Accounting 2014 Beyond the Financial Statement
Business Taxes Election Day could bring big changes for Nevada business owners Do you know about the domestic productions activity deduction?
How attractive is your business to a buyer?
Your CPA’s strategic perspective | Tips about budgeting | The new global revenue standard
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Accounting 2014 A product of
Table of Contents ELECTION DAY
4
NEW STANDARDS
10
Big changes for Nevada business
The FASB and IASB finally issue
owners could be on the horizon
new global revenue standards
TAX DEDUCTIONS
6
BUSINESS VALUE
The domestic productions activity
How attractive is your
deduction is often overlooked
business to a buyer?
BUSINESS BUDGETS
8
ACCOUNTING ADVICE
Spirit gets a business started,
The real value of your
budgeting keeps it going
CPA’s strategic perspective
11 12
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Election Day could bring big changes in taxes By Rachael Austin
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ith summer fading into fall many of us haven’t had the time to pay much attention to the fact that there is an election in November. That’s still weeks away. But for many Nevada business owners, the outcome of Election Day could have serious implications. Question 3 would levy a 2 percent margins tax on businesses with $1 million or more in gross revenues. Analysts estimate it would generate about $700 million annually in new tax revenue for the state. It’s important to note that the proposed tax would be calculated based on taxable margin, as defined by the initiative, not on net income. Potentially, companies reporting a positive gross margin but an overall net loss would be subject to the tax. One of our clients recently asked me about it; they had heard something about a “Margins Tax” and were curious how it might impact their business. After looking at their data and making some rough calculations, we determined the company might pay more than $200,000 in new taxes. Granted, this is a larger company ($50 million in gross revenue), and many smaller businesses wouldn’t see a tax bill this large if Question 3 were approved. Still, it’s easy to see why business owners would be wise to do their homework before they cast their ballots this fall. As you can imagine, the client was shocked to learn how much the proposed new tax might cost them, and that opened up a floodgate of questions. Other clients have had similar questions. Here are some facts and resources to help you understand how Question 3 might impact your business. Question 3 has two names The proponents and advocates have each coined a name for Question 3. Proponents have branded it The Education Initiative, TEI for short. The opposition campaign calls the measure The Nevada Margins Tax and is formally known as “No on 3: the Coalition to Defeat the Margins Tax.”
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The two names tell you a lot about the two sides of the issue. Proponents of Question 3 argue that Nevada has among the lowest corporate taxes in the country, and that the money generated by the new tax is needed to improve the state’s low ranking on school funding — most rankings put Nevada 49th (or lower) in per pupil funding. Opponents argue the initiative is a disincentive for business to grow or relocate to Nevada. They also say the language in the measure provides no guarantee the new revenues would be spent on education and instead allows the Nevada Legislature to use it for any general fund expense. Who would pay the new tax? If approved, Question 3 would create a new 2 percent tax on businesses with $1 million or more in gross revenues. Specifically under this initiative, taxable margin would be calculated as the lesser of 1) 70 percent of gross revenue or 2) gross revenue minus the cost of goods sold or compensation, up to $300,000 per employee. Businesses with less than $1 million in gross revenues would not be subject to the new tax, though it’s easier to reach that threshold than many people realize. It’s also worth mentioning again that because the proposed tax is based on gross revenues and taxable margin, it would be possible for a business to be subject to the tax even if it has no profits or is losing money. For larger companies like the one I mentioned earlier, the question becomes where to cut the budget to pay for the $200,000 in new taxes? If Question 3 is approved, businesses might decide to pass the cost along to customers, cut back employee hours, reduce benefits or even lay off employees. Who supports and opposes it? Proponents include national and state teachers unions, the Progressive Leadership Alliance of Nevada and other education advocates. The opposition coalition claims more than 750 members ranging from individuals and small business owners to casinos and other big business interests. Both sides are expected to pour millions into their campaigns. Earlier this year, Governor Brian Sandoval said the measure would deliver “a fatal blow” to Nevada’s economy and economic recovery. Just last month, Sen. Dean Heller said approving Question 3 would put Nevada
If approved, Question 3 would create a new 2 percent tax on businesses with $1 million or more in gross revenues. Taxable margin would be calculated as the lesser of 1) 70 percent of gross revenue or 2) gross revenue minus the cost of goods sold or compensation, up to $300,000 per employee. in the position of having a higher corporate income tax than California, compromising state efforts to lure new companies. One surprise was the decision by the Nevada AFLCIO to oppose Question 3. Danny Thompson, Executive Secretary-Treasurer of the Nevada AFL-CIO, said after the membership vote in May that it was not a vote against education but a vote “… against a flawed initiative that will cost many of our members their jobs and raise the cost of living on Nevadans on a fixed income and on citizens that are still struggling to make ends meet after years of a terrible recession.”
