and your season is summer — it’s time to start getting things organized. The more you can do before opening day, the easier it will be to stay cool when business and the weather heat up.
GET YOUR FINANCES IN ORDER
Operating a seasonal business means having to squeeze a year’s worth of business into a few months and then make your earnings last the entire year. You have to resist the temptation to overspend when cash is plentiful. So, before you start scrubbing walls or unpacking boxes, make sure your business finances are in order.
Go over last year’s budget carefully to see what changes may be necessary. Run some financial projections. Then check your progress frequently during the season to make sure you’re on track.
REVISIT AND RETHINK YOUR MARKETING PLANS
Give some thought as to how you plan to market your business. If you’re adding new product lines or services for the coming season, there may be new markets you can tap. Think about tweaking your website to give it a fresher look. If your client base is mobile friendly but your website isn’t, it may be time to upgrade.
START HIRING EARLY
If you’re hoping to rehire some of last season’s newer workers, the sooner you get in touch with them, the better. Once you know how many vacancies you have to fill, you can even start advertising and interviewing.
FOCUS ON THE DETAILS
This is a great time to take care of any needed repairs and to put on that fresh coat of paint. You also have time to search for deals and compare prices, which could result in substantial savings. Shop for items you regularly keep in stock and any equipment you need to buy or replace.
Before you know it, summer will be here.
It’s human nature to measure and compare. Whether it’s counting steps in the fitness world or tracking single-season passing yards in the sports world, measuring our progress against ourselves and others helps us keep track of how we’re doing.
As an owner of a small business, you can do something similar with financial ratios. Financial ratios help you measure how well your business is performing, and just as importantly, can let others, such as lenders and outside investors, evaluate your business’s financial health.
Looking at trends in your ratios over time and comparing them to industry averages can be instructive. There are different categories of financial ratios, all derived using data from a company’s financial statements.
These ratios measure whether your business is earning an adequate return on sales, total assets, and invested capital. For example, profit margin (the ratio of net income to sales) measures your company’s return on the sales dollar and is a key profitability ratio.
ASSET UTILIZATION RATIOS
Also known as “turnover ratios,” asset utilization ratios measure how efficiently your business is using its assets. For example, the receivables turnover ratio indicates how fast you collect cash from credit customers. The higher the ratio, the faster your collections. Similarly, the inventory turnover ratio measures how fast a company sells its inventory.
Liquidity ratios illustrate whether your business has sufficient assets to pay outstanding short-term obligations as they come due. The current ratio (current assets to current liabilities) is a commonly used liquidity ratio.
DEBT UTILIZATION RATIOS
A key ratio in this category, debt to total assets helps you to determine whether the debt your business carries is manageable. Since an inability to pay off debts may result in a business’s failure, this particular ratio is a critical indicator of the long-term financial sustainability of a business.
A recently issued final rule from the U.S. Department of Labor increases the salary threshold under which most salaried workers are eligible for overtime pay when they work more than 40 hours a week. The rule will take effect on December 1, 2016.
The rule essentially doubles the threshold, raising it from $23,660 annually ($455 per week) to $47,476 ($913 per week). The rule also updates the total annual compensation level above which most white-collar workers will be ineligible for overtime by raising the salary level of a highly compensated employee (HCE) to $134,004 from the current $100,000.
The White House announced that the new rule is expected to extend overtime protections to an additional 4.2 million employees and boost employee wages by $12 billion over the next 10 years.
The new rule will:
- Automatically update the salary threshold every three years, beginning January 1, 2020. Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the lowest wage Census region, estimated to be $51,168 in 2020. The HCE threshold will increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020.
- Allow employers to count nondiscretionary bonuses, incentive pay, or commissions toward as much as 10% of the salary threshold for non-HCE workers provided these payments are made on at least a quarterly basis.
- Keep in place the “duties test” that determines whether white-collar salaried workers earning more than the salary threshold are ineligible for overtime pay
Employers still have flexibility in choosing how they comply with the new rule. Permissible methods of compliance include raising salaries of primarily executive, administrative, or professional workers to at least the new threshold, paying overtime for hours worked in excess of 40 hours per week, or reducing overtime hours.
Article originally Published in Client Line
Home Office Tax Tips
Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home. Here are some home office tax tips that may help you make the best choice for your situation.
Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowners insurance. You can deduct only the business portion of your indirect expenses.
WHAT SPACE CAN QUALIFY?
Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following.
Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.
A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.
A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.
A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.
If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.
If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.