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Two puzzle pieces fitting together one with a light bulb the other a dollar signMany companies reach a point in their development where they have to make an important decision: Innovate themselves or acquire a competitor? Of course, it isn’t always an either/or decision. Nonetheless, business owners should consider the pluses and minuses of both approaches.

Innovating to grow

Innovation is a broad term that encompasses many strategies — all of which are intended to help the company achieve goals such as boosting profits, improving cash flow, or diversifying products or services. Common strategies are:

  • Research and development of new products,
  • New market penetration via geographic expansion or enhanced product/service offerings, and
  • Increased productivity resulting from internal improvements or enhancements.

Each strategy takes time, effort and capital. Understandably, business leaders can be hesitant to devote such vital resources to innovation initiatives and risk decreases in productivity and profitability.

Combining companies

For companies that don’t want to bet the farm on internal development, acquisitions can be appealing. If you’re looking to expand a product line, for example, it might be more time- and cost-effective to buy a competitor that already offers the goods you want.

Your acquisition target has already done the hard work — including funding, testing and creating the product or service and building a client base. By buying this competitor, you may incur less risk than you would by investing your own capital and building the product from scratch. The same holds true for geographic expansion and productivity improvements.

But business combinations come with their own risks. To fully benefit from any acquisition, your company needs to “stick the landing” — efficiently integrate operations and retain divisions and employees capable of ensuring that innovations continue to pay off. For many buyers, that’s a tall order.

Considering your options

In an ideal world, companies would devote resources to innovation and also make the occasional acquisition to bolster their standing in particular markets. But most companies don’t have the luxury to do both simultaneously. Please contact us for help examining the risks and potential rewards associated with each option.

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Dashboard for your businessWould you drive a car without a functional dashboard? Perhaps once a month someone could tell you how fast you were going and how much fuel you had left. Sound good? Probably not. Yet this is how many business owners run their companies.

The good news is there’s a solution. With the right software and some help from our firm, you can regularly receive dashboard reports that provide a one- or two-page summary of key business performance metrics in a concise, visual format.

Good looking info

Similar to a car’s control panel, dashboard reports provide business owners and managers with timely, relevant input to make quick but informed decisions. Everything in a dashboard report can typically be found elsewhere in the company’s financial reporting systems, just in a less user-friendly format.

Believe it or not, the concept of dashboard reports has been around since at least the 1990s, when they originally gained popularity. But now, thanks to 21st century technology, these reports are even easier to generate and distribute. Many companies offer them to ownership and management via an internal website or weekly e-mail blasts.

The right metrics

The critical question to ask when creating a dashboard report is: Which metrics should we include? The right answer depends on, among other things, current economic conditions, your industry and the specifics of your business operations. Nonetheless, most dashboard reports include financial ratios such as:

  • Gross margin [(revenues – cost of sales) / revenues],
  • Current ratio (current assets / current liabilities), and
  • Total asset turnover (sales / total assets).

From there, industry-specific performance metrics are typically added. For example, a warehouse might report daily shipments or inventory turnover, not just total asset turnover. Or a retailer might provide sales graphs that highlight product mixes, sales rep performance, daily units sold and variances over the same week’s sales from the previous year.

Here to help

The purpose of dashboard reports is to quickly identify trends that require corrective actions. Just remember that they’re no replacement for sound, well-maintained financial statements. Please contact us for help with both.

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College Students Don't Fall for the Federal Student Tax ScamAs you settle into your fall semester routine, both the FBI and the IRS want you to be alert for calls from scammers. The calls may spoof a legitimate number on your caller ID, and appear to come from an actual government agency, including the FBI or IRS. The caller will demand immediate payment of delinquent taxes, such as the non-existent "Federal Student Tax," or student loans, dues, or parking tickets. If you receive one of these calls, disconnect. Legitimate government agencies will not ask you for immediate payment, nor request credit or debit card information over the telephone. 

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Thank you to all our employees for voting in the News Journal's Top Work Place survey this summer. We are honored to be listed 5th in the small business category with a special award in the Ethics category and the highest ranking CPA firm - for the 9th year in a row.  

To see the full article, please visit Delaware Online

 

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Form 1120S Tax Return for S CorpsAn S corporation is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing an overall tax plan.

In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.

These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.

Other key points to consider when developing a comprehensive tax strategy include:

  •  the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
  • reporting requirements for the domestic production activities deduction;
  • the tax treatment of fringe benefits;
  • below-market loans between shareholders and S corporations; and
  • IRS scrutiny of distributions to shareholders who have not received compensation.

We can assist you in identifying and maximizing the potential tax savings. Please call our office at your earliest convenience to arrange an appointment.

 

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Tax Consequences for Self-Employed Individuals

Owning your own business can be very rewarding, both personally and financially. Being the sole decision-maker for this important undertaking can also be overwhelming. Business owners have many choices to make, and these decisions involve tax consequences that are not always foreseen. We can help you minimize your overall tax burden by identifying and maximizing business deductions, providing guidance on substantiation of expenses, and exploring tax planning alternatives that are uniquely available to the self-employed.

Some frequently overlooked business expenses that you may be able to deduct include moving expenses, costs of travel away from home, entertainment expenses, and expenses related to a home office. Code Sec. 179 expense allowances on the purchase of new equipment can provide a significant deduction. In addition, there are multiple benefits when you employ your spouse, child, or other family member in the business.

There are some risks involved in adopting tax positions related to operating a business as an independent contractor. For example, the distinction between employee and independent contractor is an issue the IRS subjects to special scrutiny. As a self-employed individual, you must comply with these rules for yourself or for any workers that you hire. If you are an employer, you must withhold income and employment taxes from an employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC, Miscellaneous Income. Failing to make the right classification, however, could result in additional taxes, interest and penalties.

The IRS offers an amnesty program called the Voluntary Classification Settlement Program (VCSP) to encourage employers to reclassify their workers as employees for employment tax purposes for future tax periods. Under the VCSP, employers are allowed to prospectively treat the workers as employees at a cost that is 10 percent of what is normally owed in a worker misclassification situation.

Complex rules and calculations are involved in many of the planning opportunities that are available to you. We will be happy to review your overall tax scenario in order to maximize your tax savings. Please contact our office at your earliest convenience to make an appointment.

 

 

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We know that you have worked hard for your money and would like to reap the benefits to the greatest extent possible. Your ultimate goal is to sustain a successful wealth-building strategy while avoiding unnecessary and expensive tax consequences. We are interested in helping you achieve these objectives.

For the last few years, there has been talk of major tax reform that would place an increased tax burden on higher income individuals. Some budget proposals include revenue raisers with increased taxes on high-income individuals and new taxes on foreign earnings of U.S. multinational firms. The so-called “Buffet Rule,” which would impose a minimum tax rate of 30 percent on adjusted gross income (AGI) over $1 million, is again being touted as an option, along with another increase in the top effective capital gains and dividends rate.

Although it is uncertain when or if tax reform will be enacted, it is wise to weigh your options carefully with higher tax rates looming on the horizon. Higher income individuals like you must carefully structure your financial transactions in order to minimize your tax burden.

Some of the issues that may impact your tax planning strategy for 2016 include:

  • your marginal tax rate;
  • personal exemption and itemized deduction phaseouts;
  • additional 0.9 percent Medicare tax on wages and self-employment income over threshold amounts;
  • net investment income tax of 3.8 percent for taxpayers with modified AGI exceeding threshold amounts;
  • a capital gain rate of 20 percent for taxpayers in the highest tax bracket;
  • gain exclusion for small business stock acquired in 2016 or later and held for more than 5 years;
  • foreign account disclosure and reporting requirements and related enforcement penalties;
  • in-service rollovers to designated Roth accounts without the imposition of a 10-percent additional tax on early distributions;
  • IRA distributions to charity of up to $100,000;
  • strict rules about deducting passive activity losses (PALs); and
  • alternative minimum tax (AMT).

As you can see, the more complex issues faced by higher-income individuals create a challenging planning environment for the 2016 tax filing season. We would like to meet with you to discuss the options that are best suited to meet your personal financial goals while minimizing your tax liability. Please contact our office at your earliest convenience to make an appointment.

 

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Tax Savings for Charitable Donations

Significant tax savings can be achieved through a properly planned program of gifts to charity. Although a contribution may be motivated by humanitarian reasons, it is nevertheless wise to take the tax considerations into account when making a contribution. Charitable giving can be divided into two general categories. First, there are donations that are made on a regular basis and involve relatively small amounts. Second, there is the large extraordinary donation often associated with estate planning. Different planning concepts govern each type of donation.

Individuals, such as you, who make charitable contributions, should take into consideration a number of factors when making the decision as to when and how much to contribute, including the deduction-limitation rules. Generally, the amount that you may deduct in a tax year cannot exceed 50% of your adjusted gross income. (Fortunately, the amount in excess of the limitation can be carried forward five years). However, lower percentages apply when donations are made to certain donees, when the contribution consists of capital gain property, and when contributions are made “for the use of” a donee rather than “to” a donee.

