Using the “per diem” approach when reimbursing employees for lodging, meals and incidental expenses requires the use of either IRS tables or a simplified high-low method to reimburse workers up to specified limits. Organizations seem to really like the per diem approach because of its simplicity. It doesn’t require too much record keeping and keeping up with receipts. However, the per diem method may put your organization at risk if you exceed the per diem limits. Exceeding the per diem limits exposes your organization to IRS penalties and your employees to higher tax liabilities. This is typically why organizations will often switch to an “accountable plan” for handling employee expense reimbursements.
Tax Advantages of An Accountable Plan
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. The biggest advantage is that your organization can deduct expenses (subject to a 50% limit for meals and entertainment), and employees and subcontractors can usually exclude 100% of advances or reimbursements from their incomes. Workers whose jobs involve frequent travel may realize significant tax savings.
How to Qualify As An Accountable Plan
Under IRS rules, your accountable plan must meet the following three criteria:
- The plan must only reimburse “ordinary & necessary” business-related expenses that would otherwise be deductible by the employee or subcontractor.
- Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly by turning in receipts.
- Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.
Failure to meet these conditions, will cause the IRS to treat your plan as “non-accountable”, which then transforms all reimbursements into wages taxable to the employee and subject to income and employment taxes.
Need Some Help?
Accountable plans take time to establish and require meticulous record keeping. Let us help. We’d be happy to assist you in setting up your accountable plan and regularly reviewing its compliance with IRS rules.
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Mitigating the risks of IT outsourcing
Nowadays it is common for many businesses to outsource at least one or more of their IT functions. The goal is usually to save money and work more efficiently and effectively. Yet if you don’t mitigate the risks involved, you could end up both losing out financially and failing to get the most from the outsourcing arrangement.
Here we suggest a few best practices to consider when outsourcing your IT functions:
- Consult your internal users – Ask for candid feedback about whether your organization’s technology is meeting your employees’ needs. What help from an outside provider do they really need?
- Consult with other organizations – Contact other organizations that have outsourced their IT functions. Much can be learned by talking with trusted colleagues about their outsourcing experience. Ask them how outsourcing actually helped — or hurt — them.
- Weigh opportunities vs. risks – Identify opportunities beyond cost savings. For example, outsourcing non-core IT functions — such as management of HR systems and supply-chain technology — could free up internal resources for projects you’ve put on the back burner but that have strategic importance. Keep in mind though, outsourcing too many non-core processes, or doing so improperly, could leave you with too little control of these functions and expose you to inefficiency or compliance risks.
- Refine your relationship expertise – Many business owners believe that, once they sign the deal, the contract will take care of itself. As a result, they don’t adequately manage the relationship and often find themselves in conflict with the vendor or stuck with unsatisfactory results. Clarify your expectations at the onset of the relationship and revisit them often by keeping the lines of communication open between you and your outsourced provider. You may need to develop new skills, processes and metrics to ensure the service provider deliver the results expected.
In today’s global economy, IT outsourcing has become — in many industries — a competitive necessity. Whether your company is large or small, we can help you assess, negotiate and maximize the bottom-line benefits of an outsourcing arrangement. Give us a call to let us know what we can do for you.
In many industries, quality customer service has become a quaint, distant memory. Customers are often reduced to selecting the provider that costs them the least. But the golden rule has not been repealed. Pleasing customers can create a powerful competitive advantage – and a few simple changes may increase your bottom line.
To distinguish your organization from the rest, we recommend establishing the following best practices for your customer service policies and procedures:
- Communicate with your customers. Return calls, emails, and social media contacts promptly, send updates about matters in progress, and explain delays as soon as you can.
- Make life easy. Offer discounts at the point of sale rather than giving out coupons or making buyers apply for mail-in rebates. If you use an automated phone system, provide a simple method for reaching a live person.
- Apologize early and whenever necessary. If you’re even partly wrong, apologize and proceed to a resolution. Train your employees to do the same and reward them for positive outcomes.
- Put customers first. Let your customers know you’re there for them and that you regard them as more than “dollar signs.” Listen to their concerns and then do whatever you can to address them promptly. If a customer is unhappy with a purchase of your product or service, fix it, replace it, or refund the payment in full. At worst, the loss won’t be compounded by damage to your reputation. At best, the money will come back multiplied by repeat business and referrals.