them can be a challenge. You may need to rework your internal data to fit these definitions. It’s important to remember that the Tax Estimator only provides an estimate, and there is room for error in the calculation based on how the detailed definitions of the amounts used to compute any of the variables are interpreted and applied. It also does not consider the effect of how the definition of an “affiliated group” will be applied if the measure is approved. To learn more about the Question 3 campaigns you can visit these websites: http://stopthemargintax.com/ and http://www.theeducationinitiative.com/. I encourage you and every business owner I meet to reach out to their accounting and tax professional to find out how Question 3 might or might not impact them. n Rachael Austin is a CPA, CFE and Senior Manager at Muckel Anderson.
How much would my business pay if Question 3 were approved? That’s a difficult question to answer. Some analysts project that for every million dollars in total revenues the new tax liability would average $14,000. To make it easier for our clients big and small to get a handle on how the proposed new tax might impact their business, we developed a Tax Estimator that’s now available to the public for free on our website, www.muckelanderson.com. To use the Tax Estimator, three figures are needed — expected annual gross revenue, expected annual cost of goods sold and expected annual compensation. The Tax Estimator provides the language from the ballot initiative defining cost of goods sold and compensation to help users create best estimates to plug into the calculator. While all you need to use the Tax Estimator is three numbers, interpreting the initiative to get to those three numbers can be tricky. When you read the ballot language (which we’ve included with the Tax Estimator) you can see the lengthy definitions and how interpreting Northern Nevada Business Weekly • 5
Domestic Productions Activities Deduction
Are you leaving money on the table? By Erin Jones
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re you a contractor, manufacturer or filmmaker doing business in the United States? Then you’re going to want to make sure you know what the domestic productions activity deduction is and make sure that you’re taking advantage of this tax deduction. It could mean up to a 9 percent deduction from net income derived from qualified productions activities. This deduction is available for corporations, partnerships, s-corporations, trusts/estates and sole proprietors. This deduction was initially phased into the Tax Code in 2005, with the passing of the American Jobs Creation Act of 2004. Within the past year, I have amended over 90 percent of the returns that came to me that were eligible for this deduction but the deduction had been overlooked. Of these returns, about 60 percent of them were prepared by a “paid preparer.” I believe this is an important deduction and every taxpayer that may be eligible for this deduction have a basic understanding of it. Let’s first discuss what Domestic Production Gross Receipts is. This is what is required to determine if you are eligible for the Domestic Productions Activities Deduction. This deduction is eligible for industries other than construction, manufacturing or filmmaking. However, these are the most common industries that I’ve seen utilize the domestic production activities deduction. IRC Section 199 defines DPGR as three different broad categories: (1) Construction of real property you perform in the United States in your construction trade or business, (2) Engineering or architectural services you perform in the United States in your engineering or architectural services trade or business for the construction of real property in the United States, and (3) Any lease, rental license, sale, exchange or other disposition of the following; (a) Qualifying production property you manufacture, produce, grow or extract in whole or in significant part in the United States, (b) any qualified film you produce, or (c) electricity, natural gas, or portable water you produce in the United States. All of the income derived from one of these categories is your DPGR. There are a few exclusions to the above broad categories. They typically include (but are not limited to)
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construction services that are cosmetic in nature (such as painting), leasing or licensing items to a related party, and selling food or beverages prepared at a retail establishment (such as a restaurant). After determining your DPGR, you then determine the portion of cost of goods sold and other expenses that are allocable to DPGR. If you are a small business you have the ability to use the small business simplified overall method. For the purposes of this article, I’m only going to discuss this method since the other methods are a bit more complex and all of my clients utilize this method. To use this method, you must meet one of the following conditions: (1) Your average annual gross receipts (over the last three years) are $5 million or less, (2) You are engaged in farming and are eligible to use the cash method, or (3) You are on the cash method of accounting under Rev. Proc. 2002-28. Although this method is generally not the most accurate method of calculating deductions, it is the easiest and least costly for small businesses to calculate. Instead of having to track all expenses and cost of goods sold relating to domestic activities and those that aren’t domestic activities, companies are allowed to determine a ratio of domestic to non-domestic activities and use that ratio to determine costs. Under the small business simplified overall method you simply determine the ratio of domestic productions gross revenue over total gross revenue. This percentage is the percentage you will apply to your cost of goods sold and other expenses, losses or deductions to determine the allocable amounts. To determine your Qualified Production Activities Income, which your DPAD deduction is ultimately calculated from, you must take your DPGR and deduct out your cost of goods sold allocable to DPGR and other expenses, losses, or deductions that are properly allocable to DPGR. Upon calculating this number, your deduction is generally 9 percent of this amount. However, there are some limitations which we will discuss next. The first limitation on DPAD is that the taxpayer (either business or individual) has to have net taxable income after net operating losses. If they do not, than DPAD cannot be taken. Secondly, the qualified production activities income must be greater than the taxpayer’s taxable income, alternative minimum taxable income or unrelated business taxable income. In other words, the deduction cannot take you below a zero income level. ... continued on page 14