The IRS requires that contributions of $250 or more must be substantiated in order to be deductible. The burden is placed on you, as the donor, to request written substantiation because a canceled check may not be sufficient to support a deduction. The amount of the contribution is fully deductible whether it is paid by cash, check or credit card. However, a charitable deduction cannot be based on a mere pledge to pay. The pledge must actually be paid before the end of the year in which the deduction is claimed.

A charitable deduction is not allowed to the extent that you receive a benefit for the contribution, such as admission to a charity ball, banquet, show or sporting event.  In such cases, payments qualify for the deduction only to the extent they exceed the fair market value of the privileges or other benefits received. In addition, no charitable deduction may be claimed for travel expenses, including meals and lodging, if there is a significant element of personal pleasure, recreation or vacation present in the travel.

A deduction is not allowed for the value of services contributed to the charitable organization. However, if you are active in such organizations, you should be aware that out-of-pocket expenses incurred while performing volunteer services are deductible as a charitable contribution. If you use your auto, you may also be able to deduct the standard mileage allowance of 14 cents per mile.

Noncash contributions present a unique set of planning opportunities. There are special rules for the donation of cars, boats, and planes if the claimed value exceeds $500. If you have appreciated assets, you may want to consider donating the asset rather than selling and donating the proceeds. Using this approach allows you to avoid the capital gains tax that results from selling the asset. In addition, the deduction amount is for the fair market value of the asset at the time of the donation, regardless of your basis. There are additional limitations and elections that must be considered when donating assets instead of cash, including the need for an appraisal.

Large contributions require special tax-planning considerations. First, you must determine whether or not it is advisable to make a contribution during your lifetime or at death. Thus, your income and prospective estate tax brackets must be considered. You should take into consideration the income tax deduction limitations mentioned above, and the fact that there are no limitations for estate tax charitable contribution deductions. Second, you should consider whether you can afford the gift, not only in the current year, but in future years as well. This requires an analysis of the financial needs of you and your family, which may indicate that some form of deferred charitable giving is appropriate.

We can assist you with your short-term and long-term charitable giving plans and answer any questions you may have regarding your overall tax plan. Please call our office at your earliest convenience to arrange an appointment.

 

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buying a house for tax planning

Buying a home is the single most valuable investment most families make, and home ownership offers tax breaks that make it the foundation for your overall tax planning. The tax law provides numerous incentives to home ownership, including the following:

  • Buying, rather than renting, replaces nondeductible rent with deductible mortgage interest.
  • Taxpayers can deduct an unlimited amount of property tax they pay on any number of residences.
  • Homeowners can exclude up to $250,000 of gain ($500,000 for married couples filing jointly and certain surviving spouses) from taxable income when they sell.
  • There is no penalty for an early withdrawal from an IRA for a “first-time” homebuyer for up to $10,000 so long as the proceeds are used for acquisition of a home.
  • Self-employed individuals may deduct expenses for a portion of the home used for business. A simplified optional method for claiming a home office deduction is now available.
  • Energy credits are available for environmentally friendly and ecologically responsible home-related expenditures.

Unless retroactively extended by Congress, the following home-friendly provisions are not available in 2015:

  • The exclusion from gross income for discharges of qualified principal residence indebtedness,  and
  • The mortgage premium insurance deduction.

You may benefit from a close review of these provisions, particularly if you are considering transactions involving your home, including selling, refinancing, or renting. Many home ownership tax benefits also apply to a second home. We would like to assist you with home ownership as it applies to your overall tax plan. Please call our offices at your earliest convenience to arrange an appointment.

 

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Retirement Savings lock box

In recent years, many tax-favored options have become available to self-employed individuals to provide for their retirement. Tax planning for retirement can include deductible contributions to a Keogh plan, traditional or Roth IRA, SEP plan, SIMPLE plan or a one-person 401(k) plan. You may wish to consider implementing one of these plans for yourself and/or your employees to benefit from a current tax year deduction and accumulate tax-deferred retirement savings.

Each of these plans has advantages and disadvantages, and some may not be applicable to your situation. For example, a sole-owner 401(k) retirement plan allows a contribution for you as both an employer and as an employee. Therefore, a sole-owner 401(k) plan may provide for the largest deductible contribution. However, a sole-owner 401(k) is not available to the self-employed with employees other than a spouse or relative. As an alternative, a Keogh plan provides more flexibility, but is more complicated to maintain than a SEP or SIMPLE plan and may have additional administrative costs. Ultimately, the choice of savings vehicle will depend on factors related to your business and your retirement needs. Regardless of which plan you qualify for or what your retirement needs are, it is important to begin planning now for your retirement.

Please call our office to arrange an appointment. We will be happy to discuss the various retirement plan options and how they might apply to your business. 

 

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