Quality service is a powerful marketing tool that’s surprisingly easy to implement. Simply imagine how you would want to be treated and provide that treatment to your customers. As customer satisfaction increases, so too will your profitability.
If you die without addressing your digital assets (such as online bank and brokerage accounts) in your estate plan, your loved ones or other representatives may not be able to access them without going to court — or, worse yet, may not even know they exist.
The first step in accounting for digital assets is to conduct an inventory, including any computers, servers or handheld devices where these assets are stored. Next, talk with your estate planning advisor about strategies for ensuring that your representatives have immediate access to these assets in the event something happens to you.
Although you might want to provide in your will for the disposition of certain digital assets, a will isn’t the place to list passwords or other confidential information, because a will is a public document. One solution is writing an informal letter to your executor or personal representative that lists important accounts, website addresses, usernames and passwords. Another option is to establish a master password that gives the representative access to a list of passwords for all your important accounts, either on your computer or through a Web-based “password vault.”
If you have significant digital assets and need help incorporating them into your estate plan, please give us a call.
Don’t underestimate the tax impact of an acquisition
If your company wants to acquire another business, you’ll need to anticipate many challenges. To improve your odds of success, it’s important to devote resources to intensive tax planning before — and after — your deal closes.
During deal negotiations, you and the seller will likely discuss issues such as to what extent each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa.
Tax management during integration is also important. It can help your company capture synergies more quickly and efficiently. You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via postmerger synergies. But if your tax projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.
Negative tax consequences of an acquisition can haunt a company for years. Let us help you avoid them and identify tax benefits that can improve the acquisition as a whole. Please contact us for more information.
Prudent business owners take measures to smooth out cash fluctuations that are a normal part of the business cycle. Follow these four practices to moderate the ebb and flow of your cash:
- Analyze cash every month: Analyzing cash doesn’t have to be complicated. Start by writing down your cash balance at the beginning of the month, then add all the cash that came in during the month from all sources. Finally subtract all of the outgoing cash and calculate the ending cash balance. After a few months, review the ending cash balances of each month and compare them. If your cash balance is decreasing month after month, then your business has a negative cash flow (not good). If the ending balance is increasing, then your cash flow is positive (the goal). You should keep record of the cash balances over the course of a and run a trend analysis to determine the causes ups and downs. If you are funding your business with loans, be sure to leave this money out of the analysis so you can gauge the true cash flow from operations.
- Monitor your customer balances: It is easy to fall short in the management of your accounts receivable (money owed to you from customers). Put in to place adequate pre-qualifying processes before extending credit to customers. Always use a software system to track who owes you money so that you can follow up with customers and send invoices and statements. A last resort would be to factor or sell your receivables to a factoring company to maintain a predictable cash flow. Just keep in mind that factoring isn’t free! There are several new companies out there that will fund your receivables for a fee – check out Fundbox amd Blue Vine.
- Slow down your cash disbursements: Prudent cash flow management dictates that you retain cash as long as possible. This doesn’t mean you become a deadbeat customer to your own vendors – you still have to pay on time, just not too early and not late. If your vendor offers any sort of early payment discount like a 2% 10, net 30 you will always want to take advantage of the cost savings. You can also try negotiating extended payment times with your vendors. The longer the cash stays in your bank account, the better. Try keeping the majority of your idle cash in an interest bearing account when possible as long as the monthly and transaction fees are not too steep or eating up any interest you might be earning.
- Time large expenses: Get in to the habit of setting aside small amounts to fund large expected expenditures such as business license renewals and quarterly estimated tax payments. You may also want to start an equipment fund, to save up for large capital assets that will eventually need to be replaced. Being prepared for large purchases with a fully funded savings account will give you peace of mind all year long. It is best to put the money in a separate account that you don’t have regular or easy access to, that way you are not tempted to “raid’ it for splurge purchases.
Give these cash management techniques a try and give us some feedback on how you made out. Do you have other ideas that work for you? Share them in the comments below.
Are problems beginning to surface in your business? Have profits been dwindling? Are customers complaining with greater frequency? Are competitors encroaching on your market share? These are warning signs that you’re headed in the wrong direction – and you don’t want to ignore them until it’s too late. Here are suggestions for turning things around.
