Tax Times

May 25 2018

For more information contact us at (818) 789 1179

 

Be Aware Of The Tax Consequences Before Selling Your Home

May 24 2018

In many parts of the country, summer is peak season for selling a home. If you’re planning to put your home on the market soon, you’re probably thinking about things like how quickly it will sell and how much you’ll get for it. But don’t neglect to consider the tax consequences.

Home sale gain exclusion

The U.S. House of Representatives’ original version of the Tax Cuts and Jobs Act included a provision tightening the rules for the home sale gain exclusion. Fortunately, that provision didn’t make it into the final version that was signed into law.

As a result, if you’re selling your principal residence, there’s still a good chance you’ll be able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

To qualify for the exclusion, you must meet certain tests. For example, you generally must own and use the home as your principal residence for at least two years during the five-year period preceding the sale. (Gain allocable to a period of “nonqualified” use generally isn’t excludable.) In addition, you can’t use the exclusion more than once every two years.

More tax considerations

Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, as long as you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Here are some additional tax considerations when selling a home:

Tax basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.

Losses. A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Second homes. If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

A big investment

Your home is likely one of your biggest investments, so it’s important to consider the tax consequences before selling it. If you’re planning to put your home on the market, we can help you assess the potential tax impact. Contact us at (818) 789-1179 to learn more.

© 2018

 

4 Ways To Encourage Innovation In Customer Service

May 23 2018

When business people speak of innovation, the focus is usually on a pioneering product or state-of-the-art service that will “revolutionize the industry.” But innovation can apply to any aspect of your company — including customer service.

Many business owners perceive customer service as a fairly cut-and-dried affair. Customers call, you answer their questions or solve their problems ― and life goes on. Yet there are ways to transform this function and, when companies do, word gets around. People want to do business with organizations that are easy to interact with.

Here are four ways to encourage innovation in your customer service department:

1. Welcome failure. Providing world-class customer service involves risk, and inevitably you’ll sometimes fail. For example, many businesses have jumped at the chance to use “big data” to develop automated systems to direct customers to answers and solutions. But the impersonality of these systems can frustrate the buying public until you establish the right balance of machine and human interaction. Remember, every failure opens the door to better strategies for serving your customers.

2. Link compensation to employees’ contributions. Companies that fail to reward innovation aren’t likely to retain their best customers or establish a good reputation. Because customer service employees tend to be paid hourly or relatively nominal salaries, consider a cash bonus program for the “most innovative idea of the year.” Or you could hold semiannual or even quarterly innovation challenges with prizes such as gift cards or additional time off.

3. Praise the groundbreakers. Employees who challenge customer-service tradition may find themselves at odds with management. But don’t be too quick to reprimand those with new ideas or methods. Fresh language and modes of communication enter the public consciousness regularly. Give companywide recognition to those who find ways to adapt — even if their initial efforts bend the rules a bit.

4. Be the customer. Among the most simple and practical ways to innovate your customer service is to simply pretend you’re a customer to get a firsthand view on how your employees treat those who contact your business. Business owners can make these calls themselves or, if your voice is too recognizable, find someone who’s less familiar but capable of taking detailed notes of the interaction.

Finding new ways to improve your company’s customer service isn’t easy. But innovations are always just one bright idea away. If you’d like more information and ideas about building your bottom line, contact our firm at (818) 789 1179.

© 2018

 

IRS Issues Guidance To Ease Transition To FASB’s New Revenue Recognition Rule

May 22 2018

In 2014, a new accounting standard on how to recognize revenue from contracts was issued by the Financial Accounting Standards Board (FASB). Now the IRS is allowing a new automatic change in accounting method for businesses to use to conform with the new financial accounting standard. This will allow for more book-tax conformity and facilitate accounting method change requests associated with adopting the new standard.

New accounting rules

Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, goes into effect in 2018 for public companies and 2019 for private ones. The new revenue recognition standard requires entities following U.S. Generally Accepted Accounting Principles (GAAP) to recognize contract revenue for promised goods and services to customers based on the following five steps:

1. Identify the contracts with a customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations.

5. Recognize revenue as the entity satisfies a performance obligation.

The new revenue recognition standard is a significant change from current accounting practices, particularly for technology firms, construction contractors and service providers with warranty and repair service contracts. However, the recognition rules for tax purposes remain unchanged.

Under the tax rules, businesses that follow the accrual method of accounting accrue income when the right to receive income is fixed and the amount can be determined with reasonable accuracy. This is known as the “all events” test.

IRS change of accounting method

Your business can apply for a change in accounting method by filing IRS Form 3115 and submitting detailed information about the change. To alleviate the administrative burden, the IRS created a list of “automatic” method changes whereby a business is deemed to have the consent of the IRS to change its accounting method if it’s within the scope of a revenue procedure and any related guidance for the specific method change.

When a business changes its accounting method for tax purposes, adjustments are generally required to be made to prevent items from being duplicated or omitted. Sometimes, the IRS allows a “cutoff” method instead, where only the items arising on or after the beginning of the year of change are accounted for under the new accounting method.

Syncing GAAP revenue and taxable income

Most entities would prefer to use the same method of recognizing revenue under GAAP as they do for reporting taxable income to the IRS. The new IRS guidance provides procedures to obtain automatic IRS consent to change to an otherwise permissible accounting method under ASU 2014-07, if such method change is otherwise permissible for federal income tax purposes and is made for the tax year in which a business adopts the new accounting standard.

Specifically, Revenue Procedure 2018-29 applies small business exception rules to more businesses and gives taxpayers the option of implementing the accounting method change either with an adjustment or on a cutoff basis. If needed, the IRS may issue additional guidance as the IRS and businesses obtain more experience with the interaction of the new standard with federal income tax accounting methods.

We can help

The new IRS guidance simplifies the procedures needed to align your taxable income with the amount of revenue reported on your financial statements. Contact us at (818) 789-1179 for answers to your questions about how to implement the changes.

© 2018

 

IRS Audit Techniques Guides Provide Clues To What May Come Up If Your Business Is Audited

May 21 2018

IRS examiners use Audit Techniques Guides (ATGs) to prepare for audits — and so can small business owners. Many ATGs target specific industries, such as construction. Others address issues that frequently arise in audits, such as executive compensation and fringe benefits. These publications can provide valuable insights into issues that might surface if your business is audited.

What do ATGs cover?

The IRS compiles information obtained from past examinations of taxpayers and publishes its findings in ATGs. Typically, these publications explain:

• The nature of the industry or issue,

• Accounting methods commonly used in an industry,

• Relevant audit examination techniques,

• Common and industry-specific compliance issues,

• Business practices,

• Industry terminology, and

• Sample interview questions.

By using a specific ATG, an examiner may, for example, be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the taxpayer resides.

What do ATGs advise?

ATGs cover the types of documentation IRS examiners should request from taxpayers and what relevant information might be uncovered during a tour of the business premises. These guides are intended in part to help examiners identify potential sources of income that could otherwise slip through the cracks.

Other issues that ATGs might instruct examiners to inquire about include:

• Internal controls (or lack of controls),

• The sources of funds used to start the business,

• A list of suppliers and vendors,

• The availability of business records,

• Names of individual(s) responsible for maintaining business records,

• Nature of business operations (for example, hours and days open),

• Names and responsibilities of employees,

• Names of individual(s) with control over inventory, and

• Personal expenses paid with business funds.

For example, one ATG focuses specifically on cash-intensive businesses, such as auto repair shops, check-cashing operations, gas stations, liquor stores, restaurants and bars, and salons. It highlights the importance of reviewing cash receipts and cash register tapes for these types of businesses.

Cash-intensive businesses may be tempted to underreport their cash receipts, but franchised operations may have internal controls in place to deter such “skimming.” For instance, a franchisee may be required to purchase products or goods from the franchisor, which provides a paper trail that can be used to verify sales records.

