Companies tend to spend considerable time and resources training and upskilling their sales staff on how to handle existing customers. And this is, no doubt, a critical task. But don’t overlook the vast pool of individuals or entities that want to buy from you but just don’t know it yet. We’re talking about prospects.

Identifying and winning over a steady flow of new buyers can safeguard your business against sudden sales drops or, better yet, push its profitability to new heights. Here are some ideas for better targeting and converting your company’s sales prospects:

Continually improve lead generation. Does your marketing department help you generate leads by doing things such as creating customer profiles for your products or services? If not, it’s probably time to create a database of prospects who may benefit from your products or services. Customer relationship management software can be of great help. When salespeople have a clear picture of a likely buyer, they’ll be able to better focus their efforts.

Use qualifications to avoid wasted sales calls. The most valuable nonrecurring asset that any company possesses is time. Effective salespeople spend their time with prospects who are the most likely to buy from them. Four aspects of a worthy prospect include having:

  • Clearly discernible and fulfillable needs,
  • A readily available decision maker,
  • Definitively assured creditworthiness, and
  • A timely desire to buy.

Apply these qualifications, and perhaps others that you develop, to any person or entity with whom you’re considering doing business. If a sale appears highly unlikely, move on.

Develop effective questions. When talking with prospects, your sales staff must know what draws buyers to your company. Sales staffers who make great presentations but don’t ask effective questions to find out about prospects’ needs are doomed to mediocrity.

They say the most effective salespeople spend 20% of their time talking and 80% listening. Whether these percentages are completely accurate is hard to say but, after making their initial pitch, good salespeople use their talking time to ask intelligent, insightful questions based on solid research into the prospect. Otherwise, they listen.

Devise solutions. It may seem next to impossible to solve the challenges of someone you’ve never met. But that’s the ultimate challenge of targeting and winning over prospects. Your sales staff needs the ability to know — going in — how your product or service can solve a prospect’s problem or help him, her or that organization accomplish a goal. Without a clear offer of a solution, what motivation does a prospect have to spend money?

Customers are important — and it would be foolish to suggest they’re not. But remember, at one time, every one of your customers was a prospect that you won over. You’ve got to keep that up. Contact us for help quantifying your sales process so you can get a better idea of how to improve it at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

The IRS just released its audit statistics for the 2018 fiscal year, and fewer taxpayers had their returns examined as compared with prior years. However, even though a small percentage of tax returns are being chosen for audit these days, that will be little consolation if yours is one of them.

Latest statistics

Overall, just 0.59% of individual tax returns were audited in 2018, as compared with 0.62% in 2017. This was the lowest percentage of audits conducted since 2002.

However, as in the past, those with very high incomes face greater odds. For example, in 2018, 2.21% of taxpayers with adjusted gross incomes (AGIs) of between $1 million and $5 million were audited (down from 3.52% in 2017).

The richest taxpayers, those with AGIs of $10 million and more, experienced a steep decline in audits. In 2018, 6.66% of their returns were audited, compared with 14.52% in 2017.

Surviving an audit 

Even though fewer audits are being performed, the IRS will still examine thousands of returns this year. With proper planning, you should fare well even if you’re one of the unlucky ones.

The easiest way to survive an IRS examination is to prepare in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns.

Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.

Returns can also be selected when they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.

The government generally has three years within which to conduct an audit, and often the exam won’t begin until a year or more after you file your return.

More audit details

The scope of an audit depends on the tax return’s complexity. A return reflecting business or real estate income and expenses is likely to take longer to examine than a return with only salary income.

An audit can be conducted by mail or through an in-person interview and review of records. The interview may be conducted at an IRS office or may be a “field audit” at the taxpayer’s home, business, or accountant’s office.

Important:  Even if your return is audited, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.

Representation 

It’s advisable to have a tax professional represent you at an audit. A tax pro knows what issues the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow deduction of a certain expense) even though courts and other guidance have expressed a contrary opinion on the issue. Because pros can point to the proper authority, the IRS may be forced to throw in the towel.