Saving for Retirement Means Saving on Taxes By Ali Nagel
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hen it comes to retirement savings, the earlier you start, the better. But if you haven’t been able to put much aside so far, there’s no better time to start than now. There are a wide range of tax-qualified retirement savings plans for small employers and self-employed individuals. Let’s consider the tax benefits, plan aspects, timelines, and choosing a plan. Retirement savings plans are structured with different variations and limits to employer and employee contributions. Plan set up and operation ranges from simple to complex. Depending on the plan type, the actual funds will be held in a trust account or individual accounts for IRA-based plans. Following are some examples of plans with tax advantages for employers and employees and the respective contribution limits for 2014. Employees who are age 50 by December 31 can often make additional catch-up contributions beyond the regular limits. Profit sharing plans allow employers to make tax-deductible contributions up to 25 percent of the aggregate employee compensation (maximum of $260,000 of compensation per employee). As contributions are not required, this type of plan allows flexibility in the contribution amount from year-to-year. Contribution limits per employee are limited to the lesser of 100 percent of employee compensation, up to a maximum of $52,000 each. A profit sharing plan with a 401(k) element offers the option of employer and employee contributions, subject to the employer limits previously described, and employees may defer up to $17,500 out of their compensation. To ensure the 401(k) deferral feature meets requirements, employers may need to provide matching contributions, or a 3 percent of compensation safe harbor contribution. The $52,000 per participant limit referred to above applies to the aggregate of all contributions (employer, employee, match, safe harbor) in these plans. A 401(k) plan can also be used to contribute a large amount to savings for businesses with only one
owner/employee or for self-employed individuals. As a one-person 401(k), when the business owner is the only employee or the individual is self-employed, this person is the one participant. Up to $17,500 can be contributed as an employee. On behalf of the participant, the employer can contribute up to 25 percent of the employee compensation or net earned income after contributions and the self-employment tax deduction contributions (so for self-employed individuals, this works out to an effective contribution rate of about 20 percent). There is again an annual employer contribution limit of the lesser of 100 percent of employee compensation or $52,000. Example of one-person 401(k) with self-employment earnings of $50,000: Employer contribution $9,293 Employee deferral $17,500 Total contribution $26,793 Potential benefit at marginal rate of 25 percent $6,698 As you can see, the potential retirement contribution here is much greater than the $5,500 allowable annual contribution to an IRA. Another important feature of the 401(k) plans above is that the elective deferral portion can be put into a Roth account. So if our self-employed person in the example above chose to use a Roth, she would lose the tax deduction on her $17,500 deferral, but those funds and the earnings thereon would be tax free when she ultimately withdrew them. One problem with the profit sharing plans above is that they can require more administration. For example, if a profit sharing plan has more than one participant it is generally required to file an annual Form 5500 with the government. If your plan will have more than one participant and you want to avoid complications, you may want to consider a SEP or a SIMPLE. A Simplified Employee Pension is an IRA-based plan. The employer makes tax-deductible contributions to individual accounts. The contribution amount is limited to 25 percent of employee compensation, up to a maximum of $25,000. While the SEP is easier to administer, an employer may be required to make contributions for employees who, because of their time working and other considerations, may be excluded ... continued on page 14 Northern Nevada Business Weekly • 7
Spirit gets business started, budgeting keeps it going By Tanya McCaffery