Likewise, for gas stations, examiners must check the methods of determining income, rebates and other incentives. Restaurants and bars should be asked about net profits compared to the industry average, spillage, pouring averages and tipping.

Avoiding red flags

Although ATGs were created to enhance IRS examiner proficiency, they also can help small businesses ensure they aren’t engaging in practices that could raise red flags with the IRS. To access the complete list of ATGs, visit the IRS website. And for more information on the IRS red flags that may be relevant to your business, contact us at (818) 789 1179.

© 2018

 

Which Benefits Do Employees Really Value?

May 18 2018

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Do You Need To Adjust Your Withholding?

May 18 2018


If you received a large refund after filing your 2017 income tax return, you’re probably enjoying the influx of cash. But a large refund isn’t all positive. It also means you were essentially giving the government an interest-free loan.

That’s why a large refund for the previous tax year would usually indicate that you should consider reducing the amounts you’re having withheld (and/or what estimated tax payments you’re making) for the current year. But 2018 is a little different.

TCJA and withholding

To reflect changes under the Tax Cuts and Jobs Act (TCJA) — such as the increase in the standard deduction, suspension of personal exemptions and changes in tax rates and brackets —the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks, generally reducing the amount withheld.

The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they might cause other taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA. So even if you received a large refund this year, you could end up owing a significant amount of tax when you file your 2018 return next year.

Perils of the new tables

The IRS itself cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld. If, for example, you itemize deductions, have dependents age 17 or older, are in a two-income household or have more than one job, you should review your tax situation and adjust your withholding if appropriate.

The IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations. The calculator reflects changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions.

More considerations

Tax law changes aren’t the only reason to check your withholding. Additional reviews during the year are a good idea if:

  • You get married or divorced,
  • You add or lose a dependent,
  • You purchase a home,
  • You start or lose a job, or
  • Your investment income changes significantly.

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

The TCJA and your tax situation

If you rely solely on the new withholding tables, you could run the risk of significantly underwithholding your federal income taxes. As a result, you might face an unexpectedly high tax bill when you file your 2018 tax return next year. Contact us at (818) 789  1179 for help determining whether you should adjust your withholding. We can also answer any questions you have about how the TCJA may affect your particular situation.

© 2018
 

Cost Control Takes A Total Team Effort

May 17 2018

“That’s just the cost of doing business.” You’ve probably heard this expression many times. It’s true that, to invoke another cliché, you’ve got to spend money to make money. But that doesn’t mean you have to take rising operational costs sitting down.

Cost control is a formal management technique through which you evaluate your company’s operations and isolate activities costing you too much money. This isn’t something you can do on your own — you’ll need a total team effort from your managers and advisors. Done properly, however, the results can be well worth it.

Asking tough questions

While performing a systematic review of the operations and resources, cost control will drive you to ask some tough questions. Examples include the following:

• Is the activity in question operating as efficiently as possible?

• Are we paying reasonable prices for supplies or materials while maintaining quality?

• Can we upgrade our technology to minimize labor costs?

A good way to determine whether your company’s expenses are remaining within reason is to compare them to current industry benchmarks.

Working with your team

There’s no way around it — cost-control programs take a lot of hard work. Reducing expenses in a lasting, meaningful way also requires creativity and imagination. It’s one thing to declare, “We must reduce shipping costs by 10%!” Getting it done (and keeping it done) is another matter.

The first thing you’ll need is cooperation from management and staff. Business success is about teamwork; no single owner or manager can do it alone.

In addition, best-in-class companies typically seek help from trusted advisors. An outside expert can analyze your efficiency, including the results of cost-control efforts. This not only brings a new viewpoint to the process, but also provides an objective review of your internal processes.

Sometimes it’s difficult to be impartial when you manage a business every single day. Professional analysts can take a broader view of operations, resulting in improved cost-control strategies.

