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The income statement can give you all kinds of insights as to whether you are bringing in enough sales, if your prices are generating enough profit, and how your expenses are running.  Let’s take a look at the report, step by step.

Revenue

The report starts by listing the revenue for the period of time covered.  Revenue includes all sources of income, including sales from operations, interest and investment income, revenue from insurance claims, sales from assets or other parts of the business, and any other source of revenue. In most small businesses, sales will be the largest part of the revenue, if not all of it. In some countries, the term used for sales is turnover.

If you sell more than one item or have more than one location, it might be a good idea to be able to view the sales detail from these categories.  This may or may not be on your income statement depending on how formal it is, but you should be able to get a drill down report on your sales detail.

Look for exceptions to what you expect to see.  There can be some decisions you can make and actions you can take from the insights you discover.

Cost of Goods Sold

This section of the income statement includes costs you incur directly on items you sell. If you maintain an inventory, it’s the cost you paid for the inventory items that you sold during the period. If your business is a manufacturer, cost of goods sold, or COGS, will include costs of materials and labor to produce the items.

COGS will typically be zero, if you own a service business.  As a service business, you may incur direct costs when providing services, and these costs can be booked in a variety of expense accounts, including supplies.

Gross Profit

Some income statement formats will include a gross profit number which is sales minus cost of goods sold.  This number is important for businesses with inventory.

Expenses

The expenses section of the income statement is the longest part. It includes all of the expenses you incurred in your business, including advertising and marketing, rent, telephone, and utilities, office supplies and meeting expenses, travel, meals, and entertainment, payroll and payroll taxes, and several more.

You might also hear the term overhead. Overhead is a subset of expenses that have to be met whether you sell zero items or millions. They include items like rent and utilities, management payroll, and office supplies.

To review your expenses, check line by line to see if anything looks out of sorts, and take the appropriate action.

Net Profit or Loss

The final number on your income statement represents whether you made or lost money in the period the report covers. The formula is simple: revenue less COGS less expenses equals net profit or loss.

Net profit/loss can go by many names, depending on the size of your business and your accountant’s vernacular. You may also see EBITDA: Earnings before interest, taxes, depreciation, and amortization. Earnings is another word for net profit.

Perspective

It’s a good idea to compare your income statement numbers to other periods in your business. Common comparisons include last period, last several periods, and same period last year.

It’s also a great idea to have a budget that sets goals for your income statement numbers. Then you can compare budget to actual numbers and take action on the variances.

If your business falls into a standard type of business, you may also be able to see how it is doing compared to others in your industry.  This is called benchmarking, and the income statement is a very common format that’s used in benchmarking.

Do spend some time each period reviewing your business’s income statement. It can help you make a faster course correction in your business so you can be even more successful than you already are.

If you need help preparing and understanding your financial statements, contact us at P.T.A and let us help your business.

Exemption

On your 2017 1040 tax return, you likely received an exemption of $4,050 per person.  Check line 42 of your own return. In 2018, this exemption is discontinued, but you won’t really lose out because the standard deduction has increased to compensate for this elimination.

Standard Deduction

In 2017, your standard deduction was $6,350 per person in general and $9,350 for head of household.  In 2018, the standard deduction will increase to $12,000 per person and $18,000 for head of household filers.

Quite a few itemized deductions have been eliminated or capped for 2018, so more taxpayers will be using the standard deduction going forward.

Tax Brackets

There are seven tax rates or brackets, just like there were before, but the threshholds and rates have changed. The rates now range from 10 percent to 37 percent:

1. 10 percent
2. 12 percent
3. 22 percent
4. 24 percent
5. 32 percent
6. 35 percent
7. 37 percent

Here are the details depending on your filing status:

The new withholding tables are posted here:

https://www.irs.gov/pub/irs-pdf/n1036.pdf

If you have questions about this or anything about the new law, please feel free to reach out to us at P.T. Anderson at any time.

In order to claim the home office deduction, you MUST QUALIFY. To qualify, you are required to meet two tests: 1) regularly used and 2) exclusively used for business.

Regular Use:

This test is clear – you use the area on a continuing basis. Occasional or incidental business use does not meet the test.

Exclusive Use:

A specific part of a taxpayer’s home is used for business only. There is no requirement that the business portion of a room be physically separated by a wall or partition. But, any personal use of the space, no matter how small, means that it is not exclusive. There are two exceptions: storage space and daycare facility.

You can have several offices. The key issue is to determine your PRINCIPAL PLACE OF BUSINESS.

Home Office Qualifications

Your home can qualify as a principal place of business if:

• The office is used regularly and exclusively for administrative or management activities (billing clients, keeping books, ordering supplies, setting appointments, writing reports)
• There is no other fixed location where the taxpayer conducts these activities

A business use of the home deduction is allowed when the taxpayer meets clients in their home. For example, if an attorney works four days a week in his downtown office and 1 day at his home office, he can deduct the home office if he meets with his clients there too. It will qualify for the deduction even though it is not the principal place of business.

The best thing about qualifying your home as the principal place of business is that the miles that you drive from your home to the first business stop are now deductible. If your home is not the principal place of business, your first stop is considered commuting and not deductible.

What is Deductible?

