Category Archives: Business Management

Selling your business? Defer — and possibly reduce — tax with an installment sale

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You’ve spent years building your company and now are ready to move on to something else, whether launching a new business, taking advantage of another career opportunity or retiring. Whatever your plans, you want to get the return from your business that you’ve earned from all of the time and money you’ve put into it.

That means not only getting a good price, but also minimizing the tax hit on the proceeds. One option that can help you defer tax and perhaps even reduce it is an installment sale.

Tax benefits

With an installment sale, you don’t receive a lump sum payment when the deal closes. Instead, you receive installment payments over a period of time, spreading the gain over a number of years.

This generally defers tax, because you pay most of the tax liability as you receive the payments. Usually tax deferral is beneficial, but it could be especially beneficial if it would allow you to stay under the thresholds for triggering the 3.8% net investment income tax (NIIT) or the 20% long-term capital gains rate.

For 2018, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) will owe NIIT on some or all of their investment income. And the 20% long-term capital gains rate kicks in when 2018 taxable income exceeds $425,800 for singles, $452,400 for heads of households and $479,000 for joint filers (half that for separate filers).

Other benefits

An installment sale also might help you close a deal or get a better price for your business. For instance, an installment sale might appeal to a buyer that lacks sufficient cash to pay the price you’re looking for in a lump sum.

Or a buyer might be concerned about the ongoing success of your business without you at the helm or because of changing market or other economic factors. An installment sale that includes a contingent amount based on the business’s performance might be the solution.

Tax risks

An installment sale isn’t without tax risk for sellers. For example, depreciation recapture must be reported as gain in the year of sale, no matter how much cash you receive. So you could owe tax that year without receiving enough cash proceeds from the sale to pay the tax. If depreciation recapture is an issue, be sure you have cash from another source to pay the tax.

It’s also important to keep in mind that, if tax rates increase, the overall tax could end up being more. With tax rates currently quite low historically, there might be a greater chance that they could rise in the future. Weigh this risk carefully against the potential benefits of an installment sale.

Pluses and minuses

As you can see, installment sales have both pluses and minuses. To determine whether one is right for you and your business — and find out about other tax-smart options — please contact us at 205-345-9898.

© 2018 Covenant CPA

Following the ABCs of customer assessment

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When a business is launched, its owners typically welcome every customer through the door with a sigh of relief. But after the company has established itself, those same owners might start looking at their buying constituency a little more critically.

If your business has reached this point, regularly assessing your customer base is indeed an important strategic planning activity. One way to approach it is to simply follow the ABCs.

Assign profitability levels

First, pick a time period — perhaps one, three or five years — and calculate the profitability level of each customer or group of customers based on sales numbers and both direct and indirect costs. (We can help you choose the ideal calculations and run the numbers.)

Once you’ve determined the profitability of each customer or group of customers, divide them into three groups:

  1. The A group consists of highly profitable customers whose business you’d like to expand.
  2. The B group comprises customers who aren’t extremely profitable, but still positively contribute to your bottom line.
  3. The C group includes those customers who are dragging down your profitability. These are the customers you can’t afford to keep.

Act accordingly

With the A customers, your objective should be to grow your business relationship with them. Identify what motivates them to buy, so you can continue to meet their needs. Is it something specific about your products or services? Is it your customer service? Developing a good understanding of this group will help you not only build your relationship with these critical customers, but also target marketing efforts to attract other, similar ones.

Category B customers have value but, just by virtue of sitting in the middle, they can slide either way. There’s a good chance that, with the right mix of product and marketing resources, some of them can be turned into A customers. Determine which ones have the most in common with your best customers; then focus your marketing efforts on them and track the results.

When it comes to the C group, spend a nominal amount of time to see whether any of them might move up the ladder. It’s likely, though, that most of your C customers simply aren’t a good fit for your company. Fortunately, firing your least desirable customers won’t require much effort. Simply curtail your marketing and sales efforts, or stop them entirely, and most will wander off on their own.

Cut costs, bring in more

The thought of purposefully losing customers may seem like a sure recipe for disaster. But doing so can help you cut fruitless costs and bring in more revenue from engaged buyers. Our firm can help you review the pertinent financial data and develop a customer strategy that builds your bottom line. So call us today at 205-345-9898.

© 2018 Covenant CPA

Now’s the time to review your business expenses

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As we approach the end of the year, it’s a good idea to review your business’s expenses for deductibility. At the same time, consider whether your business would benefit from accelerating certain expenses into this year.

Be sure to evaluate the impact of the Tax Cuts and Jobs Act (TCJA), which reduces or eliminates many deductions. In some cases, it may be necessary or desirable to change your expense and reimbursement policies.

What’s deductible, anyway?

There’s no master list of deductible business expenses in the Internal Revenue Code (IRC). Although some deductions are expressly authorized or excluded, most are governed by the general rule of IRC Sec. 162, which permits businesses to deduct their “ordinary and necessary” expenses.

