3 Ways Your Business Can Uncover Cost Cuts

Every business wants to cut costs, but it isn’t easy. We’re talking about clear and substantial ways to lower expenses, thereby strengthening cash flow and giving you a better shot at strong profitability.

Obvious places to slash costs (such as wages, benefits and overhead) often aren’t viable options because the very stability of your operation may depend on them. But there might be other ways to lower expenses if you dig deeply enough. Here are three possibilities.

1. Study Your Suppliers

Many companies find that just a few suppliers account for the bulk of their spending. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. This may also help to streamline the purchasing process.

On a related note, how well do you know your suppliers? It might be a good idea to conduct a supplier audit. This involves collecting key data regarding a supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.

2. Go Green

Operating an environmentally friendly company is generally a good idea, and it might save you money. Instead of purchasing brand-new computers and office equipment, you may find refurbished items at substantial savings that still fully meet your business’s needs. And when you no longer need certain equipment and office furniture, consider selling it to a liquidator or dealer. You’ll not only make some money, but also free up the space you’re using to store and maintain them.

In addition, if you own the property on which you operate, research energy-efficient upgrades to the HVAC and lighting systems. Naturally, there will be an initial cost outlay, but over the long term, you may lower your energy costs. You might also qualify for tax credits for installing certain items.

3. Explore Outsourcing and Tech Upgrades

Many business owners try to economize by doing everything in-house, from accounting to payroll to HR. But if the staffing and expertise just aren’t there, these companies often suffer losses because of mistakes, mismanagement and wasted time. Although you’ll incur costs when outsourcing, the time and labor it saves you could end up being a net gain.

Carefully chosen and implemented technology upgrades can serve a similar purpose. Many products on the market today are so robust and fully featured that upgrading to them may be almost comparable to outsourcing. The same may be true with a customer relationship management system that can help generate sales leads and allow you to focus on your most profitable existing customers. Again, there will be an initial cost that could eventually lower your cost of doing business.

Snip, Snip, Snip

Lowering expenses is difficult, but keeping an eye out for ways to do it is important, especially now that inflation is a major factor in the economic landscape. Please contact the office for help identifying and lowering your company’s most “cuttable” costs.

Navigating Your Business’s Second Year: Building on Success with a Strong Financial Focus

Congratulations on successfully navigating your first year in business! As you step into the second year, it’s time to build upon your initial success and solidify your business’s financial health. A key element in this phase is the importance of maintaining robust financial practices and having trusted financial advisors, such as bookkeepers and tax professionals, by your side. This guide will delve into the crucial aspects of focusing on your business’s financial well-being in its second year.

1. Evaluating and Adjusting Your Business Plan Your second year starts with reflecting on the past and planning for the future. Adjust your business plan based on your first year’s learnings. Set realistic financial goals and strategies to achieve them, keeping market trends in mind.
2. Prioritizing Financial Analysis and Forecasting Financial health is the lifeline of your business. Analyze your previous year’s financial data to understand your business’s fiscal standing. Use this data for accurate forecasting, which is essential for effective budgeting and making informed financial decisions.
3. The Role of a Trusted Bookkeeper and Tax Professional This is where the importance of a professional bookkeeper and tax professional comes into play. These advisors are invaluable for maintaining accurate financial records, ensuring tax compliance, and offering advice on financial planning. They help you understand the nuances of financial management, freeing you to focus on other aspects of your business.
4. Enhancing Customer Relationships and Feedback Mechanisms Deepen your connection with customers. Use feedback to fine-tune your offerings, pricing strategies, and payment terms, all of which impact your financial health.
5. Expanding Marketing Efforts with a Budget in Mind As you expand your marketing, do so with a budget-conscious approach. Efficient marketing strategies can lead to higher returns on investment, contributing positively to your financial stability.
6. Streamlining Operations for Financial Efficiency Look for ways to make your operations more efficient, potentially reducing costs and increasing profitability. Efficiency in operations directly affects your bottom line.
7. Exploring Growth Opportunities Wisely Consider new opportunities for growth, but do so with financial prudence. Assess the financial risks and potential returns of expanding your product line or entering new markets.
8. Building a Stronger Team with Financial Acumen As you grow your team, emphasize financial literacy. Employees who understand the financial impact of their actions contribute to the overall financial health of the business.
9. Staying Informed and Adaptable in Financial Matters Keep abreast of changes in financial regulations, market conditions, and industry trends. Being financially informed allows for timely and effective decision-making.
10. Balancing Personal and Business Financial Health Don’t overlook your personal financial well-being. A strong personal financial position supports a healthy business environment.

Your second year is a critical time for reinforcing the financial foundations of your business. With the help of trusted financial advisors like bookkeepers and tax professionals, you can make informed decisions, stay compliant, and set your business up for long-term success. Focus on financial health, and you’ll be well-positioned to navigate the challenges and opportunities of the business world.

Increase Revenue vs Decrease Cost: Which Boosts Profit More?

Did you know that an estimated five percent reduction in operating costs can have the same impact as a 30 percent increase in sales?

Reducing costs as a percentage of sales can be a more effective way to improve a business’s profitability compared to increasing sales. This is because reducing costs directly impacts the bottom line and can expand profit margins, provided that the reduction in costs does not negatively impact the quality of products or services, sales price, or sales volume.

Cost reduction can be achieved through several strategies:

• Understanding and managing variable costs: Analyzing historic cost data, benchmarking against industry norms, and identifying areas where spending is higher than necessary.
• Optimizing fixed costs: Regularly evaluating long-standing supplier relationships and recurring costs to ensure the best deals are being utilized.
• Improving operational efficiency: Investing in tools and technologies that enhance business processes and reduce costs, such as cloud software solutions and automation tools.

It’s important to note that the effectiveness of cost reduction depends on maintaining or improving product or service quality. Lowering costs should not result in reduced quality, as this could necessitate a decrease in prices to maintain sales volume, ultimately defeating the purpose of cost reduction.

In contrast, increasing revenue, while crucial for business growth, can sometimes lead to higher costs and therefore may not always be as immediately impactful on profit margins as cost reduction. Revenue-increasing strategies often involve enhancing product quality, branding, and marketing efforts, which can increase costs.

In conclusion, both strategies of reducing costs and increasing revenue are important, but reducing costs as a percentage of sales can be a more direct and effective way to enhance profitability, especially in the short term. For long-term sustainability, a balanced approach that includes both cost reduction and revenue growth is arguably the best approach.

Contact our office if you want to know more.

2024 Depreciation Limits for Business Vehicles

IRS guidance provides the 2024 depreciation limits for “luxury” business vehicles. For vehicles placed in service in 2024, depreciation limits (including first-year bonus depreciation) are $20,400 for year one, $19,800 for year two, $11,900 for year three and $7,160 for each year after that. This includes passenger cars, as well as SUVs, trucks and vans if their gross vehicle weight (GVW) is 6,000 pounds or less. The IRS also announced lease inclusion amounts for lessees of passenger vehicles first leased in 2024. To read Rev. Proc. 2024-13: https://www.irs.gov/pub/irs-drop/rp-24-13.pdf

Purchasing a heavier vehicle can offer tax advantages. New or used vehicles may be eligible for Sec. 179 expensing, which might allow you to deduct the entire cost. However, a reduced Sec. 179 limit ($30,500 for 2024) applies to vehicles (typically SUVs) with GVWs of more than 6,000 pounds but no more than 14,000 pounds.

Also keep in mind that, if a vehicle is used for both business and personal purposes, depreciation must be allocated between deductible business use and nondeductible personal use. The depreciation limit is reduced if the business use is less than 100%. If business use is 50% or less, you can’t claim any bonus depreciation or Sec. 179 expensing.

Contact our office to know more.

Retirement Saving Options for Your Small Business

If you’re looking for retirement saving options for your small business but are worried about the financial commitment and administrative burdens involved, there are some options to consider. One possibility is a Simplified Employee Pension (SEP). This plan, which comes with relative ease of administration and the discretion to make or not make annual contributions, is especially attractive for small businesses.

There’s still time to see tax savings on your 2023 tax return by establishing and contributing to a 2023 SEP, right up to the extended due date of the return. For example, if you’re a sole proprietor who extends your 2023 Form 1040 to October 15, 2024, you have until that date to establish a SEP and make the initial contribution, which you can then deduct on your 2023 return.

SEP Involves Easy Setup

You can set up a SEP easily using the IRS model SEP, Form 5305-SEP. This form, which doesn’t have to be filed with the IRS, satisfies the SEP requirements. (You can opt for an individually designed SEP instead, depending on your needs.)

As the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement.

The maximum deductible contribution that you can make to a SEP-IRA, and that can be excluded from taxable income, is the lesser of: 1) 25% of compensation, or 2) $69,000 for 2024 (up from $66,000 for 2023) per employee. Note, however, that if you, as the business owner, don’t receive a W-2 from the business (for instance, you’re an unincorporated sole proprietor), the calculation for the contribution to be made on behalf of yourself varies slightly. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA.

Your employees control their individual SEP IRAs and the investments in them as well as the tax-deferred earnings. However, they can’t contribute.

There are other requirements you’ll have to meet to be eligible to establish and make contributions to a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified retirement and profit-sharing plans.

SEPS don’t require the detailed records that traditional plans must maintain. Also, there are no annual reports to file with the IRS, and the recordkeeping that is required can be done by a trustee of the SEP-IRA, usually a bank or mutual fund.

Another Option: SIMPLEs

If your business has 100 or fewer employees, you may want to consider a Savings Incentive Match Plan for Employees (SIMPLE). An advantage is that employees can also contribute. A disadvantage is that you, as the employer, are required to make certain annual contributions. Also, a SIMPLE has more limitations on when it can be set up and when it can be contributed to than a SEP.

You establish a SIMPLE IRA for each eligible employee, generally making matching contributions based on amounts elected by participating employees under a qualified salary reduction arrangement. The SIMPLE is also subject to much less stringent requirements than traditional qualified retirement plans.

Another option: An employer can adopt a SIMPLE 401(k) plan, with similar features to a SIMPLE IRA. It’s not subject to the otherwise complex nondiscrimination rules that apply to regular 401(k) plans.

For 2024, SIMPLE employee deferrals are limited to $16,000 (up from $15,500 for 2023). Additional $3,500 catch-up contributions are also allowed for employees ages 50 and older.

More Information

Additional rules and limits apply to both SEPs and SIMPLEs. Contact the office for more information.

2024 Tax Planning: Tax Benefits of Cost Segregation

Business and individual taxpayers that acquire nonresidential real property or residential rental property have an opportunity to reduce the depreciable lives on assets which are building components. Certain assets may qualify for shorter lives and recovery periods under MACRS depreciation. The reduction of the asset lives provides accelerated deductions to offset income.

Many taxpayers mistakenly include the cost of such components in the depreciable basis of the building and the cost is recovered over a longer depreciation period. A nonresidential real property is depreciated over a 39-year life and a residential rental property is depreciated over 27.5-years. Certain building components may qualify for a reduced recovery period over 5-years, 7-years, or 15-years.

Some examples of building components include: parking lots, sidewalks, curbs, roads, fences, storm sewers, landscaping, signage, lighting, security and fire protection systems, removable partitions, removable carpeting and wall tiling, furniture, counters, appliances and machinery (including machinery foundations) unrelated to the operation and maintenance of the building, and the portion of electrical wiring and plumbing properly allocable to machinery and equipment that is unrelated to the operation and maintenance of the building.

A taxpayer may engage a specialist to conduct a cost segregation study to identify the separately depreciable components and their depreciable basis. Ideally, a cost segregation study should be conducted prior to the time that a building is placed into service (i.e., when it is under construction or at the time of purchase). However, a cost segregation study can be completed after a building is placed in service. Even if a detailed cost segregation study is impractical, a practitioner should carefully consider whether there are any obvious land improvements and personal property components of a building that can be separately depreciated over a shorter recovery life.

 

Contact Us

Please contact us if you would like greater detail or information on how cost segregation may apply specifically to your situation and we can work with you to determine your best options.

#Savings for Retirement

The SIMPLE IRA is an excellent choice for small businesses, especially those with less than 100 employees who each earn over $5,000 a year. It’s known for its easy setup and management. This retirement plan is different because it lets businesses pick how they contribute to their employees’ retirement savings.

There are two ways a business can contribute:

1. Elective Contributions: The business matches 1-3% of what each employee contributes. There’s some leeway here — for two out of every five years, the business can choose to match less.
2. Nonelective Contributions: The business gives a flat 2% of each employee’s pay to their retirement plan, regardless of whether the employee contributes themselves.

What’s great about the SIMPLE IRA is that any age employee can join, making it more inclusive.

Setting up a SIMPLE IRA is also straightforward. Businesses use one of two IRS forms:

• Form 5304-SIMPLE: This lets employees choose where they want their contributions to go.
• Form 5305-SIMPLE: All contributions go to a financial institution chosen by the employer.

This choice in setup means businesses can align the plan with their unique way of operating.

Summary

• Who it’s for: Small businesses with <100 employees earning >$5,000/year.
• Flexibility: Elective (1-3% match) or nonelective (flat 2%) contributions.
• Inclusivity: No age limit for employee participation.
• Easy Setup: Choose between IRS Form 5304-SIMPLE or 5305-SIMPLE.

3 Strategies for Estimated Tax Payments

Many individuals today are self-employed or generate income from interest, rent, dividends and other sources. If you’re in this situation, you could be risking penalties if you don’t pay enough taxes during the year through estimated tax payments and withholding. (The due date for the final estimated payment for 2023 is January 16, 2024.)

Here are three strategies to help you pay enough taxes and avoid underpayment penalties:

1. Know the minimum payment rules. Your estimated payments and withholding must equal at least:
   • 90% of your tax liability for the year,
   • 110% of your tax for the previous year, or
   • 100% of your tax for the previous year if your adjusted gross income for that year was $150,000 or less ($75,000 or less if married filing separately).
2. Use the annualized income installment method, if eligible. This method often benefits taxpayers who have large variability in income by month due to bonuses, investment gains and losses, or seasonal income, especially if it’s skewed toward year end. Annualizing calculates the tax due based on factors occurring through each quarterly estimated tax period.
3. Estimate your tax liability and increase withholding if possible. If you find you’ve underpaid your 2023 taxes, consider having the tax shortfall withheld from your salary or year-end bonus by December 31. Withholding is considered to have been paid ratably throughout the year, so this could allow you to avoid penalties, whereas trying to make up the difference with a larger quarterly tax payment could trigger penalties.

Estimated tax payments can be tricky. Please contact the office for help.

Follow IRS Rules to Nail Down a Charitable Tax Deduction

Donating cash and property to your favorite charity is beneficial to the charity, but also to you in the form of a tax deduction if you itemize. However, to be deductible, your donation must meet certain IRS criteria.

First, the charity you’re donating to must be a qualified charitable organization, with tax-exempt status. The Exempt Organizations Search tool on the IRS website allows users to search for a specific organization and check its federal tax-exempt status.

Second, contributions must be actually paid, not simply pledged. So, if you pledge $5,000 in 2023 but have paid only $1,500 by Dec. 31, 2023, you can deduct only $1,500 on your 2023 tax return.

Third, substantiation rules apply, and they vary based on the type and amount of the donation. For example, some donated property may require you to obtain a professional appraisal of value.

Many additional rules and limits apply to the charitable donation deduction. Contact the office to learn more.

Verifying Your Identity When Calling the IRS

Sometimes, taxpayers must call the IRS about a tax matter. As part of the IRS’s ongoing efforts to keep taxpayer data secure from identity thieves, IRS phone assistors take great care to discuss personal information with the taxpayer or someone the taxpayer has authorized to speak on their behalf. Therefore, the IRS will ask you and your representatives to verify your identity when calling the IRS.

Calling the IRS About Your Own Tax Matter

You should have the following information ready before calling the IRS:

• • Social Security numbers (SSNs) and birth dates for those who were named on the tax return
  • An Individual Taxpayer Identification Number (ITIN) letter if you have one instead of an SSN
  • Your filing status: single, head of household, married filing jointly, or married filing separately
  • Your prior-year tax return, because phone assistors may need it to verify taxpayer identity with information from the return before answering certain questions
  • A copy of the tax return in question
  • Any IRS letters or notices you have received

With this information in hand, you should be able to meet verification requirements and avoid having to call the IRS back with additional information to verify your identity.

Legally Designated Representatives

By law, IRS telephone assistors will speak only with the taxpayer or to the taxpayer’s legally designated representative. In other words, a taxpayer can grant authorization to a third party to help with federal tax matters. Depending on the authorization, the third party can be a family member, friend, tax professional, attorney, or business. The different types of third-party authorizations include:

• Power of Attorney – Allow someone to represent you in tax matters before the IRS. This is different from a power of attorney for property who you authorize to manage your financial affairs. It must be an individual authorized to practice before the IRS.
• Tax Information Authorization – Appoint anyone to review and receive your confidential tax information for the type of tax and years/periods you determine.
• Third Party Designee – Designate a person on your tax form to discuss that specific tax return and year with the IRS.
• Oral Disclosure – Authorize the IRS to disclose your tax information to a person you bring into a phone conversation or meeting with the IRS about a specific tax issue.

Taxpayers must meet all of their tax obligations even when authorizing someone to represent them.

Calling on Behalf of Someone Else

If you are calling the IRS about someone else’s account, you should be prepared to verify your identity and provide information about the person you represent. Before calling about a third party, you should have the following information available:

• Verbal or written authorization from the taxpayer to discuss the account
• The ability to verify the taxpayer’s name, SSN or ITIN, tax period, and tax forms filed
• Identity Protection PIN (IP PIN)
• One of these forms, which is current, completed, and signed: Form 8821, Tax Information Authorization or Form 2848, Power of Attorney and Declaration of Representative

Keep in mind that if your tax professional is calling the IRS on your behalf, your tax pro will need to have this information about you, except generally a Preparer Tax Identification Number (PTIN) instead of an IP PIN.

Questions or Concerns?

If you have any questions or concerns about verifying your identity before calling the IRS, do not hesitate to contact the office for assistance.