The easiest way to determine the business percentage is to take the total square footage exclusively and regularly used for business and divide that by the total square footage of your home. Then, you can deduct the following categories on your return for the business percentage:

• Mortgage interest
• Rent
• Property taxes
• Utilities (gas, electricity, garbage)
• House insurance
• Security system
• Home maintenance/repairs
• Depreciation (straight line method over 39 years)

Repairs and Maintenance

Note: Lawn care/landscaping expenses are not deductible according to the IRS regulations. However, the Tax Court allowed the deduction where the taxpayer’s clients regularly visited the taxpayer’s home office and where the taxpayer was a daycare provider and the children used the lawn as a play area.

If you painted the office area only, that cost would be 100 percent deductible. This is called direct expenses. However, if you paid for garbage for the home, only the business percentage used is deductible which is called indirect expenses.

Income vs. Expenses

If  total income is less than total expenses, home office deduction for certain expenses will be limited. However, these deductions can carry over the next year. Be aware of that carry over number if this happens in your situation.

If you take depreciation on your home office and you sell your home, you have to “recapture that amount.” What this means is that the amount you deducted for depreciation reduces your ordinary income – this is good. But when you sell your home, that amount will increase your capital gains. The capital gains rate is typically less than your personal income tax bracket.

Years ago, many tax preparers would never take the home office on an LLC, S-Corp or C-Corp return. If they did, it would be a Schedule A deduction as an employee, which is not a great deduction due to the two percent limitations. However, now some preparers are taking the home office for these entities.

The only thing I recommend is not to take mortgage interest or real estate taxes. Only take the business portion of rent, utilities and insurance.

When you know the rules, there should be no fear around taking a deduction that you qualify for. So…do you qualify?

Feel free to reach out to us to determine if your specific situation qualifies for a deduction and/or to determine the impact of the new tax law changes for 2018.

No longer do you need to go out for lunch if you are having a busy day or just need to stay in the office for any reason. You can simply order lunch on your cell phone, and it will be delivered approximately 45 minutes later to your door.

There’s an app for that

It used to be that you could only get pizza or Chinese food delivered, but those days are over. Some restaurants will deliver directly, but there is an easier way. Food delivery apps such as GrubHub will let you order from hundreds of different restaurants in your area while they send a driver to collect it and deliver it to your door.

How much will it cost me?

First, ask yourself how much you are worth per hour to your company. Or, if you will get home earlier because you don’t have to go out for lunch, ask yourself what the value of spending more time at home or with your family is worth to you.

Besides the cost of food, you’ll pay a delivery fee of $0 to $5 and a tip for the driver. When you factor in the cost of your time, gasoline, and wear and tear on your vehicle, using a food delivery company is a no-brainer. Not only will you be helping yourself, you’ll be helping a hard-working driver, too.

What are my options?

The specific options in your location will vary, but some of the companies that are offering food delivery services include:

• GrubHub and Seamless
• DoorDash
• Eat24
• Postmates
• Caviar
• UberEats
• Delivery.com
• Amazon Prime Now

All you need to do is download the app, set up an account, choose a restaurant, and order your food. You can also order from your PC or Mac using a browser and visiting their website.

Try these food delivery apps, and while you’re at it, treat the entire office to a meal.

List your sources of revenue

First, determine where your sales are coming from by making a list of all the ways you are currently attracting customers. Here are a few:

• Website via search
• Social media
• Google ads
• Referrals from existing customers
• Ad in local magazine
• Article on Huffington Post
• Board membership on local nonprofit
• Chamber of Commerce membership and participation

Track your expenses by source or method

Once you have your list, it’s time to look to your accounting system. Create accounts or other types of tracking codes in your system to track expenses for each of these marketing methods. If you need our help, please feel free to reach out.

The goal of this step is to be able to get all costs associated with each of these marketing methods so that you have a total cost over time by method. Don’t forget labor: if an employee spends three hours a week updating your social media accounts, this should be included in your costs.

Determine the source of your sales

To the extent you can, match the sales that come in with the marketing source or method. In other words, if a customer knows you from the Chamber and spends $500 with you, match the $500 revenue with the Chamber marketing source. Do this for every sale you can. If you don’t know or can’t attribute the sale to any one method, then code it to an Unknown tracking code or account.

This step can be difficult, depending on your business type, especially if your customers are anonymous, as in retail or restaurant sales. However, every business can do better by asking “how did you find out about us?” to each new client that comes in and recording that answer.

For online sales, you can use tracking apps such as Google Analytics to help you measure digital marketing methods.

Do the best you can on this step, and implement procedures to capture this information as accurately as possible for future sales.

Analyze and adjust

This is the fun part. Once you’ve done all the hard work, you should be able to match sales to costs and determine the volume of sales that are coming in for each marketing method. Let’s say you found out that you are getting no sales from your nonprofit board membership, the Huffington Post article, and social media. You now have some decisions to make.

If you are doing these things solely for the purpose of marketing, you could cut them out and focus on the remaining methods. It could also mean that you need to redo your social media strategy; it’s not working now, but another strategy might. Or just one article in HuffPost is not enough, but three articles could start paying off.

At any rate, you have far more information than you did before you started, and now you can make smarter decisions about your marketing. If we can help you code and crunch all of these numbers, please reach out any time.