Monthly Archives: May 2018

Implementing Tax Cuts and Jobs Act

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Implementing the Tax Cuts and Jobs Act is the IRS’s highest priority, according to IRS Commissioner David Kautter. In its newly released “Strategic Plan FY 2018-2022,” the agency outlines its intent to improve taxpayer service and tax administration over the next four years. This includes specific goals, such as “to empower and enable all taxpayers to meet their tax obligations” and “to protect the integrity of the tax system by encouraging compliance through administering and enforcing the [tax] code.” See the full strategic plan here:

It’s time for a midyear checkup!

Category : Blog , sccm

Time flies when you’re busy running a business. But it’s important to occasionally pause and assess interim performance — otherwise you’re likely to be surprised by the year-end results. When reviewing midyear financial reports, however, recognize their potential shortcomings. These reports might not be as reliable as year-end financials, unless a CPA prepares them or performs agreed-upon procedures on specific accounts.

Diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that were struggling at the end of 2017.

For example, you might compare year-to-date revenue for 2018 against 1) the same time period for 2017, or 2) your annual budget for 2018. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing.

You can also review your gross margin [(revenue – cost of sales) ÷ revenue]. If your margin is slipping compared to 2017 or industry benchmarks, find out what’s going wrong — and take corrective actions.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. Or, if your company is drawing heavily on its line of credit, operations might not be generating sufficient cash flow.

Potential shortcomings

When interim financials seem out of whack, don’t panic. Some anomalies may not be caused by problems in your daily business operations. Instead, they might be caused by informal accounting practices that are common midyear (but are corrected by your CPA at year end).

For example, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. Interim financial statements, therefore, generally paint a rosier picture of a company’s performance than its year-end report potentially may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, the controller’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked controllers may lack time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Proceed with caution

Contact us for help interpreting your midyear results, as well as detecting and correcting potential problems. Unlike year-end financials, interim reports are seldom subject to external audit or rigorous internal accounting scrutiny. We can remedy any shortcomings by performing additional testing procedures on your interim financials — or preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.

© 2018

Tax Cuts and Jobs Acts

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The IRS is expected to curtail workarounds to the state and local tax deduction limit. The Tax Cuts and Jobs Act generally limits individuals’ deductions for these taxes to $10,000. So some states have adopted, or are considering, legislation allowing taxpayers to make payments to state-run charitable funds in exchange for tax credits against state and local taxes they owe. The aim is for the payments to be deductible charitable donations. The IRS says it will propose regulations addressing the federal income tax treatment of such transfers. (Notice 2018-54)

Business Losses

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Business owners can generally deduct business losses on their tax returns. But the activity must show a profit motive by operating in a businesslike manner, which includes proving expenses. An owner of a music production and promotion company wasn’t allowed to deduct the net operating losses (NOLs) he incurred, because the IRS determined he was engaged in a hobby. The U.S. Tax Court found a profit motive did exist, but denied the deductions because the NOLs weren’t substantiated. (TC Memo 2018-67)

“Payroll Checkup”

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If you typically itemize deductions on your tax return, you may want to rethink that decision due to changes brought by the Tax Cuts and Jobs Act. To help, the IRS is encouraging itemizers to do a “payroll checkup” using its withholding calculator. Changes take effect this year, including the standard deduction nearly doubling, and limits on several itemized deductions. These changes may make it more beneficial to claim the standard deduction. If so, you may need to adjust your withholding as early as possible. To access the calculator: