The CPA Desk

A Thought Leader Production by PKFTexas

Timing business income and expenses to your tax advantage

Typically, it’s better to defer tax. Here are two timing strategies that can help businesses do this:

  1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
  2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

But if you think you’ll be in a higher tax bracket next year, consider taking the opposite approach — accelerating income and deferring deductible expenses. This will increase your tax bill this year but can save you tax over the two-year period.

These are only some of the nuances to consider. Please contact us to discuss what timing strategies will work to your tax advantage, based on your specific situation.

Using Balanced Score Cards for Your Business

Byron: Hi my name is Byron Herbert, and this is another Tool Time update brought to you by your friends at PKF Texas and the Entrepreneur’s Playbook. Today what I want to talk to you about is using a balanced score care in your business, and why you would want to use it. A balanced score card is just that, it’s balanced in that you can’t take performance from one area to offset another. To be a high performance organization there’s certain areas you need to perform well all the time, and so we’re going to talk about that, and what we do to build a balanced score card.

First we want to look at what a high-performance organization does. A high-performance organization in your industry, there’s a lot of information out there. We can find that. We can get that for you, and we want to compare ourselves not to the average, but for the high-performance organizations. So in this example I’ve given you, we’re looking a sales growth, gross profit, net profit, accounts receivable turnover, accounts payable turnover, and inventory turnover. So in our example, we’re looking at the 12 month rolling average for a company. So regardless of the month, we’re looking at the prior 12 months performance.

So we say sale’s growth. In our example here, a high-performance organization is operating at 5 percent growth ever year. Our organization is at 4.5 percent sales growth. Not bad, so we’re not going to be too worried about that one. Gross profit, a high-performance organization that’s operating at 30 percent, we’re operating at 28 percent. That’s okay too. Net profit, high-performance organization 10 percent, we’re at 8 percent. Again, we’re not worried about that. Our accounts receivable turnover, high-performance organization is running 45 days, we’re running 60 days. That’s 15 days over the high-performance organization. Fifteen days sales in your organization could be a lot of money you could drop to the bottom line in cash flow if you can improve that accounts receivable turn over. So we want to look at that. We’re going to track that, and maybe implement some policies to get that accounts receivable turnover down.

Accounts payable turnover, a high-performance organization did 50 days, we’re running 40 days, and so again we’re paying our bills a little quick, and maybe helping us on cash flow if we can extend that out another 10 days. So we’re going to look at that. We’re going to highlight that in red, and we’re going to look at it. Our inventory turnover, high-performance organizations in our industry are at four times, we’re at two times. So we’re not turning over our inventory quite as much. We’re building up inventory, which you’re probably using debt to do, and so that’s an area that we want to look at as well. We want to get our turnovers up to that four times, and get out cash flowing line.

So again, a balanced score card, comparing yourself to a high-performance organization using a 12 month rolling average, and highlighting in those areas where you’re not performing like your peers in high-performance organizations. This is Byron Herbert. This has been a Tool Time update brought to you by your friends at PKF Texas and the Entrepreneur’s Playbook.

Fraud and your W-2

Identity theft is running rampant—from social security numbers to credit cards. And now, your W-2.

The Government Accountability Office (GAO) believes they have a solution to cut back on “fraudsters.” To your payroll department’s chagrin, it requires a much earlier W-2 deadline date.

The issue is due to timing. The current W-2 deadline is the last day of February for paper filers and for electronic filers, the last day of March. Personal income tax forms (Form 1040, etc.,) are due normally on April 15. But the IRS doesn’t start reconciling data until July.

During the gap in time from when the IRS issues a refund until they verify data, fraudsters can use stolen identities to file fake returns and receive a refund. Last year over $5 billion with fraudulent returns were dished out.

The GAO’s solution: Reconcile before issuing refunds.  In order to process returns quicker, the GAO is recommending a W-2 deadlines as early as January 31 and decreasing e-filing requirements from 250 forms to as low as 5 forms.

