Small Business

Are you a business risk-taker? It could be hurting your company’s value

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Whether you’re looking to cash out now or planning a long-term exit strategy, a business valuation can offer an accurate calculation of your organization’s total worth. Like any business owner, you want to ensure you’re getting top dollar for your business and all of its assets when the time comes.

As with any company, you might discover there are risk factors that are contributing to financial loss or bringing your value down. While certain risks, such as the economy in which your business operates, are out of your hands, there are other factors that you can change to work in your favor.

Playing it safe with business risk
What are the risks in your business, and what can you do to reduce them? Before starting the valuation process, here are some ways your business can minimize risks to a potential buyer, improve finances and increase the overall value of your organization.

  • Stabilize your growth and earnings. Hefty fluctuations in year-over-year revenue are a sure-fire way to scare off buyers. Implement a plan to stabilize earnings and rate of growth over time to demonstrate your sustainability and staying power.
  • Diversify customers and suppliers. Does your business depend on much of its revenue from a single customer, or count on critical product components from a single vendor? To soften the blow of a major loss, develop your customer base and source alternative vendors for important purchases.
  • Ramp up your retention efforts. As key employees stay with your organization over a long period of time, your business can operate with less owner involvement, which can be attractive for potential buyers. To create a turnkey organization, you should incentivize your best employees to stick around.
  • Keep comprehensive accounting records. Your company’s books and records should be as thorough as possible to convey the full financial narrative of your business. This can help prevent any slip-ups or surprises that could come back to haunt you when your business is on the market. Consider an outsourced CAS solution to maximize your efficiency.
  • Carefully document policies and procedures. Documentation makes for a smooth transition for a new owner, and it’s also another way to maintain transparency. In the meantime, your business will benefit from increased efficiency and improved customer satisfaction, with standardized processes across the board.
  • Get patents and trademarks on your proprietary information. By legally safeguarding your intellectual properties, you can help ensure that your products and services can’t be replicated or stolen by the competition, instantly giving your business more value.

When you know the risks that are affecting your business, you can better understand their impact on its value. At NJ CPA firm Magone & Company, we can help uncover your risk areas, and determine what can be controlled or mitigated to your advantage. Contact us or call (973) 301-2300 to learn more.

 

Can depreciation save your business money?

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Depreciation is a deduction from income tax that lets your firm recover the cost of property. Read on to see how the IRS allows for the wear and tear, deterioration or even obsolescence of items.

The depreciation of tangible property — buildings, machinery, vehicles, furniture, equipment and even cell phones — as well as intangible property, such as patents, copyrights and computer software, is allowed by the IRS in certain situations, and can be used to offset income from your business. Does your property meet these requirements?

  • You own the property
  • You lease the property and make capital improvements
  • You use the property in business and for personal purposes (In this case, you can only deduct depreciation for business use of the property)
  • The property has a determinable useful life of more than one year

However, not everything can be depreciated. For example, land is off the table because it doesn’t get used up and is not subject to wear and tear. Inventory is not depreciated either.

You depreciate an asset over time. When you place property in service to use in your business or trade or to produce income, that’s when depreciation begins. However, property stops being depreciable when you’ve fully recovered the property’s cost or other basis or when you retire it from service — whichever happens first.

There are different schedules for different items. For computers, office equipment, cars, trucks and appliances, the recovery time is up to five years. Office furniture and fixtures work on a seven-year schedule. Residential rental properties can be recovered over 27.5 years, while commercial buildings and nonresidential properties can be recovered over 39 years, depending on the year you acquired them.

There are three basic depreciation methods. Particular situations will dictate which ones are most appropriate for you. Keep in mind that you need to know the initial cost of the asset and how long you can depreciate it for.

  • Straight line — Depreciate the property an equal amount each year over its useful life
  • Accelerated method — Take larger depreciation deductions in the first few years of the property’s useful life and smaller deductions later on
  • Section 179 deduction — Deduct the entire cost of the asset the year it’s acquired

To ensure that you properly depreciate property, you need to consider:

  • The depreciation method for the property
  • The class life of the asset
  • Whether the property is “Listed Property” as defined by the IRS
  • Whether you’ve elected to expense any portion of the asset
  • Whether you qualify for any bonus first-year depreciation
  • The depreciable basis of the property

Use depreciation to decrease your company’s tax burden, as you are lowering your overall taxable income. Depreciation doesn’t affect your company’s cash flow or its actual cash balance — it’s a non-cash expense. But before making any decisions, remember to consult your tax professional.

Understanding the tax implications of out-of-state workers

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Here in the tri-state area, where it’s a relatively easy commute from Connecticut or New Jersey to Manhattan, for example, it’s quite common for Magone & Company clients to have employees who reside out of state. And with remote workers becoming more common, you may have more employees who live across the country rather than around the corner.

When your firm has employees who live in one state and work in another, tasks like employment taxes can get a bit tricky. Taxes are generally paid in the state where your team works, but you may run into issues if:

  • Your company is located near a state border
  • You have employees who travel to job sites in other states
  • You have employees who work remotely
  • You are expanding into new states

Having some basic understanding of how the system works will help you make the right decisions about classifying wages and avoiding penalties or amended filings. Both state unemployment and withholding taxes should generally be paid to the employee’s work state, but there are exceptions; the twist is that state laws are (literally) all over the map. Be sure to familiarize yourself with the state legislation that applies to your team. Here are the basics:

Reciprocity agreements
Some states that border each other have entered into agreements allowing employees, who live in one state but work in another, to have their withholding tax paid to the work state. For example, an employee who lives in Maryland but commutes to northern Virginia or D.C. for a job can have withholding tax paid to Maryland rather than the work state. This is also known as courtesy withholding, and it means the employee can file one tax return each year.

If you have an employee complete a non-residency certificate to excuse him/her from tax withholding in their work state, let your payroll provider know that your employee has an agreement in place. If there’s no reciprocal agreement, your employee will most likely have to pay both nonresident and resident state income tax. But luckily, most states grant a tax credit to cover the cost of being taxed twice.

The unemployment tax situation is usually straightforward. When an employee is working in multiple states or working remotely for a company based in another state, employers typically withhold state unemployment tax only in the state in which the employee is working.

 When it gets complicated
Today’s remote-work world means situations that were rare or unheard of a generation ago are now commonplace. For example, consider an employee who works from her cabin in upstate New York, but your company is located in Atlanta — you’ll have to pay all state taxes to New York because that’s where the work is actually being completed.

Or, at that same Atlanta company, you have an employee who needs to work in Maine temporarily for three months. For nine months, you pay taxes in Georgia, and for three months, you pay taxes in the Pine Tree State.

As always, there are exceptions and special circumstances which may also impact your firm’s tax situation, so be sure to consult your trusted tax advisor for specifics. Need help with your cross-border workforce? The professionals at Magone & Company can help you organize your tax system accordingly.

Making sense of the new regulations for retirement plan hardship distributions

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Last month, the IRS issued its final regulations relating to hardship distributions from employee-sponsored retirement plans, including 401(k) and 403(b) plans. These regulations come in response to statutory changes affecting hardship distributions contained in the Bipartisan Budget Act of 2018. The objective: to provide one general standard for determining whether a distribution is necessary — thus simplifying the rules.

If your firm offers retirement benefits, here’s what you need to know:

According to the IRS, a hardship distribution is a withdrawal from an elective deferral account due to an immediate and substantial financial need, limited to the amount necessary to satisfy that need. The money is not paid back to the borrower’s account, but is taxed to the participant.

What constitutes financial need?
Under the new regulations, distribution is treated as necessary when the following requirements are satisfied:

  • The employee has obtained all other distributions available under the plan, as well as all deferred employer compensation plans
  • The employee has provided a written representation to prove insufficient funds to satisfy the need, and the plan administrator does not harbor any knowledge that conflicts with the representation
  • The distribution amount doesn’t exceed the amount required to satisfy the financial need, including any monies needed to cover taxes or penalties resulting from the distribution

What’s changed?
A distribution is not treated as necessary to meet an employee’s urgent financial need if the need may be relieved from another reasonably available resource, including a spouse’s assets. Hardship withdrawals can also be extended to the employee’s primary beneficiary for qualifying educational, medical and funeral expenses. Going forward, hardship withdrawals may also be made from an employee’s elective contributions, as well as the matching contributions from employers — including the earnings on the savings.

Hardship-related amendments in the legislation include:

  • Elimination of the six-month suspension requirement for employee elective deferrals following receipt of a hardship distribution
  • Elimination of the requirement that available retirement plan loans be taken before a hardship distribution is granted
  • Inclusion of employer-provided qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) and their earnings — as well as any income on employee elective deferrals — in hardship distributions

What does this mean for your business?
Plan sponsors are now tasked with ensuring that retirement plan documents are in compliance with the newly-issued hardship distributions. Plans that currently allow hardship distributions will need to be amended to reflect the final regulations by December 31, 2021. Operational changes, however, must comply with the amendments by January 1, 2020.

 Questions? Reach out — we’re happy to discuss these changes and their impact in more detail.

8 ways to cut costs and boost your small business bottom line

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They say little things mean a lot. And relatively small expenses can add up to a huge amount of money your small business could be wasting. By cutting costs, you can help enhance your bottom line in several ways. Here are 10 ideas for various types of businesses to consider:

  1. Improve cash flow. If your business is seasonal, ask your biggest vendors to let you stock up now but pay when customers buy. Also, check into renegotiating your leases to pay only those nine or 10 months out of the year when you experience the greatest number of sales.
  2. Investigate new products. For the next few weeks, have your customer service staff keep a list of products (or services) that customers would have bought if you offered them. Then calculate how much revenue you would have earned by stocking the three most requested items.
  3. Reduce waste. Ask your production foreman to estimate how much you spent in the last six months on lost production, manufacturing errors, injuries and re-works. Then, calculate how much extra you would have made by paying your crew a small percentage of the materials waste reduction and hourly pay required to fix mistakes.
  4. Do some purging. Ask your plant foreman to give you a list of equipment that’s idle most of the time. Calculate how much you would save in insurance, carrying charges, property taxes, income taxes, maintenance and storage space by getting rid of it.
  5. Solicit innovative ideas. Ask everyone who performs day-to-day work in your business — delivery people, administrative assistants, customer service personnel, production employees —  to write down five ways your company could save money or expand sales. You may be surprised by the great ideas you receive.
  6. Renew old acquaintances. Send letters or emails to lapsed customers. Thank them for their past patronage and ask them to come back. Track how many call to reinstate their accounts.
  7. Reassess priorities. Rank your customers by revenue. Then figure out how much more money you’d make by transferring your time and money from servicing the lowest-producing 80% to “wowing” the top 20%.
  8. Cut back on overtime. Ask your payroll manager to give you a list of employees who were paid overtime last year. Initiate a bonus to departments who get their work done on time without incurring any expensive overtime.

Think of what you can do with the savings from just these quick ideas. It will motivate you to do even more to improve your company’s bottom line.

 

Can Client Accounting Services lead to increased efficiencies?

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 From increased visibility to enhanced financial controls, Magone & Company’s Client Accounting Services (CAS) were created to streamline your company’s accounting and finance functions and help you operate more efficiently.

But don’t take our word for it! Respondents to Bill.com’s 2018 Client Accounting Services Report say that CAS delivers measurable benefits.
 


What’s more, these benefits lead to hard-dollar CAS outcomes, such as increased profit (28%) and improved revenue (23%). 

Your financial needs are a moving target. So why lock into a hire who may not be able to keep pace? Our CAS team has the expertise to handle finance-related tasks at every level — for less than the cost of hiring a full-charge bookkeeper or staff accountant. 

With four levels of service — from bookkeeping and accounting to more strategic controller and CFO-level tasks — Magone & Company’s CAS services provide the financial skills, services and systems you need, without having to invest in expensive staff and technology infrastructure.

Is CAS right for you? Learn more or  call (973) 301-2300 for details.