Tag: expenses

Tax Planning Strategies – Minimizing 2016 Individual Income Taxes

It is never too early to get a jump start on tax planning. Why not start now and minimize your end of the year holiday stress? These tax planning techniques could help you reduce 2016 taxes.

Make Charitable Contributions

Tax planning strategies for 2016Making charitable contributions is a great way to reduce your taxable income. The most common type of donation is a monetary contribution. Taxpayers are allowed to make tax deductible monetary contributions to qualified organizations in amounts up to 50% of adjusted gross income.

Additionally, donating securities is an excellent way to support a charitable organization and avoid paying capital gains tax.  When you donate securities that were held for more than one year, the contribution is deducted at fair market value and capital gains tax is avoided.  This strategy works best with appreciated securities.  Unlike monetary charitable contributions, donating securities to qualified organizations are limited to 30% of adjusted gross income.

Plan for Capital Gains

If capital gains are expected to be significant in 2016, consider selling some securities in your portfolio at a loss and generate capital losses. Capital losses are netted against capital gains to calculate the net taxable amount. Furthermore, if capital losses exceed capital gains, taxpayers may take a capital loss deduction up to $3,000 in the current year and carry forward the remainder to future years.

For example, if a taxpayer sells two securities, one with a gain of $50,000 and one at a loss of $65,000, a $3,000 capital loss deduction is allowed in the current year. The remaining $12,000 capital loss is carried forward to the following year.

Avoid Alternative Minimum Tax

The alternative minimum tax (AMT) has a significant impact on tax planning for high income individuals.  AMT limits certain benefits and itemized deductions you might otherwise be eligible to receive. In years where taxpayers will be subject to AMT, one strategy is to accelerate income or defer tax deductions. This will help avoid AMT either in the current year or over multiple years.

For example, if you are subject to AMT and will not receive any benefit for state tax payments in the current year, defer those payments, if possible, to the next year when you’re not subject to the AMT.

If you’re not in the AMT for the current year, pay any state taxes before the end of the year, which may be due in April, to accelerate the year of the tax deduction. The IRS has the following tax tool to help determine if you might be taxed under AMT (https://www.irs.gov/individuals/alternative-minimum-tax-assistant-for-individuals).

Prepay Deduction Items

Another way to reduce taxable income in 2016 is to prepay 2017 real estate taxes, state and local income taxes, and other miscellaneous itemized deductions.  Itemized deductions are recognized in the year they are paid, not the year they are due. If a taxpayer itemizes and has the option to accelerate 2017 expenses to 2016, this will increase deductions in 2016 which will decrease adjusted gross income.

Before implementing this strategy confirm you will not be subject to the AMT and your overall itemized deductions will be greater than the standard deduction. You should also consider itemized deduction limitations that may be greater due to higher income in 2016.

You may benefit from implementing at least one of these tax planning strategies. They are just a few of the methods to reduce taxable income and should be implemented on a case-by-case basis. At KRS we work with our clients to develop fluid tax plans and minimization strategies.

If you would like to learn more about tax planning and how to implement strategies to reduce your taxes, please contact Maria Rollins, CPA, to set up a consultation.

Is Your Business Ready for 2017?

Budget Projections Offer a Road Map to Success

I know that many businesses do not prepare projections, and among the ones that do, many do not use them to monitor results. Many believe that one of the most important steps in achieving personal goals is to write them down.  Preparing and monitoring a budget for your business is similar to a person listing his or her goals.  It introduces accountability, and can be used as a road map for the upcoming year.

preparing a 2017 budget can lead to financial successHow to prepare a budget projection

Using Microsoft Excel, list the months in columns across the top with a total column after December, and income and expense accounts on the left. Add a line for total expenses, and below that a line for net income. Insert formulas to sum total expenses and annual total income and expenses in the column to the right of December.

