Lessons for Accountants from Self-Driving Cars How to make the leap from sci-fi fantasy to business reality in six steps. By Hitendra Patil Accountaneur The Uberization of Accounting has already begun, and disruption is creating a “no-choice future” for some firms…………………………………………………………………………………………. http://cpatrendlines.com/2017/02/20/seven-lessons-accountants-self-driving-cars/      

Preface: Construction accounting – unbeknownst to many in the industry,  contains special accounting rules for long-term contracts. Businesses with annual construction contracts in excess of $10m are required to apply long-term contract accounting. What is it, and what should you know?   Accounting for Long-Term Contracts Long-term contracts for tax law recognition-of-income purposes are contracts for manufacturing, building, installing or constructing property that are not completed in tax year in which they are entered into.  A contract is considered to be for building, installation or construction of property if it provides for the erection of a structure, such as a building, oil well or other improvement, bridge, railroad or highway, or large industrial machine.   Taxable income from long-term contracts generally must be determined using the percentage of completion method.   Under the percentage-of-completion method, gross income is reported annually according to the percentage of the contract completed in that year. The completion percentage must be determined by comparing costs allocated and incurred before the end of the tax year with the estimated total contract costs (cost-to-cost method or simplified cost-to-cost method).  A taxpayer who has entered into a small construction contract or home construction contract, however, may use an exempt contract method of accounting.   Direct-benefit services. Income and expenses attributable to engineering or architectural services are accounted for as part of the long-term contract if they enable the taxpayer to construct or manufacture the qualifying subject matter of the long-term contract.  Other income and expense items, such as investment income, expenses not attributable to such contracts, and costs incurred with respect to any guarantee, warranty, maintenance or other service agreement relating to the subject matter of such contracts, including engineering activity performed after the delivery and acceptance of the subject matter of the contract, must be accounted under the taxpayer’s…

Preface: Vision without action is merely a dream…Action without vision just passes the time….Vision with action can change the world – Quote: Joel Barker.   Answer the Question — What Your Plan Is   Proper planning prevents variances in implementation. If you want to improve the performance of your business, you need a plan; and if you’re already implementing reflectively prepared plans, your business probably doesn’t have poor performance. It pays to plan; it pays to budget; it pays to accurately count the cost, and measure the reward, great or small (i.e. is the new airplane for business, or only a luxurious hobby [cost vs. benefit – do you need a depreciation expense and want to pay airplane maintenance yearly, or could you charter flights for less stress when the need arises] ).   Proper planning circulates around accurate financial measures. It’s how you track performance (e.g. is net income increasing?), budget vs. actual (e.g. are cost of goods sold similar, higher, or lower than prior year?), and financial measures are also the inputs for trends and metrics.   Tactics vs. Strategy   You can implement idea’s with little planning and achieve tactical success. But tactical success must always be woven into strategic success to truly succeed. The difference between tactical and strategic success are your entrepreneurial vision and entrepreneurial resources.   Entrepreneurial resources are a combination of talent, expertise, capital, and networks.  The expertise and talent to research and develop are different than the experience and talents required to market and sell a product that is built or manufactured. Additionally, the network of supportive talent and expertise that you draw upon for idea’s, advice, and professional services are also key instruments to properly strategize solutions to entrepreneurial concerns and ceilings; and more importantly – avoid financial avalanches.   Entrepreneurial vision is…

Preface: Is your business plan Drive 123191 or Drive 123116?   Drive 123191.         Drive 123116.  

Preface: What would a customer like this cost your business? A Virginia man sent a message to the Department of Motor Vehicles earlier this week when he used 300,000 pennies to pay the sales tax on two new cars.  

Preface: Form 4797 easily could sound like a part of the national export strategy compliance reporting from the Department of Commerce or Customs and Borders Protection. It is an IRS workpaper for sales of business assets. Business property is typically either Section 1231, 1245 or 1250 property and the sale is listed on a 4797.   Form 4797 – Sale of Business Property   When your business sells a company vehicle, or a customer list, how does your tax accountant report the gain? Answer: On Form 4797 “Sale of Business Property.” The IRS tax code requires the reporting of a sale of business property in a different section of the tax code than ordinary revenues, from say a sale of inventory (Section 471.) The most common gain and loss code sections for business property are Section 1231, Section 1245 and Section 1250.   Section 1231 gains and losses can be taxed as either ordinary income or loss, or capital gain, depending on the characteristics of the transaction. Section 1231 assets are the exchanges of 1) real property, e.g. leasehold improvements; or 2) depreciable property used in a business and held for more than a year, [typically property that is held for rental or royalties income] or 3) Section 197 intangibles such as goodwill, customer lists or copyrights. Note: the origin of the Section 197 intangible is a key factor in the tax attributes of the transaction, e.g. self-created intangibles are always ordinary income. Other section 1231 property include sales or exchanges of livestock, unharvest crops, or timber. To determine if your asset sale is ordinary or capital you must net all section 1231 gains and losses for the year. If you have a net section 1231 loss, it is an ordinary loss. If you have a net section 1231 gain, it is ordinary…

Preface: Optimizing vendor costs, or purchases, is an opportunity to increase profits for any business. Astute negotiating with vendors can often lead to an increase in gross profit and net income percentages. Consider yourself a good negotiator? Is that D10T the better deal in a box? Let’s say it practical.   Vendor Management and Negotiation   What would your business do without good vendors? Maintaining supportive affinity with vendors is vital to a successful business; albeit a top priority. Vendor terms, discounts and payment negotiations, can reduce your cost of goods sold and increase net income with a little extra effort; the greater your cost of goods sold, the more value your business can obtain from optimal vendor negotiations. For instance, if your cost of goods sold is $870,000, a savings of 2% on vendor terms is $17,400. If cost of goods sold is 60% of sales on $1,450,000, for either the month or the year, then your net income increases 1.2% from good cash management using vendor discounts. If cost of goods sold are say $2,500,000, a 2% cost reduction is $50,000. It’s easy to see, negotiating vendor terms can be as important as advertising to increase revenue.   Vendors are people, just like your customers. You should learn the names of those in the accounting department who send invoices and process payments. Who has key decision making authority at the vendors to negotiate discounts? Treat your vendors the same way you want your customers to treat you. If cash is restricted, tell your vendors, be proactive in communicating late payments; a good vendor will have stringent terms on payment, but most often understand if you communicate honestly the situation. Yet, if you can pay something towards the balance, it is always advisable to do so.   Before you begin negotiating vendor terms, research thoroughly the…

Preface: Amortization of intangible assets is similar yet different than depreciation. It is governed by a different Section of the IRC and methods are unique to the intangible asset based on the IRC code section relevant to various intangible. This blog is provide an explanation of amortization and namely IRC Code Section 197 relevant to the majority of small business intangible assets. Amortization of a Businesses Intangible Assets   Amortization is the expensing of intangible asset costs ratably over the intangible assets life. Amortization is governed with Internal Revenue Code (IRC); including section 197 and 195. Section 197 assets have a three factor test 1. They must be listed in Section 197 descriptions, 2. They must have been purchased, 3. They must be held in connection with the conduct of trade of business or investment activity. Factor 1 assets in Code Section 197 include: goodwill, workforce in place, patents, copyrights, formulas, processes, designs, patterns, market share, customer lists, licenses, permits, governmental rights, covenants not to compete, franchise fees, trademarks, trade names, contracts for use of acquired intangibles, and information bases in a business. This is not a comprehensive list of Section 197 assets, but the majority of the typical Section 197 intangibles.   Intangibles in Section 197 are expenses ratably over 15 years, beginning with the month of the acquisition. In businesses where intangibles are purchases along with other business assets, the intangible assets are determined by subtracting the cost of Class 1, Class 2 and Class 3 assets from the purchase price. This information is listed on IRS Form 8594 Asset Acquisition Statement.  For example, if a business is purchases $150,000 of intangible assets, including goodwill and patents in a acquisition, the intangible costs would be expensed at say $10,000 for 15 years, and not depreciated at standard MACRS methods…

Preface: Alternative minimum taxes (AMT) are increasingly applicable to taxpayers. Understanding what AMT is and being aware of the additional tax cost, as earnings increase, is the purpose of this blog.   What is Alternative Minimum Tax?   The Internal Revenue Codes Section 55, is a shadow tax system, designed to collect more tax revenues and is becoming more relevant an increasing number of taxpayers resulting from inflationary increases in wages and business earnings. In fact, more than 4 million taxpayers filed Form 6251 for an Alternative Minimum Tax (AMT) liability in the previous year. AMT was introduced to the tax code in 1969 after Treasury Secretary Joseph Barr testified that in 1967, 155 individuals paid no federal income tax with incomes over $200,000 at that time (the equivalent of say $1.2m today). To resolve that problem, Congress added a minimum tax feature the Internal Revenue Code, hence today’s code Section 55, and called AMT after the 1982 modification of IRC Section 55. AMT tax calculations involve adjustments to taxable income and preferences designed to either eliminate or defer tax deductions for AMT purposes. To name a few adjustments and preferences: medical expenses to the extent they exceed 10% on AGI and not 7.5% for regular tax; state and local taxes are not deducted for AMT purposes from itemized deductions, so therefore, taxes for income to state and local authorities, sales tax, property taxes etc. are not deduction for AMT. This reduces the Schedule A itemized deductions for income earners subject to AMT. In addition, numerous miscellaneous itemized deductions subject to the 2% floor are not deductible for AMT, i.e. investment advisor fees, and portfolio management fees say or unreimbursed employee business expenses. A planning tip for AMT is to reduce withholdings and quarterly estimates in the years subject to AMT so…

Preface: Gifting of assets is a tax strategy typically referenced in December. This blog is help entrepreneurs understand the gift options that can work for a specific gifting idea. Tax Strategies With the Gifting of Assets Reducing taxes can sometimes involve the gifting and transfer of assets (although it doesn’t reduce your taxes) to family or friends.  Numerous strategies for this are 1. Using the annual gift tax exclusion; 2. Using the lifetime exemption; 3. Making direct payments of medical or education expenses that qualify for the exclusion; 4. Contributing to a 529 qualified tuition plan or Coverdell Education Savings Account; 5. Transferring assets to a spouse; 6. Transferring assets to a charity. Gifting is a common form of transferring taxable assets for most taxpayers among family and friends. An annual exclusion for gifts from the IRS taxability and reporting is below a threshold of $14,000 for 2016 and 2017. Therefore, you can gift up to $14,000 to another individual, of fair market value property without any reporting requirements in those years. If you and a spouse are gifting the balance then the value increases to $28,000, i.e. $14,000 per taxpayer. If you and your spouse gift to another couple, say a child and spouse, then the balance increases to $56,000, e.g. $14,000 per taxpayer to two individuals each. Gift in excess of $14,000 to an individual requires the filing of a federal gift tax Form 709 for IRS purposes. A gift is a transfer to an individual either directly or indirect where full consideration is not received in return. Gifting of assets must be conventional, i.e. you can’t gift $10,000 to an individual for a free vehicle, so they can avoid taxable income; neither can you gift for payments of landscape or lawn work at your home a friendly vendors avoidance of income taxes,…