Solomon & Hoover CPAs, PLLC Blog - Financial Guidance to Help Your Business Succeed

Solomon & Hoover CPAs, PLLC Blog

Financial Guidance to Help Your Business Succeed

Archive for January, 2015

Taking (tax) advantage of your home

Posted by admin On January 21st

Taking (tax) advantage of your home

Couple

 

 

 

In addition to helping you build wealth, owning a home provides valuable tax breaks. Knowing about potential tax savings associated with homeownership is the best way to get the most out of this major investment.

Positively in debt

You’re likely already aware that homeowners can deduct their mortgage interest payments — up to $1 million in what the IRS terms “acquisition indebtedness.” But did you know that you also may be able to write off interest on an additional $100,000 in home equity indebtedness? You don’t even have to use this debt to improve your home; you could use it to pay off debt whose interest isn’t deductible, such as credit card balances and auto loans.

In the past, the IRS has challenged some equity indebtedness claims where debt was used to acquire a home. But more recent U.S. Tax Court decisions have bolstered confidence that most taxpayers should be able to deduct interest on the full $1.1 million amount. (Note that there are exceptions. Review your situation with your tax advisor.)

Certain home upgrades also offer tax savings. Homeowners may claim a 10% credit for qualifying energy-efficient improvements — both purchase and installation costs — up to a lifetime limit of $500. Windows may account for up to $200 of this amount.

Time to sell

When you sell your principal residence you may exclude up to $250,000 ($500,000 for married couples) in capital gains. However, you must have:

  • Owned the home for at least two years,
  • Used it as a principal residence for two of the five years preceding the sale, and
  • Not have claimed the exclusion within the last two years.

If an unexpected life change (including death and job loss) forces you to sell your home in less than two years, a pro-rata exclusion amount based on the length of your residence may be available.

Further, in what might be considered a “bonus” tax break, any capital gains eligible for the $250,000 home sale gain exclusion are also excluded from the 3.8% net investment income tax that now applies to certain higher-income taxpayers.

Maximum tax savings

Depending on your circumstances, there may be additional tax benefits associated with homeownership. Your tax advisor can help ensure you’re receiving all of the savings you’re entitled to.

Help insure your favorite charity’s future

Posted by admin On January 21st

Help insure your favorite charity’s future

BMSwi15_4

 

 

If you’re thinking about making a major gift to a charity, take a look at your life insurance policies. Including life insurance in your charitable giving strategy is simple and can provide tax benefits.

The easiest option is to designate a charitable organization as your beneficiary. On your death, the charity receives the policy proceeds. Alternatively, you can irrevocably give your permanent (as opposed to term) policy to charity by naming the charity as its owner. This enables the organization to access the policy’s accrued cash before your death, though this will reduce the death benefit.

Tax ramifications vary. If you donate the policy, you can take a current income tax deduction equal to the lesser of your cost basis or the policy’s value. If you continue to pay the premiums, you also can deduct each premium payment. Although you can’t deduct premiums if you make a charity your policy’s beneficiary, by retaining ownership you can change the beneficiary or access the policy’s cash value.

In both situations, proceeds paid to the charity on your death aren’t subject to estate tax.

Should you outsource your company’s HR function?

Posted by admin On January 21st

Should you outsource your company’s HR function?

Doctor

 

Thanks to his deep industry knowledge and financial acumen, Doug is building a rapidly growing manufacturing business. But Doug is no human resources expert, and his wife, who squeezes HR tasks into her busy day as the company’s marketing director, is worried about finding qualified new hires — not to mention keeping up with the regulations governing employee benefits.

Miranda, who leads a midsize retail chain, has plenty of HR employees in-house. But thanks to departmental inefficiencies, including redundant positions, HR is costing her company a bundle.

Both Doug’s and Miranda’s companies may benefit from outsourcing their HR function. Here’s what they — and you — need to consider.

Efficiencies = savings

In recent years, HR administration has become a broad and complex function that includes everything from hiring and firing to managing health care and retirement benefits to filing workers’ compensation claims. It can be challenging for smaller businesses to find one person with all of the necessary expertise — and afford to pay that person. Besides, most companies would rather focus on what they do best. While HR isn’t a core competency of, say, Doug’s business, it is for an HR outsourcing firm.

An HR provider has greater experience and will be up to date on IRS regulations, legislation and even court decisions that affect employee hiring and benefits. It also can offer greater economies of scale for managing and supporting a company with, for example, information management systems and staff resources. Companies that outsource may even realize discounts on benefits that HR providers typically buy in bulk.

For companies such as Miranda’s that are concerned about their HR department’s impact on the bottom line, outsourcing can offer several benefits. These include increased service quality and responsiveness, advanced technological capabilities and lower costs due to greater operational efficiencies.

Overcoming hurdles

On the flip side, outsourcing can trigger fear and anxiety among a company’s HR staff, and all employees may worry about the security of their personal information. For their part, owners and executives often feel uncomfortable turning over certain managerial responsibilities and decisions, such as recruiting or laying off staff. In such cases, outsourcing limited functions, such as payroll administration or employee assistance programs, might make sense. It’s also important that businesses choose a provider they trust and can communicate with easily.

Some HR providers are willing to work on a per-project or hourly basis. But most HR outsourcing contracts are structured with terms of at least one year and specify that the provider will help the company achieve predetermined cost-saving and performance goals. Providers typically assume a degree of financial risk if they fail to achieve those goals.

Higher value

If your business is struggling to effectively perform the HR function at a reasonable cost, outsourcing may be the solution. Besides lowering expenses, outsourcing HR enables you and your employees to focus on higher-value and more strategic activities.

Why companies succeed
3 keys to building a healthy business

Keys

 

 

Businesses fail for complicated reasons — from dysfunctional management to insufficient capital; too-rapid growth to an inability to respond to changing markets. Why businesses succeed, on the other hand, is often easily explained. Regardless of size and sector, most healthy companies share three characteristics: 1) strong revenues, 2) low production costs and 3) low operating expenses. Here’s how to achieve them.

Revenue paving the way

To determine how much revenue your company needs to be profitable, perform a profitability breakeven analysis. (See the sidebar “Crunching the numbers.”) The results provide a baseline for setting revenue goals.

If you calculate your profitability breakeven point and find you may fall short, review your sales and determine where you can make changes. For example, you may need to invest more in R&D or focus more on prospective customers.

Production costs in check

For most companies, labor is their biggest production cost, particularly when benefits and taxes are factored into the equation. You need to ask whether your labor force increases the value of products or services enough to offset its high cost. If not, consider such solutions as providing more training or better incentives, improving production processes, or investing in more modern facilities.

To keep materials costs in check, use cost management software. It can help you evaluate materials purchases, measure optimal ordering quantities and reduce waste.

Finally, keep an eye on production overhead. Many businesses mistakenly allocate production overhead costs based on sales volume. Say, for example, a product accounts for 25% of sales volume, yet it uses 50% of plant space. Production overhead makes it less profitable than its sales numbers would suggest.

When production overhead costs are too high relative to a product’s sales price, take action. You might increase the price of the product, find better production methods or even discontinue the product.

Toward leaner operations

Operating expenses — costs you incur to run your business that aren’t directly attributable to production — also should be minimized. For example, compensation takes a big bite out of your operations budget, so monitor staffing needs relative to sales and adjust staffing levels when necessary. And while you can’t eliminate marketing expenditures, you can review your sales levels relative to them and ensure you’re getting bang for your buck.

Also, regularly revisit your R&D budget and the progress you’re making toward established goals. Are you squandering resources on projects unlikely to come to fruition? It may be time to redeploy resources.

Establish a foundation

A company with strong revenues, low production costs and minimal operating expenses can still fail due to poor management decisions and other pitfalls. But if you’re trying to build the foundation for a healthy, long-lived business, start by focusing on these three keys.

 

 


Crunching the numbers


Every business should regularly perform profitability breakeven analyses. At its most basic, the formula is:


Operating expenses + interest expense
gross profit margin


So if your operating expense is $500,000 and your interest expense is $50,000, a gross profit margin of 25% would require $2.2 million in sales for you to break even. Your accounting software should be able to calculate more sophisticated analysis based on various scenarios.