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Internal control helps to reduce organizational risk. It is what you put in place to avoid mistakes, intentional or accidental, and to control accuracy and quality. It impacts every aspect of an organization.

Concepts for Internal Control

Small businesses, should familiarize with the concept as it can help reduce risks they have not noticed. Here are some practical examples of good ideas that support internal control:

• For private and secure data, provide access only to employees who need the data and restrict access of others.
• Have someone check that your bank balance matches the reconciled amount in your books, and that someone should be different from the person who does the reconciliation. This is one way businesses can implement a segregation of duties.
• Lock up paper checks and use the missing check number report to make sure none of the stock could be used for nefarious purposes.
• Have employees sign in and out equipment that they take home. This is part of asset management.
• Write and enforce a hardware and software use policy that includes items like employees should make sure their anti-virus software is active at all times, they should not bring in disks or CDs, and they should not download games or other unauthorized programs. This protects from computer viruses and helps to avoid catastrophic network failures.

Small businesses can implement a number of internal control procedures as they grow and operations become more complicated.

Relation to Audits

Internal control is typically a big part of an audit or an attest function in accounting; it determines how many additional procedures an auditor needs to do in order to provide assurances about the reliability of the financial reports.  But it’s also just good plain common business sense to implement as many internal control processes as are cost-effective for your business to protect it at the level of risk you’re comfortable with.

If you’d like to discuss the idea of internal control further, please feel free to reach out any time.

The Basics

All pass-thru entities, such as Sole Proprietors, S-corporations and Partnerships that qualify may be able to take the 20% small business deduction.  The deduction can be taken against qualified business income from sales/services, rental real estate (not W-2 income) and can help to reduce taxes.  IRS has not published a final 2018 form, but the deduction will come after the itemized deduction amount and before the taxable income amount.

But it’s not easy or simple. The rules are complex as well as fuzzy, and some accountants are waiting on IRS guidance to clarify the fuzzy parts.

First, the deduction is calculated differently for certain “specified service businesses.” We’ll talk about what that means in a minute. If the business is NOT a specified service business, the deduction is limited and must go through this calculation:

If the personal return of the owner of the specified service business has taxable income of LESS than $315k (married filing joint) or $157,500 (single), they CAN deduct 20%.

For taxpayers who have taxable income of MORE than $415k (married filing joint) or $207,500 (single), the amount of the deduction is limited to the LESSER of the qualified business deduction of 20% OR the GREATER of:

1. 50% of the W-2 wages paid by the business OR
2. 25% of the W-2 wages paid by the business PLUS 2.5% of unadjusted basis on qualified property!

If the taxpayer has taxable income BETWEEN $315k and $415k (married filing joint) or between $157,500 and $207,500 (single), they will get a PARTIAL DEDUCTION.

Specified Service Business

To qualify for the deduction, it must be determined if the business is a “specified service business.”  What is a specified service business?   This is any trade or business involving:

• Health
• Law
• Accounting
• Performing Arts
• Consulting
• Athletics
• Financial Services

…where the principal asset of the business is the reputation or skill of one or more of its owners or employees.  This does NOT include architects nor engineers because they were specifically mentioned as excluded from this exclusion (confused yet?).

A specified service business small business deduction is calculated differently than all other businesses.

1. Personal returns of owner’s of specified service business’s with taxable income of LESS than $315k (married filing joint) or $157,500 (single), they CAN deduct 20%.
2. If the personal return owner of the specified service business has taxable income of MORE than $415k (married filing joint) or $207,500 (single), they get NO deduction!
3. If the personal return owner of the specified service business has taxable income BETWEEN $315k and $415k (married filing joint) or between $157,500 and $207,500 (single), they will get a PARTIAL DEDUCTION.

Entity Change Considerations

Consulting your tax professional is key so there are NO surprises come tax filing time!  Taxpayers must be PROACTIVE to seek counsel for their specific situation because the type of entity they file as will impact their eligibility.  In some cases, it may make sense to change entities, but there are more than tax considerations for such decisions.

Do contact us if you’d like to discuss the 20% business deduction and how it applies to your business.

Your car’s dashboard items, if they applied to business, would be called key performance indicators or KPIs. Unlike a car’s, the KPIs of your business vary depending on your business goals and what’s important to you. Common ones might include your cash balance, how fast you get paid, how much revenue is coming in, and whether you’re making plan. There are literally hundreds of them to choose from, and many of them are not derivable from your financial statements, such as number of orders, client satisfaction levels, and employee turnover.

How to Create a Financial Dashboard

Would it be useful to have a dashboard of KPIs for your business? In short, yes, so you can know what’s working and get alerted to what needs focus. Here are the steps to creating a dashboard for your business:

1. Decide on the KPIs you want to track.  Selecting 6-10 to create and track is a good place to start.
2. Select a tool that will provide you with the KPIs in the format you desire. There are many great add-ons to your accounting software that will instantly crunch the financial KPIs for you and present them in insightful formats, including charts, graphs, dashboards, and reports.
3. Create any new processes to calculate the new KPIs and get them entered into the dashboard app.
4. Hold a review meeting to go over the KPIs and determine any action based on the review.

Get Help!