- Focus on the money-makers.
- Perhaps your business has developed products your customers aren’t willing to buy. If so, it may make sense to redirect your company’s available resources. Does that mean you should never create new product lines or expand into new markets? No. But new products must eventually improve the bottom line. If they don’t make money within a reasonable time, refocus.
- Reestablish your brand.
- Identify what you do best; then tell everyone. Your goal is to educate customers, vendors, and employees on the reasons why your product or service is better than the competition. Be specific. Of course, to remain credible you must back up your claims, so be realistic as well. Win trust by following through.
- Track results.
- Once you’re refocused on the money-making segments of your business, keep a close eye on the numbers. Know whether customer complaints are down, cash flow is improving, back orders are declining, and market share is holding steady or increasing. If profits aren’t showing an upward trend, take another look – then adjust and remeasure.
For help getting your business back on track, give us a call (757) 926-4109, it’s what we do.
Considering establishing your own company? Here are a few tips to help your new venture get off to a smart start.
- Choose the right form for your business.
- Sole proprietorship, partnership, corporation, or limited liability company: your decision will depend on questions such as how many owners the business will have, who will be in control of decision-making, and what liability issues exist.
- Set up a good recordkeeping system.
- A business launch means paperwork, including establishing a business bank account, filing for an employer identification number, acquiring a local occupational license, and maybe registering a fictitious name.
- In addition to these permanent records, you’ll also need to track pre-launch costs and ongoing expenses for tax write-offs.
- Understand tax reporting requirements.
- Depending on how you structure your business, you may need to file a separate tax return each year.
- You might also need to make quarterly estimated tax payments.
- Other tax returns include federal and state forms for reporting sales and employment taxes.
Please call for advice before you open the doors of your new business. We’ll work with your legal, banking, and other advisors to help you establish a good foundation for future success.
Considering Crowdfunding as a Means for Raising Funds?
Have you ever thought about raising funds for your small business using online crowdfunding tools? Crowdfunding gives entrepreneurs the ability to raise funds by attracting relatively small amounts of money from large numbers of people. Through a provision in the Jumpstart Our Business Startups Act (JOBS Act), crowdfunding creates a means for allowing startups and small businesses to raise capital through securities offerings using the internet. The JOBS Act permits internet-based platforms, like kickstarter, rockethub and indiegogo, to facilitate the offer and sale of securities. In coming up with the rules, the SEC attempted to create protections for investors while enabling businesses to use crowdfunding effectively. Click on the following link to read the SEC press release and to get a rundown of the new JOBS Act rules pertaining to crowdfunding SEC Press Release 2015-49 .
The CPAs at Todd & Co. CPA Group understand the tax implications of raising funds through crowdfunding. We also understand the Securities and Exchange Commission’s rules, which help small businesses gain access to capital and take advantage of more investment choices. We can help you understand this innovative means for raising capital. Contact us at (757) 926-4109 to find out more.
The decision of whether to trade in an old business car or try to sell it for cash generally should be based on factors such as the amount you can get on a sale versus a trade-in, and the time and bother a sale will entail. However, important tax factors also may affect your decision-making process. Here’s an overview of the complex rules that apply to what appears to be a simple transaction, and some pointers on how to achieve the best tax results.
In general, the sale of a business auto yields a gain or loss depending on the net amount you receive from the sale and your basis for it. Your “basis” is your cost for tax purposes and, if you bought the asset, usually equals your cost minus the depreciation deductions you claimed for the auto over the years. Under the tax-free swap rules, trading in an old business auto for a new one doesn’t result in a current gain or loss, and the new car’s basis will equal the old car’s remaining basis plus any cash you paid to trade up. As a general rule, you should trade in your old business car if you used it exclusively for business driving, and its basis has been depreciated down to zero, or is very low. The trade-in often avoids a current tax. For example, if you sell your business car for $9,000, and your basis in it is only $7,000, you will have a $2,000 taxable gain, but if you trade it in, a current tax is avoided because any gain is deferred. Your basis in the new car will be lower than it would be if you bought it without a trade-in, but that doesn’t necessarily mean lower depreciation deductions on the new car. Because of the so-called “luxury auto” annual depreciation dollar caps, your annual depreciation deductions on a new car may be the same whether you sold the old car or traded it in.