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e have no doubt entered the era of the small business. Created by teaming pools of entrepreneurs focused on challenging the status quo, the business world offers a vibrant new landscape never really seen before, at least not on this scale. For many, taking the entrepreneurial plunge is in itself revolutionary. With it comes the freedom to make independent choices, tremendous opportunities for success and the ability to take full control of your professional life. However, the highway of the entrepreneur is also filled with obstacles, turbulence and risk. Some challenges that come within the first year of operation dissipate over time, only to make room for new ones. Other challenges stick around past your rookie season, lingering for the remainder of your time as a business owner. Still, to most who are considering the jump into entrepreneurship, no tales of challenges can compare to the pride, satisfaction and joy that could be possible from challenging themselves and running head-first after their dreams. No sane person will ever say the road to entrepreneurial success is easy. There are, however, plenty of seasoned business owners — including myself — who can look back to their beginnings and tell you that you can indeed make the venture easier on yourself. By taking certain steps in key areas — most notably with regard to budgeting finances correctly from the beginning — you’ll save some headaches and possibly save your business. Budgeting appropriately will prove to be vital to your success not only throughout your first few years, but for the longevity of your company’s career as well. Your Budget is Your Buddy. To make sure you have adequate funds in the future, your budget is your best pal. In fact, budgeting is one of the single-most crucial components to maintain your financial wellbeing. And by budget, I do not mean simply tracking how much you can spend in your head; I mean an accurate forecast of all income and expenses in a
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comprehensive manner. You can stop procrastinating and aim to reach an accurate, comprehensive forecast by beginning with the following guidelines (I would say rules, but what entrepreneur likes rules?). Create One. No Excuses. If you are planning your business launch, great; it is budget time. And, even if you are already a few months or a few years on the scene, you still need to set aside time to create a budget. Budgets are not something you “should have done,” they are something you just do; it’s never too late. Once you sit down, gather the necessary information and map out your budget, it is not a task that once complete can be dismissed. I encourage you to refrain from tucking your budget away in a filing cabinet to be forgotten. You just made this important financial plan for your business; use it to keep you focused and on-track. Use the Information You Have Available. Procrastinating small business owners oftentimes argue they do not have enough data to create a budget. Phewy. Whether you have previously sold goods and services or you are freshly coming out of the gate, you have valuable information around you to help craft a budget. If you have been open for a few months, use that information to project forward. Even if you have not made a single sale, do not overlook the worthwhile information that you can uncover with a little research: What are the trends in your industry telling you? What are businesses in a similar industry receiving for their goods and services? Is it typical for someone selling the goods and services you sell to experience seasonal ebbs and flows such as booming summers and halted winters? Use all the information you can gather to estimate your sales numbers and expense figures. Start BIG. Yes, writing a budget for your business the first time — or any time after that, really — can be daunting. Try this: start by projecting how much your business is going to bring in within a certain time period (a.k.a. your gross income). Working off a calendar year and considering important tax deadlines is common, but you can create your budget for any timeline that makes sense for you and your business, regardless of the time of year you are starting. Gather all the relevant data to make an educated estimate and work backwards from that number to help guide all of the other figures in your budget. Starting with
this grand number will help you identify the steps required to reach the amount you are estimating to gross. With this in front of you at all times, you’ll be able to make decisions based on whether or not you are on track to hit your projection. For example, you will know when it is a smart time to ramp up your marketing efforts or cut back on spending. Review, revisit, repeat. Plan time periodically to refer to your budget — the more frequent the better. Doing so allows you to identify as early as possible where your business might have gotten off track and then make necessary adjustments. Also, your business is going to change along the way. More information will become available as you experience more sales and expenses. Therefore, I encourage you to update your budget as you uncover more data. Just because you created your budget does not mean you can’t change it as you go to be more accurate. Yes, definitely stay focused on working inline with your budget, but at the same time do not beat yourself up if some updating is necessary along the way. While budgeting is indeed a crucial component to entrepreneurship, it is just that: a single component to the overall plan for the success of your business. In addition to establishing a comprehensive operating budget, you’ll also tackle steps such as setting up a business entity, finding an accounting service that
operates in your best interest, and a slew of others. Running a new business is filled daily with all kinds of shiny objects that are way more exciting than sitting down and etching out a clear budget. But, to ensure your financial sanity as an entrepreneur, I’m strongly encouraging you to take the time to create a comprehensive budget and review it consistently. Don’t let the excitement of starting a new business cloud your longer-term vision. The spirit of the entrepreneur is incredible, and it is that spirit that’s helping to fuel this era of small business. It is this remarkable spirit that allows business owners to undergo the turbulence that an entrepreneur goes through on a regular basis while maintaining the passion that got them inspired to start their own business in the first place. It is a passion of mine to promote the entrepreneurial spirit wherever I can, specifically by helping companies maintain financial literacy so that at the end of the day, we are all operating through a state of comfortable, accurate financial wellness. Best of luck! n Tanya McCaffery, CPA, is CEO of VAST powered by The CFO Group. She can be reached at 775.359.7600 or tanya@thecfogroup.com Northern Nevada Business Weekly • 9
