Today’s business technology is both powerful and restive. No matter how “feature rich” a software solution or hardware asset may be, there’s always another upgrade around the corner. In other words, it’s just a matter of time before your company’s next IT project.

When that day arrives, watch out for “scope creep.” This term refers to the tendency of a project’s objective (or “scope”) to gradually expand while the job is underway. As a result, the schedule may drag and dollars may go to waste.

Common culprits

A variety of things can cause scope creep. In many cases, too few users give input during the planning stage. Or misunderstandings may occur between the project team and users, obscuring the purpose of the job.

Excessive implementation time undoes many projects as well. As weeks and months go by, business processes, policies and priorities tend to change. For a new system to meet the needs of the business, the project’s scope needs to be executable within a reasonable time frame.

Ineffective project management is another common culprit. Scope creep often arises when a project manager underestimates the complexity of the tasks at hand or fails to adequately motivate his or her team.

5 steps to success

To stop or at least minimize scope creep, follow these five steps:

1. Distinguish “must-haves” from “nice-to-haves.” Draw a red line between the functionalities your business absolutely must have and any added features that would be nice to have. Schedule the prioritized requirements in the form of phased deliverables during the project’s life cycle. Add “nice-to-haves” to the final phase or, better yet, defer them to future projects.

2. Put agreed-on deliverables in writing. Use a Statement of Work document to clearly outline the stated project requirements. Be sure to cover both those that are included and those that aren’t. Have everyone involved sign off on this document.

3. Divide and conquer. Segregate the project into small, manageable phases. As it proceeds, continue to review and sign off on each phase as it’s delivered, following an adequate testing period.

4. Introduce a formal change management process. If someone demands a change, ask him or her to rationalize the request in writing on a change order form. Then analyze the potential impact, estimate the added cost and time, and obtain consensus before proceeding. Adhering to this step typically eliminates many low-priority demands.

5. Anticipate some scope creep. It’s a rare project, if any, that proceeds exactly as planned. Allow for some scope creep in your budget and timeline.

Head-on approach

Improving your company’s technology should be cause for excitement and, eventually, celebration. Unfortunately, it too often brings anxiety and conflict. Tackling scope creep head on can help ensure that your IT projects go more smoothly. Our firm can help you assess the financial impact of any technology solution you’re considering and, if you decide to proceed, set a budget for the job. Contact us at 205-345-9898 or info@covenantcpa.com

© 2019 Covenant CPA

While the Tax Cuts and Jobs Act (TCJA) reduces most income tax rates and expands some tax breaks, it limits or eliminates several itemized deductions that have been valuable to many individual taxpayers. Here are five deductions you may see shrink or disappear when you file your 2018 income tax return:

1. State and local tax deduction. For 2018 through 2025, your total itemized deduction for all state and local taxes combined — including property tax — is limited to $10,000 ($5,000 if you’re married and filing separately). You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.

2. Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. For 2018 through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after Dec. 15, 2017, with some limited exceptions.

3. Home equity debt interest deduction. Before the TCJA, an itemized deduction could be claimed for interest on up to $100,000 of home equity debt used for any purpose, such as to pay off credit cards (for which interest isn’t deductible). The TCJA effectively limits the home equity interest deduction for 2018 through 2025 to debt that would qualify for the home mortgage interest deduction.

4. Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018 through 2025. If you’re an employee and work from home, this includes the home office deduction. (Business owners and the self-employed may still be able to claim a home office deduction against their business or self-employment income.)

5. Personal casualty and theft loss deduction. For 2018 through 2025, this itemized deduction is suspended except if the loss was due to an event officially declared a disaster by the President.

Be aware that additional rules and limits apply to many of these deductions. Also keep in mind that the TCJA nearly doubles the standard deduction. The combination of a much larger standard deduction and the reduction or elimination of many itemized deductions means that, even if itemizing has typically benefited you in the past, you might be better off taking the standard deduction when you file your 2018 return. Please contact us with any questions you have at 205-345-9898.

