Working capital management is critical to business success
Working capital management is critical to business success
Success in business is often measured in profitability — and that’s hard to argue with. However, liquidity is critical to reaching the point where a company can consistently turn a profit.
Even if you pile up sales to the sky, your bottom line won’t flourish unless you have the cash to fund operations to fulfill all those orders. The good news is there’s a tried-and-true way to stay liquid while you grow your company. It’s called working capital management.
Multifunctional metric
Working capital is a metric — current assets minus current liabilities — that’s traditionally used to measure liquidity. Essentially, it’s the amount of accessible cash you need to support short-term business operations. Regularly calculating working capital can help you and your leadership team answer questions such as:
- Do we have enough current assets to cover current obligations?
- How fast could we convert those assets to cash if we needed to?
- What short-term assets are available for loan collateral?
Another way to evaluate liquidity is the working capital ratio: current assets divided by current liabilities. A healthy working capital ratio varies from industry to industry, but it’s generally considered to be 1.5 to 2. A ratio below 1.0 typically signals impending liquidity problems.
For yet another perspective on working capital, compare it to total assets and annual revenue. From this angle, working capital becomes a measure of efficiency.
Working capital requirement
The amount of working capital your company needs, known as its working capital requirement, depends on the costs of your sales cycle, operational expenses and current debt payments.
Fundamentally, you need enough working capital to finance the gap between payments from customers and payments to suppliers, vendors, lenders and others. To optimize your business’s working capital requirement, focus primarily on three key areas: 1) accounts receivable, 2) accounts payable and 3) inventory.
High liquidity generally equates with low credit risk. But having too much cash tied up in working capital may detract from important growth initiatives such as:
- Expanding into new markets,
- Buying better equipment or technology,
- Launching new products or services, and
- Paying down debt.
Failure to pursue capital investment opportunities can also compromise business value over the long run.
3 critical areas
The right approach to working capital management will obviously vary from company to company depending on factors such as size, industry, mission and market. However, as mentioned, there are three primary areas of the business to focus on:
1. Accounts receivable. The faster your company collects from customers, the more readily it can manage debt and capitalize on opportunities. Possible solutions include tighter credit policies, early bird discounts and collections-based sales compensation. Also, continuously improve your administrative processes to eliminate inefficiencies.
2. Accounts payable. From a working capital perspective, you generally want to delay paying bills as long as possible — particularly those from noncritical suppliers, vendors or other parties. One exception to this is when you can qualify for early bird discounts. Naturally, delaying payments should never drift into late payments or nonpayment, which can damage your business credit rating.
3. Inventory. If your company maintains inventory, recognize the challenge it presents to working capital management. Excessive inventory levels may dangerously reduce liquidity because of restocking, storage, obsolescence, insurance and security costs. Then again, insufficient inventory levels can frustrate customers and hurt sales. Be sure to give your inventory the “TLC” it deserves — including regular technology upgrades and strategic reconsideration of optimal levels.
The right balance
It isn’t easy to strike the right balance of maintaining enough liquidity to operate smoothly while also saving funds for capital investments and an emergency cash reserve. Our firm can help you assess precisely where your working capital stands and identify ways to manage it better.
How businesses can better retain their salespeople
How businesses can better retain their salespeople
The U.S. job market has largely stabilized since the historic disruption of the pandemic and the unusual fluctuations that followed. But the fact remains that employee retention is mission-critical for businesses. Retaining employees is still generally less expensive than finding and hiring new ones. And strong retention is one of the hallmarks of a healthy employer brand.
One role that’s been historically challenging to retain is salesperson. In many industries, sales departments have higher turnover rates than other departments. If this has been the case at your company, don’t give up hope. There are ways to address the challenge.
Lay out the welcome mat
For starters, don’t focus retention efforts only on current salespeople. Begin during hiring and ramp up with onboarding. A rushed, confusing or cold approach to hiring can get things off on the wrong foot. In such cases, new hires tend to enter the workplace cautiously or skeptically, with their eyes on the exit sign rather than the “upper floors” of a company.
Onboarding is also immensely important. Many salespeople tell horror stories of being shown to a cubicle with nothing but a telephone on the desk and told to “Get to it.” With so many people still working remotely, a new sales hire might not even get that much attention. Welcome new employees warmly, provide ample training, and perhaps give them a mentor to help them get comfortable with your business and its culture.
Incentivize your team
Even when hiring and onboarding go well, most employees will still consider a competitor’s job offer if the pay is right. So, to improve your chances of retaining top sales producers and their customers, consider financial incentives.
Offering retention bonuses and rewards for maintaining or increasing sales — in addition to existing compensation plans — can help. Make such incentives easy to understand and clearly achievable. Although interim bonus programs might be expensive in the near term, they can stabilize sales and prevent sharp declines.
When successful, a bonus program will help you generate more long-term revenue to offset the immediate costs. That said, financial incentives need to be carefully designed so they don’t adversely affect cash flow or leave your business vulnerable to fraud.
Give them a voice
Salespeople interact with customers and prospects in ways many other employees don’t. As a result, they may have some great ideas for capitalizing on your company’s strengths and shoring up its weaknesses.
Look into forming a sales leadership team to help evaluate the potential benefits and risks of goals proposed during strategic planning. The team should include two to four top sellers who are given some relief from their regular responsibilities so they can offer feedback and contribute ideas from their distinctive perspectives. The sales leadership team can also:
- Serve as a clearinghouse for customer concerns and competitor strategies,
- Collaborate with the marketing department to improve messaging about current or upcoming product or service offerings, and
- Participate in developing new products or services based on customer feedback and demand.
Above all, giving your salespeople a voice in the strategic direction of the company can help them feel more invested in the success of the business and motivated to stay put.
Assume nothing
Business owners and their leadership teams should never assume they can’t solve the dilemma of high turnover in the sales department. The answer often lies in proactively investigating the problem and then taking appropriate steps to help salespeople feel more welcomed and appreciated. We can help your company calculate turnover rate, identify and track its hiring and employment costs, and assess the feasibility of financial incentives.
Advantages of keeping your business separate from its real estate
Advantages of keeping your business separate from its real estate
Does your business require real estate for its operations? Or do you hold property titled under your business’s name? It might be worth reconsidering this strategy. With long-term tax, liability and estate planning advantages, separating real estate ownership from the business may be a wise choice.
How taxes affect a sale
Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.
However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate is transferred to a pass-through entity instead, the profit upon sale will be taxed only at the individual level.
Safeguarding assets
Separating your business ownership from its real estate also provides an effective way to protect the real estate from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.
The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.
Estate planning implications
Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but all members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one member and the real estate to another.
Handling the transaction
If you’re interested in this strategy, the business can transfer ownership of the real estate and then the transferee can lease it back to the company. Who should own the real estate? One option: The business owner can purchase the real estate from the business and hold title in his or her name. One concern though, is that it’s not only the property that’ll transfer to the owner but also any liabilities related to it.
In addition, any liability related to the property itself may inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.
An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.
An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.
Tread carefully
It isn’t always advisable to separate the ownership of a business from its real estate. If it’s a valuable move, the right approach will depend on your individual circumstances. Contact us to help determine the best way to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.
Understanding your obligations: Does your business need to report employee health coverage?
Understanding your obligations: Does your business need to report employee health coverage?
Employee health coverage is a significant part of many companies’ benefits packages. However, the administrative responsibilities that accompany offering health insurance can be complex. One crucial aspect is understanding the reporting requirements of federal agencies such as the IRS. Does your business have to comply, and if so, what must you do? Here are some answers to questions you may have.
What is the number of employees before compliance is required?
The Affordable Care Act (ACA), enacted in 2010, introduced several employer responsibilities regarding health coverage. Certain employers with 50 or more full-time employees (called “applicable large employers” or ALEs) must use Forms 1094-C and 1095-C to report information about health coverage offers and enrollment for their employees.
Specifically, an ALE uses Form 1094-C to report each employee’s summary information and transmit Forms 1095-C to the IRS. A separate Form 1095-C is used to report information about each employee. In addition, Forms 1094-C and 1095-C are used to determine whether an employer owes payments under the employer shared responsibility provisions (sometimes referred to as the “employer mandate”).
Under the ACA mandate, an employer can be penalized if it doesn’t offer affordable minimum essential coverage that provides minimum value to substantially all full-time employees and their dependents. Form 1095-C is also used in determining employees’ eligibility for premium tax credits.
If an employer has fewer than 50 full-time employees, including full-time equivalent employees, on average during the prior year, the employer isn’t an ALE for the current year. That means the employer isn’t subject to the employer shared responsibility provisions or the information reporting requirements for the current year.
What information must be reported?
On Form 1095-C, ALEs must report the following for each employee who was a full-time employee for any month of the calendar year:
- The employee’s name, Social Security number (SSN) and address,
- The Employer Identification Number (EIN),
- An employer contact person’s name and phone number,
- A description of the offer of coverage (using a code provided in the instructions) and the months of coverage,
- Each full-time employee’s share of the coverage cost under the lowest-cost, minimum-value plan offered by the employer, by calendar month, and
- The applicable safe harbor (using one of the codes provided in the instructions) under the employer shared responsibility or employer mandate penalty.
What if we have a self-insured plan or a multi-employer plan?
If an ALE offers health coverage through a self-insured plan, the ALE must report additional information on Form 1095-C. For this purpose, a self-insured plan also includes one offering some enrollment options as insured arrangements and other options as self-insured.
Suppose an employer provides health coverage in another manner, such as through a multiemployer health plan. In that case, the insurance issuer or the plan sponsor making the coverage available will provide the information about health coverage to enrolled employees. An employer that provides employer-sponsored, self-insured health coverage but isn’t subject to the employer mandate isn’t required to file Forms 1094-C and 1095-C. Instead, the employer reports on Forms 1094-B and 1095-B for employees who enrolled in the employer-sponsored, self-insured health coverage.
On Form 1094-C, an employer can also indicate whether any eligibility certifications for relief from the employer mandate apply.
Be aware that these reporting requirements may be more complex if your business is a member of an aggregated ALE group or if the coverage is provided through a multiemployer plan.
What are the W-2 reporting requirements?
Employers also report certain information about health coverage on employees’ Forms W-2. But it’s not the same information as what’s reported on 1095-C. The information on either form doesn’t cause excludable employer-provided coverage to become taxable to employees. It’s for informational purposes only.
The above is a simplified explanation of the reporting requirements. Contact us with questions or for assistance in complying with the requirements.
IT strategy showdown: Enterprise architecture vs. Agile
IT strategy showdown: Enterprise architecture vs. Agile
Few, if any, companies can operate successfully today without the right information technology (IT) strategy. And as businesses grow, their IT needs and infrastructures become even more complex and costly.
This push and pull of managing growth while grappling with tech has brought two broad approaches to IT strategy to the forefront: enterprise architecture and Agile. Let’s look at both so you can contemplate where your company stands and whether an adjustment may be warranted.
Following a blueprint
As its name implies, enterprise architecture is a strategic philosophy that focuses on mindfully designing or adapting a companywide framework for choosing, implementing, operating and supporting technology.
Think of an architect drawing up a blueprint for a commercial building — every aspect of that structure will be thought through ahead of time to suit the size, operational needs and mission of the company. So it goes with enterprise architecture, which seeks to ensure every IT decision and move:
Aligns with the goals of the business. Everything done technologically flows from the company’s current goals as established through ongoing strategic planning. So, for example, no new software acquisitions or upgrades can occur without approval from the enterprise architecture unit, which can be a dedicated department or a special committee.
Complies with standardization and organization protocols. Businesses using enterprise architecture construct their IT systems to integrate seamlessly and follow stated rules for access, use, upgrades, cybersecurity and so forth. They also organize their systems to support digital transformation (digitalizing all areas of the business) and adapt relatively quickly to technological changes.
In some cases, complies with an established framework. There are various widely accepted enterprise architecture frameworks for companies that don’t wish to do it all themselves or would like a starting point. These include The Open Group Architecture Framework, the Zachman Framework and ArchiMate.
Being project-focused
Rather than being a top-down blueprint for IT strategy, Agile generally approaches business tech on a project-by-project basis. The idea is to be as nimble as possible. Some of its key features include:
- Breaking up IT projects into small pieces (often called “sprints” or “iterations”),
- Collaborating closely with customers (whether internal or external),
- Using cross-functional teams, rather than only IT staff,
- Focusing on continuous improvement during and after projects,
- Emphasizing flexibility over strict protocols, and
- Valuing interpersonal collaboration over processes and tools.
Like enterprise architecture, Agile also has different time-tested versions that many types of organizations have used. These include Scrum and Kanban.
Leaning one way or the other
Not too long ago, many large companies began leaning away from enterprise architecture and toward Agile. Some experts attribute this to increased reliance on cloud-based storage and software, which tends to decentralize IT infrastructure.
Earlier this year, however, market research firm Forrester released the results of a survey of 559 technology professionals worldwide in its Modern Technology Operations Survey, 2023 report. Of respondents who work for large enterprises, 55% said their organizations had an enterprise architecture unit. That’s an 8% increase from the 47% reported in the 2022 version.
Some experts believe the renewed emphasis on enterprise architecture could be a reaction to a couple potential downsides of relying largely or solely on Agile. That is, businesses running small, speedy IT projects with little to no oversight may encounter higher “technical debt” — the predicament of getting suboptimal project results that lead to costly downtime and rework. Companies may also suffer from “vendor sprawl,” a term that describes having too many software providers because Agile project teams act independently.
Managing the costs
To be clear, enterprise architecture and Agile aren’t mutually exclusive. Many companies use both approaches to some extent. Work with your leadership team and professional advisors to devise and execute your best IT strategy. We can help you quantify, track and manage your company’s technology costs.
Businesses must stay on guard against invoice fraud
Businesses must stay on guard against invoice fraud
Fraud is a pernicious problem for companies of all shapes and sizes. One broad type of crime that seems to be thriving as of late is invoice fraud.
In the second quarter of 2024, accounts payable software provider Medius released the results of a survey of 1,533 senior finance executives in the United States and United Kingdom. Respondents reported that their teams had seen, on average, 13 cases of attempted invoice fraud and nine cases of successful invoice fraud in the preceding 12 months. The average per-incident loss in the United States was $133,000 — which adds up to about $1.2 million annually.
Typical schemes
Invoice fraud can be perpetrated in various ways. Among the most common varieties is fraudulent billing. In billing schemes, a real or fake vendor sends an invoice for goods or services that the business never received — and may not have ordered in the first place.
Overbilling schemes are similar. Your company may have received goods it ordered, but the vendor’s invoice is higher than agreed upon. Duplicate billing, on the other hand, is where a fraud perpetrator sends you the same invoice more than once, even though you’ve already paid.
Employees sometimes commit invoice fraud as well. This can happen when a manager approves payments for personal purchases. In other cases, a manager might create fictitious vendors, issue invoices from the fake vendors and approve the invoices for payment.
Such schemes generally are more successful when employees collude. For example, one perpetrator might work in receiving and the other in accounts payable. Or a receiving worker might collude with a vendor or other outside party.
Best practices
The good news is there are some best practices that businesses can follow to discourage would-be perpetrators and catch those who try to commit invoice fraud. These include:
Know with whom you’re doing business. Verify the identity of any new supplier or vendor before working with that entity. Research its ownership, operating history, registered address and customer reviews. Also, ask for references so you can contact other companies that can vouch for its legitimacy.
Follow a thorough approval process. Establish a firm “no rubber stamp” policy for invoices. Train accounts payable staff to review them for red flags, such as unexpected changes in the amounts due or unusual payment terms. Manual alterations to an invoice should require additional scrutiny, as should the first several invoices from new vendors.
Instruct employees to contact an issuing vendor if anything seems strange or inaccurate about its invoice. In cases where the response lacks credibility or raises additional concerns, your business should decline to pay until the matter is resolved.
Implement additional antifraud controls as well. For instance, before approving payment, accounts payable staff should confirm with your receiving department that goods were delivered and check invoices against previous ones from the same vendor to ensure there are no discrepancies. Also, you may want to require more than one person to approve certain invoices for payment — such as those at or above a specified amount.
Leverage technology. Automating your accounts payable process can help prevent and detect invoice fraud. And, as you might expect, artificial intelligence (AI) is having an impact here.
One AI-driven technology called optical character recognition (OCR) can scan and read invoices to verify that line items and charged amounts match those vendors quoted you per your company’s financial records. OCR minimizes employee intervention, hinders collusion and makes diverting payments to personal accounts harder.
Decisive action
As the aforementioned survey indicates, invoice fraud is likely widespread. Be sure to put policies and procedures in place to prevent it as well as to respond swiftly and decisively if you suspect wrongdoing. Our firm can help you assess your accounts payable processes for efficiency, completeness and security.
Help ensure your partnership or LLC complies with tax law
Help ensure your partnership or LLC complies with tax law
When drafting partnership and LLC operating agreements, various tax issues must be addressed. This is also true of multi-member LLCs that are treated as partnerships for tax purposes. Here are some critical issues to include in your agreement so your business remains in compliance with federal tax law.
Identify and describe guaranteed payments to partners
For income tax purposes, a guaranteed payment is one made by a partnership that’s: 1) to the partner acting in the capacity of a partner, 2) in exchange for services performed for the partnership or for the use of capital by the partnership, and 3) not dependent on partnership income.
Because special income tax rules apply to guaranteed payments, they should be identified and described in a partnership agreement. For instance:
- The partnership generally deducts guaranteed payments under its accounting method at the time they’re paid or accrued.
- If an individual partner receives a guaranteed payment, it’s treated as ordinary income — currently subject to a maximum income tax rate of 37%. The recipient partner must recognize a guaranteed payment as income in the partner’s tax year that includes the end of the partnership tax year in which the partnership deducted the payment. This is true even if the partner doesn’t receive the payment until after the end of his or her tax year.
Account for the tax basis from partnership liabilities
Under the partnership income taxation regime, a partner receives additional tax basis in his or her partnership interest from that partner’s share of the entity’s liabilities. This is a significant tax advantage because it allows a partner to deduct passed-through losses in excess of the partner’s actual investment in the partnership interest (subject to various income tax limitations such as the passive loss rules).
Different rules apply to recourse and nonrecourse liabilities to determine a partner’s share of the entity’s liabilities. Provisions in the partnership agreement can affect the classification of partnership liabilities as recourse or nonrecourse. It’s important to take this fact into account when drafting a partnership agreement.
Clarify how payments to retired partners are classified
Special income tax rules also apply to payments made in liquidation of a retired partner’s interest in a partnership. This includes any partner who exited the partnership for any reason.
In general, payments made in exchange for the retired partner’s share of partnership property are treated as ordinary partnership distributions. To the extent these payments exceed the partner’s tax basis in the partnership interest, the excess triggers taxable gain for the recipient partner.
All other payments made in liquidating a retired partner’s interest are either: 1) guaranteed payments if the amounts don’t depend on partnership income, or 2) ordinary distributive shares of partnership income if the amounts do depend on partnership income. These payments are generally subject to self-employment tax.
The partnership agreement should clarify how payments to retired partners are classified so the proper tax rules can be applied by both the partnership and recipient retired partners.
Consider other partnership agreement provisions
Since your partnership may have multiple partners, various issues can come into play. You’ll need a carefully drafted partnership agreement to handle potential issues even if you don’t expect them to arise. For instance, you may want to include:
- A partnership interest buy-sell agreement to cover partner exits.
- A noncompete agreement.
- How the partnership will handle the divorce, bankruptcy, or death of a partner. For instance, will the partnership buy out an interest that’s acquired by a partner’s ex-spouse in a divorce proceeding or inherited after a partner’s death? If so, how will the buyout payments be calculated and when will they be paid?
Minimize potential liabilities
Tax issues must be addressed when putting together a partnership deal. Contact us to be involved in the process.
Which leadership skills are essential to strategic planning?
Which leadership skills are essential to strategic planning?
To help ensure continued stability and profitability, businesses need to engage in some form of strategic planning. A recent survey by insurance giant Travelers drives home this point.
In its 2024 CFO Study: A Travelers Special Report, the insurer surveyed 610 chief financial officers (CFOs) from companies with 500 or more employees in various industries. One of the questions posed was: What are the most valuable skills needed by today’s CFOs?
One might assume their answers would relate to being able to crunch numbers or understand complex regulations. But the top skill, coming from 62% of respondents, was “Strategic planning for future company success and resiliency.”
5 critical skills
Along with being somewhat surprising, the survey result begs the question: Which leadership skills, specifically, are essential to strategic planning? Among the five most important are the ability to:
1. View the company realistically and aspirationally. Strategic planning starts with a grounded view of where the company currently stands and a shared vision for where it should go. You and your leadership team need accurate information — including properly prepared financial statements, tax returns and sales reports — to establish a common perception of the state of the business. And from there, you need to be able to reach a mutually agreed-upon vision for the future.
2. Analyze the industry and market — and foresee impending changes. Everyone should be up to speed on the state of your industry and market from the pertinent perspective. Your CFO, for example, needs to be able to report on key performance indicators that place your company’s financial status in the context of industry averages and explain how those metrics compare to competitors in your market.
What’s more, everyone needs to develop the ability to make reasonable, fact-based predictions on where the industry and market are headed. Not every prediction will come true, but you’ve got to be able to forecast effectively as a team.
3. Understand customers and anticipate their needs. Again, from every member’s distinctive perspective, your leadership team needs to know who your customers truly are. This is where your marketing executive can come into play, laying out all the key features and demographics of those who buy your products or services.
Then you’ve got to put in the teamwork to determine what your customers want now and, even more important, what they will want in the future. That latter point is perhaps the biggest challenge of strategic planning.
4. Recognize the capabilities and resources of the business. Your company can operate only within realistic limits. These include the size of its workforce, the skill level of employees, and the availability of resources such as liquidity, physical assets and up-to-date technology.
Every member of your leadership team needs to be on the same page about what your business can realistically do before you decide where you can realistically go. Having a balanced collective of voices — financial, operational and technological — is critical.
5. Communicate effectively. Many companies struggle with strategic planning, not because of a shortage of ideas, but because of a failure to communicate. Leaders who tend to “silo” themselves and the knowledge of their respective departments can be particularly inhibitive. There are also those whose behavior or communication style is simply counterproductive. Continually work on improving how you and your leadership team communicate.
Confident growth
So, does your leadership team have all the requisite skills to succeed at strategic planning? If not, there are certainly ways to upskill your key players through training and performance management. We can help your business gather the financial information it needs to plan for the future confidently and decisively.
It’s time for your small business to think about year-end tax planning
It’s time for your small business to think about year-end tax planning
With Labor Day in the rearview mirror, it’s time to take proactive steps that may help lower your small business’s taxes for this year and next. The strategy of deferring income and accelerating deductions to minimize taxes can be effective for most businesses, as is the approach of bunching deductible expenses into this year or next to maximize their tax value.
Do you expect to be in a higher tax bracket next year? If so, then opposite strategies may produce better results. For example, you could pull income into 2024 to be taxed at lower rates, and defer deductible expenses until 2025, when they can be claimed to offset higher-taxed income.
Here are some other ideas that may help you save tax dollars if you act soon.
Estimated taxes
Make sure you make the last two estimated tax payments to avoid penalties. The third quarter payment for 2024 is due on September 16, 2024, and the fourth quarter payment is due on January 15, 2025.
QBI deduction
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that amount for other taxpayers), the deduction may be limited based on whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.
Taxpayers may be able to salvage some or all of the QBI deduction (or be subject to a smaller deduction phaseout) by deferring income or accelerating deductions to keep income under the dollar thresholds. You also may be able increase the deduction by increasing W-2 wages before year end. The rules are complex, so consult us before acting.
Cash vs. accrual accounting
More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2024, it’s satisfied if, during the three prior tax years, average annual gross receipts don’t exceed $30 million. Cash method taxpayers may find it easier to defer income by holding off on billing until next year, paying bills early or making certain prepayments.
Section 179 deduction
Consider making expenditures that qualify for the Section 179 expensing option. For 2024, the expensing limit is $1.22 million, and the investment ceiling limit is $3.05 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems.
The high dollar ceilings mean that many small and midsize businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Even if you place eligible property in service by the last days of 2024, you can claim a full deduction for the year.
Bonus depreciation
For 2024, businesses also can generally claim a 60% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. As with the Sec. 179 deduction, the write-off is available even if qualifying assets are only in service for a few days in 2024.
Upcoming tax law changes
These are just some year-end strategies that may help you save taxes. Contact us to customize a plan that works for you. In addition, it’s important to stay informed about any changes that could affect your business’s taxes. In the next couple years, tax laws will be changing. Many tax breaks, including the QBI deduction, are scheduled to expire at the end of 2025. Plus, the outcome of the presidential and congressional elections could result in new or repealed tax breaks.
6 key elements of a business budget
6 key elements of a business budget
Every business needs a budget, but not every budget looks the same. Some companies have intricately detailed ones, others rely on simple templates generated with off-the shelf software, and still others forego formal budgets in favor of a “fly by the seat of your pants” approach. (That last option isn’t recommended.)
Because budgeting is such an essential part of running a business, it’s easy to take for granted. You may fall into a routine that, over time, doesn’t keep up with your company’s evolving needs. To identify areas of improvement, here are six key elements of a business budget and some best practices to consider:
1. Current overview. You may think you’ve created a sound budget, but its usefulness will be limited if it’s based on what your business looked like and how it operated five years ago. Compose an up-to-date description of your business. This should include its strategic goals, sales targets, the state of your industry and market, and impactful economic factors.
2. Budget rationale. Explain in clear language how the budget supports your company’s mission, vision, values, goals and objectives. To be included in the budget, every line item (see below) must support all five of those factors. If one doesn’t, question its merit.
3. Detailed line items. Naturally, the “meat” of every budget is its line items. These typically include:
- Revenue, such as sales income and interest income,
- Expenses, such as salaries and wages, rent, and utilities,
- Capital expenditures, such as equipment purchases and property improvements, and
- Contingency funds, such as a cash reserve.
An important question to ask is: Are we including everything the business spends money on? Although maintaining a detailed budget can be tedious, it’s imperative to managing cash flow.
4. Selected performance metrics. Among the primary purposes of a budget is to compare projected spending to actual spending — making adjustments as necessary. As part of the budgeting process, establish precisely which metrics you’ll use to determine whether you’re making, breaking or beating the budget.
5. Supporting appendices. Discuss with your leadership team whether your budget would be more useful with additional information. Commonly attached supporting appendices include historical budget and results analyses, department spending summaries, tables and graphs depicting market and cost trends, organizational charts, and glossaries of terminology.
6. Executive summary. This brief written snapshot, which usually appears at the very top of the budget report, is intended to provide a concise overview of the chief objectives and major sections of the budget. If you’re not already using one, consider it. For you and other internal users, an executive summary can serve as a quick reference and help you set your expectations. Perhaps more important, it can make your budget easier to understand for outside parties such as lenders and investors.
Your current budget may not include all six of these elements — and that’s OK. As mentioned, companies are free to create budgets in whatever format suits their size and needs. But you should approach budgeting with an eye on continuous improvement. And to that end, please contact us. We can assess your budgeting process from start to finish and suggest ways to perform this critical business function more efficiently and effectively.