All Posts by Mike Jesowshek, CPA

The Ultimate Cheat Sheet on Growing Your Fitness Studio or Gym

By Mike Jesowshek, CPA | Bookkeeping , General Business

Every business must have a constant eye on growth. If your company is not growing, it is losing key opportunities and longevity. Yet, growth does not always come from increased sales. In many cases, it’s important to take an inside look at how you are operating, what costs you have, and how you can better manage day-to-day operations. To stimulate growth in your business – no matter the sector – focus in on these key areas specifically. It could mean improving your company’s ability to compete at a higher level.

Using KPIs to Guide Growth and Budgeting

Key Performance Indicators (KPIs) help you know how your company is performing. They should be used as a compass and guiding point for every decision you make within the company. KPIs such as profit, cost, sales by region, customer lifetime value, and product defects are just some of the areas to focus on. To achieve clarity here, you need an efficient way of managing all of this data. Cloud computing makes it possible along with implemented automation. These metrics can provide you with key opportunities for:

• Growth
• Cost-cutting
• Better employee management
• Better customer management
• Scaling limitations and much more

Use KPIs to help guide every one of your company’s decisions about growth from this point out. Invest the time in learning what these figures are to get started.

Real-Time Cloud Accounting and Improving the Books

A good place to focus attention is on your accounting. Here’s what to look for:

• Are you in the cloud yet? This provides the most effective and efficient way to manage your business’s books.
• Real-time access means you can pull up reports and profit margins to get a clear understanding of opportunities.
• Put more attention into accuracy and bottom lines. If you are not working with a professional service to improve your accounting clarity, what every dollar means, it is time to do so.

Use Reviews and Social Proof to Convert More Clients

Social proof and reviews are insights into what your customers are thinking, expecting, and desiring. They provide an opportunity for you to get more info on what your customers want. Social proof indicates that someone “says” your product or service is good. That means other people are going to flock toward this. Learn what reviews are out there. Amplify your marketing to focus on them. Build strong customer relationships through this process.

Shoring Up Cash Flow by Reducing Costs and Boosting Efficiency

Next, take a look at your efficiency. Using your KPIs, you can provide more insight into key areas of cost. For example, spend the time examining the various costs your company has and work to reduce them. Then, find more efficient methods to improve production, employee productivity, and customer service.

Extend Market Reach by Honing in on Your Target Market or Expand Your Reach

Establish who is your target market. Instead of marketing to the masses, reach people where they are. For example, if you are targeting Millennials as your ideal client, marketing on social media and connecting digitally is essential. For seniors, television and local ads still reign as ideal.

At the same time, consider the value and potential possible if you expand into other markets. Carefully consider other markets that fit your product perhaps in a different way. For example, if you are marketing just to Millennials right now, consider how your product or service could impact the up and coming younger generation. Do you need to make modifications? Should you use different marketing to capture the early lead in this generation?

Provide More Services to Existing Customers

Expand through your existing customers. Perhaps one of the best ways for today’s company to increase sales without having to expand on services or customer acquisition costs is to focus on increasing sales to existing customers. What else can you offer? There are several solutions here:

• Offer more products and services you already provide to existing customers. For example, introduce them to a secondary service you provide that they have yet to purchase.
• Build relationships with complementary service providers and market those services to your existing customers.
• Build on your existing products and services to provide more comprehensive options. Grow the company by expanding what you offer.

In these situations, the goal is clearly to get more money from existing customers. Provide them with quality, value, and opportunity to achieve these key opportunities.

Understand Which Products Are “Losers” and Should Go

Do you have “loser” products? These are products that never really capture enough sales to make them a profit point for you. It’s important to target these products with careful insight. To grow your business’s bottom line, you need to know how effective every product is. Are you putting a lot of money into marketing a product that only has a very limited customer base? Does it yield a very small profit margin? Determine if you have these products in your lineup and then work to eliminate them, improve them, make them less expensive, or pull at least some of your marketing and labor hours away from them.

Get Better Control Over Employee Costs and Reduce Turnover

How much do you spend on managing your employees? From payroll to taxes to human resources, there are many costs that go into managing your employees. Reducing those costs is always a good thing. Automation and software can help you to reduce your human resource department to create massive savings that you could put toward scaling. The key here is to ensure you are using the most up-to-date resources and tools available.

Alongside this is the goal to reduce employee turnover. Don’t create a bad experience for your employees. Provide them with support. Be sure they have constant guidance and the ability to achieve your company’s goals. Retaining employees is essential. It costs much more to have to find, hire, train, and manage new employees than it does to keep well-performing, talented, or employees with potential on staff. Find that balance within your HR department for the best results.

Improve Customer Retention to Reduce Costs

It’s hard (and expensive) work to get new customers. Every dollar you spend on marketing and bringing in new customers and clients needs to be money well spent. While you cannot stop marketing, you should do what you can to improve customer retention. To do this, consider:

• Speak to customers one-on-one to ensure they are satisfied.
• Ask for feedback and respond to it routinely.
• Meet with customers to gather more insight. Conduct market research routinely.

Most importantly, listen to the negative. These are areas where you’ll be able to improve and grow specifically. Fixing a customer’s problem is also a surefire way to keep them as a lifelong customer. Are you doing what you can to improve customer retention?

Get a Clear Picture of Profit Margins of All Products and Services

How much does each product cost to make, buy, produce, market, and sell? Every service needs a clear understanding of the costs to acquire and provide that service to your customer base. These costs will change over time, especially as many companies see significant changes in production and logistics costs. You’ll need a method for monitoring these costs on an ongoing basis. That’s not always easy. With proper software and accounting tools, you should be able to gain insight into costs in real time or at least over the course of several months. This gives you the ability to know where to move prices, where to place your marketing dollars, and where to focus your efforts to scale your business.

What Steps Can You Take Now?

Business growth is always necessary, but there are many ways for your company to expand. Don’t always focus on just increasing sales and growing locations. Also look at ways to monitor the financials within your company. This will give you more leverage and power to achieve more of what you want long term.

Thanksgiving and Black Friday Tips!

By Mike Jesowshek, CPA | Uncategorized

Tax Cuts and Jobs Act – See How It Would Affect You (Business Version)

By Mike Jesowshek, CPA | Taxes

If you have been reading social media the past couple weeks you will notice that there is suddenly thousands of tax professionals sharing their opinions and “knowledge” of the tax reform bill. Unfortunately with all this knowledge there are many rumors and mixed information being spread around. This is why we have provided a complete breakdown of all the changes and how they MAY affect you.

The House Ways and Means Committee included a substantial number of proposed tax changes affecting businesses in the Tax Cuts and Jobs Act. This article covers those proposals generally affecting self-employed taxpayers and small businesses. When reading the information included in this article, please keep in mind that it is PROPOSED legislation and is not law yet. However, it does give you an insight to what may be coming. These provisions would be effective in 2018 unless otherwise noted.

Maximum Tax Rate on Business Income of Individuals – Among the goals that the Republicans want to accomplish with tax reform are simplification of the tax code and making it fairer. However, those two aims seem to collide when it comes to how they propose to tax higher-income individuals on their pass-through income. The proposed approach will complicate tax returns for many of these individuals.

Currently, income from a self-employed business, partnership and S-Corporation is passed through to the business owner, or the stockholder in the case of an S-Corporation, and is subject to the taxpayer’s personal income tax rates.

Under the proposed act, a portion of net income distributed by a pass-through entity to an owner or shareholder would be treated as “business income” subject to a maximum rate of 25%, instead of ordinary individual income tax rates. The remaining portion of net business income would be treated as compensation and continue to be subject to ordinary individual income tax rates.

Owners or shareholders receiving net income derived from an active business activity (including any wages received) would determine their business income by reference to their “capital percentage” of the net income from such activities.

• Owners or shareholders generally would be able to elect to apply a capital percentage of 30% to the net business income derived from active business activities to determine their business income that would be eligible for the 25% tax rate. That determination would leave the remaining 70% of net business income subject to ordinary individual income tax rates.
• Alternatively, owners or shareholders would be allowed to elect to apply a formula based on the facts and circumstances of their business to determine a capital percentage of greater than 30%. That formula would measure the capital percentage based on a rate of return (the federal short-term rate plus 7%) multiplied by the capital investments of the business. Once made, the election of the alternative formula would be binding for a five-year period.

In most cases, taxpayers actively participating in businesses involving the performance of services in the fields of law, accounting, consulting, engineering, financial services, or performing arts (i.e., personal service businesses) would not be eligible for the 30% capital percentage but would be allowed to use the facts and circumstances formula.

Business Expensing – Under current law, when a taxpayer acquires a business asset, a taxpayer must depreciate the cost over the asset’s useful life. However, a taxpayer can utilize the bonus depreciation allowance or Sec 179 expensing rules to increase the write-off in the first year. The act would permit 100% unlimited expensing of tangible business assets (except structures) acquired after September 27, 2017, and through 2022. This provision would apply for the tax year when a taxpayer first uses the asset. The asset would not need to be new to qualify for the unlimited expensing.

Sec 179 – Currently a taxpayer may immediately expense up to $500,000 of the cost of Section 179 property, with the deduction phasing out when the costs of eligible property exceed $2 million. These amounts are inflation-adjusted and for 2017 are $510,000 and $2,030,000, respectively. The act would increase the annual expensing limit to $2 million, and the phaseout would begin at $20 million. If enacted, this provision would be effective for assets purchased and placed in service after 11/2/17.

Business Interest Expense Limitation – Under the act, the interest deduction for businesses would be limited. However, the act carves out an exception for small businesses with gross receipts of $25 million or less.

Business Entertainment – Under current law, when a taxpayer establishes that an item was directly related to the active conduct of the taxpayer’s trade or business, a taxpayer can deduct 50% of the cost of business entertainment. Under the act, no deduction would be allowed for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes. However, the 50% limitation would continue to apply to expenses for food or beverages and to qualifying business meals.

Sec 1031 Exchanges – Under current law, gain from the exchange of most business or investment property can be tax-deferred when the property is exchanged for like-kind property. Under the act, tax-deferred exchanges would only be allowed for real property after 2017.

Self-Created Property – Under current law, a self-created patent, invention, model or design (whether patented or not), or secret formula or process is treated as a capital asset and subject to capital gain rates when sold. Under the act, these items would be subject to ordinary tax rates upon sale. In addition, the election to treat musical compositions and copyrights in musical works as a capital asset would be repealed.

Domestic Production Deduction (DPD) – Under current law, taxpayers are able to claim a deduction equal to 9 percent (6 percent for certain oil and gas activities) of the lesser of the taxpayer’s qualified U.S. production activities income or the taxpayer’s taxable income for the tax year. The deduction is limited to 50 percent of the W-2 wages paid by the taxpayer during the calendar year. Under the act, the DPD would be repealed after 2017.