If you receive an IRS audit letter or simply want to improve your recordkeeping, we’re here to assist you. Contact us to discuss this or any other aspect of your taxes at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Summer is just around the corner, so you might be thinking about getting some vacation time. If you’re self-employed or a business owner, you have a golden opportunity to combine a business trip with a few extra days of vacation and offset some of the cost with a tax deduction. But be careful, or you might not qualify for the write-offs you’re expecting.

Basic rules 

Business travel expenses can potentially be deducted if the travel is within the United States and the expenses are:

  • “Ordinary and necessary” and
  • Directly related to the business.

Note: The tax rules for foreign business travel are different from those for domestic travel.

Business owners and the self-employed are generally eligible to deduct business travel expenses if they meet the tests described above. However, under the Tax Cuts and Jobs Act, employees can no longer deduct such expenses. The potential deductions discussed in this article assume that you’re a business owner or self-employed.

A business-vacation trip

Transportation costs to and from the location of your business activity may be 100% deductible if the primary reason for the trip is business rather than pleasure. But if vacation is the primary reason for your travel, generally no transportation costs are deductible. These costs include plane or train tickets, the cost of getting to and from the airport, luggage handling tips and car expenses if you drive. Costs for driving your personal car are also eligible.

The key factor in determining whether the primary reason for domestic travel is business is the number of days you spend conducting business vs. enjoying vacation days. Any day principally devoted to business activities during normal business hours counts as a business day. In addition:

  • Your travel days count as business days, as do weekends and holidays — if they fall between days devoted to business and it wouldn’t be practical to return home.
  • Standby days (days when your physical presence might be required) also count as business days, even if you aren’t ultimately called upon to work on those days.

Bottom line: If your business days exceed your personal days, you should be able to claim business was the primary reason for a domestic trip and deduct your transportation costs.

What else can you deduct?

Once at the destination, your out-of-pocket expenses for business days are fully deductible. Examples of these expenses include lodging, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days aren’t deductible.

Keep in mind that only expenses for yourself are deductible. You can’t deduct expenses for family members traveling with you, including your spouse — unless they’re employees of your business and traveling for a bona fide business purpose.

Keep good records

Be sure to retain proof of the business nature of your trip. You must properly substantiate all of the expenses you’re deducting. If you get audited, the IRS will want to see records during travel you claim was for business. Good records are your best defense. Additional rules and limits apply to travel expense deductions. Please contact us if you have questions at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

One of the governing principles of the employee/employer relationship is that employees have a fiduciary duty to act in their employer’s interests. An employee’s undisclosed conflict of interest can be a serious breach of this duty. In fact, when conflicts of interest exist, companies often suffer financial consequences.

Ignorance isn’t bliss

Here’s a fictional example of a common conflict of interest: Matt is the manager of a manufacturing company’s purchasing department. He’s also part owner of a business that sells supplies to the manufacturer — a fact Matt hasn’t disclosed to his employer. And, in fact, Matt has personally profited from the business’s lucrative long-term contract with his employer.

What makes this scenario a conflict of interest isn’t so much that Matt has profited from his position, but that his employer is ignorant of the relationship. When employers are informed about their workers’ outside business interests, they can act to exclude employees, vendors and customers from participation in certain transactions. Or they can allow parties to continue participating in a transaction — even if it runs contrary to ethical best practices. But it’s the employer’s, not the employee’s, decision to make.

Cut off at the pass

Sometimes employees simply neglect to inform their employers about possible conflicts of interest. In other cases, they go to great lengths to hide conflicts — usually because they’re afraid it will jeopardize their jobs or they’re financially benefiting from them. These latter cases can be difficult to detect, which is why your company might fare better by playing offense.

For example, develop conflict of interest policies and communicate them to all employees. Provide specific examples of conflicts and spell out exactly why you consider the activities depicted to be deceptive, unethical and possibly illegal. Don’t forget to state the consequences of nondisclosure of conflicts, such as immediate termination.

Disclosing all

You might also require workers to complete an annual disclosure statement on which they list the names and addresses of their family members, their family’s employers and business interests, and whether the employees have an interest in those entities (or any others).

To help ensure accurate statements, provide employees with a hotline to call if they:

  • Have general questions or concerns about the policy,
  • Don’t understand how the policy relates to their unique circumstances, or
  • Want to report someone who appears to have a conflict of interest.

Also protect your business from conflicted vendors and customers. Before entering into a new agreement, compare the names and addresses on your employee disclosure statements with ownership information provided by prospective business partners.

Maintain standards

Conflicts of interest aren’t always clear cut because what one employer considers a serious conflict might seem negligible to another. But in general, the best way to promote your business’s success is by holding all stakeholders to the highest ethical standards. Contact us for more at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

If a prime objective of your estate plan is to leave a lasting legacy, a dynasty trust may be the right estate planning vehicle for you. And, thanks to the substantially increased generation-skipping transfer (GST) tax exemption amount established by the Tax Cuts and Jobs Act, a dynasty trust is more appealing than ever.

GST tax and dynasty trusts

A dynasty trust allows substantial amounts of wealth to grow and compound free of federal gift, estate and GST taxes, providing tax-free benefits for your grandchildren and future generations. The longevity of a dynasty trust varies from state to state, but it’s becoming more common for states to allow these trusts to last for hundreds of years or even in perpetuity.

Avoiding GST tax liability is critical to a dynasty trust’s success. An additional 40% tax on transfers to grandchildren or others that skip a generation, the GST tax can quickly consume substantial amounts of wealth. The key to avoiding the tax is to leverage your $11.40 million GST tax exemption.

For example, let’s say you haven’t used any of your $11.40 million combined gift and estate tax exemption. In 2019, you transfer $10 million to a properly structured dynasty trust. There’s no gift tax on the transaction because it’s within your unused exemption amount. And the funds, together with all future appreciation, are removed from your taxable estate.

Most important, by allocating your GST tax exemption to your trust contributions, you ensure that any future distributions or other transfers of trust assets to your grandchildren or subsequent generations will avoid GST taxes. This is true even if the value of the assets grows well beyond the exemption amount or the exemption is reduced in the future.

Setting up a dynasty trust

A dynasty trust can be established during your lifetime, as an inter vivos trust or part of your will as a testamentary trust. An inter vivos transfer to a dynasty trust may have additional benefits associated with transferring assets that have greater appreciation potential out of your taxable estate.

After creating the trust, you must determine which assets to transfer to it. Because the emphasis is on protecting appreciated property, consider funding the trust with securities, real estate, life insurance policies and business interests.

Finally, you must appoint a trustee. Your choices may include a succession of family members or estate planning professionals. For most people, however, a safer approach is to use a reputable trust company with a proven track record, as opposed to assigning this duty to family members who might not be born yet.

If you think a dynasty trust might be right for your family, talk with us before taking action. A currently effective dynasty trust is irrevocable — meaning that, once you create it, you may be unable to modify the arrangement if your family dynamic changes. Contact us with questions at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Few businesses today can afford to let potential buyers slip through the cracks. Customer relationship management (CRM) software can help you build long-term relationships with those most likely to buy your products or services. But to maximize your return on investment in one of these solutions, you and your employees must have a realistic grasp on its purpose and functionality.

Putting it all together

CRM software is designed to:

  • Gather every bit and byte of data related to your customers,
  • Organize that information in a clear, meaningful format, and
  • Integrate itself with other systems and platforms (including social media).

Every time a customer contacts your company — or you follow up with that customer — the CRM system can record that interaction. This input enables business owners to track leads, forecast and record sales, assess the effectiveness of marketing campaigns, and evaluate other important data. It also helps companies retain valuable customer contact information, preventing confusion following staff turnover or if someone happens to be out of the office.

Furthermore, most CRM systems can remind salespeople when to make follow-up calls and prompt other employees to contact customers. For instance, an industrial cleaning company could set up its system to automatically transmit customer reminders regarding upcoming service dates.

Categorizing your contacts

Customers can be categorized by purchase history, future product or service interests, desired methods of contact, and other data points. This helps businesses reach out to customers at a good time, in the right way. When companies flood customers with too many impersonal calls, direct mail pieces or e-mails, their messaging is much more likely to be ignored.

Naturally, an important part of maintaining any CRM system is keeping customers’ contact data up to date. So, you’ll need to instruct sales or customer service staff to gently touch base on this issue at least once a year. To avoid appearing pushy, some businesses ask customers to fill out contact info cards (or request business cards) that are then entered into a drawing for a free product or service — or even just a free lunch!