© 2019 Covenant CPA

In the restaurant industry, where long hours and thin profit margins are the norm, owners and managers often lack the time and resources to focus on fraud. Unfortunately, restaurants can provide crooked employees, customers and vendors with plenty of opportunities to steal. So you need to be able to recognize fraud threats — and nip them in the bud before they lead to heavy financial losses.

Opportunity on the house

Many restaurants have high transaction volumes but lack the technology linking point-of-sale, inventory and accounting systems. This leaves gaps for fraudsters to exploit. Employees could, for example, provide food and drinks to friends without entering the sales — or ring up only a portion of friends’ bills. They might issue voids or refunds when there was no original sale and pocket the proceeds. Or they could overcharge customers by, say, charging for premium beverages but serving cheaper alternatives.

Although it’s less common, intangible property theft is another risk. Your restaurant may use proprietary recipes and confidential marketing plans to compete in the dog-eat-dog world of food service. If a departing employee takes such secrets to a rival, it could threaten your restaurant’s survival.

Back-office book cooking

Owners often employ bookkeepers to manage back-office operations but may neglect to give proper oversight. Such an environment provides criminals — or even ordinary people experiencing unusual financial pressures — with opportunities to cook the books. In one frequently seen scheme, the bookkeeper creates a fake vendor account, submits and approves fraudulent invoices, then directs payments to a bank account he or she controls.

Even when bookkeepers are honest, the invoices they process may not be. It can be hard for managers to keep track of the daily stream of food, beverage and supply deliveries. Vendors might exploit such chaos by inflating their bills to reflect more or pricier items than they actually delivered. When vendors collude with restaurant employees, particularly receiving or accounting staff, theft can exact a heavy financial toll.

Ingredients for success

Successfully combatting restaurant fraud takes a multipronged approach. If you haven’t already:

  • Integrate your accounting, inventory and sales systems,
  • Use loss prevention technology to detect suspicious transactions such as excessive voids,
  • Process credit cards with EMV (chip) readers,
  • Conduct background checks on new hires,
  • Train supervisors to recognize red flags,
  • Set up a confidential fraud reporting hotline, and
  • Install video surveillance throughout your restaurant.

Also engage a CPA to review your financial records at least once a year for errors and discrepancies, and consider having this outside expert conduct occasional surprise audits. Contact us for assistance at 205-345-9898 or info@covenantcpa.com.

© 2019 Covenant CPA

If you run your business from your home or perform certain functions at home that are related to your business, you might be able to claim a home office deduction against your business income on your 2018 income tax return. There are now two methods for claiming this deduction: the actual expenses method and the simplified method.

Basics of the deduction

In general, you’ll qualify for a home office deduction if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if 1) you physically meet with patients, clients or customers on your premises, or 2) you use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for your business.

Actual expenses 

Traditionally, taxpayers have deducted actual expenses when they claim a home office deduction. Deductible home office expenses may include:

  • Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
  • A proportionate share of indirect expenses, such as mortgage interest, property taxes, utilities, repairs and insurance, and
  • A depreciation allowance.

But keeping track of actual expenses can be time consuming.

The simplified method

Fortunately, there’s a simplified method that’s been available since 2013: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.

For example, if you’ve converted a 300-square-foot bedroom to an office you use exclusively and regularly for business, you can write off $1,500 under the simplified method (300 square feet x $5). However, if your business is located in a 600-square-foot finished basement, the deduction will still be only $1,500 because of the cap on the deduction under this method.

As you can see, the cap can make the simplified method less beneficial for larger home office spaces. But even for spaces of 300 square feet or less, taxpayers may qualify for a bigger deduction using the actual expense method. So, tracking your actual expenses can be worth the extra hassle.

Flexibility in filing

When claiming the home office deduction, you’re not locked into a particular method. For instance, you might choose the actual expense method on your 2018 return, use the simplified method when you file your 2019 return next year and then switch back to the actual expense method thereafter. The choice is yours.

Unsure whether you qualify for the home office deduction? Or wondering whether you should deduct actual expenses or use the simplified method? Contact us at 205-345-9898. We can help you determine what’s right for your specific situation.

