The CPA Desk

A Thought Leader Production by PKFTexas

Using Sustainable Competitive Advantage to Impact Your Business

Hi, my name is Byron Hebert, and this is another quick Tool Time update by PKF Entrepreneur Playbook. What I want to talk to you today about is the sustainable competitive advantage and strategic planning.

A lot of people talk about strategic planning but they really don’t know where to start. Where you start is with your sustainable competitive advantage. What is that one thing about your company that separates you from your competition? That’s what you want to focus on. That will drive your marketing; the promise that you’re going to make to the marketplace about what your company can do.

That, in turn, will drive your operations so that you can deliver on the promise you’ve made to the marketplace. Now what drives that? That’s driven by your people, your innovation, and money.

Let me give you an example right here in town. Mattress Mack, a great entrepreneur. His sustainable competitive advantage is if you buy today he delivers tonight. Well, that is his marketing. That is the promise he makes. Everybody’s heard that. His operations have to support that. You go to his business, you buy a mattress today, he’s going to deliver it that very day. I assure you he will do that. So as soon as that purchase goes in, someone is loading that on a truck and trying to figure out the logistics of how to get to that to you by the end of the day.

So think about that, how that, that will operate in your business. Use your sustainable competitive advantage to drive your marketing, your operations, and then people, innovation, and money to drive your operations as well.

All right? Thank you. This is Byron Hebert. This has been another quick Tool Time update brought to you by PKF Texas Entrepreneur Playbook. If you’d like to learn more about the Mind Shop Tools and how we can help you in your business, please call PKF Texas.

The 2016 Greater Houston Partnership Soiree

Join the Greater Houston Partnership at Hotel Zaza on Saturday, August 27 for the 2016 Soiree. This event is an annual gala showcasing the Houston region as a center of commerce, influence, arts and culture and PKF Texas is proud to be involved every year through various leadership roles and sponsorships. Attended by more than 600 of Houston’s dignitaries, consular corps and business leaders, Soiree offers a night of entertainment, culinary delights and a world-class silent auction. Click here to register and learn more.

There are still opportunities for silent auction items to be donated. This is a great way to spotlight your company and it’s services. If you and your company are interested in donating items for the silent auction, please review and complete the following form: Soiree-Silent Auction Form

This year’s theme, Inspiring Innovation, will showcase Houston’s creativity and ingenuity in an immersive experience you won’t forget.

If you have any questions about the Soiree, contact Kristin Culwell, We hope you’ll be able to join the region’s local and international business, government and economic development leaders in supporting and attending this extraordinary event!

Do You Qualify for “Material Participation”?

You can only deduct losses from an S corporation, partnership or LLC if you “materially participate” in the business. If you don’t, your losses are generally “passive” and can only be used to offset income from other passive activities. Any excess passive loss is suspended and must be carried forward to future years.

Material participation is determined based on the time you spend in a business activity. For most business owners, the issue rarely arises — you probably spend more than 40 hours working on your enterprise. However, there are situations when the IRS questions participation.

Several tests

To materially participate, you must spend time on an activity on a regular, continuous and substantial basis.

You must also generally meet one of the tests for material participation. For example, a taxpayer must:

  1. Work 500 hours or more during the year in the activity,
  2. Participate in the activity for more than 100 hours during the year, with no one else working more than the taxpayer, or
  3. Materially participate in the activity for any five taxable years during the 10 tax years immediately preceding the taxable year. This can apply to a business owner in the early years of retirement.

There are other situations in which you can qualify for material participation. For example, you can qualify if the business is a personal service activity (such as medicine or law). There are also situations, such as rental businesses, where it is more difficult to claim material participation. In those trades or businesses, you must work more hours and meet additional tests.

Proving your involvement

In some cases, a taxpayer does materially participate, but can’t prove it to the IRS. That’s where good recordkeeping comes in. A good, contemporaneous diary or log can forestall an IRS challenge. Log visits to customers or vendors and trips to sites and banks, as well as time spent doing Internet research. Indicate the time spent. If you’re audited, it will generally occur several years from now. Without good records, you’ll have trouble remembering everything you did.

Passive activity losses are a complicated area of the tax code. Consult with your tax adviser for more information on your situation.

Using a Force Field Analysis to Help Your Business

Byron: Hi, my name is Byron Hebert and I’m here to give you another quick Tool Time Update, brought to you by PKF Entrepreneur Playbook. What I want to talk to you about today is a force field analysis. This is a good tool for you and your management team to work together to help eliminate issues in your company. Just think now, if you worked on one of these issues every four or five weeks, what your business would look like by the end of the year.

So what we do with the force field analysis is we put the issue right down the middle of the page. That is, in this example, we’re gonna talk about employee turnover – how you can improve your employee turnover.

So maybe when we start talking about how we can positively impact this issue of employee turnover, we may think, “Well, we need a mentor program. Or maybe we need better orientation.” So what we want to think about is how we can positively impact this business.

Then, once you’ve done that, you think, “Well, what is keeping us from doing it? How can I eliminate some of the negative impacts here?” This is where you go to find out about your soft issues that you may not be hearing about but you need to hear about. Maybe you’ve got the wrong HR manager. You may not find out about that unless you go through an exercise like this with your group.

Now, next, what you want to do is start ranking these. Which ones do we want to work on? It can come from either all negative, all positive, or a mix of the two. It doesn’t matter. The point is you want to pick the best two or three ideas out of this exercise and start an implementation process. Again, this is force field analysis, a great tool for you to use with your management team to eliminate issues in your business.

My name’s Byron Hebert. This has been a quick tool time update, brought to you by PKF Entrepreneur Playbook. If you’d like some more information on how these mind-shop tools can help you and your business, please contact PKF Texas. Thank you.

Greater Houston Women’s Chamber of Commerce Leadership Luncheon

Our Director of Practice Growth, Karen Love and the Founder and CEO of ContentActive, Leisa Holland-Nelson, will be speaking at the Greater Houston Women’s Chamber of Commerce Woodlands and North Houston Leadership Luncheon on Wednesday, July 20. In their presentation entitled The Friendship Factor: Building Your Network, they will be discussing best practices, sharing valuable networking advice and explaining how they both used networking to find success. See all of the details below and register for this event here.

Woodlands North Houston July Woodlands Leadership Luncheon Social Media Art_V2

The International Business Lifecycle

Karen: This is PKF Texas Entrepreneur’s Playbook, I’m Karen Love, the host and Co-founder. So today I’m here with Frank Landreneau, one of our International Tax Directors and I’d like to welcome Frank back to the Playbook.

Frank: It’s wonderful to be here, thank you Karen.

Karen: Thank you. Well I’m very intrigued by the international business that you live and breathe on a daily basis and I really think the description that you’ve had of this international business lifecycle is completely captivating so can you go into that a little bit more for us?

Frank: Absolutely, I’d love to do that. Well one of the things we’ve found when working with entrepreneurial clients here in Houston, particularly manufacturers and distributors, is that their first step is obviously to gain traction and market share here in the U.S. market. After they’ve been very successful in doing that we find that clients want to do more for their business and that typically means exporting their goods to other markets outside the U.S. They do that for a period of time and then we find that once they’ve gained some traction in particular jurisdictions they will often want to set up a more permanent office in that foreign location. So it does tend to migrate into a lifecycle of business.

Karen: Well and it sounds like you know about those lifecycles and can be of assistance to people in companies that are doing that.

Frank: Exactly. Well for example, one of the things that we do is we help them register in those foreign jurisdictions or set up a company to do business more effectively.

Karen: Wow, so there’s a lot more to it and we need to have you back to hear about that.

Frank: I’d love to do that.

Karen: Thank you; so for other international topics visit This has been another Thought Leader Production brought to you by the PKF Texas Entrepreneur’s Playbook.

Scenario Planning for the Year Ahead

Byron: Hi, my name is Byron Hebert and this is another quick tool time update brought to you by the Entrepreneur’s Playbook and your friends at PKF Texas. This time of year a good thing to be doing is getting your budgets together for your organization for the upcoming year, getting a sales forecast in place, maybe having a workshop with your key management team to make sure that you’re all on the same page and the company’s moving the right direction. As simple as this seems to be I get a lot of push back from my clients sometimes about putting together budgets and forecasts and the argument is that there’s too many scenarios in play that could affect that budget. So to them I say, “Well let’s put a scenario planning process in place.”

So that’s what I’ve done here. Let’s assume that this company’s very heavily dependent on the price of crude, the success of their company. Maybe they’ve experienced some turnover in their organization in the last several years. So we put that on an axis like this and for each one of these quadrants we think about, “What would our strategy be if either one of these happen?” So let’s assume that our turnover goes down and the price of crude goes up. So we’ve got good people and the price of crude goes up. We want to have a growth strategy. We want to take advantage of that, that we’ve got good people in place and the price of crude has gone up.

So let’s assume over here that our turnover has gone up. We’ve lost some people but the price of crude is going up and we want to take advantage of that. We need to have an H.R. strategy to get people in place, get them assimilated into the organization and get them trained. Down here let’s assume turnover’s gone up but the price of crude has gone down. So here we want to get rid of our waste. We have a waste reduction program in the mine shop tools. We want to go through that program and make sure that we’ve eliminated waste.

Let’s say turnover goes down. We’ve got good people but the price of crude has gone down as well. Again, we want to become efficient. We want to get a waste program in place. We want to become very efficient and maybe technology added so we can become very streamlined in our processes. Again, this is Byron Hebert. This is a quick tool time update brought to you by the Entrepreneur’s Playbook and your friends at PKF Texas.

Restricted Tax Units Can Provide Tax Deferral Opportunity

Executives and other key employees are often compensated with more than just salary, fringe benefits and bonuses: They may also be awarded stock-based compensation, such as restricted stock or stock options. Another form that’s becoming more common is restricted stock units (RSUs). If RSUs are part of your compensation package, be sure you understand the tax consequences — and a valuable tax deferral opportunity.

RSUs vs. restricted stock

RSUs are contractual rights to receive stock (or its cash value) after the award has vested. Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.

But RSUs do offer a limited ability to defer income taxes: Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.

Tax deferral

Rather than having the stock delivered immediately upon vesting, you may be able to arrange with your employer to delay delivery. This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).

However, any income deferral must satisfy the strict requirements of Internal Revenue Code Section 409A.

Complex rules

If RSUs — or other types of stock-based awards — are part of your compensation package, please contact us. The rules are complex, and careful tax planning is critical.

Measuring Esteem With the Birkman Method

Byron: Hi, my name is Byron Hebert and this is another Tool Time Update brought to you by your friends at PKF Texas and the Entrepreneur’s Playbook. In the last Tool Time Update I talked to you about Birkman and how we use it in coaching our clients, hiring, conflict resolution and all the things that come up from the people side of our business, which as we all know is very important. Within Birkman there are 11 component parts and these component parts make up our personality if you will in how we come to work every day and it’s really am accumulation of our life experiences. The first one I’m going to talk to you about is esteem. Now esteem, not to be confused with self esteem, is how we relate to each other on a one on one basis. So the predominant style usually people are fairly direct communicators; you’ve got a low esteem score, means you’re going to be a direct communicator. You may sound blunt to some people you’re so direct.

If you have a high esteem score that means that you may be more cautious in the way you talk to people, maybe a little bit more sensitive to what people are hearing. And do there’s not a good or bad, there’s not a right or wrong, it’s just the way we are hard-wired if you will.

So we also have a need in esteem and our need in esteem is how people are going to communicate to us; how we hear people and how we want to be communicated with. The interesting thing is the predominant score on this is that people have a fairly low esteem – they’re fairly direct communicators – but their need may be that they don’t want to be talked to that directly. And so it’s interesting to find that out about someone so you know how to communicate with them, and this is the power of Birkman. All these things you’ll learn about someone over time, but with a tool like this you can learn it much quicker. And so what we want to do, again, is make sure that we know what people’s communication style, what their need is, so we’re meeting that so we keep them out of their stress behavior. Stress behavior is what we want to avoid because it’s destructive behavior. We’re going to be going over more component parts in more Tool Time Updates coming.

Again, my name is Byron Hebert, this is another Tool Time Update brought to you by your friends at PKF Texas and the Entrepreneur’s Playbook.

Enjoy Larger Deductions by Throwing a Company Picnic

Many businesses host a picnic for employees in the summer. It’s a fun activity for your staff and you may be able to take a larger deduction for the cost than you would on other meal and entertainment expenses.

Deduction limits

Generally, businesses are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:

  • For recreational or social activities for employees, such as summer picnics and holiday parties,
  • For food and beverages furnished at the workplace primarily for employees, and
  • That are excludable from employees’ income as de minimis fringe benefits.

There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.

Recordkeeping requirements

Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses.

If your company has substantial meal and entertainment expenses, you can reduce your tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.

For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction, please contact us.