Encouraging buy-in

A properly implemented CRM system can improve sales, lower marketing costs and build customer loyalty. But, as mentioned, you’ll need to train employees how to use the software to get these benefits. And buy-in must occur throughout the organization — a “silo approach” to CRM that focuses only on one business area won’t optimize results.

Establish thorough use of the system as an annual performance objective for sales, marketing and customer service employees. Some business owners even offer monthly prizes or bonuses to employees who consistently enter data into their CRM systems.

Making the right choice

There are many CRM solutions available today at a wide variety of price points. We can help you conduct a cost-benefit analysis of this type of software — based on your company’s size, needs and budget — to assist you in choosing whether to buy a product or, if you already have one, how best to upgrade it. Contact us today at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Due to the massive changes in the Tax Cuts and Jobs Act (TCJA), the 2019 filing season resulted in surprises. Some filers who have gotten a refund in past years wound up owing money. The IRS reports that the number of refunds paid this year is down from last year — and the average refund is lower. As of May 10, 2019, the IRS paid out 101,590,000 refunds averaging $2,868. This compares with 102,582,000 refunds paid out in 2018 with an average amount of $2,940.

Of course, receiving a tax refund shouldn’t necessarily be your goal. It essentially means you’re giving the government an interest-free loan.

Law changes and withholding

Last year, the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks. In general, the amount withheld was reduced. This was done to reflect changes under the TCJA — including the increase in the standard deduction, suspension of personal exemptions and changes in tax rates.

The new tables may have provided the correct amount of tax withholding for some individuals, but they might have caused other taxpayers to not have enough money withheld to pay their ultimate tax liabilities.

Conduct a “paycheck checkup”

The IRS is cautioning taxpayers to review their tax situations for this year and adjust withholding, if appropriate.

The tax agency has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the increased child credit, the new dependent credit and the repeal of dependent exemptions. You can access the IRS calculator at https://bit.ly/2aLxK0A.

Situations where changes are needed

There are a number of situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:

  • Adjusted your withholding in 2018, especially in the middle or later part of the year,
  • Owed additional tax when you filed your 2018 return,
  • Received a refund that was smaller or larger than expected,
  • Got married or divorced, had a child or adopted one,
  • Purchased a home, or
  • Had changes in income.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payment is due on Monday, June 17.)

We can help

Contact us to discuss your specific situation and what you can do to remedy any shortfalls to minimize taxes due, as well as any penalties and interest. We can help you sort through whether or not you need to adjust your withholding. 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

If you’re a business owner and you hire your children (or grandchildren) this summer, you can obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, save for college and learn how to manage money. And you may be able to:

  • Shift your high-taxed income into tax-free or low-taxed income,
  • Realize payroll tax savings (depending on the child’s age and how your business is organized), and
  • Enable retirement plan contributions for the children.

It must be a real job

When you hire your child, you get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill, your self-employment tax bill (if applicable), and your state income tax bill (if applicable). However, in order for your business to deduct the wages as a business expense, the work performed by the child must be legitimate and the child’s salary must be reasonable.

For example, let’s say a business owner operates as a sole proprietor and is in the 37% tax bracket. He hires his 16-year-old son to help with office work on a full-time basis during the summer and part-time into the fall. The son earns $10,000 during 2019 and doesn’t have any other earnings.

The business owner saves $3,700 (37% of $10,000) in income taxes at no tax cost to his son, who can use his 2019 $12,200 standard deduction to completely shelter his earnings.

The family’s taxes are cut even if the son’s earnings exceed his or her standard deduction. The reason is that the unsheltered earnings will be taxed to the son beginning at a rate of 10%, instead of being taxed at his father’s higher rate.

How payroll taxes might be saved

If your business isn’t incorporated, your child’s wages are exempt from Social Security, Medicare and FUTA taxes if certain conditions are met. Your child must be under age 18 for this to apply (or under age 21 in the case of the FUTA tax exemption). Contact us for how this works.

Be aware that there’s no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes nonparent partners.