Business Credits – The act would make the following changes to business tax credits:

• Employer-provided Child Care Credit – Repealed
• Rehabilitation Credit – Repealed
• Work Opportunity Credit – Repealed
• Deduction for unused business credits – Repealed

Corporate Tax Rate – Currently the corporate tax rate is made up of four graduated tax brackets: 15%, 25%, 34%, and 35%. The act would make the corporate tax rate a flat 20%.

Personal Service Corporation Tax Rate – Corporations whose principal activity is the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting and where such services are substantially performed by the employee-owners, would no longer be able to use the graduated tax brackets and would be taxed at a flat rate of 25%.

Net Operating Loss (NOL) – Carryback of NOLs arising after 2017 would be repealed, except for a one-year carryback allowed for a loss in a federally declared disaster area incurred by a small business (gross receipts under $25 million) or farming trade or business. The carryforward period, which is currently limited to 20 years, would become indefinite, and the loss deductible in any carryforward or carryback year would be limited to 90% of that year’s taxable income (figured without the NOL deduction). Additionally, for NOLs incurred after 2017 and carried forward, an interest factor would be applied each year that would increase the amount of the NOL to preserve its value.

The foregoing only includes the major changes, and there are other details not covered. Of course these are proposed law changes, and there is no assurance these changes will pass into law. Even if the provisions are enacted, there is no guarantee they will not have been altered from the form described above. If you have questions or concerns about these proposals, please give this office a call.

Tax Cuts and Jobs Act – See How It Would Affect You (Personal Version)

By Mike Jesowshek, CPA | Uncategorized

If you have been reading social media the past couple weeks you will notice that there is suddenly thousands of tax professionals sharing their opinions and “knowledge” of the tax reform bill.  Unfortunately with all this knowledge there are many rumors and mixed information being spread around. This is why we have provided a complete breakdown of all the changes and how they MAY affect you.

The House of Representatives Way and Means Committee has finally released their version of the long-promised tax-reform legislation. This is the first step toward enacting new tax legislation. A Senate version is also required; if both versions pass, the two bills will then be reconciled, and both chambers of Congress will then need to pass the final bill before it can go to the President to be signed into law. There is no assurance that this tax-reform legislation will pass; it looks likely that the vote will largely be on party lines, so, if some Republican members of Congress do not vote with their party, the legislation could fail. Thus, it is important to stress that the information included in this article is on legislation that merely has been proposed and that is not law yet. However, this article will give you insight about what may be coming. The provisions described below would be effective in 2018 unless otherwise noted.

Standard Deductions – The legislation would nearly double the standard deductions while limiting itemized deductions. The following compares the proposed new standard deductions to the current amounts:

Itemized Deductions – Currently itemized deductions include medical, state and local taxes; home-mortgage Interest; charitable contributions; and miscellaneous deductions. The proposed act would substantially change what would be allowed as an itemized deduction.

Medical – Medical deductions, which currently are allowed for unreimbursed medical expenses that exceed 10% of adjusted gross income (AGI), would no longer be allowed.

Taxes – Under the proposed act, deductions for taxes would be allowed for property taxes only, and they would be limited to a maximum of $10,000. The currently allowed deductions for state and local income and sales taxes would no longer be allowed if this legislation is passed. This change is a huge point of contention for individuals who reside in states or localities that have high income taxes. Strategy: If you normally itemize your deductions or if you are right on the cusp of qualifying to itemize under current rules, it may be appropriate to estimate your state and local income taxes for 2017 and to pay that amount by way of withholding or estimated taxes before year-end – just in case state income taxes are no longer deductible after 2017.

Home-Mortgage Interest – Currently, taxpayers can deduct interest on up to $1 million of home-acquisition debt and up to $100,000 of home-equity debt from primary residences and second homes. The proposed legislation would reduce the $1 million limit on home-acquisition debt to $500,000 for homes purchased after November 2, 2017. The $1 million cap will continue to apply to mortgages that were already in existence as of November 2, 2017, as well as to mortgages resulting from binding written contracts that were entered into before that date.

However, many taxpayers may be concerned because the act would disallow home-equity debt interest and second-home interest deductions.

Charitable Contributions – Charitable contributions would continue to be deductible; in fact, the limitation would increase from 50% to 60% of AGI, thus allowing those who itemize to deduct larger contributions.

Miscellaneous Itemized Deductions – This is a sort of catch-all category for deductions; the act would make the following changes:

• Employee business expenses would no longer be deductible.
• Tax preparation fees would no longer be deductible.
• Casualty losses would no longer be deductible except for taxpayers who live in federally declared disaster areas; special legislation allows such losses to be deducted without itemizing.
• Gambling losses would still be deductible; the legislation would also add a deduction for gambling expenses to the extent of gambling income.

Exemptions – Under today’s law, a personal exemption of $4,050 is allowed for the filer, for his or her spouse (if married), and for each dependent. Under the proposed legislation, these exemptions would be repealed.

Tax Rates – Under current law, there are seven tax brackets; 10, 15, 25, 28, 33, 35 and 39.6%. The proposed tax rates would be 12, 25, 35 and 39.6%. The brackets in both versions operate as step functions, which means that the income within each bracket is taxed at that bracket’s rate; the income exceeding a given bracket is taxed at the next-highest bracket’s rate. The tables below illustrate the current and proposed tax brackets.

Example using the 2017 table – A single taxpayer has taxable income of $20,000. From the table, we find that the first $9,325 (in the 10% bracket) is taxed at 10%; the balance, $10,675, is within the 15% tax bracket and thus is taxed at 15%. The total tax on the $20,000 is thus ($9,325 x 10%) + ($10,675 x 15%) = $2,533.75.

Example using the proposed table – A single taxpayer has taxable income of $20,000 in 2018 after the proposed changes are enacted. The tax-bracket table above indicates that the top of the 12% bracket is $45,000, so all $20,000 would be taxed at 12%; thus, the tax on the $20,000 would be $20,000 x 20% = $2,400.

The act would also add a new, complicating twist to the tax calculation that phases out the benefit of the 12% bracket for those with adjusted gross incomes of over $1,000,000 (or $1,200,000 for joint filers).

Enhanced Child Tax Credit and New Family Flexibility Tax Credit – The act would increase the child tax credit from $1,000 to $1,600; the first $1,000 would be refundable. (Note: There are both refundable and nonrefundable credits. Nonrefundable credits cannot reduce a taxpayer’s tax liability below zero, but with refundable credits, any excess is refundable to the taxpayer.) In addition, the act would add a $300 nonrefundable credit for each non-child dependent.

The act also includes a “family flexibility credit” that would provide a $300 nonrefundable credit to each taxpayer (and each spouse when a couple files jointly). Both the non-child credit and the family flexibility credit would expire after 2022.

These credits would phase out for taxpayers with income of at least $115,000 for single filers or $230,000 for joint filers.

Capital-Gains Tax – The act retains the special rates for long-term capital gains but increases the range for the 15% bracket. The following table illustrates the taxable incomes at which the capital-gains tax rates would apply.

Education Benefits – A number of education benefits are currently included in the tax code. Here is how the act would affect each.

Coverdell Education Savings Accounts – No further contributions to these savings accounts would be allowed after 2017; the act would allow current funds to be rolled into a Sec 529 plan.

Sec 529 College Savings Plan – Contributions to these plans would continue under the new act, which would add a provision allowing up to $10,000 a year to be used for elementary-school and high-school education expenses.

Higher Education Interest – The act would repeal the currently allowed deduction of up to $2,500 for higher-education student-loan interest.

Employer Provided Education Assistance – The act would repeal this $5,250 tax-free benefit that is available to employees under existing law.

American Opportunity Tax Credit (AOTC) – The AOTC currently provides a tax credit of up to $2,500 for up to 4 years of eligible students’ higher-education expenses. Up to 40% of the AOTC is refundable; it phases out for higher-income taxpayers. The act would enhance the AOTC by increasing its extent from 4 to 5 years, although the credit in the 5th year would be limited to $1,250, no more than $500 of which would be refundable.

Lifetime Learning and Hope Credits – The act would repeal both of these credits.

Employer-Provided Dependent Care Assistance – Existing law allows employees to exclude from their annual income up to $5,000 ($2,500 if married filing separately) of the value of their employer-provided dependent-care assistance for each child under age 13 and for each spouse or other dependent who is physically or mentally unable to care for themselves. The act would repeal this exclusion.

Plug-In Electric Motor Vehicles – There is currently a credit of up to $7,500 for the purchase of a qualified electric vehicle. The act would repeal this credit for vehicles placed in service after 2017. Strategy: If you are contemplating the purchase of a qualifying electric vehicle, make sure to take possession of and begin using the vehicle before the end of 2017, just to be on the safe side.

Alimony – Alimony is currently deductible for the payer and treated as income for the recipient. The act would retain that treatment for divorce agreements completed through 2017. However, for those entered into after 2017, alimony will no longer be deductible for the payer and will no longer be considered income for the recipient.

Home-Sale Exclusion – Currently, taxpayers can generally exclude $250,000 ($500,000 if married filing jointly) of gains from the sale of a primary residence if the taxpayer has owned and used the home as a principal residence for at least 2 of the past 5 years immediately prior to the sale. For sales completed after 2017, the act would change the ownership-and-use requirement to at least 5 out of the prior 8 years and would only allow one exclusion every 5 years. In addition, the act would limit the exclusion for higher-income taxpayers by phasing out the exclusion by one dollar for every dollar for which a taxpayer’s AGI exceeds $250,000 ($500,000 if married filing jointly).

Moving Expenses – Under current law, taxpayers can generally deduct the unreimbursed costs of a work-related move of 50 miles or more, and employer-reimbursed moving expenses are generally excluded from the employee’s income. Under the act, after 2017, moving expenses would no longer be deductible, and employer reimbursement would be taxable.

Adoption Expenses – Currently, lower-income taxpayers are entitled to a credit for adoption expenses of up to $13,570. When an employer reimburses an employee for adoption costs, up to $13,570 of that reimbursement is tax-free to the employee. The act would repeal both of these provisions.

Roth IRA Recharacterizations – Under current law, a taxpayer may convert a traditional IRA to a Roth IRA by paying tax on the converted amount. The House of Representatives Way and Means Committee has If, for some reason, he or she regrets making this conversion, the contribution can then be recharacterized back to a traditional IRA, essentially undoing the original conversion. The act would repeal the recharacterization provision so that, once a conversion is made, the taxpayer would not be able to undo it.

401(k)s – In the days before releasing the details of the act, an idea was floated to substantially reduce the annual amount of pretax contributions that could be made to 401(k)s and similar retirement plans. The act does not include this proposal.

Estate Taxes – Under current law, a decedent’s estate is subject to tax on the amount that exceeds the current inflation-adjusted lifetime limit on consolidated gifts and estates, which is $5.49 million for 2017. The act would increase the lifetime limit to $10 million, annually adjusted for inflation; the inflation-adjusted amount is not known at this time. In addition, the act would repeal the estate and generation-skipping taxes after 2023 while maintaining beneficiaries’ stepped-up basis in estate property.

Gift Tax – The gift tax rate is currently 40%; the act would reduce it to 35%. The act would also continue to allow an inflation-adjusted annual exemption, which is $14,000 in 2017 ($15,000 in 2018).

Alternative Minimum Tax (AMT) – There is currently an alternative way of computing a taxpayer’s liability while limiting deductions and adding preference income. When the AMT is higher than the regular tax, the AMT applies. The act would repeal the AMT.

The forgoing is only an overview of the provisions that would affect individual taxpayers; of course, there is no guarantee that the act will pass without changes – if it passes at all. Please give this office a call if you have any concerns or questions about the proposed changes.

Following Congress on its Path to Tax Reform

By Mike Jesowshek, CPA | Taxes

As Congress begins debating tax reform, you might be interested in an overview of the GOP’s proposed changes so you’ll have an understanding of what the proposals actually entail as you follow the debate and won’t have to rely on politically motivated analysis by the various media sources. It is important to understand that the GOP’s tax reform proposal is actually only an overall framework of the tax legislation that will be formulated later by congressional committees. So it only provides the “big picture,” with details to be added later. However, the devil is always in the details, and you frequently have to read between the lines and listen to and read comments by Washington insiders to glean additional detail. Based upon that, the following are the provisions of the proposed tax reform that will apply to individual taxpayers and small businesses.

Filing Status

Current Law: The current law includes five filing statuses: single (unmarried), married taxpayers filing jointly (MFJ), head of household, married filing separately (MFS) and surviving spouse. The head of household (HH) status is for single individuals and some married but separated individuals who are maintaining a home for a dependent. MFS is a filing status that applies to a married individual who is not filing a joint return with their spouse (it keeps married individuals from filing as single and abusing the intent of the tax laws). Surviving spouse is a status that allows a widow or widower with a dependent child to continue to use the joint tax rates for 2 years after the year of death of their spouse.

Proposed Law: It appears that the proposal would retain only the single and married taxpayers filing jointly statuses in an effort to simplify the tax law. If this is the actual intent, it would greatly streamline the tax code, which is littered with special treatment for HH and MFS taxpayers. Potential losers under this proposal are HH filers, who currently enjoy a standard deduction that is higher than that of a single filer as well as lower tax rates.

Personal Exemptions

Current Law: A deduction from adjusted gross income (AGI), called an exemption allowance, is permitted for the filer of the return, his or her spouse if filing jointly, and each dependent claimed on the return. For 2017, each exemption allowance is $4,050. So, for example, a married couple filing jointly with two dependent children would be entitled to an exemption allowance of $16,200. However, the exemption deduction phases out for higher-income taxpayers.

Proposed Law: Personal exemptions would be eliminated, but child and other dependent credits might take their place, as described later in this article.

Standard Deduction

Current Law: The standard deduction is for taxpayers without enough deductions to file a Schedule A and itemize their deductions. Currently a standard deduction is set for each filing status and is adjusted for inflation each year. For 2017, the standard deduction is $6,350 for single and married separate, $9,350 for head of household, and $12,700 for married joint and surviving spouse. There are also add-on amounts for each filer and spouse who is age 65 or over, plus an additional amount for blindness.

Proposed Law: The GOP’s framework would replace both the current standard deduction and the personal exemptions with new higher standard deductions. In addition, the proposal would do away with the additional standard deductions for the seniors and people with visual impairments.

When the proposed higher standard deductions were first announced some months ago, those using the standard deduction were excited to think their standard deductions would be roughly doubled. But now that we have a few more details, we find that personal exemptions would no longer be allowed, which changes the outcome significantly. The table below compares the current standard deduction and exemptions for different filing statuses and number of exemptions to the proposed standard deduction replacement.

As you can see, the proposed change favors the smaller family size, but this is supposed to be compensated for with a larger and partially refundable child tax credit that is discussed below.

Itemized Deductions

Current Law: Medical deductions are allowed to the extent that they exceed 10% of the taxpayer’s AGI, tax deductions for state and local (city) income taxes or sales tax, plus real and personal property taxes. Also included is interest paid on qualified first and second home mortgage acquisition and equity debt, provided the acquisition debt doesn’t exceed $1 million and the equity debt isn’t over $100,000. The debt amounts of the first and second homes are combined for this limitation. Other categories of itemized deduction are charitable contributions and miscellaneous itemized deductions.

Proposed Changes: The tax reform would eliminate all deductions except for charitable contributions and those that encourage home ownership, such as home mortgage interest.

There is already pushback from members of Congress whose constituents reside in states that impose an income tax on their residents. Taking away the ability to deduct state and local income tax, referred to as the SALT deduction, would most significantly impact taxpayers living in states that have income taxes, and thus they would be double-taxed on the same income. All but seven states have income tax, with California, New York and New Jersey imposing the highest rates.

Eliminating medical deductions will significantly impact senior citizens who require expensive elder care and taxpayers who incur extraordinary medical expenses.

Casualty, theft and disaster losses are currently included in itemized deductions, and the proposal is silent as to what will become of these all-important deductions. Also unaccounted for is the deduction for gambling losses, the elimination of which will force recreational gamblers to pay tax on all winnings even if they have a net loss.

Individual Tax Rates:

Current Law: There are seven tax rates (10%, 15%, 25%, 28%, 33%, 35% and 39.6%), with the tax progressively increasing as the taxpayer’s taxable income increases. Each tax rate is applied to ever-increasing ranges of taxable income, referred to as tax brackets, with the 2017 top brackets kicking in at $418,400 for single taxpayers and $470,700 for married taxpayers filing jointly.

Proposed Changes: The tax reform would reduce the number of tax rates to three: 12%, 25% and 35%, with possibly a fourth rate for the “highest-income” taxpayers. The proposal is silent as to the ranges of taxable income these rates will apply to, making it impossible to make comparisons between the current law and the proposed changes. However, should the three rates be made into law, the wealthiest taxpayers would enjoy a significant tax cut.

Child Tax Credit (CTC)

Current Law:  Allows a tax credit of $1,000 for each qualifying child dependent under the age of 17. The credit is generally nonrefundable (meaning it can only offset your tax liability and any excess is lost). However, when a taxpayer’s income is low or there are three or more qualifying children, a portion of the credit is refundable. The credit is also phased out for higher-income taxpayers.

Proposed Changes: The reform would increase the amount of the credit by an unspecified amount and make the first $1,000 of the CTC refundable. It would also add a nonrefundable credit of $500 for other dependents of the taxpayer that do not meet the child criteria. This presumably eliminates the current complicated calculation for the refundable portion of the child tax credit. The proposal intends that the income phaseout ranges be adjusted so more taxpayers will be eligible for the credit, but the higher phaseout levels are not specified. These adjustments to the CTC are touted to make up for the loss of personal exemptions, but without knowing the amount of the credit increase and the high-income phaseout ranges, it is impossible to make comparisons between the current and proposed regimes.

Alternative Minimum Tax (AMT)

Current Law: The AMT was originally initiated to keep higher-income taxpayers from benefiting from certain tax provisions. Over the years, inflation has caused the AMT to significantly impact more taxpayers than originally intended. Determining whether the AMT applies and computing the tax adds a layer of complexity to preparing the return.

Proposed Changes: The reform would eliminate the AMT.

Estate Tax

Current Law: The current code imposes a 40% tax on the estate of a decedent whose estate’s value exceeds $5.49 million. The $5.49 million is adjusted down for certain gifts made during the decedent’s lifetime. Beneficiaries of estates receive inheritances at the fair market value of the property inherited as of the decedent’s date of death. Thus beneficiaries who inherit property and then sell it are subject to tax only on the appreciation from the time they inherited the property.

Proposed Changes: The reform would eliminate the estate tax. Unanswered in the proposal is whether a beneficiary will continue to receive inherited property at fair market value or whether the heir will inherit the decedent’s basis in the property. If the latter, then when the beneficiary sells the property the beneficiary will be stuck with paying income tax on the entire appreciation in value from the time the property was acquired by the decedent. Also unanswered is whether the gift tax will continue to apply.

Top Tax Rate for Small Businesses

Current Law: At present, business income from a Schedule C, LLC, Partnership and S-Corporation is passed through to the owner of the business and included on his or her 1040 individual return and taxed at rates ranging rom 10% to 39.6%.

Proposed Changes: As mentioned previously, the proposed changes would reduce the current seven tax rates to three. For pass-through businesses, the proposed changes limit the tax on pass-through small business income to 25%, the middle rate of the three new proposed rates. Unfortunately, the term “small business” is not defined in the proposal. This proposed change would favor successful businesses that would otherwise be subject to the highest proposed tax rates.

Expensing Business Purchases

Current Law: Generally, capital purchases by a business, such as machinery, vehicles, or computer systems, must be depreciated (written off) over their useful lives—usually 3, 5 or 7 years for most purchases by small businesses. A special allowance, usually referred to as bonus depreciation, is available in the first year for certain types of property. There is also a provision that allows expensing up to $510,000 worth of purchases in lieu of depreciating the cost of the property.

Proposed Changes: The reform would allow 100% first-year expensing of capital purchases (other than structures) after September 27, 2017. The full expensing provision would not be permanent, but would be in the tax code for a minimum of five years. A future Congress could decide to extend the provision or make it permanent.

Other issues: Other issues generally not impacting small businesses or individuals include reducing the corporate tax rate to 20% – which is below the 22.5% average of the industrialized world – with the intent to make U.S. businesses more competitive with their foreign rivals. The corporate alternative minimum tax would also be eliminated. The proposed changes would also repeal the domestic production activities deduction and most business tax credits, except the low-income housing and the research and development credits.

The current consensus is that the changes, other than the business expensing, would not be effective until 2018. We hope this provides you with insight into the GOP’s proposed tax reform. But keep in mind that these proposals could, and probably will, change as the proposal works its way through Congress.

Understanding Sales Tax for Fitness Studios

By Mike Jesowshek, CPA | Uncategorized

Learn more about sales tax specifically related to fitness studios and gyms by clicking the link below for an article posted on the Association of Fitness Studios blog.

Understanding Sales Tax for Fitness Studios

Tax Scams Reach All-Time High; Don’t Be a Victim

By Mike Jesowshek, CPA | Taxes

One thing we can count on when tax season begins is the scammers coming out from under their rocks with schemes to try and trick you so they can steal your ID and file returns under your Social Security number (SSN). Or, they may even email or call you pretending to be IRS or state tax agents and attempt to intimidate you into sending them money to pay fabricated tax liabilities. These crooks take advantage of individuals’ natural fear of the IRS and use it to coerce their marks into making payments without first verifying the validity of the liability.

Don’t be a victim of these unscrupulous predators. The only way to protect yourself is to understand their tricks and what to do (actually, what not to do). This article includes a variety of plots that have been employed in the past. But, keep in mind these lowlifes can be very clever, intimidating, and aggressive, and come up with new schemes all the time, so you need to be vigilant.

ID thieves prize three things: your name, Social Security number, and birth date. You should always be very careful about divulging your birth date and SSN. Don’t use them unless absolutely necessary, and always question the requester’s need to know.

You should also be aware that the IRS never initiates contact in any way other than by U.S. Mail. So, if you receive a phone call from out of the blue demanding payment, you can be assured it is a scam. Simply hang up the phone without providing any information. If you receive an email from the IRS, do not click on embedded links or attachments. That could cause malware to be installed on your computer, allowing scammers to access your computer. The first thing you should do is call this office.

Additionally, it is important for taxpayers to know that the IRS:

1. Never asks for credit card, debit card, or prepaid card information over the telephone.
2. Never insists that taxpayers use a specific payment method to pay tax obligations.
3. Never requests immediate payment over the telephone.
4. Will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior written notification of IRS enforcement actions involving IRS tax liens or levies.

Email Scams & Phishing – Every tax season, the scammers become very active. They create bogus emails disguised as authentic emails from the IRS, your bank, or your credit card company, none of which ever request information that way. They are trying to trick you into divulging personal and financial information that they can use to invade your bank accounts, make charges against your credit card, or pretend to be you to file phony tax returns or apply for loans or credit cards. Always be skeptical! If the email is related to taxes, call this office before doing anything. If it is supposedly from your credit card company, your bank, or another financial institution, call the organization to verify the authenticity of the email.

One scam last year was an email sent to taxpayers requesting that they click on a link in the email to verify their identity before their tax refund could be released. The link took them to the ID thief’s website, made to look like the IRS’s, where victims entered their names, SSNs, and birthdates. Others used the same scheme, pretending to be an individual’s bank or credit card company.

Phone Scams – Very aggressive scammers will call, claiming to be an IRS agent, and tell the person answering the call that they owe money that must be paid immediately or their home will be seized, their wages will be attached, or even that they will be arrested. After threatening the victim with jail time or driver’s license revocation, the scammer hangs up. Soon, someone else calls back pretending to be from the local police or DMV, and the (rigged) caller ID supports their claim.

These are frequently thieves from outside the U.S., and once the money is transferred, there is no chance of getting it back.

In 2016, the police in Mumbai, India, busted a phone center that was calling U.S. taxpayers with just such a scheme and bilking U.S. taxpayers to the tune of $150,000 a day. They demanded payment by credit card, debit card, or gift card.

ID Thieves – These rip-off artists file phony tax returns using stolen IDs and counterfeit W-2s and have the refunds directly deposited into their bank accounts, which they then clean out before the victim or the IRS discovers what happened. If the IRS rejects your return because a SSN on your return was previously used to file, that is a good indication your ID has been stolen, and you should contact this office for instructions on notifying the IRS. Once your ID has been compromised, the IRS will issue a special six-digit Identity Protection number that can be used in conjunction with your SSN to file your return.

If your ID has been compromised, or you suspect it might have been, contact this office immediately so we can assist you in notifying the IRS, so that they block returns filed with your SSN but without the special six-digit filing number.

We also urge you to educate others in your family who could be scammed.

If you have questions, please give this office a call.

5 Bookkeeping Tips for New Fitness Studio Owners

By Mike Jesowshek, CPA | Bookkeeping

Learn more about these tips on our article located posted on the Association of Fitness Studios blog.

https://member.afsfitness.com/content/5-bookkeeping-tips-new-fitness-studio-owners

When Business Meals and Entertainment Are Deductible

By Mike Jesowshek, CPA | Bookkeeping , Taxes

An often asked question is: are meals and entertainment deductible in the course of one’s business, and if so, under what circumstances? This type of expense requires you to comply with some pretty complicated qualifications, and if you can jump through the hoops, the expenses may be deductible in certain cases.

But before we go too far, know that unreimbursed meal expenses incurred while out of town overnight on business are always deductible but generally limited to 50% of the cost. The focus of this article is the deductibility of meals and attendance at events in the form of business entertainment.

The first hoop to jump through is meeting the “ordinary and necessary” requirement, which applies to all deductible expenses needed to carry on a business. Ordinary and necessary is broadly defined to mean customary or usual and appropriate or helpful.

The next hoop is meeting one of two tests: the “directly-related test” or the “associated-with test.”

• Directly-Related Test – In order to meet the directly-related test, the meal expense must be incurred in the active conduct of business and be for the taxpayer, business guest(s) and any spouse(s). Under the directly-related test, actual business discussions are required during the meal, and the taxpayer must show that he or she anticipated a specific business benefit from the meal, even if the benefit never materialized. Meetings or discussions that take place at sporting events, nightclubs, or cocktail parties – essentially, social events – wouldn’t meet this test.
• Associated-With Test – The associated-with test is somewhat more liberal, because it allows deductions for meal or entertainment expenses incurred the same day either directly preceding or following a substantial and bona fide business discussion. However, entertainment can still pass muster, even if it didn’t occur on the same day as the business meeting, if the facts and circumstances warranted a delay.

  Entertainment at shows, sporting events, night clubs, etc., can qualify under the associated-with test if its purpose is to get new business or encourage the furtherance of a business relationship. For meals, you or one of your employees must be present; otherwise, the expense is not deductible.

  If non-business guests are invited to an otherwise allowable “associated-with business” entertainment event, the expenses must be allocated between the business and nonbusiness guests. The expenses related to the non-business guests are nondeductible. However, the spouses of the taxpayer and of his or her business guests or associates are considered business guests for this purpose.

Still another hoop is the restriction for lavish expenses. Meal and entertainment expenses are deductible up to an amount not considered “lavish” (reasonable under the circumstances). Also, the taxpayer (or a representative of the taxpayer) must be present. The representative could be, for example, the taxpayer’s employee, an attorney or an independent contractor who performs significant services for the taxpayer.

The final hoop, which is as important as qualifying for the deduction, is meeting the substantiation requirements. You must be able to establish the amount spent, the time and place, the business purpose and the business relationship and names of the individuals involved. You should keep a diary, account book or similar records with this information and record the details within a short time of incurring the expenses – a timely kept record carries more weight in an IRS audit than one created months or years after the event occurred, when memory can be hazy. For expenses of $75 or more, documentary proof (receipts, etc.) is also required.

A final word: even after you have jumped through those hoops, in the majority of cases, only 50% of the qualified expenses are actually tax-deductible.

How to Identify When the Time Is Right to Bring an Accounting Pro Into the Fold

By Mike Jesowshek, CPA | Bookkeeping , General Business

Running your fitness studio or gym is a complicated affair with a wide range of different “moving parts” to concern yourself with, but many people don’t realize how many of them ultimately lead back to your finances until it’s far too late.

A large part of your ability to be successful in the long-term will ultimately come down to the rate at which you expand. Grow your fitness studio too quickly and you might spread yourself too thin. Grow too slowly and you’ll be passing up opportunities that are rightfully yours, leaving a lot of money on the table at the same time. Your control over your finances will dictate whether you’re able to strike that perfect balance the way you need to.

Marketing, paying vendors, paying employees, managing client relationships – all of it depends on the quality of your bookkeeping (or lack thereof). To that end, a large part of your success will ultimately come down to your ability to identify when the time is right to stop doing things yourself and bring a professional accounting provider into the fold. To do this, you’ll need to keep a few key things in mind.

The Warning Signs You Need to Know

As it does every year, Intuit recently released a survey outlining the state of small business accounting in the United States. The results are very telling in terms of when people should bring a financial professional into the fold – and what the consequences are of inaction.

Asset tracking, for example, is something that you may not immediately think impacts your bookkeeping, but it does in a fairly significant way. Ghost assets are fixed assets that have either been rendered unusable or are physically missing. However, “out of sight, out of mind” does not apply in this case – they still count toward a business’s tax and insurance liability, thus making it difficult to properly reconcile their books every year.

Of the people who responded to Intuit’s survey, 74% indicated that they didn’t understand this, and 49% said that they didn’t even know what ghost assets were in the first place. If you are among those numbers, congratulations on arriving at one of the biggest indicators that you need to bring a financial professional into your business (and also that you’ll likely want to conduct inventory on a regular schedule moving forward).

Other signs that the time is right to bring a accounting professional into the fold ultimately come down to the most pressing financial issues that most businesses face. 51% of people who responded to Intuit’s survey said that accounts receivable and collections were their most significant business challenge. 44% said that cash flow was always something they were concerned about, and getting a better handle on “money in vs. money out” was always a top priority.

Cash flow troubles, it is important to note, is the number one reason why most small businesses fail within the first four years of existence.

Other pressing issues included properly managing paperwork on a regular basis, accurately closing the books each month, and managing payroll. The major thing to understand is that a financial professional will be able to help with ALL of these things, taking the stress off your plate so that you can focus simply on running your business like you should be. If ANY of these things are ones that keep you awake every night, or you feel these issues are significantly affecting your ability to grow and evolve, guess what? It’s time to contact a professional to do as much of the heavy lifting as possible.

Never Underestimate the Power of Trust

Consider it from another perspective. Recently, small business owners responded to a survey outlining all of their most pressing accounting issues. The survey, conducted by Wasp Barcode Technologies, spoke to 393 small business leaders of nearly every organization size and industry that you can think of.

When asked to rank the professionals that they worked with on a regular basis in the order of importance, these business leaders overwhelmingly agreed that accounting experts were one of the single most valuable assets they had. They outranked attorneys, insurance agents, technology firms and even staffing services.

This is how important tax professionals are: Business leaders know that much of what they’re trying to do each day, along with what they hope to be able to accomplish in the future, would be impossible without the stable foundation that only an accounting professional can provide.

When It Comes to Accounting, Knowledge Is Power

At the end of the day, it’s important to remember what may be the single most important piece of advice for small business owners when it comes to accounting: It is far, far cheaper to hire an accounting professional today before things get out of hand tomorrow.

Think about it this way: A large part of the reason why you got where you are today is because you took the initiative and started to do things for yourself. You have a “can do” attitude that just won’t quit, and you’ve built something incredibly successful from the ground up as a result. But there are certain situations where you cannot let pride get in the way of making the right decision, and accounting is absolutely one of them.

You already have a full-time job: running your fitness studio or gym. You don’t have the time to take on another one, let alone the expertise to guarantee that you’re making the best decisions at all times. Yet this is exactly what business accounting is – a heavily specialized, full-time job that requires a careful hand and attention to detail that is second to none.

Bringing in a professional sooner rather than later will not only help make sure that you have cleaner books and other records, it will also significantly reduce the chance that you’ll get hit with penalties for things like late taxes and allow you to be much, much more successful in the long term. These types of benefits, to say nothing of the peace of mind that only comes with knowing your accounting is taken care of, are things that you literally cannot put a price on.