However, you should consider selling your old business car for cash rather than trading it in if you used it exclusively for business driving and depreciation on the old car was limited by the annual depreciation dollar caps. In this situation, your basis in the old car may exceed its value. If you sell the old car, you will recognize a loss for tax purposes. However, if you trade it in, you will not recognize the loss.
For example, let’s you bought a $30,000 car several years back and used it 100% for business driving. Because of the annual depreciation dollar caps, you still have a $16,000 basis in the car, which has a current value of $14,500. Now, you want to buy another $30,000 car. If the old car is sold, a $1,500 loss will be recognized ($16,000 basis less $14,500 sale price). If the old car is traded in for a new one, there will be no current loss. Of course, if the old car’s value exceeds its basis, the tax-smart move is to trade it in and thereby avoid the gain.
You also may be better off selling your old business car for cash rather than trading it in, if you used the standard mileage allowance to deduct car-related expenses. For 2016, the allowance is 54¢ per business mile driven. The standard mileage allowance has a built-in allowance for depreciation, which must be reflected in the basis of the car. When it’s time to dispose of a car, the depreciation allowance may leave you with a higher remaining basis than the car’s value. Under these circumstances, the car should be sold in order to recognize the loss. All of this sounds very complicated, and it is. Before you sell or trade in your business car or lease a new one, please give us a call and we’ll set up a meeting to discuss your options.
We often get asked about the requirements for deducting business meals and entertainment expenses. This type of expense requires you to jump through several extra hoops to qualify as deductible and is subject to limitations. Nevertheless, if you pay careful attention to the rules outlined below, the expenses should qualify as deductible.
- Ordinary and necessary business expenses. All business expenses must meet the general deductibility requirement of being “ordinary and necessary” in carrying on the business. These terms have been fairly broadly defined to mean customary or usual, and appropriate or helpful. Thus, if it is reasonable in your business to entertain clients or other business people you should be able to pass this general test.
- “Directly related” or “associated with.” A second level of tests especially applicable to meals and entertainment expenses must also be satisfied. Under them, the business meal or entertainment must be either “directly related to” or “associated with” the business. “Directly related” means involving an “active” discussion aimed at getting “immediate” revenue. Thus, a specific, concrete business benefit is expected to be derived, not just general goodwill from making a client or associate view you favorably. And the principal purpose for the event must be business. Also, you must have engaged actively during the event, via a meeting, discussion, etc. The directly related test can also be met if the meal or entertainment takes place in a clear business setting directly furthering your business, i.e., where there is no meaningful personal or social relationship between you and the others involved. Meetings or discussions that take place at sporting events, night clubs, or cocktail parties—essentially social events—would not meet this test. If the “directly related” test cannot be met, the expense may qualify as “associated with” the active conduct of business if the meal or entertainment event precedes or follows (i.e., takes place on the same day as) a substantial and bona fide business discussion. This test is easier to satisfy. “Goodwill” type of entertainment at shows, sporting events, night clubs, etc. can qualify. The event will be considered associated with the active conduct of the business if its purpose is to get new business or encourage the continuation of a business relationship. For meals, you (or an employee of yours) must be present. That is, for example, if you simply cover the cost of a client’s meal after a business meeting but don’t join him at it, the expense does not qualify.
- Substantiation. Almost as important as qualifying for the deduction are the requirements for proving that it qualifies. The use of reasonable estimates is not sufficient to stand up to IRS challenge. You must be able to establish the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. Obviously, you must set up careful and detailed record-keeping procedures to keep track of each business meal and entertainment event and to justify its business connection. For expenses of $75 or more, documentary proof (receipt, etc.) is required.
- Deduction limitations. Several additional limitations apply. First expenses that are “lavish or extravagant” are not deductible. This is generally a “reasonableness” test and does not impose any fixed limits on the cost of meals or entertainment events. Expenses incurred at first class restaurants or clubs can qualify as deductible. More importantly, however, once the expenditure qualifies, it is only 50% deductible. Obviously, this rule severely reduces the tax benefit of business meals and entertainment. If you spend about $50 a week on qualifying business meals, or $2,500 for the year, your deduction will only be $1,250, for tax savings of around $300 to $400.
Please call if you have any questions or would like my help in setting up record-keeping procedures.