There are many great KPIs available right in your accounting system, which might be plenty to get started with. And there are some real gems outside your accounting system that will take a bit of work to calculate. In any case, we can help you through this process.  Feel free to reach out to us any time to discuss the possibilities of having a dashboard in your business.

• 100% bonus deduction for assets placed in service after September 27^th, 2017.  The old law only allowed 50% deduction.
• Old law only allowed you to take bonus depreciation on new assets.  The new law allows used property to qualify.
• Deduction for energy efficient commercial buildings.
• Credit for renewable diesel fuel.
• Old law allowed businesses to carry back a loss 2 years and carry forward the loss 20 years.  The new law eliminates the 2-year carryback, but allows you to carry the loss forward indefinitely!
• If a business pays out money for sexual harassment and there is a non-disclosure agreement, there is no deduction for the payout.  If no non-disclosure agreement exists, then the payout is deductible.
• New credit for employers that provide family leave in 2018 and 2019.  A company must pay more than 50% of the employee’s historical wages to receive the credit
• Transportation fringe benefit expenses are revoked (parking/mass transit), but excluding it from the employee’s income is retained.
• Luxury auto deductions tripled by allowing a deduction of $10k in the first year, $16k in the second year, $9600 in the third year and $5760 in the fourth and later years.  Maximum bonus depreciation is $8000.
• Old law required companies earning over $5 million to file on the accrual basis.  New law says that companies under $25 million can file on a cash basis.

Meals & Entertainment

It was a surprise to many businesses that the new law does not allow entertainment expenses.  This would include golf outings, ball games, movies, theatre, etc.  The good news is that meals with clients are still 50% deductible, including meals while you travel.  Be aware though, if you go to the ball game and have a meal, there is no deduction for the meal while participating in entertainment.

The old law allowed a 100% deduction for meals provided to all employees when there was a company meeting during a meal break.  This has changed to be 50% deductible.

Holiday parties, company picnics, and employee appreciation remain at 100% deductible.

C-corporations

The old law taxed corporations between 15% to 35%.  In fact, personal service corporations, like accountants, attorneys, architects, were taxed at a flat rate of 35%.  The new law says that all corporations will be taxed at a 21% rate.  This is fantastic for those personal service corporations, but businesses that were taxed at 15% may want to look at the options of switching their entity to pay less in tax.  Corporations that have less than $87,100 of income will end up paying more in taxes.

The good news is that the alternative minimum tax (AMT) for corporations is eliminated!

Partnerships

Prior to the new law, the rule was that if a partnership sold more than 50% of the ownership, the partnership was automatically terminated.  The new rule eliminates this rule.

Consult your attorney because partnerships will want to make sure that it is documented on who the partnership representative is.  If there is no written representative, the IRS may assign someone and you could lose rights and control.

That’s just a quick look at some of the changes affecting businesses.  If there ever was a year to do some business tax planning, this year is it. Contact us to find out more.

Here are the types of items you can set up in most systems.

Inventory item

Inventory items are used in retail and wholesale businesses. They are physical items that the system can keep count of for you.  You can purchase or make the items, and the associated cost is usually tracked when a shipping receipt or bill is entered.  They are sold when a sale is made and an invoice or sales receipt is entered.

Transactions using inventory items impact a lot of accounts on both the balance sheet (cash, accounts payable, accounts receivable, and inventory) as well as the income statement (cost of goods sold, sales, and returns).  The inventory item can be tied to default sales and purchase accounts in most systems.

Non-inventory item

QuickBooks offers a type of item called a non-inventory item. There’s a big difference in that non-inventory items do not have quantities associated with them. They don’t increase or decrease the inventory account. But they are able to be tied to default sales and purchase accounts like inventory items above.

Examples of non-inventory items include items purchased for a specific jobs, such as a contractor purchasing appliances for a custom home, items you sell but do not buy, such as an ebook or other digital product, and items you purchase but do not sell, such as shopping bags.

Service item

A service item is a special type of non-inventory item. There are no quantities, which makes sense because services are not physical items. They also are only connected to a sales account and not a purchase account.

With service items, you could set up service packages or hourly rates.

Bundle

A bundled item is a group of items that were designed to be sold together. For example, if you sell a gift basket of coffee products, you would bundle the items used to create the basket.

Assembly Item

An assembly item is a special type of inventory item where the quantity is tracked, but it differs from an inventory item in that it can’t be sold separately because it is a component and not a whole item.  Assembly items are available in larger accounting and inventory apps, such as QuickBooks Enterprise, and are used in conjunction with a Bill of Materials or other build feature.

An example is a set of shelves. The assembly components are the individual shelves and the frame pieces that you may want to keep counts of. An inventory item that contains the shelves, the frames, and other parts is “built” from the assembly items.  The nuts and bolts could be non-inventory items or assembly items, depending on whether you want to keep count of them or not.

Sales Tax

Sales tax is a very special type of item used on an invoice or sales receipt to calculate sales tax due on the order. In many accounting systems, it’s usually kept in a separate list from the other product and service items. Rates can be entered for each sales tax jurisdiction.

Other

Some systems have an “other” category to capture items such as freight, shipping, handling, and other add-ons to the sale.

Tracking Profitability

Setting up the right type of products and services is critical to matching costs and revenue. This section of your accounting system is also the one that’s most different from industry to industry and company to company. Be sure you get professional help from experts who know both the software and your industry for best results.