Payroll personnel are not happy with this idea. The time allowed to process and correct forms goes from 90 days to as little as 30 days. The potential number of W-2c’s needed to be filed could increase exponentially. And we all know that garbage in, is garbage out.

So is an earlier deadline really a solution? The SSA says go for it. The IRS is sitting on the fence, waiting to see if the “potential corrective action” is worth the cost and important enough to do. Are they saying the $5 billion in fraudulent refunds isn’t worth the time and effort to fix? You decide.

Defining Skill Sets in a Design Based Work Environment

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s guest host, and I’m back with Kelsey Ruger, the Chief Experience Officer at CogMine and the President of the Houston Interactive Marketing Association. Kelsey, welcome back to the Playbook.

Kelsey: Thanks, Jen.

Jen: So we’ve talked about design thinking and how it can be applied to, you know, kind of any type of company, but I guess the question that is in my mind is how do you hire for that?

Kelsey: So this is a topic I’m really passionate about, and I think it’s probably the most critical thing that a company can look at is who do you hire and how do you fill these roles. Typically what’s happened in the past is companies would hire what I call I-shaped people, and I-shaped means you are – you have a depth of skill in one area and it’s really deep. When I think of people that you need to really work across the organization, you need T-shaped people, and so those are people who have a depth of skill in one area, but they are also broadly skilled in other areas that not only help them understand their job and the problems that they’re solving, but they can also relate to other people’s jobs.

And in a lot of cases, you’ll find that you will have people who cross over into difference disciplines so you’ll get designers who become really good at writing software, or you have developers who get really good at marketing or sales because the company is looking to build people with broadly-based skill sets. And that way you can have teams that work really well together and it works really well in these environments where the team is really responsible for building and executing on the projects.

Jen: That’s really cool. Well, thanks for sharing that with us, we appreciate it. This has been another Thought Leader Production brought to you by the PKF Texas Entrepreneur’s Playbook. Tune in next week for another chapter.

Overtime Changes are Coming

Heads up for business owners to expect a change in compensation rules that could really affect the bottom line.

Earlier this year, 2014, President Obama directed the Department of Labor (DOL) to modernize existing overtime regulations. He noted the current $455 per week threshold for overtime entitlement is outdated. In the past 40 years, numbers have been updated twice.

The DOL was hoping to have proposed regulations out in November 2014, but according to Solicitor of Labor, M. Patricia Smith, proposals are months away. They are hoping for early 2015.

Community Outreach Fuels Growth

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s guest host. And I’m here with Rassul Zarinfar, the founder and CEO of Buffalo Bayou Brewing Company. Welcome back to the Playbook, Rassul.

Rassul: Thank you so much for having me.

Jen: Now, I see you guys everywhere. So I know you guys are really proud of being local.

Rassul: Yes.

Jen: You’re in the community. Tell me about that.

Rassul: Yeah, well, I mean, we try to be everywhere. At the end of the day, we’re just so proud to be from Houston, and that’s why we named the brewery the way that we named it. Houston was founded on the banks of the Buffalo Bayou in 1836, and so we wanted to pay homage to the city, so we named ourselves Buffalo Bayou Brewing Company, and our only flagship is 1836.

You almost think of a brewery as a collection of people who like to drink together. And that’s how I think about it, and so when I go around town – I mean, beer is a product that – maybe you meet your next best friend over a beer, or maybe you go out on a first date with a girl who’s gonna become the future mother of your children or something like that, and you meet them over a beer as well. And beer can be a product that can do a lot of cool stuff in terms of art openings and supporting the community and fundraisers for friends and family who’ve had some troubles or whatever. So that’s what we try and do. We try and remind ourselves that it’s a very community-driven thing.

Jen: Now, can you actually host events at your brewery, or do you typically go to community events? How does that work?

Rassul: A little bit of both. I mean, we sponsor a lot of events, and we try and give back to the community that way. We do a lot of fundraisers for cancer research – for instance, partnering with Spec’s last year for that. And then we also have a lot of fundraisers at the brewery, and we also host just good old-fashioned parties at the brewery too.