The new global revenue standard is here By Brian Wallace
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fter dedicating more than 10 years to its development, the Financial Accounting Standards Board and International Accounting Standards Board have finally issued a new, converged standard on revenue recognition that, according to the FASB, aims to better address revenue issues and provide superior comparison across industries and capital markets. The FASB issued ASU 201409, Revenue from Contracts with Customers, and the IASB issued IFRS 15 with the same title. ASU 2014-09 creates a new topic in the FASB Accounting Standards Codification, Topic 606. The new standard will affect nearly every revenue-generating entity that applies U.S. generally accepted accounting principles. As the new standard, ASU 2014-09 supersedes and replaces virtually all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, which will have the greatest impact on the real estate, software, life sciences, retail, manufacturing and construction industries. Public companies currently applying U.S. GAAP revenue guidance are required to apply the new guidance to all reporting periods beginning on or after Dec. 15, 2016. Early adoption is not permitted. The effective date for all other entities is deferred for one year to annual reporting periods beginning after Dec.15, 2017, and interim periods in annual reporting periods beginning after Dec. 15, 2018. Nonpublic entities may elect to early adopt the guidance in accordance with public entity effective dates. These dates might seem far away now, but all companies have been encouraged by the FASB and IASB to begin assessing and determining the impact on their organizations as soon as possible. Though not every entity will experience a significant change in the top-line revenue amount or its accounting policies, the new guidance will require a new approach and significant new disclosures
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about contracts with customers, and presents an overall disclosure objective. It requires an entity to present sufficient information for users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and the related cash flows. Topic 606 creates a single, principle-based revenue recognition framework. The core principle requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The shift from current U.S. GAAP guidance, which tends to be more prescriptive, to guidance that is based on a single core principle will require entities to apply significantly more judgment. Many entities that have previously applied U.S. GAAP industry-specific guidance may be particularly impacted by the following areas of the new standard: ■ Applying the collectability guidance, including in arrangements with extended payment terms ■ Identifying promised goods and services and assessing whether they are distinct ■ Estimating variable consideration and applying the constraint ■ Allocating the transaction price to performance obligations ■ Determining whether control for promised goods and services transfers over time or at a point in time ■ Gathering data and preparing the required disclosures One of the first decisions a company should make is to determine which transition approach to apply. Companies should then consider the information needs of their stakeholders — investors, lenders, analysts and others — to ensure that their needs and expectations are addressed by the transition approach. Most companies will also need to closely examine: ■ Accounting policies and disclosures ■ Processes to develop and incorporate new management judgments ... continued on page 15
How attractive is your business to a buyer? By Scott T. Wait
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ow attractive is your company to a potential buyer? It depends on the buyer and your value drivers. There are three main buyer types: the individual buyer, the financial buyer and the strategic buyer.
■ The individual buyer is looking to buy a job with the intention of growing it into an investment for the long term. In general, they look for an industry in which they are familiar, are looking for smaller-sized companies that they can finance, and usually they are the riskiest buyers to a typical seller, because they usually require payment plans with a promissory note with or without collateral taken by the seller. ■ The financial buyer is looking for cash flow and return on investment. The financial buyer wants to know the payback time on the investment to show their owners return on investment. They also are interested in growing the value of the company. Many financial buyers, in my experience, are interested in an alliance with the seller for some time. The financial buyer may not cash out the seller 100 percent at time of purchase. There may be two or more years where the seller must commit to be involved in the business. If the relationship goes well over time, the financial buyer may be open to a 100 percent buyout. Many financial buyers will negotiate for an earnout. An earnout is a contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future financial goals. Financial buyers will pay a higher premium for companies than individual buyers. ■ The strategic buyer is looking for long-range business plans that meet their overall goal such as economies of scale or vertical and horizontal integration. Vertical integration examples would be strategy used by a company to gain control over its suppliers or distributors in order to increase the firm’s power in the marketplace, reduce transaction costs and secure supplies or distribution channels. ■ Horizontal integration is the acquisition of additional business activities that are at the same level of the value chain in similar or different industries. This