How much money do you want to make? Start the projection by entering the net income for each month of the year.  Next, enter projected monthly expenses for each month of the year.  Hint: the current year monthly financial statements will be a big help in estimating future expenses.  Now, enter a formula in each month of the sales line that adds net income and total expenses.  Based on projected expenses and budgeted net income, this will show you the monthly sales necessary to achieve this profitability.  Is this sales number realistic and achievable?  If not, which expenses can be reduced?  Does your business offer some products and services that are more profitable than others?  Preparing projections will force you to deal with these issues, and help you understand what drives the profits in your business.

Monitoring business performance

This process is not as overwhelming as it may seem. It will become much easier once you do it, and it is a valuable tool for monitoring business performance.  If you need help, contact your CPA firm; they have all the necessary historical data and the expertise in preparation of financial projections.

Beware of Phantom Income

Real Expenses vs. Phantom Expenses

As a real estate investor, it is essential to know the difference between a real expense and a phantom expense. An investor might think a $1,000 roof repair is a good thing since he or she can deduct it as an expense. What if you never had to make that repair in the first place? You would have $1,000 of taxable income in your pocket. Being taxed isn’t automatically a bad thing, since that means you are making money on the property.

real estate and phantom incomeWhat is a Phantom Expense?

Depreciation is the perfect example of a phantom expense since it allows an owner of real estate to recover the value of the building against rental income. The IRS allows a deduction for the decrease in value of your property over time, irrespective of the fact that most properties never really wear out. Simply put, depreciation allows you to write off the buildings and improvements over a prescribed period of time, providing a “phantom expense” that is used to offset rental income.

Residential real estate and improvements are depreciated over a 27.5 year period. Commercial real estate and improvements are depreciated over 39 years.

Debt Amortization

In addition to a depreciation deduction, the Internal Revenue Code allows for the interest portion of a mortgage payment to be deducted for income tax purposes. The principal portion of a mortgage payment is treated as taxable income or “phantom income“.

During the initial years of a typical mortgage loan, the principal reduction (debt amortization) is normally offset by depreciation deductions and interest expense, decreasing taxable income. In the later years of a typical loan amortization, principal reduction will exceed interest expense and depreciation, thereby increasing taxable income and generating a seemingly disproportionate tax liability (the dreaded phantom income).

Disposition of a Property

A taxpayer may incur phantom income upon disposition of a property. Phantom income is triggered when taxable income exceeds sales proceeds upon the disposition of real estate. Usually, this results from prior deductions based on indebtedness. You may have deducted losses and/or received cash distributions in prior years that were greater than your actual investment made in the property. If you are planning to dispose of a property and believe you are in this situation, there are strategies to minimize the tax impact including IRC 1031 exchanges, which are discussed in my blog Understanding IRC Code Section 1031 and why you should care.

Real estate investors who want to maximize their after tax cash flow need to be cognizant of phantom income and compare their cash flow to taxable income. This analysis should be undertaken regularly as it may impact their investment returns. If you have questions about phantom income and your real estate, contact me at [email protected] or 201.655.7411.

Choosing The Right Accounting Software

Get the Accounting Software Your Small Business Needs to Succeed

If you are looking for an accounting system for a small business you may want to start by reviewing the features included in prepackaged solutions such as QuickBooks or Xero. These are relatively inexpensive and can be set up and functioning quickly with some user training.

Businesswoman working on laptop.Depending upon the version purchased, these packages will offer the user the ability to perform basic bookkeeping functions such as

  • Creating estimates and invoices
  • Syncing bank or credit card accounts
  • Printing checks
  • Reconciling bank accounts
  • Exporting data to Excel
  • Maintaining a General Ledger
  • Providing basic financial reports such as Balance Sheet and Profit & Loss statements.

If not offered in the basic versions, more advanced features may include preparation and printing of 1099’s, payroll, inventory tracking, time & billing, budgets, and enhanced financial reporting. In addition to the pre-packaged accounting software, there are many add-on applications that can automate many business processes.  For example, applications are available to provide point of sale solutions, enhanced inventory management, paperless bill-pay processes, employee expense/reimbursement processing and sales tax automation. There are even CRM and document management add-on applications available to help manage and grow your business.