An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business. (It need not be indispensable.) Even if an expense is ordinary and necessary, it may not be deductible if the IRS considers it lavish or extravagant.

What did the TCJA change?

The TCJA contains many provisions that affect the deductibility of business expenses. Significant changes include these deductions:

Meals and entertainment. The act eliminates most deductions for entertainment expenses, but retains the 50% deduction for business meals. What about business meals provided in connection with nondeductible entertainment? In a recent notice, the IRS clarified that such meals continue to be 50% deductible, provided they’re purchased separately from the entertainment or their cost is separately stated on invoices or receipts.

Transportation. The act eliminates most deductions for qualified transportation fringe benefits, such as parking, vanpooling and transit passes. This change may lead some employers to discontinue these benefits, although others will continue to provide them because 1) they’re a valuable employee benefit (they’re still tax-free to employees) or 2) they’re required by local law.

Employee expenses. The act suspends employee deductions for unreimbursed job expenses — previously treated as miscellaneous itemized deductions — through 2025. Some businesses may want to implement a reimbursement plan for these expenses. So long as the plan meets IRS requirements, reimbursements are deductible by the business and tax-free to employees.

Need help?

The deductibility of certain expenses, such as employee wages or office supplies, is obvious. In other cases, it may be necessary to consult IRS rulings or court cases for guidance. For assistance, please contact us at 205-345-9898.

© 2018 Covenant CPA

4 pillars of a solid sales process

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Is your sales process getting off-balance? Sometimes it can be hard to tell. Fluctuations in the economy, changes in customer interest and dips in demand may cause slowdowns that are beyond your control. But if the numbers keep dropping and you’re not sure why, you may need to double-check the structural soundness of how you sell your company’s products or services. Here are four pillars of a solid sales process:

1. Synergy with marketing. The sales staff can’t go it alone. Your marketing department has a responsibility to provide some assistance and direction in generating leads. You may have a long-standing profile of the ideal candidates for your products or services, but is it outdated? Could it use some tweaks? Creating a broader universe of customers who are likely to benefit from your offerings will add focus and opportunity to your salespeople’s efforts.

2. Active responsiveness. A sense of urgency is crucial to the sales process. Whether a prospect responded to some form of advertisement or is being targeted for cold calling, making timely and appropriate contact will ease the way for the salesperson to get through to the decision maker. If selling your product or service requires a face-to-face presence, making and keeping of appointments is critical. Gather data on how quickly your salespeople are following up on leads and make improvements as necessary.

3. Clear documentation. There will always be some degree of recordkeeping associated with sales. Your salespeople will interact with many potential customers and must keep track of what was said or promised at each part of the sales cycle. Fortunately, today’s technology (typically in the form of a customer relationship system) can help streamline this activity. Make sure yours is up to date and properly used. Effective performers spend most of their time calling or meeting with customers. They carry out the administrative parts of their jobs either early or late in the day and don’t use paperwork as an excuse to avoid actively selling.

4. Consistency. A process is defined as a series of related steps that lead to a specific end. Lagging sales are often the result of deficiencies in steps of the sales process. If your business is struggling to maintain or increase its numbers, it may be time to audit your sales process to identify irregularities. You might also hold a sales staff retreat to get everyone back on the same page. Contact us at 205-345-9898 to discuss these and other ideas on reinforcing your sales process.

© 2018 Covenant CPA

A strong BYOD policy combines convenience with security

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It’s easy to understand why more and more businesses are taking a “bring your own device” (BYOD) approach to the smartphones, tablets and laptops many employees rely on to do their jobs. BYOD can boost employee efficiency and satisfaction, often while reducing a company’s IT costs. But the approach isn’t without risk for both you and your staff. So, it’s highly advisable to create a strong formal policy that combines convenience with security.

Primary concerns

As an employer, your primary concern with BYOD is no doubt the inevitable security risks that arise when your networks are accessible to personal devices that could be stolen, lost or hacked. But you also must think about various legal compliance issues, such as electronic document retention for litigation purposes or liability for overtime pay when nonexempt employees use their devices to work outside of normal hours.

For employees, the main worry comes down to privacy. Will you, their employer, have access to personal information, photos and other non-work-related data on the device? Could an employee lose all of that if you’re forced to “wipe” the device because it’s been lost or stolen, or when the employee leaves your company?

Important obligations

A BYOD policy must address these and other issues. Each company’s individual circumstances will determine the final details, but most employers should, at minimum, require employees to sign an acknowledgment of their obligations to:

  • Use strong passwords and automatic lock-outs after periods of inactivity,
  • Immediately report lost or stolen devices,
  • Install mandated antivirus software and other protective measures,
  • Regularly back up their devices,
  • Keep apps and operating systems up to date, and
  • Encrypt their devices.

