A midyear review should go beyond financials

Every year is a journey for a business. You begin with a set of objectives for the months ahead, probably encounter a few bumps along the way and, hopefully, reach your destination with some success and a few lessons learned.

The middle of the year is the perfect time to stop for a breather. A midyear review can help you and your management team determine which objectives are still “meetable” and which one’s may need tweaking or perhaps even elimination.

Naturally, this will involve looking at your financials. There are various metrics that can tell you whether your cash flow is strong and debt load manageable, and if your profitability goals are within reach. But don’t stop there.

3 key areas

Here are three other key areas of your business to review at midyear:

1. HR. Your people are your most valuable asset. So, how is your employee turnover rate trending compared with last year or previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.

2. Sales and marketing. Are you meeting your monthly goals for new sales, in terms of both sales volume and number of new customers? Are you generating an adequate return on investment (ROI) for your marketing dollars? If you can’t answer this last question, enhance your tracking of existing marketing efforts so you can gauge marketing ROI going forward.

3. Production. If you manufacture products, what’s your unit reject rate so far this year? Or if yours is a service business, how satisfied are your customers with the level of service being provided? Again, you may need to tighten up your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals.

Necessary adjustments

Don’t wait to the end of the year to assess the progress of your 2018 strategic plan. Conduct a midyear review and get the information you need to make any adjustments necessary to help ensure success. Call us at 916-649-1040, and let us know how we can help.


Assessing the S corp

The S corporation business structure offers many advantages, including limited liability for owners and no double taxation (at least at the federal level). But not all businesses are eligible – and, with the new 21% flat income tax rate that now applies to C corporations, S corps may not be quite as attractive as they once were.

Tax comparison

The primary reason for electing S status is the combination of the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when distributed to the shareholder. Instead, S corp tax items pass through to the shareholders’ personal returns and the shareholders pay tax at their individual income tax rates.

But now that the C corp rate is only 21% and the top rate on qualified dividends remains at 20%, while the top individual rate is 37%, double taxation might be less of a concern. On the other hand, S corp owners may be able to take advantage of the new qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.

You have to run the numbers with your tax advisor, factoring in state taxes, too, to determine which structure will be the most tax efficient for you and your business.

S eligibility requirements

If S corp status makes tax sense for your business, you need to make sure you qualify – and stay qualified. To be eligible to elect to be an S corp or to convert to S status, your business must:

  • Be a domestic corporation and have only one class of stock,
  • Have no more than 100 shareholders, and
  • Have only “allowable” shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders.

In addition, certain businesses are ineligible, such as insurance companies.

Reasonable compensation

Another important consideration when electing S status is shareholder compensation. The IRS is on the lookout for S corps that pay shareholder-employees an unreasonably low salary to avoid paying Social Security and Medicare taxes and then make distributions that aren’t subject to payroll taxes.

Compensation paid to a shareholder should be reasonable considering what a nonowner would be paid for a comparable position. If a shareholder’s compensation doesn’t reflect the fair market value of the services he or she provides, the IRS may reclassify a portion of distributions as unpaid wages. The company will then owe payroll taxes, interest and penalties on the reclassified wages.

Pros and cons

S corp status isn’t the best option for every business. To ensure that you’ve considered all the pros and cons, contact us, Ken Cone, CPA at 916-649-1040. Assessing the tax differences can be tricky — especially with the tax law changes going into effect this year.

© 2018

Hidden liabilities: What’s excluded from the balance sheet?

Financial statements help investors and lenders monitor a company’s performance. However, financial statements may not provide a full picture of financial health. What’s undisclosed could be just as significant as the disclosures. Here’s how a CPA can help stakeholders identify unrecorded items either through external auditing procedures or by conducting agreed upon procedures (AUPs) that target specific accounts.

Start with assets

Revealing undisclosed liabilities and risks begins with assets. For each asset, it’s important to evaluate what could cause the account to diminish. For example, accounts receivable may include bad debts, or inventory may include damaged goods. In addition, some fixed assets may be broken or in desperate need of repairs and maintenance. These items may signal financial distress and affect financial ratios just as much as unreported liabilities do.

Some of these problems may be uncovered by touring the company’s facilities or reviewing asset schedules for slow-moving items. Benchmarking can also help. For example, if receivables are growing much faster than sales, it could be a sign of aging, uncollectible accounts.

Evaluate liabilities

Next, external accountants can assess liabilities to determine whether the amount reported for each item seems accurate and complete. For example, a company may forget to accrue liabilities for salary or vacation time.

Alternatively, management might underreport payables by holding checks for weeks (or months) to make the company appear healthier than it really is. This ploy preserves the checking account while giving the impression that supplier invoices are being paid. It also mismatches revenues and expenses, understates liabilities and artificially enhances profits. Delayed payments can hurt the company’s reputation and cause suppliers to restrict their credit terms.

Identify unrecorded items

Finally, CPAs can investigate what isn’t showing on the balance sheet. Examples include warranties, pending lawsuits, IRS investigations and an underfunded pension. Such risks appear on the balance sheet only when they’re “reasonably estimable” and “more than likely” to be incurred.

These are subjective standards. In-house accounting personnel may claim that liabilities are too unpredictable or remote to warrant disclosure. Footnotes, when available, may shed additional light on the nature and extent of these contingent liabilities.

Need help?

An external audit is your best line of defense against hidden risks and potential liabilities. Or, if funds are limited, an AUP engagement can target specific high-risk accounts or transactions. Contact our experienced CPAs to gain a clearer picture of your company’s financial well-being.

© 2018

An FLP can save tax in a family business succession

One of the biggest concerns for family business owners is succession planning — transferring ownership and control of the company to the next generation. Often, the best time tax-wise to start transferring ownership is long before the owner is ready to give up control of the business.
A family limited partnership (FLP) can help owners enjoy the tax benefits of gradually transferring ownership yet allow them to retain control of the business.

How it works

To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children.

You retain the general partnership interest, which may be as little as 1% of the assets. But as general partner, you can still run day-to-day operations and make business decisions.

Tax benefits

As you transfer the FLP interests, their value is removed from your taxable estate. What’s more, the future business income and asset appreciation associated with those interests move to the next generation.

Because your children hold limited partnership interests, they have no control over the FLP, and thus no control over the business. They also can’t sell their interests without your consent or force the FLP’s liquidation.

The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax. For example, if the discount is 25%, in 2018 you could gift an FLP interest equal to as much as $20,000 tax-free because the discounted value wouldn’t exceed the $15,000 annual gift tax exclusion.

To transfer interests in excess of the annual exclusion, you can apply your lifetime gift tax exemption. And 2018 may be a particularly good year to do so, because the Tax Cuts and Jobs Act raised it to a record-high $11.18 million. The exemption is scheduled to be indexed for inflation through 2025 and then drop back down to an inflation-adjusted $5 million in 2026. While Congress could extend the higher exemption, using as much of it as possible now may be tax-smart.

There also may be income tax benefits. The FLP’s income will flow through to the partners for income tax purposes. Your children may be in a lower tax bracket, potentially reducing the amount of income tax paid overall by the family.

FLP risks

Perhaps the biggest downside is that the IRS scrutinizes FLPs. If it determines that discounts were excessive or that your FLP had no valid business purpose beyond minimizing taxes, it could assess additional taxes, interest and penalties.

The IRS pays close attention to how FLPs are administered. Lack of attention to partnership formalities, for example, can indicate that an FLP was set up solely as a tax-reduction strategy.

Right for you?

An FLP can be an effective succession and estate planning tool, but it isn’t risk free. Please contact us at (916) 649-1040 or ken @kenconecpa.com for help determining whether an FLP is right for you.

© 2018

Get SMART when it comes to setting strategic goals

Strategic planning is key to ensuring every company’s long-term viability, and goal setting is an indispensable step toward fulfilling those plans. Unfortunately, businesses often don’t accomplish their overall strategic plans because they’re unable to fully reach the various goals necessary to get there.

If this scenario sounds all too familiar, trace your goals back to their origin. Those that are poorly conceived typically set up a company for failure. One solution is to follow the SMART approach.

Definitions to work by

The SMART system was first introduced to the business world in the early 1980s. Although the acronym’s letters have been associated with different meanings over the years, they’re commonly defined as:

Specific. Goals must be precise. So, if your strategic plan includes growing the business, your goals must then explicitly state how you’ll do so. For each goal, define the “5 Ws” — who, what, where, when and why.

Measurable. Setting goals is of little value if you can’t easily assess your progress toward them. Pair each goal with one or more metrics to measure progress and success. This may mean increasing revenue by a certain percentage, expanding your customer base by winning a certain number of new accounts, or something else.

Achievable. Unrealistically aggressive goals can crush motivation. No one wants to put time and effort into something that’s likely to fail. Ensure your goals can be accomplished, but don’t make them too easy. The best ones are usually somewhat of a stretch but still doable. Rely on your own business experience and the feedback of your trusted managers to find the right balance.

Relevant. Let’s say you identify a goal that you know you can achieve. Before locking it in, ask whether and how it will move your business forward. Again, goals should directly and clearly support your long-term strategic plan. Sometimes companies can be tempted by “low-hanging fruit” — goals that are easy to accomplish but lead nowhere.

Timely. Assign each goal a deadline. Doing so will motivate those involved by creating a sense of urgency. Also, once you’ve established a deadline, work backwards and set periodic milestones to help everyone pace themselves toward the goal.

Eye on the future

Strategic planning, and the goal setting that goes along with it, might seem like a waste of time. But even if your business is thriving now, it’s important to keep an eye on the future. And that means long-term strategic planning that includes SMART goals. At Ken Cone, CPA, we would be happy to explain further and offer other ideas.

© 2018

Transitioning to remote audits

Are you comfortable communicating electronically with your auditors? If so, a logical next step might be to transition from on-site audit procedures to a more “remote” approach. Remote audits can help reduce the time and cost of preparing audited financial statements.

21st century audits

Traditionally, audit fieldwork has involved a team of auditors camping out for weeks (or even months) in one of the conference rooms at the headquarters of the company being audited. Now, thanks to technological advances — including cloud storage, smart devices and secure data-sharing platforms — many audit firms are testing the feasibility of remote auditing as a replacement for sending auditors on-site.

In addition to saving time and audit fees, allowing auditors to work remotely improves the work-life balance for auditors and in-house accounting personnel. Your employees won’t need to stay glued to their desks for the duration of the audit, because they can respond to the auditor’s inquiries and document requests remotely.

Best practices

Changing the format of an audit requires flexibility, including a willingness to embrace the technology needed to facilitate the exchange, review and analysis of relevant documents. You can facilitate the transition process by:

Being responsive to electronic requests. Auditors who are out of sight shouldn’t be out of mind. Answer all remote requests from your auditors in a timely manner. If a key employee will be on vacation or out of the office for an extended period, give the audit team the contact information for the key person’s backup.

Giving employees access to the requisite software. Sharing documents with remote auditors may require you to install specific software on employees’ computers. But your company’s policies may prohibit employees from downloading software without approval from the IT department.

Before remote auditors start “fieldwork,” ask for a list of software and platforms that will be used to interact with in-house personnel. Give the appropriate employees access and authorization to share audit-related data from your company’s systems. Work with IT specialists to address any security concerns they may have with sharing data with the remote auditors.

Tracking audit progress. With less face-to-face time with your auditors, you have fewer opportunities to receive updates on the team’s progress. Ask the engagement partner to explain how they’ll track the performance of their remote auditors, and how they plan to communicate the team’s progress to in-house accounting personnel.

Wave of the future

Like remote working arrangements with employees and contractors, remote audits are a growing trend that could potentially reduce the costs of preparing financial statements. But not every audit firm or business is ready to embrace remote auditing. Contact us at (916) 649-1040 or by email at [email protected] to discuss ways to make next year’s audit more efficient and cost-effective.

© 2018

Effective choice for your company

Most companies have found that it saves a lot by outsourcing their accounting needs. This fact has led to the development of many accounting firms and all promising to offer the best services. This has posed a maze for many people when it comes to choosing the right firm for their accounting needs. However, this can be alleviated by considering a few points about a firm when searching for the best for you.

Effective Choice For Your Company

The first thing that you should look at is the size of the accounting firm. You should first consider the size of your company and the accounting needs required before considering the accounting services. Know how big your bookkeeping requirements are and how many people can complete it within the shortest time possible? For a big firm, hiring the services of a small firm will labor its resources and thereby lead to inaccuracy. Choose the firm( Accounting Sacramento) that compares with your company’s needs. This will enable you to consider the best firm for your needs with the highest efficiency and accuracy.

The second thing is to consider the specialization of the firm. We cannot be good in everything. The accounting field is huge and most of the accounting firms specialize in a certain field like tax, bookkeeping, etc. It is advisable to choose the firm that specializes in your area of interest in order to get the best services. Moreover, you should not only consider their services but also their specialization in terms of the size of the company they handle and the type of companies they handle. If they specialize most on research companies, they might not give the best on your computer accessories company.

Once you have this covered, price and their experience will only be used to narrow down your list. Settle only for the best accountants for the best accounts.

Sacramento Accounting Firm is a recommendable firm for your accounting services in Sacramento. Try our services and you will never regret.

Why You Should Use A CPA Firm?

A CPA firm is a group of professionals who does a number of accounting-related jobs. They monitor as well as keep tabs on an organization’s or an individual’s financial records. Each year, a lot of businessmen doubt why they need the services of such a company when all they do is to be responsible for filing paperwork for the state as well as delivering profit and loss statements.


Why You Should Use A CPA Firm?Many businesses aren’t organized nor do they have people in charge who are just too busy and can’t organize the business’ finances. A CPA firm oversees the financial records and the financial statements of their clients. They are both trained as well as experienced, making them a great choice when it comes to your account as well.

A company doesn’t need to hire throughout the year and normally in any business, there’s already an accounts division that exists. However, certain businessmen keep one in their payroll in order to make sure that their finances are organized.

A CPA firm specializes in taxes. In fact, a lot of them get hired just to take care of them. These companies are made up of experts who file various tax returns and these experts also know how to precisely organize every receipt as well as other documents needed for tax deductions.

In going for one, certain businessmen search for one that’s located nearby, so that in case of any unexpected issues, they could be contacted right away. However, some businessmen prefer hiring a service provider that has a proven track record even though they’re located someplace else.

These reasons are why you hire a CPA firm. However, in case you’re still in doubt, other reasons exist as well. Most businesses go for such a service in order for their financial records to be preserved and to have them file their taxes. The provider could keep track of budgeting processes, creating financial systems, training staff and offering money saving advice, among others.

There are businesses that never seem to make the most out of the collective skills of a CPA firm. With the kind of expertise that a provider has over everything financial, businesses can considerably benefit from such expertise. Instead of spending time sorting out your finances, why not go for such a service? Simply pick up your phone or go online and have an appointment set-up with a firm that has an experienced roster who can easily help you out.

Tax Service: 5 Things You Should Keep in Mind When Searching

A lot of people are going to agree that doing your taxes can be a pain and this is especially true if you happen to be a small business owner.

As one, you only have a little time in thinking about tax preparation and, most often, they don’t have any clue on how these are properly prepared. Not to mention, Internal Revenue isn’t going to make things easier on and/or for you.

It is for these reasons why getting in touch with a professional tax service comes as an easy recommendation. However, how do you go about looking for that ideal one, you may ask? Here are 5 things you should keep in mind:


Tax Service: 5 Things You Should Keep in Mind When Searching

1. Affordability – It’s obvious that by contacting a professional. In doing some research, be sure that you go about asking the right questions and one of the most vital ones here is how much will their services cost you. Outsourcing is going to cost fees but it’s a small investment that’s worth making.

2. Experience – It’s unfortunate that certain small businessmen attempting to pinch each penny are going to go for a tax service that has CPAs who have just recently graduated. Even though this may prove to be a good move in certain aspects, with regards to your business, looking for those who have the experience is vital. CPAs who have a ton of experience are going to know codes like they know their very own names.

3. Proper education and training – It’s essential to keep in mind that tax services can prove to be quite technical. It isn’t about just a handful of people pounding away at their calculators, in-depth know-how is required and your CPA has to have had a college education. Likewise, your CPA ought to also do consistent completions regarding continued education units as well as be regularly up-to-date the latest developments in the laws regarding accounting and taxation.

4. Going above as well as beyond – Since you’re a business owner, you’re going to need a service to go both above as well as beyond their responsibilities in order to find you some extra money or find ways for you avoid any penalties.

5. Reliability – You’re very much aware that you need to think about those tax deadlines. As such, your service must follow the accounting process as well as their important deadlines. Simply put, you ought to go for a tax service that isn’t mired by a lot of work. Since you’re a business owner, go for one who can and will make it work for you.

Questions Should Ask Your Accountant

When you are working with an accountant for your business, it is important to ask the right questions so that you are both on the same page when it comes to managing your finances. Your accountant doesn’t just add up figures and balance your books, they can also be a valuable resource for developing the financial strategy of your business.

Questions Should Ask Your Accountant

So what questions should you ask your accountant? Here are a few very important ones. They are relatively simple questions, but the answers are very important to know when it comes to running your business:

Will it Be You Who Looks After My Account, Or Someone Else?

When your account is secured as a client, your accountant might pass on most of the work with the account to one of thier partners or an apprentice. You want to know whether the person you have met with is the one who will actually deal with you on a day to day basis. If there will be more than one partner involved in your account, ask if you can meet with the others too.

How Does Your Fee Structure Work?

It is important to know how your accountant will be charging you for the work that they are performing – so that you don’t have a surprise when the bill arrives. Consider working out a fixed fee for routine work that can be done by junior apprentices, such as the filling out of forms. Then, you can determine an hourly rate for the consultancy and advice of the more senior partners.

Watch out for accountants who will charge you a full hourly rate for a small task, even if they are just looking up a figure or having a short chat with you on the phone. Make sure that you ask how your accountant will charge you for their time when they need to perform small tasks that only take a few minutes.

What Happens if My Business Gets Audited?

No one wants to think about what would happen if the business was singled out for an audit, but it is something that you should have a plan for in advance just in case. Ask your accountant about how they handle audits and examinations. Will they represent you? How much would it cost to fix any mistakes? How will these fees be calculated? This is important information to know, just in case it happens.

How and When Can I Contact You?

Another thing you will want to know is how accessible your accountant is. How long do they expect to take before they respond to you? When you need urgent help, are you able to contact them on their mobile? Find out how this works, in case you need to contact your accountant right away in an emergency.

Are My Financial Results Where They Should Be?

Your accountant can help you to analyse the financial results of your business, so that you can determine how your company is performing. They can point out important factors such as gross profit percentage and compare them to how other businesses are performing. Your accountant can access benchmark data and compare your businesses to the average, so that you can see how you are performing.

With this honest appraisal of your success, your accountant can then have a discussion about what actions you can take that will help you build on the strengths of your business and address any weaknesses or challenges you might be facing.

What are Your Successful Clients Doing?

Your accountant will work with other business clients and some of them will be doing much better than others. A smart move is to ask your accountant for their observations on what their top clients are doing to make themselves successful. It’s a great way to pick up ideas and if you apply these strategies to your own company, you might be able to improve your own results.

Asking your accountant the right questions can really improve your relationship and can have a beneficial effect on your business – don’t be afraid to enquire! Your accountant can be a very valuable resource when it comes to increasing the future success off your business.