Do your homework before buying accounting software

Not every app will integrate with every software package or version so it is important to do your homework. And if remote access is important to you, many packages offer both cloud-based and desktop versions of their software. Be sure to compare the features offered in each since certain functionality may be available in one and not the other.

It is also important that the system you use for your business provide an audit trail and the ability to lock down closed accounting periods. These functions will protect the integrity of the data and limit unauthorized posting or deletion of data.

Accounting software for a growing business

So what do you do when you believe you have outgrown the small business packaged software solutions such as QuickBooks or Xero?

First, be certain that it is the accounting software that you have outgrown and not your operational software. For example, a large volume distributor may have intricate inventory management, markup and costing operational needs that are best managed through industry-specific operational software. If this is your dilemma, then it is not only necessary to evaluate the accounting functions of the software; most often, the operational functionality will take the lead in the selection process.

Although they are getting better, we often see excellent industry-specific operational systems that lack functionality and integrity on the accounting and financial reporting side. In these circumstances, it is important to determine if the benefits of operational reporting outweigh the accounting functionality. If so, some customized software enhancements may be needed at additional cost. These operational and accounting software packages will be much more costly than packaged software and require significant training for all users. Most often it is recommended to run a new system simultaneously with the prior system until the integrity of the data can be tested and trusted.

In either scenario your accountant should be able to help you in the software selection process. He or she should understand your business operations, user needs and reporting requirements and be able to offer valuable insight in your selection process. Your accounting software should allow you to process transactions efficiently and provide financial reporting that will help your business be more profitable.

If you have questions about choosing the right accounting software for your small business, KRS CPAs can help. Give me a call at 201.655.7411 or email me at [email protected]

Valuation Considerations in Selling a Business

 

The most important tool in helping evaluate cash flow and risk is good accounting records. If the business has five or more years of good accounting records, the buyer’s perception of risk is reduced, because the records will tell the story of the company’s cash flow, and make it easier to project future cash flow.

Price and Value balance conceptIt is unlikely that any single action will result in a significant increase in cash flow, but the here are some areas where improvement may be achieved:

Expense Reductions – Review your financial statements line by line. Can the company operate with less payroll?  Fewer vehicles?  Can you reduce your space and related rent expense?

Have employee contributions to health insurance costs kept up with rising premiums?  I once assisted with a business sale in which the owner’s mantra was “find an expense reduction or become one.”  Every dollar that is added to the bottom line may increase the value of the business.

Revenue Increases – Can the customer base be expanded?   How will the company’s market share be affected by a price increase?  What about a price decrease?  Can the company take on new product lines?

Accounts Receivable – Can customer payments be accelerated? Money that is not in accounts receivable will be in your bank account, available for the business to use.  For example, a business that has $10 million of annual sales will gain approximately $385,000 of cash by reducing its average collection period by 14 days.

Inventory – Are you carrying obsolete or slow moving inventory? If so, it should be sold at a discount to reduce inventory and raise cash.  This step is also necessary so that prospective buyers of the business will have an accurate picture of normal inventory levels.

Common risk factors

Although different businesses may have different risks factors, some risks are common to all businesses. In evaluation of risk, we identify factors that may cause cash flow to not be received in the amounts expected and when expected. Following are some risks common to many businesses:

Customer Concentration – Is the business dependent on sales to one or a few customers? What would happen if one or more of those customers were lost?

Supplier Concentration – Are business operations dependent upon one supplier? If that supplier ceased to exist, could it be replaced?

Key Employees – Do the key employees have employment agreements and/or non-compete agreements? If not, and they went to work for a competitor, would the business suffer?

Obsolescence – Are your products or the processes used to produce your products approaching obsolescence, or are you updating your products and processes to stay competitive?

To understand the value of the business and how to increase it, a business owner considering selling should have the business valued. This will help him understand the factors that drive the value of the business.  If this is done long before the contemplated sale, this will give the owner and management team more time to make the changes necessary to increase the value of the business.

For more about business valuation, read the posts, “Why You Need a Business Valuation,” and “Goodwill and Your Business.” Also visit the KRS Business Valuation and Litigation Support page.