The policy also should prohibit the use of public wi-fi networks or require employees to log in through a secure virtual private network when connecting via public wi-fi. You may want to forbid certain apps, too.

In addition, you need to spell out your rights to access, monitor and delete data on employees’ devices — including the types of data you can access and under which conditions. In particular, explain your wiping procedures and the steps employees can take to protect their personal information from permanent erasure.

Protection now

Nearly everyone who works for your company likely has a smartphone at this point. As such devices integrate themselves ever more deeply into our daily lives, it’s only natural that they’ll affect our jobs. Establishing a BYOD policy now can help prevent costly mistakes and potential litigation down the road. We can provide further information, so call us at 205-345-9898.

© 2018 Covenant CPA

Could a cost segregation study help you accelerate depreciation deductions?

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Businesses that acquire, construct or substantially improve a building — or did so in previous years — should consider a cost segregation study. It may allow you to accelerate depreciation deductions, thus reducing taxes and boosting cash flow. And the potential benefits are now even greater due to enhancements to certain depreciation-related breaks under the Tax Cuts and Jobs Act (TCJA).

Real property vs. tangible personal property

IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Most times, you’ll depreciate a building’s structural components — such as walls, windows, HVAC systems, elevators, plumbing and wiring — along with the building. Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Too often, businesses allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases — computers or furniture, for instance — the distinction between real and personal property is obvious. But often the line between the two is less clear. Items that appear to be part of a building may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.

Depreciation break enhancements

Last year’s TCJA enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing. Sec. 179 allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%).

Assess the potential savings

Cost segregation studies may yield substantial benefits, but they’re not right for every business. To find out whether a study would be worthwhile for yours, contact us  at 205-345-9898 for help assessing the potential tax savings.

© 2018 Covenant CPA

Dig out your business plan to prepare for the year ahead

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Like many business owners, you probably created a business plan when you launched your company. But, as is also often the case, you may not have looked at it much since then. Now that fall has arrived and year end is coming soon, why not dig it out? Reviewing and revising a business plan can be a great way to plan for the year ahead.

6 sections to scrutinize

Comprehensive business plans traditionally are composed of six sections. When revisiting yours, look for insights in each one:

1. Executive summary. This should read like an “elevator pitch” regarding your company’s purpose, its financial position and requirements, its state of competitiveness, and its strategic goals. If your business plan is out of date, the executive summary won’t quite jibe with what you do today. Don’t worry: You can rewrite it after you revise the other five sections.

2. Business description. A company’s key features are described here. These include its name, entity type, number of employees, key assets, core competencies, and product or service menu. Look at whether anything has changed and, if so, what. Maybe your workforce has grown or you’ve added products or services.

3. Industry and marketing analysis. This section analyzes the state of a company’s industry and explicates how the business will market itself. Your industry may have changed since your business plan’s original writing. What are the current challenges? Where do opportunities lie? How will you market your company’s strengths to take advantage of these opportunities?

4. Management team description. The business plan needs to recognize the company’s current leadership. Verify the accuracy of who’s identified as an owner and, if necessary, revise the list of management-level employees, providing brief bios of each. As you look over your management team, ask yourself: Are there gaps or weak links? Is one person handling too much?

5. Operational plan. This section explains how a business functions on a day-to-day basis. Scrutinize your operating cycle — that is, the process by which a product or service is delivered to customers and, in turn, how revenue is brought in and expenses are paid. Is it still accurate? The process of revising this description may reveal inefficiencies or redundancies of which you weren’t even aware.

6. Financials. The last section serves as a reasonable estimate of how your company intends to manage its finances in the near future. So, you should review and revise it annually. Key projections to generate are forecasts of your profits and losses, as well as your cash flow, in the coming year. Many business plans also include a balance sheet summarizing current assets, liabilities and equity.

Keep it fresh

The precise structure of business plans can vary but, when regularly revisited, they all have one thing in common: a wealth of up-to-date information about the company described. Don’t leave this valuable document somewhere to gather dust — keep it fresh. Our firm can help you review your business plan and generate accurate financials that allow you to take on the coming year with confidence. Call us now at 205-345-9898.

© 2018 Covenant CPA

Be sure your employee travel expense reimbursements will pass muster with the IRS

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Does your business reimburse employees’ work-related travel expenses? If you do, you know that it can help you attract and retain employees. If you don’t, you might want to start, because changes under the Tax Cuts and Jobs Act (TCJA) make such reimbursements even more attractive to employees. Travel reimbursements also come with tax benefits, but only if you follow a method that passes muster with the IRS.

The TCJA’s impact

Before the TCJA, unreimbursed work-related travel expenses generally were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to benefit from the deduction because either they didn’t itemize deductions or they didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.

For 2018 through 2025, the TCJA suspends miscellaneous itemized deductions subject to the 2% of AGI floor. That means even employees who itemize deductions and have enough expenses that they would exceed the floor won’t be able to enjoy a tax deduction for business travel. Therefore, business travel expense reimbursements are now more important to employees.

The potential tax benefits

Your business can deduct qualifying reimbursements, and they’re excluded from the employee’s taxable income. The deduction is subject to a 50% limit for meals. But, under the TCJA, entertainment expenses are no longer deductible.

To be deductible and excludable, travel expenses must be legitimate business expenses and the reimbursements must comply with IRS rules. You can use either an accountable plan or the per diem method to ensure compliance.

Reimbursing actual expenses

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:

  • Payments must be for “ordinary and necessary” business expenses.
  • Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
  • Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.

The IRS will treat plans that fail to meet these conditions as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).

Keeping it simple

With the per diem method, instead of tracking actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses, based on location. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)

Be sure you don’t pay employees more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely overpay per diems.

What’s right for your business?

To learn more about business travel expense deductions and reimbursements post-TCJA, contact us at 205-345-9898. We can help you determine whether you should reimburse such expenses and which reimbursement option is better for you.

© 2018 Covenant CPA

Prepare for valuation issues in your buy-sell agreement

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Every business with more than one owner needs a buy-sell agreement to handle both expected and unexpected ownership changes. When creating or updating yours, be sure you’re prepared for the valuation issues that will come into play.

Issues, what issues?

Emotions tend to run high when owners face a “triggering event” that activates the buy-sell. Such events include the death of an owner, the divorce of married owners or an owner dispute.

The departing owner (or his or her estate) suddenly is in the position of a seller who wants to maximize buyout proceeds. The buyer’s role is played by either the other owners or the business itself — and it’s in the buyer’s financial interest to pay as little as possible. A comprehensive buy-sell agreement takes away the guesswork and helps ensure that all parties are treated equitably.

Some owners decide to have the business valued annually to minimize surprises when a buyout occurs. This is often preferable to using a static valuation formula in the buy-sell agreement, because the value of the interest is likely to change as the business grows and market conditions evolve.

What are our protocols?

At minimum, the buy-sell agreement needs to prescribe various valuation protocols to follow when the agreement is triggered, including:

  • How “value” will be defined,
  • Who will value the business,
  • Whether valuation discounts will apply,
  • Who will pay appraisal fees, and
  • What the timeline will be for the valuation process.

It’s also important to discuss the appropriate “as of” date for valuing the business interest. The loss of a key person could affect the value of a business interest, so timing may be critical.

Are we ready?

Business owners tend to put planning issues on the back burner — especially when they’re young and healthy and owner relations are strong. But the more details that you put in place today, including a well-crafted buy-sell agreement with the right valuation components, the easier it will be to resolve buyout issues when they arise. Our firm would be happy to help, contact us at 205-345-9898.

© 2018 Covenant Consulting CPA

Do you need to make an estimated tax payment by September 17?

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To avoid interest and penalties, you must make sufficient federal income tax payments long before your April filing deadline through withholding, estimated tax payments, or a combination of the two. The third 2018 estimated tax payment deadline for individuals is September 17.

If you don’t have an employer withholding tax from your pay, you likely need to make estimated tax payments. But even if you do have withholding, you might need to pay estimated tax. It can be necessary if you have more than a nominal amount of income from sources such as self-employment, interest, dividends, alimony, rent, prizes, awards or the sales of assets.

A two-prong test

Generally, you must pay estimated tax for 2018 if both of these statements apply:

  1. You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and
  2. You expect withholding and credits to be less than the smaller of 90% of your tax for 2018 or 100% of the tax on your 2017 return — 110% if your 2017 adjusted gross income was more than $150,000 ($75,000 for married couples filing separately).

If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

Quarterly payments

Estimated tax payments are spaced through the year into four periods or due dates. Generally, the due dates are April 15, June 15 and September 15 of the tax year and January 15 of the next year, unless the date falls on a weekend or holiday (hence the September 17 deadline this year).

Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

Confirming withholding

If you determine you don’t need to make estimated tax payments for 2018, it’s a good idea to confirm that the appropriate amount is being withheld from your paycheck. To reflect changes under the Tax Cuts and Jobs Act (TCJA), the IRS updated the tables that indicate how much employers should withhold from their employees’ pay, generally reducing the amount withheld.

The new tables might cause some taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA. The IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations.

Avoiding penalties

Keep in mind that, if you underpaid estimated taxes in earlier quarters, you generally can’t avoid penalties by making larger estimated payments in later quarters. But if you also have withholding, you may be able to avoid penalties by having the estimated tax shortfall withheld.

To learn more about estimated tax and withholding — and for help determining how much tax you should be paying during the year — contact us at 205-345-9898.

© 2018 Covenant Consulting CPA