Mid-Year Review

Can you believe that half of 2019 is gone already? That means it’s a great time to take stock of how your business has done for the first half of 2019 so that you can meet your financial goals for the entire year. 

On Track for Sales

Are you on track to make your 2019 revenue number?  The first step is to check your 2019 budget numbers for total revenue. (Don’t have a budget? – Check with us; we’d be delighted to discuss that service with you.)

Next, get your Income Statement for June 2019 Year-to-Date and check the revenue figure. Are you on track with your budget, or are you halfway there revenue-wise, accounting for seasonality? If so, pat yourself on the back!  If not, what promotions will you put in place to boost your growth for the rest of 2019?

On Track for Profit

Looking at the same Income Statement, check your net income figure. Are you on track with what you planned?  If so, great!  If not, the reason is simple: it will be either lower sales than expected or higher expenses than expected. 

If your expenses are too high, you’ll need to drill down into each of your expense accounts, including cost of goods sold, to see which ones are higher than expected. Were there some unanticipated costs?  Does your pricing need adjusting? Do you need more volume to cover your costs?  This is where we can help you with an analysis of where your opportunities are to increase profit. 

On Track for Cash

One more place to look is your cash balance. It can be uncomfortable when you are running short of cash for your business. If your balance is lower than you’d like it to be, it could be because of some of the factors mentioned above.  It could also be because you just purchased an asset like a truck.  If you need help with improving your cash flow, that’s another thing we can help you with. 

Mid-Year Review

This mid-year review can help you head off any small problems before they grow into big ones throughout the rest of the year. And it can keep you on track so you can meet your 2019 business goals.

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How to Avoid IRS “Red Flags”

Undergoing the scrutiny of an IRS audit is liable to put any taxpayer on edge. While it may seem like the IRS randomly hands out audit notices like candy to unlucky victims, there are some best practices you can put in place in order to avoid inadvertently putting up any red flags.

There are several myths you may have heard when it comes to triggering an audit, like you are more likely to be audited when you efile versus paper file. Or if you file an extension you are less likely to get audited and if you claim deductions, credits and expenses you are more likely to be audited. One of the most common worries is that IRS audits are everywhere and are always terrible and could destroy your life and finances.

IRS audit statistics show that audits are not as commonplace as they may seem. In March 2018, the IRS published its 2017 data book reporting that they received 149,919,416 individual tax returns for the 2017 tax year. Of those, only 933,785 were audited. That means that less than 1% of taxpayers who filed an individual return were audited – 0.6% to be exact. This is the lowest audit rate since 2003.

The IRS has ascribed this decrease in audits to its reduced budget and staff levels. With the limited number of audits, the IRS focuses on looking at certain inconsistencies. That is to say that the timing of when a taxpayer files, whether it be on extension or not, does not affect the likelihood of an audit so much as other hot topic items included on a return.

There are audit trends that manifest based on the feedback from tax professionals. One area that seems to be under more scrutiny is real estate professionals. There are two tests one must past in order to be deemed as a real estate professional. One must also materially participate in order to deduct any real estate losses against nonpassive income.

The IRS is also paying close attention to Schedule A medical expense deductions. Auditors will be looking for expenses that do not qualify as medically necessary such as cosmetic treatments or the installation of a swimming pool for someone whose doctor prescribed swimming as a form of exercise. It is predicted with the changes to Schedule A miscellaneous itemized deductions under the Tax Cuts and Jobs Act that this area could be another red flag to trigger an audit should the IRS suspect any incorrect deductions.

While an audit may seem overwhelming, make sure to communicate clearly with the IRS. Many times, an audit is to check if a taxpayer can substantiate their claims. Keep organized records and make sure to understand the numbers that are submitted to the IRS so you can explain your reasoning if needed.

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Do You Know Who Your Top Customers Are?

Every business has customers, and while all customers are important, most entrepreneurs will agree that some customers are more important than others. This may be due to the amount of revenue the customer brings in, their ability to refer new clients to you, the interesting challenges of the customer, or another factor. It makes sense to identify these clients so you can spend more time with them or at least acknowledge them in some way.

How do you find out which clients have generated the most revenue with you? If you store customer data in your accounting system, you can run a report to generate the data you need.  In QuickBooks, the report is called the Income by Customer Summary Report.  In Xero, it’s called Income by Contact. If you do not store customer data in your accounting system, you may be able to generate a report from your billing system, shopping cart, or point-of-sale system.

The reports look like this: each row holds the customer name and the Income column holds total revenue by the customer. If your system allows you to sort the revenue field, do this in descending order. If not, you can export the data to Excel and sort it in Excel. 

Once you’ve sorted the data, the answer is right in front of you.  Your top customers based on revenue will show in order. These are the customers you may want to consider spending more time with. Schedule periodic lunches with them, give them a call on a regular basis, and send them a gift or thank you note once in a while.  The report helps you organize your connection points with your top clients so you don’t miss an opportunity or forget to reach out to an important customer. 

Run this report on a regular basis so that you’re focused on nurturing the most important relationships in your business. You can also look at trends to see if you’re losing revenue over time or gaining revenue with new clients. You can reach out to clients that are spending less with you to try to save the relationship before it’s too late.  And you can get to know new clients that are growing with you so that you can grab even more business. 

Make this report a regular activity in your business to stay close to what your customers are doing with you.

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Taxes and Retirement Income

While many taxpayers plan for retirement by investing in retirement savings accounts, it is important for taxpayers to also plan on how to handle income during retirement as well.

The timing of different retirement distributions could drastically affect the amount of taxes paid throughout retirement. To start, the various retirement accounts available have different tax treatments.

Withdrawals from traditional IRA accounts are taxed as ordinary income. If any portion was contributed on an after-tax basis, then it is not subject to taxes. Traditional 401(k) accounts are also taxed as ordinary income when funds are withdrawn.  Both Roth IRA and Roth 401(k) account withdrawals are tax free, although the account holder must be older than 59½ and the first contribution must have been made at least five years prior to the withdrawal.

To time withdrawals to minimize tax liability, taxpayers must evaluate when they will stop working and when they will apply for Social Security. Social Security benefits are available at age 62 but if a taxpayer is still working, receiving Social Security may push the taxpayer into a higher tax bracket. The taxpayer could end up paying taxes on their W-2 income, Social Security income, and any additional withdrawals from a retirement plan.

Many advisors recommend taxpayers withdraw first from taxable accounts, then from tax deferred accounts and lastly, Roth accounts when withdrawals are tax free. This way, the taxable accounts are paid first and the tax-deferred accounts can grow longer. While this method does allow for less in taxes paid later on in a taxpayer’s life, it may mean the taxpayer is paying an increased amount of taxes for a few years with little to no taxes in other years. By taking stock of where retirement income is coming from and creating a proportional withdrawal strategy, a taxpayer can spread out their taxable income evenly over retirement and potentially reduce taxes paid on Social Security benefits.

Each situation is different, so it is essential to take a thorough look at your projected income for retirement and plan ahead. Periodic adjustments during retirement are also important as different tax rates and laws change.

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How AI Is Changing Accounting

Artificial intelligence (AI) has arrived in the accounting profession in a big way. The good news is it’s streamlining accounting tasks, finding patterns in data you can take action on, and generally making things better. Here are just a few places we’re seeing AI and machine learning impact accounting.

Transaction Coding

Most systems have incorporated some form of machine learning into transaction coding. When bank feeds are imported, each transaction needs to be coded to add the account code in the chart of accounts.  Class, tracking codes, and other custom data may need to be added as well. Rules can be set so that the accounting application can pre-code the transactions; in this case the accountant simply approves or corrects the entry.

Invoice Fetching

It starts with a picture of a receipt. Invoice fetching applications can turn pixels into data using sophisticated OCR (optical character recognition). The data is then turned into a business transaction that can be imported into an accounting system.


The books of many government agencies, nonprofits, and large businesses need to be audited on a regular basis. Auditing is an expensive process. Smart programs can review a company’s data and assess where the risks and anomalies are so that the audit program can be modified to focus on the more important parts. This reduces risk and cost for everyone involved. 

Accounts Payable

Artificial intelligence can help to speed up the matching of purchase orders, packing slips, and invoices so that accounts payable tasks are streamlined.  It can also automate approvals and look for duplicate invoices to avoid overpayments. 

Accounting Tasks That Are Clerical

Robotic Process Automation (RPA) is a platform that allows users to create automation without involving the IT department. Think Excel macros or Zapier on steroids. Any workflow with a mind-numbing set of clerical steps is a candidate for RPA. 

AI allows accountants to spend less time on routine tasks and more time on higher-level analysis work. As AI becomes more affordable for small businesses, everyone will benefit from this long-term trend.

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Identity Theft and the IRS

Identity theft happens when someone uses your personal information without your permission. While this can include credit cards, banking information, and passwords, it’s your Social Security number that’s the biggest IRS-related identity theft problem. 

An estimated 4 to 5 million taxpayers are currently affected by identity theft with the IRS. When their Social Security numbers are stolen by an identity thief, the thief files for a tax refund early in the season. When you go to file your taxes, you receive a notice that you have already filed.

Here are some tips to prevent it from happening to you:

  • Do not answer any emails from the IRS. The IRS does not send emails or text messages. If you receive suspicious IRS emails, report them to the IRS at phishing@irs.gov.
  • Do not carry your Social Security number with you. Keep it in a secure location.
  • Protect your computers with firewalls and anti-spam software.
  • Change passwords for internet accounts.
  • Do not give personal information on the phone or through email unless you are absolutely sure who you are giving it to.
  • Shred all documents containing personal information.
  • Check your credit report annually.

If you do happen to become a victim of this crime, here’s what you should do:

  • If the IRS sends you a notice, respond immediately. Follow the instructions on the notice.
  • File an Identity Theft Affidavit (IRS Form 14039).
  • Call the IRS Identity Theft Specialized Unit at 1-800-908-4490.
  • Request an Identity Protection PIN from the IRS if you’ve received a letter inviting you to opt-in to the program.  An IP PIN is a 6-digit number assigned to a taxpayer to help prevent the misuse of the Social Security number on fraudulent tax returns. 
  • If your purse or wallet containing personal information is stolen, contact all credit cards to cancel.
  • Report the theft to the police department.
  • Contact the credit bureaus about a fraud alert at the following numbers:
    • Equifax: 1-800-525-6285
    • Experian: 1-888-397-3742
    • Trans Union: 1-800-680-7289
  • If your Social Security number has been stolen, notify the Social Security office of Inspector General at 1-800-269-0271.
  • The Federal Trade Commission has a toll-free Identification Theft helpline at 1-877-438-4338 or visit their website: www.ftc.gov.  

We certainly hope it doesn’t happen to any of our clients, but if it does, this handy checklist will help you through it.

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Your New Hire Checklist

Hiring a new employee is a big accomplishment in any small business, and there are a lot of steps involved, too. Here’s a handy checklist to help you stay organized when you bring that new hire on board. 

First things first, the legal and accounting items:

  • Signed employment agreement, typically an offer letter. There may also be a supplemental agreement outlining employee policies.
  • Payroll documents include:
    • IRS form W-4
    • Form I-9
    • Copy of employee’s government-issued ID
  • Most states require a new hire report to be filed; sometimes your payroll system vendor will automatically file this for you.
  • Notify your workers comp insurance carrier.

Next, it’s time for employee benefits enrollment:

  • Health insurance
  • 401K
  • Any other benefits you provide
  • Provide the employee with the holiday schedule
  • Explain their PTO and vacation if not already explained in the offer letter

Set your new employee up for success with the right equipment:

  • Desk, chair, lamp, other furniture
  • Uniform
  • Tools
  • Coffee mug, refrigerator shelf
  • Phone
  • Truck, keys
  • Computer, monitor, mouse, keyboard, power strip, floor mat
  • Office keys, card entry, gate remote, parking assignment
  • Filing cabinet, keys
  • Tablet
  • Forms
  • Office supplies
  • Cooler, other supplies

Your new employee may need access to your computer software systems:

  • Employee email address
  • Any new user IDs and password for all the systems they will need to access
  • Document access

How will your new employee learn the ropes?

  • Set up training
  • Assign a buddy

Hopefully, this list will give you a start toward making your employee onboarding process a little smoother.

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Disasters and Taxes

While some may say that tax season in and of itself should be classified as a “federally declared disaster,” the phrase holds more weight this upcoming year as thousands of families have been devastated by the California wildfires and East Coast hurricanes.

Beginning in 2018, the personal casualty and theft loss deduction is limited to casualty losses incurred in a federally declared disaster area. The casualty and theft deduction is only available to those who itemize their deductions, not to those who take the standard deduction.

In the instructions for the 2018 Form 4684 (Casualties and Theft Loss Deductions), the IRS defines a disaster loss as “a loss that occurred in an area determined by the President of the United States to warrant federal disaster assistance and that is attributable to a federally declared disaster. It includes a major disaster or emergency declaration.” A list of federally declared disasters can be found at https://www.fema.gov/Disasters.

There are two limitations to qualify for the deduction:

  1. A loss must exceed $100 per casualty
  2. Net total loss must exceed 10 percent of your AGI (adjusted gross income)

You can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which you incurred the disaster loss. IRS Publication 976 provides information about personal casualty losses resulting from disasters that occurred in 2016 and certain 2017 disasters, including Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires.

An exception to the rule above limiting the personal casualty and theft loss deduction to losses incurred in a federally declared disaster area applies if you have personal casualty gains for the tax year. In this case, you will reduce your personal casualty gains by any casualty losses not attributable to a federally declared disaster. Any federal disaster losses that remain are subject to the 10% AGI limitation.

In a recent publication clarifying some of the new tax reform laws (Publication 5307), the IRS touched on how some of the recent laws enacted in 2018 make it easier for retirement plan participants to access their retirement plan funds. This may allow affected taxpayers to:

  • waive the 10% additional tax on early distributions and
  • include a qualified hurricane distribution in income over a 3-year period
  • repay their distributions to the plan
  • have expanded loan availability
  • extend the loan repayment period

We certainly hope you weren’t affected by a disaster last year, but if you were, we have you covered tax-wise. 

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5 Ways to Speed Up Your Cash Flow

One of the biggest challenges for small businesses is managing cash flow. There never seems to be enough cash to meet all of the obligations, so it makes sense to speed up cash flow when you can. Here are five tips you can use to get your cash faster or slow down the outflow.

1. Stay on top of cash account balances.

If you’re collecting money in more than one account, be sure to move your money on a regular basis when your balances get high. One example is your PayPal account.  If money is coming in faster than you’re spending it, transfer the money to your main operating account so the money is not just sitting there. 

2. Invoice faster or more frequently.

The best way to smooth cash flow is to make sure outflows are in sync with inflows. If you make payroll weekly but only invoice monthly, your cash flow is likely to dip more often than it rises. When possible, invoice more frequently or stagger your invoice due dates to smooth your cash balances. 

Take a look at how long it takes you to invoice for your work after it’s been completed.  If it’s longer than a few weeks, consider changing your invoicing process by shortening the time it takes to send out invoices. That way, you’ll get paid sooner.  

3. Collect faster.  

Got clients who drag their heels when it comes to paying you? Try to get a credit card on file or an ACH authorization so you’re in control of their payment.

Put a process in place the day the invoice becomes late. Perhaps the client has a question or misplaced the bill. Be aggressive about following up when the bill is 45, 60, and 90 days past due. Turn it over to collections quickly; the older the bill is, the less likely it is to get paid. 

4. Pay off debt.

As your cash flow gets healthier, make a plan to pay off any business loans or credit cards that you have. The sooner you can do this, the less interest expense you’ll incur and the more profit you’ll have. 

Interest expense can really add up. If you have loans at higher interest rates, you might try to get them refinanced at a lower rate, so you won’t have to pay as much interest expense.    

5. Reduce spending.

You don’t always have to give up things to reduce spending. Look at your expenses from last year and ask yourself:

  • What did you spend that was a really great investment for your business?
  • What did you spend that was a colossal mistake?
  • What do you take for granted that you can cut?
  • Where could you re-negotiate contracts to save a little?
  • Where could you tighten up if you need to?

Managing cash flow is always a challenge, and these tips will help give you a little cushion to make it easier. 

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How to Speak “Tax”

This time of year and into April, we begin to hear a different vocabulary come to life: “Credit.”  “Exemption.”  “Adjusted Gross Income.”  It can seem as if your accountant speaks a different language from you.

While we’ll do our best to explain the tax terms we use during your appointment, we’ve compiled a list of them for those of you who’d like to be more “in the know.” Not only will this better equip you to keep up at your next social gathering, but it will allow you to ask the right questions when you meet with your tax professional.

TY = Tax Year

If you file your taxes on time, the tax year is always one year behind the year we’re in. In 2019, you will be filing your TY 2018 tax return.

FY = Fiscal Year

Fiscal year is a one-year period for accounting purposes. Most businesses make their fiscal year the same as the calendar year: January 1st through December 31st. Others run their business with start and stop dates different from the calendar year. A common fiscal year is July 1st to June 30th.

EIN = Employer Identification Number

This is a unique identification number assigned to a business by the IRS.

Form 8879 = IRS e-file Signature Authorization

This form must be signed for your return to be efiled, and it can be digitally signed.

Form 1040 = U.S. Individual Income Tax Return

This is the main form used when reporting individual income. It includes the taxpayer’s basic information, dependents, and tax calculations. If the taxpayer is a sole proprietor or a single-member LLC, their business activity is reported on their personal tax return.

Form 1120 = U.S. Corporation Income Tax Return

When reporting C corporation income, this form is used. S corporations are reported on Form 1120S. 

AGI = Adjusted Gross Income

AGI is equal to your total income subject to income tax minus specific deductions you may be eligible to take. AGI is calculated before applying the standard or itemized deduction. Many credits are subject to AGI limitations, meaning that if your AGI is above a certain amount, you may be disqualified from certain deductions and credits.

MFJ = Married Filing Jointly

This is one of five possible filing status categories.

MFS = Married Filing Separate

This is another one of five possible filing status categories. You may see these acronyms frequently in tax articles explaining how new laws affect the different types of taxpayers.

TCJA = Tax Cuts and Jobs Act

The name bestowed upon the largest tax law changes approved by Congress, many of which went into effect for TY 2018.

SSTB = Specified Service Trade or Business

This term specifically relates to Section 199A, which is a new tax law that allows for up to a 20% deduction on “qualified business income” (“QBI”) for any “qualified trade or business” (“QTB”) other than a “specified trade or business” (“SSTB”). This deduction is available to sole proprietors and passthrough entities.

This list will get you started, and if you run across another tax term, feel free to reach out and ask us what it means.

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