Donald Sauder, CPA

Preface: Job costs are a decisive factor in service businesses. If you didn’t know your job costs before, call your CPA today.   What is Job Costing Do know your job costs; maybe you need an Excel document from Robert Cratchit? Costs count; and accurate job costing is a major component when analyzing your business profitability. If you have a team of service technicians who say service computer networks, how do you know how much to bid on a new server install, or client network upgrade? How do you calculate what to charge per service hour? For instance if one technician works on three projects in a day, how do you begin to calculate your cost for upgrading a hard drive, repairing a server power supply, and resolving malware concerns? Here’s Robert Cratchit’s expertise explained. Let’s say your service technicians costs $40 per hour including employee benefits, employer taxes, and perks. If a hard drive upgrade takes 3 hours, your cost is $40 * 3 = $120 for labor. So what should you charge? Let’s say you have 5 technicians who work a combined 420 billable hours per month. Your cost for employee wages would be approximately $1,600 per week (40 hours * $40 per hour), and $6,400 for the month ($1,600 * 4 = $6,400 – per technician, per month). Let’s say your overhead on the five technicians is $175,000 a year [rent, utilities, office supplies, advertising, office staff and sales reps]. In this instance your fixed cost for the service technicians salaries plus overhead is approximately $575,000 per year. At 420 billable hours per month average, your five technicians would work 5,040 hours a year. $575,000/5040 = $114 per hour of labor costs to breakeven. For an 8% net profit margin, you should charge at least $123 per hour ($123 * 5040…

Preface: Internal control processes are a vital component to financial reporting. If your business doesn’t give proper attention to internal controls or is foreign to those systems, this should give you an understanding of what internal controls are and how to important they are to quality financial reporting. Accounting with Appropriate Internal Control Processes The reliability of your businesses financial reporting is a process; and that process is also known as internal controls. Internal controls are a system of financial governance designed to facilitate quality assurance on your financial reporting, governance that provide users (you) with accurate financial data. If your business has not implemented a process of appropriate internal controls, that plan should be designed for your business sooner rather than later. Strong businesses have superb internal controls. A properly designed internal control plan contains i) policies and procedures that implement segregation of duties in accounting processes ii) hiring of qualified personnel to perform assigned responsibilities iii) provides for soundness of procedural authorization and reporting of financial transactions iv) monitors the practices of the personnel performing the accounting role(s). Segregation of duties minimizes the risk of fraud in your business and corresponding asset losses. Segregation of duties includes examples of the following – those who are issuing customer invoices should not collect checks and oversee accounts receivables; those in charge of accounts payable should not have check signing privileges, those who order supplies or inventory should not post the order on the general ledger or have control over accounts payable; those in charge of payroll should segregate the person who calculates the gross and net pay from the person who verifies the payroll balances and signs the checks. Segregation of duties is a preventive control. Hiring qualified personnel is a characteristic of a well designed process. A qualified staff will have…

Preface: Form 3115 is required when changing accounting methods to comply with IRS regulations. Changes can be either automatic or advanced consent required. Starting with the 2014 tax year IRS regulation adjusted the requirements for Form 3115 filings.   Changes in Accounting Method – 3115 Is your tax accountant suggesting a Form 3115 Change In Accounting Method to be filed for your business? Is it as complex as they quote? Here’s what you need to know. Form 3115 is filed when changing an overall method of accounting or changing the accounting treatment of any item. Form 3115 is most commonly filed for changes in a basis of accounting, e.g. from cash to accrual accounting, or to long-term contracts, depreciation or amortization changes, a change in 263A costs or inventory methods, or say warranty expenses. A Form 3115 filing is as complex as a small business tax return. Two options are available for filing a Form 3115 for a change in accounting method(s). The first option is an automatic change request; the second is option an advanced consent request. When applicable, an automatic change requests is the simplest filing of a Form 3115. An automatic request requires no user fee on behalf of the applying business. An automatic change request must be filed with an original timely filed federal tax return, including the extension date of the filing. Automatic change requests are not permitted when the business is under certain circumstances, say a tax audit, or in its final tax year as a trade or business, or the applicant made the change in method of accounting for the same item within the last five years. Automatic accounting method changes include changes in depreciation or amortization from an impermissible method to a permissible method. Let’s say the prior accountant applied wrong depreciation…

Preface: Partnership Section 754 basis step-ups are a complex area of the tax code. If you have a partnership, chances are you will be involved in Section 754 basis adjustments. Partnership Taxation: What is 754 Basis Step-Up If you are working on a partnership ownership change, you would be advised to have your tax accountant approve the deal before inking sale agreements. One of the common complexities is a Section 754 basis step-up. Technically, a 754 Basis Step-Up is an election in the partnership tax code permitting partners to adjust the basis of their partnership interest when a distribution, sale, or exchange of ownership occurs. A Section 754 adjusts the basis of a partnership inside basis. A Section 754 basis adjustments can be governed by Code Section 743 in the sale of partnership interest; or Code Section 734 in the distribution of property. A Section 754 can also result in a step-down of basis, but most common are basis step-ups. How a Section 754 works in theory? Let’s say that Karl and Harry each contribute $500,000 to a partnership and purchase investment land. After a few years, the land is appraised for $2,000,000. Since the partners contributed each $500,000, the partnership basis is $1,000,000. Let’s say Karl decides to sell his partnership interest to Monty for $1,000,000. The partnership capital accounts are $500,000, less real estate taxes, and property surveillance. Let’s say Karl and Harry contributed cash to finance these yearly expenses so the capital accounts maintain $500,000. When Karl sells his partnership interest, he realizes a $500,000 capital gain. Monty on the other hand, now has an outside basis of $1,000,000. This is where the Section 754 election works. The partnership can elect a Section 754 basis step-up and adjust the land value on the partnerships books higher to $1,500,000 of inside basis ($500,000…

Preface: It’s important to plan. Many entrepreneurs implement without proper planning and while that can be ok,  they could achieve so much more mapping a plan for the vision destination of  the business. Destination – Your Business MAP   20 years ago a man walked up to me at church, and point blank inquired, “If you get where you are going, where will you be”? Destination – it’s clearly important; destination matters. You don’t get lost driving to a local store for the 10th time. It’s when you step outside your comfort zone, i.e. new business, unfamiliar or new product or service areas in your business. To use the travel analogy, If you’re traveling from Washington DC to London, you will probably pay a pilot or captain and for numerous other peripheral services on the way. It will incorporate infrastructure designed to make reaching that destination achievable. The Chinese Admiral Zheng He didn’t make 7 successful voyages to Arabia, East Africa, India, Indonesia, and Thailand in the 1400th century without planning; and chances are he wasn’t the first to think about it, but the important fact, he had a destination in mind and planned appropriately. He also must have had a very high quality map or he wouldn’t have gotten back to China. Entrepreneurism is very similar. You need to map a plan to reach your destination. Few entrepreneurs invest the appropriate time to think through their business endeavors. Why? Do they think they’re too busy; it’s time and money wasted, and/or would require too much energy; or maybe they’re satisfied with the status quo? A Business MAP – Marketplace Assessment Profile, is a great way to reach your vision destination. A Business MAP is a business planning tool that helps you make sense of your business; the services(s) and/or products(s) viability in the marketplace, your businesses competitive advantages,…

Preface: The Obama Administration has developed a new savings tool that may be helpful for your employees. Interested..learn about the myRA here….. myRA – What is it A myRA (rhymes with IRA) account is a savings tool initiative from the Obama Administration. The myRA program was announced on January 28, 2014, by President Barack Obama during the 2014 State of the Union Address, quote “Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in.” After almost a one year pilot program, a myRA is an official savings tools for Americans who haven’t started savings for retirement. The intention of a myRA is to simplify savings for employees who do not have a 401(k) or pension at work. If you’re an employer, who doesn’t provide a 401(k) or pension coverage for your employees, you can encourage your employees to start using this new savings tool today. How does it work? To setup an account simple login to the myRA webpage. Three options are present for myRA account contributions; i) direct deposit of after-tax dollars from your paycheck, ii) one time deposits from a checking or savings account each year, or, iii) you can channel some of your federal tax refund into the account each year. A $25 investment will open a myRA account and continuing paycheck contributions can…

Preface: Sales tax is a unique are of the tax code. You should periodically check on sales tax compliance for business revenues with your tax advisor who can assess nexus risks.  PA Sales Tax 100.1 Sales tax is a State-per-State revenue tax assessed on regulated sales revenue that the legislation subjects to the sales tax within a specific State jurisdiction. Sales tax occurs when there is sales tax nexus. Rigid logic surrounds sales tax nexus, such as origin-based sales tax or destination-based sales tax, and the definition of nexus differs from state to state; most often it is considered to be a businesses physical presence in the state. Physical presence in PA can include such business activity as i) an office in the state, ii) a warehouse location, or storing inventory in the state, iv) an employee in the state, v.) delivery of merchandise in the state, or vi) leasing property in the state. If you are deemed to have sales tax nexus in the state, then you must charge sales tax on all applicable sales in that state. Sales tax laws in Pennsylvania are unique and specific. If the sales revenues are infrequent and if the seller is not in a business trade, and does not hold reoccurring sales more than three times a year, for no more than seven days in the year, no sales tax needs charged, e.g. if your neighbor holds a yard sales 5 times a year they may be audited for sales tax in Pennsylvania. If your business repairs vehicles, your labor is subject to sales tax; but if your labor is to repair or install an item, i.e. a new roof, and that new roof is part of the real estate, the labor is not subject to sales tax assessment. Food purchased with food stamps is…

Preface: Crowdfunding is developing into the future of business financing with the internet lowering the barriers between investors and entrepreneurs. Title IV is just one aspect of the JOBS Act that legislated crowdfunding into law.   Crowdfunding – What is Title IV with Regulation A+ The JOBS Act President Obama signed into legislation in 2012, is implementing incrementally. An acronym for Jumpstart Our Business Startups Act, The JOBS Act has multiple titles. The Act is designed to encourage funding for businesses in the USA, with easing of regulations on issuance of securities for funding business ventures. The JOBS Act simplifies the laws and regulations for companies to go public. Mid-summer 2015 Title IV of the JOBS Act was finalized in legislation. Title IV includes Regulation A+. Title IV of the JOBS Act permits non-accredited investors into crowdfunding larger capital raising projects. Title IV has two tiers. Tier 1 permits a company to raise as much as $20m, with required registration submitted each state the business seeks to raise money in. Tier II permits a company to raise $20m to $50m while circumventing the individual state registrations and regulation – a preemption of Blue Sky laws. Tier I and Tier II of Title IV are both considered Regulation A+. Title IV is a viable alternative to an IPO for many small business, who seek to acquire investor capital. Regulation A+ is great for business who want to raise capital from non-accredited investors, and have the revenue to support the business venture in a crowdfunding venture. Title IV is not for the smaller business. The cost to conduct a Regulation A+ offering is $70,000+/- and the annual reporting costs can be $15,000 to $20,000 or higher. Regulation A+ requires highly detailed disclosures, similar to an IPO. If your idea is confidential, crowdfunding probably isn’t…

Preface: Reverse mortgages permit homeowners, 62 years and older, to borrow money on home equity, without required repayment cash flow. This blog is written to help you understand when reverse mortgages can be helpful.   Reverse Mortgage — When it Makes Sense   A reverse mortgages a.k.a. a home equity conversion mortgage (HECM) is specifically designed to permit homeowners 62 years or older to draw equity from their homes. The draws on equity can be for any discretionary purpose deemed necessary on behalf of the homeowner, e.g. paying for new home improvements or additions, new car, grandchild’s education, or a bucket list vacation. A reverse mortgage converts a qualifying home into a type of ATM machine. Repayments on the reverse mortgage draws are not required until the borrower vacates the house or dies. Reverse mortgages simply permit a draw on equity for qualifying homeowners, without the required amortized repayments typical of a traditional mortgage, or home equity line of credit interest. What is the difference between a standard home equity line of credit and a reverse mortgage? For one, the points on a reverse mortgage are higher up-front than a line of credit, but on the other hand, interest payments commence immediately on a line of credit. For instance, if you draw on a home equity line of credit for financing a new roof, interest will begin immediately upon drawing the funds. With a reverse mortgage, you can too obtain a credit line too, up to say $200,000 and draw only $10,000 on the initial financing. The additional line of $190,000 can accessed in the future, same as a home equity line of credit; but you will not be required to make a monthly interest payment. The main difference between a home equity line of credit and home equity conversion mortgage…

Planning for Taxes – 2015   From: McClarigan CPAS: As Q4 of the 2015 tax year orbits, it is a good time to think of planning tax strategies that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress’s failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later). These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70-1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence. For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first-year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax. The latter tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000…