Month: November 2018

Understanding IRC Code Section 1033

Understanding IRC Code Section 1033Unfortunately, 2018 has been another year of major disasters due to hurricanes, fires, and floods. As taxpayers turn to the process of restoring property, some may be considering whether a 1033 exchange is more relevant than a 1031 exchange.

This blog entry examines some of the key aspects of the 1033 exchange.

What is an IRC 1033 exchange?

A section 1033 exchange, named for Section 1033 of the Internal Revenue Code, applies when you lose property through a casualty, theft or condemnation and realize gain from the insurance or condemnation proceeds. If your accountant or tax advisor believes you will realize gain from the insurance or condemnation proceeds, you may be able to defer that gain using a 1033 exchange.

Compared to IRC 1031

Internal Revenue Code Section 1031, commonly referred to as a “like-kind exchange,” does not allow a taxpayer to hold or benefit from the proceeds during the exchange period. It also requires the replacement property be identified within 45 days and acquired within 180 days after the closing of the relinquished property. If a taxpayer is deferring gain in a 1033 exchange, he can hold the proceeds until the acquisition of the replacement property and an intermediary is not required.

Replacement property

Another difference between a 1031 and a 1033 exchange is the standard that is used to limit what you can buy as replacement property. In general, the standard is more restrictive under 1033 than the like-kind standard under IRC 1031. Section 1033 provides the replacement property must be “similar or related in service or use” to the property that was lost in the casualty or condemnation. It is important to note the Tax Cuts and Jobs Act of 2017 eliminated tax-deferred like-kind exchanges of personal property, but allows exchanges of business and investment real estate.

Time period

The time period allowed for the taxpayer to acquire the replacement property is much more liberal than Section 1031 exchanges. The period begins at the earlier of when the taxpayer first discovers the threat or imminence of condemnation proceedings or when the condemnation or other involuntary conversion occurs. The period ends either two or three years after the end of the tax year in which the conversion occurs. The time period is three years for real property held for business or investment and two years for all other property. If the taxpayer has lost property in a federally declared disaster area, Section 1033 gives the taxpayer a two year extension on the replacement period, granting a total of four years in which to replace the lost property.

Taxpayers having lost their property due to casualties or those facing condemnation should consult with their tax advisors to take advantage of the tax deferral afforded under Section 1033 if they wish to replace their lost property.

We’ve got your back

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

 

Time to Gather All Your Papers for Taxes

Time to gather your paperwork for Tax TimeGet started organizing paperwork now to make tax time less stressful.

Most of the papers you need to document the income, interest and withheld taxes you report arrive in your mailbox in January, with investment-related 1099s often coming in February. Get ready for their arrival by creating print and online folders. It’s a good idea to create a paper and an email tax folder for messages relating directly to tax information.

Email announcements that documents are available online will land in your inbox. The postal service may deliver your W-2s in your physical mailbox — although some companies post them on a secure site for downloading. Mortgage providers, banks and other financial institutions often post important 1099 forms on your online account.

Paperless banking may have turned shoe boxes into receipt relics of the past, while your online statements often contain key backup records for such potential deductions as:

  • Charitable donations
  • Outlays for health care
  • Gambling winnings and losses
  • Property tax expenditures

Many of us ignore the line items on these statements until we start our annual tax-filing ritual. However you may save time by taking a few extra minutes each month to jot down tax-related information, like:

  • Expense title
  • Check numbers
  • Payee names
  • Dollar amounts
  • Dates

Create a spreadsheet dedicated to tax records. Throughout the year, consider downloading and printing online documents that will be available for only a limited time.

Keeping track of everything

Here are some of the documents you should have handy:

  • Documents related to life events — marriage, death of a spouse or divorce, deductible alimony payment records, adoption papers, and child custody agreements should all be saved.
  • Paperwork related to childbirth. You’ll want the newborn’s Social Security card, childcare receipts and details on college savings plans.
  • Home ownership information. Keep such paperwork as closing documents — it’s good to keep closing documents in case you paid real estate taxes or points when you closed that don’t appear on your year-end mortgage interest statement. Save annual mortgage statements.

Other documents to consider:

  • Last year’s taxes, both federal and state. These are handy as good refreshers of what you filed and documents you’ll need.
  • Retirement account contributions. Keep track of your contributions to a traditional IRA or a self-employed retirement account. Keep this information handy for tax time.
  • Education expenses. Documents help your deduction claim here.
  • State and local taxes. Save these documents so that they can be easily retrieved.

The value of a tax return doesn’t end on April 15. You’ll need to provide this document to get a mortgage, apply for student loans and check the status of your refund. Generally, the IRS can audit you for three years after a filing date, and in some cases, even longer. Hold on to your return copies and supporting documents just in case. The IRS can audit you years after you file, so be prepared.

We’ve got your back

KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources to help you succeed. Check it out today!

The Importance of Working Capital for Staffing Companies

A snapshot of short-term liquidity

Working capital is a key financial concept for business owners when evaluating the overall health of operations. It reveals a snapshot of the company’s short-term liquidity position.

The working capital computation is relatively simple:

Current Assets – Current Liabilities = Working CapitalThe Importance of Working Capital for Staffing Companies

Current assets represent the most liquid items on the company’s balance sheet. They consist mostly of cash, accounts receivable, and inventory.

Current liabilities represent debts the company will need to satisfy within 12 months or less.

How much working capital do owners need?

A company should have sufficient working capital on hand to pay all its bills for a year. The amount of working capital informs owners if they have the necessary resources to expand internally or they will need to turn to banks or outside services to raise capital to reach sufficient working capital levels. Having a large positive working capital balance allows the company to grow using funds that were generated internally instead of being liable to outside investors or banks.

One of the main advantages of looking at the working capital position of a company is being able to foresee potential financial difficulties that might arise. If there is insufficient working capital the Company may need to secure financing to meet its current financial obligations. For staffing companies, having positive working capital is imperative for the business to succeed.

Staffing companies and working capital

Staffing companies also need to look into the business cycle of the company to fully understand the importance of working capital. The operating cycle analyzes the accounts receivable, inventory, and accounts payable cycles in terms of days. In other words, accounts receivable is analyzed by the average number of days it takes to collect an account. Accounts payable are analyzed by the average number of days it takes to pay a supplier invoice.

The main goal for staffing companies is to have a high accounts receivable turnover ratio, which is net credit sales divided by average accounts receivable. Divide 365 by your ratio and that will reflect the number of days, on average, to collect receivables. A higher ratio and lower number of days means the company is efficient in collecting receivables. A strong performance ratio for staffing companies range from 11.4 to 16.0, with the number of days to collect balances between 23-32 days.

If receivables are not being collected in a timely manner then the agency has to generate the cash to fund payroll, employee benefits, and payroll taxes not only for placements but for its own employees as well.

Working capital has a direct impact on cash flow in a staffing agency. Since cash flow is the name of the game for all business owners, a good understanding of working capital is imperative to make s business venture successful.

We’ve got your back

At KRS, our CPAs can help you review your staffing company’s working capital and put together a plan for improving your company’s financial situation. Give us a call at 201.655.7411 or email Sean at [email protected]

Understanding Family Business Dynamics

The Family Business – It’s Not Easy!

Managing a family business presents unique challenges not faced by businesses owned and operated by unrelated individuals.  If not addressed, family issues can divide the family and damage or destroy the business.  The larger the family, the more difficult it is to address the challenges. Ignoring the problems is Understanding Family Business Dynamicsnot a solution because they will not go away.

Statistics show that only 10 to 15 percent of family businesses make it to the third generation and only three to five percent make it to the fourth generation.

Typically, the business is started by the first generation and the founder’s children go to work in the business.  While the founder is alive and well, he or she takes the lion’s share of the compensation and profits and, most of the time, everyone appears to get along.  After the founder is gone, the second generation may continue to get along, but in many cases, it becomes a competition to see who can take the most and work the least. This puts a great deal of financial stress on the business because it now may have to support two, three or more families at the level that it previously supported one.

If the business does make it to the third generation, there are many more children involved and the problem grows exponentially, which almost always leads to its demise.

Compensating family members fairly

When it comes to family business, fair is not equal.  Although the business may be owned by many family members, the ones that actually work in the business must receive fair compensation for the jobs they do.  If one family member is the company’s top salesperson and her older brother is a part time worker, they should not receive equal compensation.  For a family business to succeed over multiple generations, there can be no entitlement.  The top performers can get a job anywhere; they do not have to stay in the family business.  If the performers leave, the entitled people are in trouble.

If after everyone receives fair compensation for their services, profits can be distributed to all owners, but only in an amount that will leave the business with enough cash to continue operations.  The business should never make the mistake of borrowing to make distributions.

To succeed in the end, business decisions must be right for the business and family decisions must be right for the family.  All of the children may not be interested in the business, or your youngest daughter may have more to contribute than your oldest son.  When it comes to the business, each family member should be evaluated based on what they bring to the table, not who their parents are or the order in which they were born.

We’ve got your back

At KRS CPAs, we know business is personal for you and your family. Learn more about our services for family-run businesses and contact me at 201.655.7411 or [email protected] to discuss your situation.