Start saving for retirement early

Your business also may be able to provide your child with retirement benefits, depending on the type of plan you have and how it defines qualifying employees. And because your child has earnings from his or her job, he can contribute to a traditional IRA or Roth IRA. For the 2018 tax year, a working child can contribute the lesser of his or her earned income, or $6,000 to an IRA or a Roth.

Raising tax-smart children

As you can see, hiring your child can be a tax-smart idea. Be sure to keep the same records as you would for other employees to substantiate the hours worked and duties performed (such as timesheets and job descriptions). Issue your child a Form W-2. If you have any questions about how these rules apply to your situation, don’t hesitate to contact us at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

According to the Association of Certified Fraud Examiners’ Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse, organizations victimized by fraud lose a median $130,000. But construction companies, in particular, are even harder hit, with a median loss of $227,000. What can you do to protect your construction business? Adopt this checklist.

Ways to tighten controls

An effective strategy for minimizing fraud is to tighten your internal controls. Make sure the following are part of your policies and procedures:

Surprise audits and jobsite visits. These visits can not only help detect fraud, but also send a strong message that combating fraud is a priority — which is a powerful deterrent.

Segregation of duties. Avoid situations in which one person handles multiple financial or accounting tasks. For example, the person who processes cash transactions shouldn’t also prepare the company’s bank deposits.

Bank statements. Have monthly bank statements sent to you or a manager independent of the accounting function. Canceled checks should be reviewed for unfamiliar payees and forged signatures.

Purchase monitoring. Name someone other than the purchasing agent — you or an estimator, for instance — to review vendor invoices, purchase orders and other documents. Use prenumbered purchase orders. Physically check materials and supplies to ensure they correspond to what was ordered in terms of quantity and quality.

Kickbacks and bid-rigging. If your company is suddenly winning bids that you haven’t in the past and that seem like a stretch, verify that your bid processes have been followed. Sometimes employees disguise illegal activities as change orders, so be sure to scrutinize each change order.

Budget analysis. Prepare annual budgets — for your company and each job — and regularly compare actual results to budgets. Scrutinize large or unanticipated discrepancies.

Payroll practices. Have someone independent of your accounting department verify the names and pay rates on your payroll. If you don’t already, pay employees using direct deposit, rather than with checks or cash.

Vacation policy. Require full-time employees to take time off every year. Fraud is often exposed when the perpetrator isn’t there to cover it up.

Many benefits

These are just some of the many internal controls contractors should implement to protect their businesses. In addition to preventing and revealing fraud, solid internal controls can help avoid accounting errors, reduce waste and boost cash flow by making billing, purchasing and other processes more efficient. Contact us for more information at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Planning your estate around specific assets is risky and, in most cases, should be avoided. If you leave specific assets — such as homes, cars or stock — to specific people, you may inadvertently disinherit them.

Illustrating the problem

Let’s say Debbie has three children — Abbie, Mary Kate and Lizzie — and wishes to treat them equally in her estate plan. In her will, Debbie leaves a $500,000 mutual fund to Abbie and her home valued at $500,000 to Mary Kate. She also names Lizzie as beneficiary of a $500,000 life insurance policy.

When Debbie dies years later, the mutual fund balance has grown to $750,000. In addition, she had sold the home for $750,000, invested the proceeds in the mutual fund and allowed the life insurance policy to lapse. But she neglected to revise her will. The result? Abbie receives the mutual fund, with a balance of $1.5 million, and Mary Kate and Lizzie are disinherited.

Even if Debbie continued to own the home, it could have declined in value after she drafted her will (rather than increased), leaving Mary Kate with less than her sisters.

Avoiding this outcome

It’s generally preferable to divide your estate based on dollar values or percentages rather than specific assets. Debbie, for example, could have placed the mutual fund, home and insurance policy in a trust and divided the value of the trust equally between her three children.

If it’s important to you that specific assets go to specific heirs — for example, because you want your oldest child to receive the family home or you want your family business to go to a child who works for the company — there are planning techniques you can use to avoid undesired consequences. For example, your trust might provide for your assets to be divided equally but also provide for your children to receive specific assets at fair market value as part of their shares. If you have questions regarding the division of your assets to your heirs, contact us. We can review your plan and address your concerns. 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA