Author: Accounting Clarity by John

Potential Changes to Tax Depreciation

Tax Depreciation

Another key change potentially coming in 2017 is to the write off of “Capital Investments”.  Think about this as §179 deductions on steroids.

Currently under tax law, businesses can accelerate their depreciation by writing off up to $500,000 in the year of purchase. The problem, for larger businesses is that it phases out if you put more than $2,000,000 in assets into service in the year.

So for smaller businesses which can already take full advantage of §179 there is going to be a negative trade off coming.  You see, today, if the business needed new assets we would encourage the Company to borrow the funds from either the seller or the bank to buy the equipment.  Then we would take the full write off and also get to deduct the interest expense in the following years.

This may be going away as part of the 2017 tax restructuring.

If businesses want to take the full write-off of unlimited asset purchases but use debt, interest may no longer be deductible. This could be a big set back for small businesses as most prefer to match long lived asset purchases with long term debt. It has, until now, made more sense.

Congress may carve out an exception but I do not see an easy work around.  It may be they only deny deductions for term loans but that doesn’t seem workable.

There would also be the potential headache of defining a capital asset. Obviously a computer qualifies but what about real estate?  Expect to see some restrictions on what qualifies or perhaps on what “businesses” can take advantage of this potential change.

We have a monthly series that we hold here in downtown Vancouver, WA called the Currie & McLain Lunch and Learn. This months topic is on the potential tax law changes and how to start planning for it. I will post a copy of the Powerpoint after the presentation along with thoughts and the Q&A which come out of the conversation.

In the meantime, consider having a conversation with your tax and accounting professional about what might be coming as part of the new tax changes for 2017. Make no mistake, the changes are coming. If you are not currently working with an accounting professional or are interested in a second opinion, feel free to contact me for a free consultation.

 

 

Taxes and Small Business

In our research for the upcoming Lunch and Learn, we discovered something quite interesting. I thought I would work through it here and try to figure out how to help small businesses plan effectively.

As part of the potential for tax reduction is an attempt to deal with flow-through entities; that is sole proprietorships, S Corporations and LLC’s. Currently, with flow-through entities, the tax on profits is paid by the owners. The problem becomes defining profits. Let’s look at 3 companies A, B and C.

Profits and Compensation

All 3 companies make $100,000 before owner compensation. A decides to pay herself $50,000 of wages, B decides not to pay any and C pays almost all in the form of wages. The tax consequences are remarkably different.

A B C
Taxable Income Before Owner Compensation      100,000      100,000      100,000
Owner Compensation        50,000              –        92,500
Company Payroll Taxes 8.0%          4,000              –          7,400
Taxable Income Passed Through        46,000      100,000            100
Income Tax for Owner
Wages        50,000              –        92,500
Taxable Income Passed Through        46,000      100,000            100
Taxable Income for Owner        96,000      100,000        92,600
Tax Liabilities 25.0%        24,000        25,000        23,150
Total Taxes Paid
Company Payroll Taxes          4,000              –          7,400
Owner Payroll Taxes          4,000              –          7,400
Income Taxes        24,000        25,000        23,150
Total Taxes        32,000        25,000        37,950
Taxes as a Percent of Income Before Comp 32.0% 25.0% 38.0%

The difference between the results is the payroll taxes which every employee pays and which every employer matches.  The problem is that the only statutory requirement is that “Compensation must be Reasonable”.   And this has been an audit headache as the term “Reasonable Compensation” is based upon the facts and circumstances of the particular taxpayer and Company.

This difference in the tax law has been around for decades and has been left to auditors and taxpayers to argue about the term “Reasonable Compensation”.    In this case, we have argued on all sides – that A’s and C’s compensation is reasonable and so is B’s.   Most professionals would worry about losing in B’s position but clearly any compensation less than the amount of taxable income before owner compensation is a win for the taxpayer by reducing employment taxes.

Given that there is already this disparity and given that Congress knows about it and has elected not to touch it yet should give us all pause for concern as Congress looks at passing a substantial rewrite of the tax law to both reduce rates as well as treat Business earnings with a different tax rate.

Deemed Wages

To address this issue Congress will need to figure out a way to address owner compensation. So far, in all the proposals they use a phrase “Deemed Wages” to account for owner compensation. Randy and I have debated this and we are of the opinion that what is likely to happen is that the IRS will publish a table of expected compensation for various businesses and the owner’s compensation should be close to that in order to be considered reasonable. If an owner wants to pay differently, there should be some written justification for the position, such as minutes to the board of directors or a memo from a meeting between the owners and their representatives.

Keep in mind though, that this is one areas where is almost no guidance as it hasn’t been touched before.

This change to how small business reflects taxable income will be major.  By addressing the disparity shown above, Congress will potentially eliminate an audit headache and improve compliance.  It may mean that some pay more and some pay less, but it could also help give taxpayers peace of mind by addressing the unknown of “Reasonable Compensation” and reducing the risk of money spent on litigating this issue.

 

Fun Fast-paced Accounting Firm Seeking Cat Herder

About us: 8 amazing accounting professionals in an awesome downtown Vancouver , WA office.  Not quite Parks and Recreation but not as bad as the Apprentice.  Not even close.  The front desk has a great view of Smith Tower and the Broadway Building – and a glimpse of the I-5 bridge if you lean over far enough.

About the position: We need someone who can successfully herd cats and handle the massive confusion of a busy accounting practice front desk.  Working closely with the office manager, our herder extraordinaire will be able to easily handle a dozen simultaneous phone calls, 8 walk-in clients, 2 accountant’s wondering where documents are and a printer that has been known to eat small children.

In the remaining 30 minutes of your day, you will help keep the office manager sane by accurately keeping track of every odd-ball document and work product that comes and goes.  Since everything gets scanned and loaded into a document management system, we do expect our cat herder to know more about computers and office equipment than how to push the power button.

Oh and it is slightly stressful between January 15 and April 15.  So… if your doctor suggested giving up skydiving this probably isn’t a good fit for you.

Sense of humor optional but highly recommended.  Mind readers strongly encouraged to apply.  But then, you already knew that, didn’t you?

About you: You are a people person who can project sympathy for a wealthy person who owes tax and yet be totally ruthless when it comes to the excuses why they can’t pay their bill.  You appreciate hard work but have a strong emotional attachment to laziness.  You often day-dream about the ultimate prank to play on coworkers but are realistic enough to realize that a water balloon filled with sour milk going off in a desk drawer will create a little too much mess… and you will likely have to clean it up.  Please be the type who doesn’t lose the car keys more than twice a week or your car more than once a month.

Our ideal cat herder will have between zero and gazillion years of experience.  This position can be part-time (this works very well if you have a twin) or full-time.  Whether this is your first position or the last one you ever want, it can be a great place to work.  I know, I work here.

If the place, position and description interest you, please email a brief story about what you can bring to our little troupe of wizards.  Or, if you wish, you can email a boring resume and cover letter.  Please, not too boring.

If you prefer, you can reply to our traditional ad here.  http://portland.craigslist.org/clk/ofc/5804704747.html

Sorry, there are no bonus points for applying in both places.

We are really looking forward to your response.

Pricing

Happy Tuesday.  On Sunday, we had brunch with some good friends Jordan and Whitney at Tommy O’s in downtown Vancouver.  Kubae and I split a delicious Kahlua Pork Quesadilla and had a great time with conversation about firing ranges and civil liberties.  We then spent the rest of the day driving around contemplating if it is time to move to another spot as we are fast approaching our 2 years in downtown.  How time flies when you are having a great time.

One of the things I think that worry small business owners is what price to charge.  And since most small business owners start their small business after leaving their employer, they typically follow the model they were taught there.  This works, but I think there may be a better way.

When I was working with VSource in the startup of Argentstratus, I decided to approach the pricing model differently.  Instead of first saying, “here is our price”, I suggested the sales team start by asking what the prospective buyers budget was for things like

  • Server replacement
  • Desktop PC replacement
  • Software updates
  • System security
  • Downtime for server maintenance
  • etc

The typical response was a blank – deer-in-the-headlights- stare because most small business owners don’t stop to think about those things.  Depending on their answer though, the sales team could help create a frame of reference for the costs of doing everything in-house versus outsourcing their entire IT.

This had two benefits: First we avoided having the investment discussion too soon and second we ensured that the prospective buyer understood what they were really purchasing.  In essence, we established the value of the offer and then provided a price which was dramatically lower than that value.

To be clear, there is no such thing as the right price.  What the small business faces are buyers with absolute maximum and minimums to their pricing decision.  Many start-ups are willing to pay legal counsel several thousands of dollars: Some will not pay a dime.  Established businesses are willing to pay a million dollars to buy out a competitor but won’t spend $100,000 on an advertising campaign.  Each party perceives the value differently but I honestly believe the main point of differentiation is how the investment is packaged to the buyer.

By the way, I intentionally use the word investment over “Price” or “Cost”.  For most of us, especially in the service industries, we are often considered a “Cost of Doing Business” – an expense.  I go out of my way to explain that using my services is an investment.  By paying my firm you get access to some of the best business, tax and accounting minds in the area.  By deliberately removing loaded words we can continue the conversation in ways that benefit all parties.  If I say your tax return is going to cost  you $1,800 you will try to shop me.  If I say that your investment in assistance in running, managing and reporting on your business is $1,800 and I will throw in a tax return for free… you see my point.

So some guidelines I have learned along the way when it comes to pricing.  Where I can remember the source I will give credit and if I do not actually remember the source I apologize in advance and if you can send me a message with the actual source I will update this post for that information.

  • Do not charge by the hours worked, but by the years it took to get you to this point. Harry Beckwith
  • Price high and offer amenities – it is easier to remove add-ons than raise prices
  • It is always easier to offer discounts than to raise prices
  • Determine what your customer can pay and then figure out if you can service the client profitably.
  • Offer tiers of service (Bronze, Silver, Gold or the like) with very clear differences between them so you can cater to a larger audience
  • Ask the prospective buyer their budget and try to hit it.  Jeffrey Gitomer
  • People hate to be sold but they love to buy.  Help them buy.  Jeffrey Gitomer
  • Your number one competitor is apathy, price accordingly.
  • Your costs are not your customers problem.

What these guidelines suggest is to be open and creative when it comes to pricing your solution.  You are offering a solution to someone’s problem so don’t be afraid to be creative about what they pay for their investment.  As a general rule, if you are looking for new or more business opportunities, look at how your competition is pricing and then do something different.  Make your pricing easy to understand and consistent for a set of prospective buyers.  Test your price and if you are getting 100% of prospects saying yes, realize your price may be too low.  If you are getting 100% saying no, your price is too high.

Somewhere in between is that sweet spot for that group.  You can find it.  If you are interested in thinking about ways to create new pricing models, try talking with your current accounting professional about ways to make your solution and pricing more effective.  If you are looking for a new accounting professional or would like a second opinion, feel free to contact me for a free no obligation consultation.

Have a great day and enjoy the challenge of charting a new course on pricing your solution.