Jen: Awesome, awesome.

Rassul: So a little bit of column A, B, and C.

Jen: Perfect. Well, thanks so much for being here. Appreciate it.

Rassul: Thank you so much for having me.

Jen: This has been another Thought Leader production brought to you by the PKF Texas Entrepreneur’s Playbook. Tune in next week for another chapter.

Donating appreciated stock can offer substantial tax benefits

Are you planning to make charitable donations before year end? Do you own appreciated stock that you’d like to sell, but you’re concerned about the tax hit? Then consider donating it to charity rather than making a cash gift.

Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it, you can both avoid the capital gains tax you’d pay if you sold the property and deduct its current fair market value.

Let’s say you donate $10,000 of stock that you paid $4,000 for, your ordinary-income tax rate is 33% and your long-term capital gains rate is 15%. If you sold the stock, you’d pay $900 in tax on the $6,000 gain. If you were also subject to the 3.8% net investment income tax (NIIT), you’d pay another $228 in NIIT. By instead donating the stock to charity, you save $4,428 in federal tax ($1,128 in capital gains tax and NIIT plus $3,300 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,300.

If you are charitably inclined or would like to minimize taxes related to your investment portfolio, we can help find the strategies that will best achieve your goals.

Change Readiness Model – Capabilities and Beliefs

Byron: Hi. This is Byron Hebert and this is another Tool Time Update brought to you by your friends at PKF Texas and the Entrepreneur’s Playbook. If you remember, we’ve been talking about the “Change Success” model. We went and talked, overall, about the beliefs and readiness capabilities of an organization to affect change. And, we talked about – the beliefs was 30% of that change; readiness 30 %, and capabilities 40%. Last week, I talked to you about “change readiness” and all the components that make up the “change readiness.” And, today, I want to talk to you about change – the capability of an organization to change – and their belief systems that need to be in place to affect positive change in your organization.

Let’s talk, first, about capabilities. This is where a company’s sustainable competitive advantage lies. This is the company’s ability to make a profit and, also, dynamic capabilities; their ability to improve the performance of the company and the profitability of a company. Personal capabilities; same thing. Capabilities of an individual to make a living and their dynamic capabilities to improve their living. And so, while these are important components – because it’s 40% of the change process – and, in fact, it’s a “non-starter” without these; these are, really, enablers is all it is. So, most organizations have focused, quite heavily, on their capabilities and that’s how they’ve gotten to the position they’re in now. But, these are things that we have to address in a change model.

Moving on to “beliefs.” Let’s talk about “beliefs.” So, that’s 30% of our change effectiveness. And, we’ve got three of those, there. So, we broke ‘em down, evenly, to 10%, each. First, let’s talk about significant others. This is an area that, a lot of times, we fail to address; and that is, “How about the peoples’ significant others; that they live with or they work with, here, in the organization? Do they believe in the change that we’re trying to make? Do they support it?” And that’s an important component that we have to take into consideration.

What about our attitude towards change? “What’s the organization’s attitude towards change? Do we believe in it? Do we like it?” The change participants attitude towards the change; “What is their belief, there?” “Perceived difficulty;” again, 10% of our belief systems will lie in, “How difficult do we think it is to make this change in the organization; whatever it may be?” So, that wraps up all of these areas in the last three Tool Time Updates that we’ve given you on change readiness, change capability and change beliefs.

My name is Byron Hebert. This has been a Tool Time Update brought to you by your friends at PKF Texas and the Entrepreneur’s Playbook.

2015 401k Limits

The IRS has announced limitations for 2015 Pension Plans. The maximum elective deferral for 401(k) is $18,000 up from $17,500.

Catch-up contributions for those over 50 years old is $6,000 up from $5,500

IRA maximum contribution remains the same at $5,500 as well as the catch-up amount at $1,000.

For more on other pension plans click here.