can be achieved by external expansion. Since different companies are involved in the same stage of production, horizontal integration allows them to share resources at that level. If products offered by the companies are the same or similar, it is a merger of competitors. Strategic buyers will pay the highest premium compared to the other buyers mentioned earlier. The highest performing businesses have effective systems in place that facilitate their rapid growth, have higher than average cash flow, drive up the business’ value, and are attractive prospects. These companies are watched carefully by financial and strategic buyers. Here are common value drivers that attract optimal buyers for your company: Grow your revenue wisely. Revenue growth is an essential driver as long as it is profitable growth. In many companies there are a variety of ways that can improve revenue, yet not all revenue is equally valued by buyers. For example, some customer segments are more profitable than others because of higher operating margins and the likelihood that the satisfied customers will spread the word to similar, like-minded, potential customers of your product or service. As is commonly known, your best customers will more likely consider buying new products or services because of their satisfaction level. Recurring revenue with contracts or due to strong brand value imply that the company has consistent, repeat customers and make the company more valuable to potential suitors. The best scenario is significant revenue based on contracts. Contractual revenue is highly valued by financial and strategic buyers. Also, note that revenue is more valuable from buyers when it has low concentration per customer. A low concentration barometer would be 5 percent or less per customer. Operating margins vary in value. A company that is a wholesaler and a retailer will have different operating margins between these customer segments, as a rule, wholesale customers demand a lower price which translates to lower operating profits. Wholesale customers may require less administrative support to service, which may mean that bottom line cash flow is higher than retailers. Wholesale customers are usually higher volume customers compared to retail. Wholesalers are able to buy inventory in bulk and provide products in lower cost per unit compared to retailers. Retailers with high operating margins may be more attractive, because they have a diverse customer base compared to wholesalers. ... continued on page 15 Northern Nevada Business Weekly • 11
The real value of your CPA’s strategic perspective By Michael Bosma
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om Watson had much more than short-game skill and confidence helping him achieve victories on the golf course. Tom had his caddie, Bruce Edwards, as his No.1 partner by his side for over 30 years to strategically navigate the challenges on and off the greens. Ask yourself: Who is my caddie? Who is helping me navigate known and unknown obstacles, and provide clarity, insight and experience as well? From my 20-plus years of being “caddie” for my clients, what follows are common observations and an action plan to navigate to better results. Your CPA should help you select the right club when you are unsure of how to approach certain obstacles. Tax Filing Versus Tax Planning Smart business owners know the value of having an experienced CPA manage the complexities of changing tax laws and properly prepare and file their business returns. Getting full value for the fees charged for CPA services should include advice based both your needs and a depth of understanding of your company. In previous articles, I have differentiated between a predominantly compliance tax practice versus a predominantly consultative approach. There is absolutely a place in the business environment for using compliance-driven CPAs. If your business is a mature business that you have operated for years, with few changes in the business landscape, a compliance CPA practice might be what you need. Generally, this type of firm can very efficiently prepare the business taxes without taxing the owner with needless questions and the inevitable poking and prodding that is hand-in-hand with a more consultative
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approach. Lower fees are an added benefit! If you only see your CPA to sign tax returns, they probably have a compliance practice. If you have an emerging company that in a dynamic business environment, odds are you need a CPA that provides proactive tax strategies, creative restructuring and develops effective accounting systems. Entrepreneurs today want and need more real-world, roll-upyour sleeves business advice from a financial strategist who will help chart the path to success. For example, we helped an entrepreneur minimize self-employment tax by their LLC making a “check-thebox” election to be taxed as an “S Corporation” rather than the default tax status of a partnership. We first had to make sure that the limitations on non-pro-rata distributions and the reasonable wage issues were dealt with appropriately. This case also identified certain appreciated assets (the business real estate) that would be better suited being held in a separate LLC rather than be confined by the fairly inflexible rules that limit owner’s options if the property were to later no longer be used in the business. After discussing this with their business attorney, there was the additional benefit of liability protection for those same assets from company creditors. Failure to plan is planning to fail — It does take a village! I consult with business owners from various industries everyday who take the team approach to finding solutions. While these entrepreneurs have different needs and goals, they share one common problem: Finding time to carve out a strategic business plan. Oftentimes, business owners are too busy fighting fires, meeting payroll or following up client needs to create an individualized plan for their company. Many Fortune 500 companies have boards of directors to help them with the creation and measurement of the strategic plan.
If you have an emerging company that in a dynamic business environment, odds are you need a CPA that provides proactive tax strategies, creative restructuring and develops effective accounting systems. The Bosma Business Advisors are now filling the role of strategic advisor for many local businesses. Advisers view themselves as your partner in success and take the time to learn your business, listen to your needs and, most importantly, prepare and execute a sophisticated plan which helps clarify your company’s direction, ensures your key leaders are all “on the same page” and keeps both management and staff focused on the tasks at hand. Teaching the NV Small Business Center’s NxLevel program with fellow business adviser Mike Kitson has helped exponentially in this area. As more than 30 current and would-be entrepreneurs met weekly and cobbled their business plan together, it became clear that each area of the plan (marketing, financial, legal, etc.) are all interrelated. For example you can’t fund the marketing plan until you understand the cash-flow projection. Your personnel plan depends on having a viable business plan that can make a significant con tribution to your company’s success and help get the funding it requires. In fact, most lending institutions and private investors will not even talk to you without a solid business plan. The advisers your company uses should provide a strategic plan describing your company, its products, the competitive environment, management team, financial health and business risks. You don’t know what you don’t know Warren Buffet says “Risk comes from not knowing what you are doing.” With my own experience working for an international accounting firm and then following my entrepreneurial dreams, I believe this is solid advice. Not knowing your company’s financial health can lead to
mistakes in creating and executing your game plan. Unfortunately, the world of accounting is exponentially more complicated than when I started my CPA career 20 years ago. Gone are the days of the generalist. Today, you need a team of accounting, tax, and business consultants to help navigate the related technical challenges in today’s business environment. Most companies need specialists in accounting information systems and processes, sales tax, multi-state income tax, federal income tax, international tax, and the list goes on. Even in the “general” field of federal tax, it never ceases to amaze me that we need more resources than ever when you consider the detailed analysis required for cost segregation studies, domestic production activities deduction, and research and experimentation credit analysis. It is important that your CPA will have access to technical research libraries and experts on staff with a wide range of expertise. We subscribe to all 50 states tax reporters through Commerce Clearing House, BNA federal, international, and estate and tax reporters, RIA, (you get the drift). For example, we had a manufacturing client that was looking to attend a trade show on the East Coast. While they were going to be “in the neighborhood,” they thought it would be prudent to visit some of their suppliers and customers. They had relocated to Nevada to stay out of the nexus dragnet and asked us our thoughts. We had our state and local tax experts analyze the situation and were able to assist them in what they could (or couldn’t) do by state without triggering filing requirements. The clients’ biggest takeaway was that they should be collecting resale certificates from the customers to mitigate the exposure to a state sales tax audit. Conclusion Today’s entrepreneurs need multiple expert resources, from a CPA firm to outside consultants, to break down barriers and spark innovation through collaboration. There is significant value to a strategic adviser team approach when it is effectively used, rather than just talked about. n
Mike Bosma is the Managing Shareholder of Bosma Group, P.C. and has been in public accounting, specializing in taxation for over 20 years. He founded Bosma Group in 2007 with the vision of pairing entrepreneurs with world-class tax and accounting professionals. Northern Nevada Business Weekly • 13
Domestic Productions Activities ...from page 6 The next limitation is known as the wage limitation. The main reason that this deduction is available for manufacturing and construction in the United States is to increase production and to create jobs within the United States. Therefore, one of the limitations of this deduction is Form W-2 wages paid. The 9 percent deduction calculated above cannot exceed 50 percent of the Form W-2 wages paid to employees. This Form W-2 limitations leaves the door open to some fun tax planning meetings with clients. I’ve discussed some ideas with clients who are either sole proprietors (income reported on Schedule C of Form 1040) and who are partnerships about ways to receive this deduction, even if they aren’t paying Form W-2 wages currently. We discussed converting the business to an S-corporation and paying Form W-2 wages to themselves, thus becoming eligible for the DPAD deduction. Sometimes doing this would simply not be beneficial for the taxpayer, but that is why the taxpayer should meet with a qualified Certified Public Accountant and lawyer before making any major business changes. To check and see if you have missed this deduction in previous years you will have to review either your business tax return or your personal tax return. For partnerships, s-corporations or sole proprietors, simply look at the first page of your Form 1040 and see if there is an amount on line 35 (“Domestic production activities deductions. Attach Form 8903”). If there is an amount there, you’ve included DPAD on your tax return. For all other returns, simply
Saving for Retirement ...from page 7 from participation on a full-blown profit sharing plan. A SIMPLE IRA is also an IRA-based plan where employees make contributions and the employer makes a contribution based on a formula. Employee contributions are limited to $12,000 for 2014. Employer contribution formulas provide for an employer matching contribution of up to 3 percent of employee compensation or 2 percent of eligible employee’s compensation (with a compensation limit of $260,000) A SIMPLE IRA also has requirements related to which employees participate in the plan and for making contributions to all eligible employees. When is the deadline? If setting up a plan and obtaining a tax benefit for 2014 is on your “to do” list, there’s still time. Employer retirement plans need to be set up before the year-end, by December 31 if on a calendar year. One exception is the SEP, which can be established after year end. A safe harbor 401(k) plan or a SIMPLE IRA must be in existence for a minimum of three months during the year, unless it is a newly established business. Employee deferral contributions must be made shortly after the
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look for a Form 8903 in your business tax return. If it’s not included, you’ve likely missed the deduction. Although this deduction seems fairly straightforward, it could easily become complicated, especially when you have to determine what is qualified production activities income and what is not. It’s best to meet with a Certified Public Accountant that specializes in film, construction or manufacturing. They are likely to have experience in this deduction and will be able to properly determine if you qualify for it and they will be able to calculate it for you. n Erin Jones, CPA is a partner at Belle Business Services, LLC, a full service accounting firm located in the Bosma Business Center in Reno, Nevada. Belle Business Services, LLC is a female owned and operated accounting firm, specializing in business startups, construction and manufacturing. Erin can be reached at 775-525-1(TAX) or erin@bellebs.com.
compensation is paid, but employers generally have until the due date of their income tax returns, including extensions, to make their portions of the contributions. When choosing a plan, consider how much can be contributed to a plan and how much flexibility is needed in the employer contribution amount from year-to-year. Which individuals the maximized saving is intended to benefit will make certain plans an optimal choice. Self-employed individuals can use a one-person 401(k), SEP or SIMPLE IRA. Take into account the ease of administration, complexity of rules and related fees. Given all these factors, consider getting the advice of a professional to help you make the optimal decision. In conjunction with the American Institution of Certified Public Accountants (AICPA), the U.S. Department of Labor has website that provides additional resources and an interactive tool for choosing a retirement plant at www. choosingaretirementsolution.org. n Ali Nagel, CPA, MAcc, is a manager for Kafoury, Armstrong & Co. For more information visit kafoury.com or call 689-9100.
Attractive Business ...from page 11 Asset efficiency is key driver of business value. Improving operating efficiency is critical to driving up gross margins (revenue net of direct costs) and improving longterm cash flow. Most buyers are impressed with positive, growing cash flow trends. One planning point to consider when making aggressive growth plans is that cash flow needs to keep pace with profit, or the company will experience cash flow shortage at some point. Fast-growing companies are at risk of running out of cash. Most buyers are interested in positive trends in cash flow unless they are looking for a turnaround situation. Turn-around buyers are looking for severely discounted prices and terms which obviously are not ideal buyers for typical business owners ready to sell. Asset efficiency includes managing cash flow so that accounts receivable keep pace with accounts payable. The best case scenario is that there are little or no accounts receivables or receivable collections arrive ahead of payables and allow there to be adequate cash to pay vendors on time and consistently. Customer expectations drive value. If the company’s ability to deliver their products or services does not meet expectations, the company’s reputation (brand) is at risk of being damaged and cash flow will be at risk. As an example, online retailers have a unique challenge in this new world of social media. The retailers “social media” reputation may catapult upward their revenue and its
brand value in a short time, or if the company does not meet customer’s needs, viral negative word-of-mouth by customers can severely damage the company’s reputation and cause their revenues to plummet. Customer expectations are an indicator of the company’s differentiation from competition as well. Sophisticated buyers are interested in competitive advantages. Smart buyers review target companies in large market (customer) segments. Businesses that are in large markets have huge profit potential. An example of a sophisticated buyer taking action based on a large market segment is Tony Hsieh who purchased Zappos in 1998. Tony became very interested in investing in the company when he learned that the retail shoe market was $40 billion and 5 percent were through mail order catalogs. In 2002 the company’s revenue was $8.6 million. In 2008 their revenues reached $1 billion. In 2009, Amazon purchased Zappos for $1 billion. Keep in mind the type of buyer you would like to attract and focus on driving up your business’ value when you interested in positioning your company for sale. The type of buyer and your company’s value drivers will determine the terms and price you can expect when you are ready to exit. n Scott T. Wait, CPA, a partner in RS Wait, Chtd. of Reno, welcomes your questions or comments at 775.825.7337 or scott@rswait.com; www.rswait.com
Global Standards ...from page 10 ■ Related internal controls that will require updating, if not overhauling, to reflect changes in accounting policies and processes ■ Potential impact on financial results and the consequent tax implications
will be one of the most significant accounting changes in memory and require substantial effort by all involved. ■ Brian Wallace is the Reno office managing partner with Grant Thornton LLP. He can be reached at 775.332.1768 or brian.wallace@us.gt.com.
■ Systems to capture and process new data ■ Revenue-based employee bonus and compensation arrangements ■ Income and other taxes ■ Debt covenant compliance ■ Sales contract terms ■ Sales agent agreements The best thing companies can do right now is to gain an understanding of the standard, measure the potential impact on their organization, select a transition plan that works for their organization and begin planning how to execute the transition. Grant Thornton LLP recommends establishing a cross-functional implementation team, including accounting, tax, IT, legal, sales, and compensation and benefits personnel. For many companies, this Northern Nevada Business Weekly • 15