© 2019 Covenant CPA

Have you made substantial gifts of wealth to family members? Or are you the executor of the estate of a loved one who died recently? If so, you need to know whether you must file a gift or estate tax return.

Filing a gift tax return

Generally, a federal gift tax return (Form 709) is required if you make gifts to or for someone during the year (with certain exceptions, such as gifts to U.S. citizen spouses) that exceed the annual gift tax exclusion ($15,000 for 2018 and 2019); there’s a separate exclusion for gifts to a noncitizen spouse ($152,000 for 2018 and $155,000 for 2019).

Also, if you make gifts of future interests, even if they’re less than the annual exclusion amount, a gift tax return is required. Finally, if you split gifts with your spouse, regardless of amount, you must file a gift tax return.

The return is due by April 15 of the year after you make the gift, so the deadline for 2018 gifts is coming up soon. But the deadline can be extended to October 15.

Being required to file a form doesn’t necessarily mean you owe gift tax. You’ll owe tax only if you’ve already exhausted your lifetime gift and estate tax exemption ($11.18 million for 2018 and $11.40 million for 2019).

Filing an estate tax return

If required, a federal estate tax return (Form 706) is due nine months after the date of death. Executors can seek an extension of the filing deadline, an extension of the time to pay, or both, by filing Form 4768. Keep in mind that the form provides for an automatic six-month extension of the filing deadline, but that extending the time to pay (up to one year at a time) is at the IRS’s discretion. Executors can file additional requests to extend the filing deadline “for cause” or to obtain additional one-year extensions of time to pay.

Generally, Form 706 is required only if the deceased’s gross estate plus adjusted taxable gifts exceeds the exemption. But a return is required even if there’s no estate tax liability after taking all applicable deductions and credits.

Even if an estate tax return isn’t required, executors may need to file one to preserve a surviving spouse’s portability election. Portability allows a surviving spouse to take advantage of a deceased spouse’s unused estate tax exemption amount, but it’s not automatic. To take advantage of portability, the deceased’s executor must make an election on a timely filed estate tax return that computes the unused exemption amount.

Preparing an estate tax return can be a time consuming, costly undertaking, so executors should analyze the relative costs and benefits of a portability election. Generally, filing an estate tax return is advisable only if there’s a reasonable probability that the surviving spouse will exhaust his or her own exemption amount.

Seek professional help

Estate tax rules and regulations can be complicated. If you need help determining whether a gift or estate tax return needs to be filed, contact us at 205-345-9898.

© 2019 Covenant CPA

Many companies, especially those that operate in areas prone to natural disasters, should consider business interruption insurance. Unlike a commercial property policy, which may cover certain repairs of damaged property, this coverage generally provides the cash flow to cover revenues lost and expenses incurred while normal operations are suspended because of an applicable event.

But be warned: Business interruption insurance is arguably among the most complicated types of coverage on the market today. Submitting a claim can be time-consuming and requires careful preparation. Here are some best practices to keep in mind:

Notify your insurer immediately. Contact your insurance rep by phone as soon as possible to describe the damage. If your policy has been water-damaged or destroyed, ask him or her to send you a copy.

Review your policy. Read your policy in its entirety to determine how to best present your claim. It’s important to understand the policy’s limits and deductibles before spending time documenting losses that may not be covered.

Practice careful recordkeeping. Maintain accurate records to support your claim. Reorganize your bookkeeping to segregate costs related to the business interruption and keep supporting invoices. Among the necessary documents are:

  • Predisaster financial statements and income tax returns,
  • Postdisaster business records,
  • Copies of current utility bills, employee wage and benefit statements, and other records showing continuing operating expenses,
  • Receipts for building materials, a portable generator and other supplies needed for immediate repairs,
  • Paid invoices from contractors, security personnel, media outlets and other service providers, and
  • Receipts for rental payments, if you move your business to a temporary location.

The calculation of losses is one of the most important, complex and potentially contentious issues involved in making a business interruption insurance claim. Depending on the scope of your loss, your insurer may enlist its own specialists to audit your claim. Contact us at 205-345-989 for help quantifying your business interruption losses and anticipating questions or challenges from your insurer. And if you haven’t yet purchased this type of coverage, we can help you assess whether it’s a worthy investment.

© 2019 Covenant CPA

When you file your 2018 income tax return, you’ll likely find that some big tax law changes affect you — besides the much-discussed tax rate cuts and reduced itemized deductions. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) makes significant changes to personal exemptions, standard deductions and the child credit. The degree to which these changes will affect you depends on whether you have dependents and, if so, how many. It also depends on whether you typically itemize deductions.

1. No more personal exemptions 

For 2017, taxpayers could claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions could really add up.

For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates and other changes, might mitigate this increase.

2. Nearly doubled standard deduction 

Taxpayers can choose to itemize certain deductions or take the standard deduction based on their filing status. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.

For 2017, the standard deductions were $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. For 2019, they’re $12,200, $18,350 and $24,400, respectively. (These amounts will continue to be adjusted for inflation annually through 2025.)

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.

3. Enhanced child credit

Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.

The TCJA also makes the child credit available to more families. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.

The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.

Maximize your tax savings

These are just some of the TCJA changes that may affect you when you file your 2018 tax return and for the next several years. We can help ensure you claim all of the breaks available to you on your 2018 return and implement TCJA-smart tax-saving strategies for 2019. Call us at 205-345-9898 or email us at info@covenantcpa.com

© 2019 Covenant CPA

Concert, sporting and other event tickets can go for astronomical prices — when they’re even available. Hoping to find reasonably priced tickets (or to find tickets at all), many consumers turn to the online resale market. But while most resale transactions are legitimate, some involve ticket scammers. Buy from one of these sellers and you may end up with stolen or counterfeit tickets.

Playing defense

Ticket scams generally succeed because they exploit a common desire to bag a bargain or gain access to something that isn’t easily obtainable. But you can avoid getting tricked. Here’s how:

Buy direct. Whenever possible, buy first-release or secondary market tickets from the event’s official ticketing agent. The ticket may cost more, but buying from a reputable agent comes with peace of mind.

Look out for crooks. Ticket scammers often use spam email and fake websites to impersonate legitimate ticketing agents. Don’t click on links contained in unsolicited emails and don’t buy tickets from sites until you’ve researched their authenticity. Plug the ticket agent’s name into search engines and look at the agent’s social media accounts. Pay close attention to how the agent interacts with customers and handles disputes.

Ask questions. When buying from individuals, ask them to disclose how they received the tickets and why they want to sell them. If their story sounds suspicious, look elsewhere.

Verifying and reporting

It’s only when they’re turned away on game or concert day that many ticket scam victims learn they’ve been conned. So if you have any doubts about your tickets’ legitimacy, call or present them at the venue’s box office for confirmation as early as possible.

And if you’ve indeed been sold stolen or counterfeit tickets, notify law enforcement and report the incident to the Federal Trade Commission. You may not get your money back, but you’ll help prevent criminals from fleecing other unsuspecting ticket buyers. You can protect yourself from losing money on ticket scams by buying tickets only from agents that accept credit cards. In the event of fraud, most credit card issuers will refund the cost of your tickets and pursue collection with the seller. Contact us at 205-345-9898.

© 2019 Covenant CPA

Limited liability company (LLC) members commonly claim that their distributive shares of LLC income — after deducting compensation for services in the form of guaranteed payments — aren’t subject to self-employment (SE) tax. But the IRS has been cracking down on LLC members it claims have underreported SE income, with some success in court.

SE tax background

Self-employment income is subject to a 12.4% Social Security tax (up to the wage base) and a 2.9% Medicare tax. Generally, if you’re a member of a partnership — including an LLC taxed as a partnership — that conducts a trade or business, you’re considered self-employed.

General partners pay SE tax on all their business income from the partnership, whether it’s distributed or not. Limited partners, however, are subject to SE tax only on any guaranteed payments for services they provide to the partnership. The rationale is that limited partners, who have no management authority, are more akin to passive investors.

(Note, however, that “service partners” in service partnerships, such as law firms, medical practices, and architecture and engineering firms, generally may not claim limited partner status regardless of their level of participation.)

LLC uncertainty

Over the years, many LLC members have taken the position that they’re equivalent to limited partners and, therefore, exempt from SE tax (except on guaranteed payments for services). But there’s a big difference between limited partners and LLC members. Both enjoy limited personal liability, but, unlike limited partners, LLC members can actively participate in management without jeopardizing their liability protection.

Arguably, LLC members who are active in management or perform substantial services related to the LLC’s business are subject to SE tax, while those who more closely resemble passive investors should be treated like limited partners. The IRS issued proposed regulations to that effect in 1997, but hasn’t finalized them — although it follows them as a matter of internal policy.

Some LLC members have argued that the IRS’s failure to finalize the regulations supports the claim that their distributive shares aren’t subject to SE tax. But the IRS routinely rejects this argument and has successfully litigated its position. The courts generally have imposed SE tax on LLC members unless, like traditional limited partners, they lack management authority and don’t provide significant services to the business.

Review your situation

The law in this area remains uncertain, particularly with regard to capital-intensive businesses. But given the IRS’s aggressiveness in collecting SE taxes from LLCs, LLC members should assess whether the IRS might claim that they’ve underpaid SE taxes.

Those who wish to avoid or reduce these taxes in the future may have some options, including converting to an S corporation or limited partnership, or restructuring their ownership interests. When evaluating these strategies, there are issues to consider beyond taxes. Contact us to discuss your specific situation at 205-345-9898 or info@covenantcpa.com

© 2019 Covenant CPA

The right estate planning strategy for you likely is the one that will produce the greatest tax savings for your family. Unfortunately, there can be tension between strategies that save estate tax and ones that save income tax. This is especially true now that the Tax Cuts and Jobs Act nearly doubled the gift and estate tax exemption — but only temporarily. Through 2025, income tax might be a greater concern, but, after that, estate taxes might be a bigger issue.

Fortunately, it’s possible to build an “on-off switch” into your estate plan.

Why the conflict?

Generally, the best way to minimize estate taxes is to remove assets from your estate as early as possible (through outright gifts or gifts in trust) so that all future appreciation in value escapes estate tax. But these lifetime gifts can increase income taxes for the recipients of appreciated assets. That’s because assets you transfer by gift retain your tax basis, potentially resulting in a significant capital gains tax bill should your beneficiaries sell them.

Assets held for life, on the other hand, receive a stepped-up basis equal to their fair market value on the date of death. This provides an income tax advantage: Your beneficiaries can turn around and sell the assets with little or no capital gains tax liability.

Until relatively recently, estate planning strategies focused on minimizing estate taxes, with little regard for income taxes. Why? Historically, the highest marginal estate tax rate was significantly higher than the highest marginal income tax rate, and the estate tax exemption amount was relatively small. So, in most cases, the potential estate tax savings far outweighed any potential income tax liability.

Today, the stakes have changed. The highest marginal estate and income tax rates aren’t too different (40% and 37%, respectively). And, the gift and estate tax exemption has climbed to $11.40 million for 2019, meaning fewer taxpayers need to be concerned about estate taxes, at least for now.

Flipping the switch

With a carefully designed trust, you can remove assets from your taxable estate while giving the trustee the ability to direct the assets back into your estate should that prove to be the better tax strategy in the future. There are different techniques for accomplishing this, but typically it involves establishing an irrevocable trust over which you retain no control (including the right to replace the trustee) and giving the trustee complete discretion over distributions. This removes the assets from your taxable estate.

If it becomes desirable to include the trust assets in your estate because income taxes are a bigger concern, the trustee can accomplish this by, for example, naming you as successor trustee or granting you a power of appointment over the trust assets.

Of course, irrevocable trusts also have their downsides. Contact us to discuss what estate planning strategies make the most sense for you. Call us at 205-345-9898 or email us at info@covenantcpa.com.

© 2019 Covenant CPA