Staying in the game

An effective, ongoing program to assess and contain expenses can help you prevent both gradual and sudden financial losses while staying competitive in your market. For further information about cost control, and customized help succeeding at it, please contact us at (818) 789 1179.

© 2018

 

What’s All The Buzz About XBRL?

May 16 2018

The Securities and Exchange Commission (SEC) requires public companies to provide their financial statements in the eXtensible Business Reporting Language (XBRL) format as an exhibit to their regulatory filings. But XBRL isn’t just for reporting to the SEC. There are many compelling reasons for public companies to expand their use of XBRL data — and for private companies and financial statement users to jump on the XBRL bandwagon, too.

Many uses

Introduced in 1999, XBRL is based on a complex technical infrastructure. It provides a universal standards-based method to prepare, publish, exchange and analyze financial data across disparate accounting and operating systems.

Using a tagging system, computers filter XBRL data “intelligently,” automating many aspects of report preparation, data collection and due diligence. Companies can apply XBRL to various types of business data, such as internal and external financial reports, tax returns and loan applications.

Potential upsides

This machine-readable reporting format makes financial statements more useful to researchers, regulators and investors. It has the potential to increase the speed, accuracy and usability of financial disclosure — and eventually reduce costs.

Companies that report financial data using XBRL can share it directly with their auditors and lenders. This significantly reduces the need to manually re-enter data into spreadsheets and other analytic software programs and repackage it into new formats. Automation, in turn, cuts data processing costs and minimizes human error.

Another upside is that XBRL permits automatic validation of financial data by highlighting inconsistencies, deviations from industry norms and even transaction patterns characteristic of fraudulent behavior. And it provides a global framework for exchanging financial information that transcends current language and reporting standards barriers. XBRL doesn’t replace current operating or accounting systems but, instead, piggybacks onto existing systems.

Further, XBRL speeds up the financial reporting process, facilitating real-time disclosures and continuous auditing, and eases the burden of Sarbanes-Oxley compliance for public companies. For companies making acquisitions, XBRL can link formerly incongruent systems, eliminating costly conversions to a common operating system.

Put XBRL to work for you

Companies that choose to adopt XBRL can convert data to this format in two ways. They can either 1) purchase off-the-shelf software and categorize line items themselves, or 2) outsource their XBRL projects. Once the company incurs initial setup costs, ongoing costs generally are minimal.

XBRL may ultimately reduce compliance costs through greater efficiency. Contact us at (818) 789 1179 for more information on switching over to this user-friendly reporting format.

© 2018

 

A Review Of Significant TCJA Provisions Affecting Small Businesses

May 15 2018

Now that small businesses and their owners have filed their 2017 income tax returns (or filed for an extension), it’s a good time to review some of the provisions of the Tax Cuts and Jobs Act (TCJA) that may significantly impact their taxes for 2018 and beyond. Generally, the changes apply to tax years beginning after December 31, 2017, and are permanent, unless otherwise noted.

Corporate taxation

  • Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Replacement of the flat personal service corporation (PSC) rate of 35% with a flat rate of 21%
  • Repeal of the 20% corporate alternative minimum tax (AMT)

Pass-through taxation

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
  • New 20% qualified business income deduction for owners — through 2025
  • Changes to many other tax breaks for individuals — generally through 2025

New or expanded tax breaks

  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million (these amounts will be indexed for inflation after 2018)
  • New tax credit for employer-paid family and medical leave — through 2019

Reduced or eliminated tax breaks

  • New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
  • New rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
  • New limitations on excessive employee compensation
  • New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Don’t wait to start 2018 tax planning

This is only a sampling of some of the most significant TCJA changes that will affect small businesses and their owners beginning this year, and additional rules and limits apply. The combined impact of these changes should inform which tax strategies you and your business implement in 2018, such as how to time income and expenses to your tax advantage. The sooner you begin the tax planning process, the more tax-saving opportunities will be open to you. So don’t wait to start; contact us at (818) 789 1179 today.

© 2018

 

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