Contractor Corner

Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don’t even think about their taxes until it’s time to meet with their accountants, but tax planning is an ongoing process and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.

Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:

  1. Failure to report substantial amounts of income such as a shareholder’s failure to report dividends or a store owner’s failure to report a portion of the daily business receipts.
  2. Claims for fictitious or improper deductions on a return such as a sales representative’s substantial overstatement of travel expenses or a taxpayer’s claim of a large deduction for charitable contributions when no verification exists.
  3. Accounting irregularities such as a business’s failure to keep adequate records or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
  4. Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder’s children.

Tax Planning Strategies

Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:

  • Reducing the amount of taxable income
  • Lowering your tax rate
  • Controlling the time when the tax must be paid
  • Claiming any available tax credits
  • Controlling the effects of the Alternative Minimum Tax
  • Avoiding the most common tax planning mistakes

In order to plan effectively, you’ll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the “right” tax plan made “wrong” by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.

Maximizing Business Entertainment Expenses

Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.

In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.

The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records and the business meal must be arranged with the purpose of conducting specific business. Bon appetite!

Important Business Automobile Deductions

If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses.

The mileage reimbursement rates for 2015 are 57.5 cents per business mile (56 cents per mile in 2014), 14 cents per charitable mile (unchanged from 2014) and 23 cents for moving and medical miles (down from 23.5 cents per mile in 2014).

If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.

Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don’t hesitate to contact the office.

Increase Your Bottom Line When You Work At Home

The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.

Try prominently displaying your home business phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.

Section 179 expensing for tax year 2015 allows you to immediately deduct, rather than depreciate over time, up to $25,000, with a cap of $200,000 (down from $500,000 and $2,000,000, respectively, in 2014) worth of qualified business property that you purchase during the year. The key word is “purchase”. Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification.

Some deductions can be taken whether or not you qualify for the home office deduction itself. It’s never too early to meet with a tax professional to learn more about home office deductions. Call today to schedule a consultation.

The Customer Experience is the most critical process and strategy a contractor can implement in their business. Incorporating simple procedures, policies, and training will set your company apart. The Customer Experience Process starts with the owner of the company and becomes a culture that every employee embraces to make your customers Lifetime RAVING Fans!

The following steps are an example of how a Contractor Company could implement a process in their business to establish themselves as a Customer Focused company. There are many variations and we encourage to add your own company personality and special flair to set up company apart.

  1. Customer Calls a Company with a Request for an Estimate or Information– A courteous, confident, and informed person answers the company phone. A company representative is scheduled to visit the customer within 48 hours or based on customer’s schedule. If the request is for more information, capture the caller’s information for a callback the same day or immediately.
  2. Scheduled Estimate – Notify the customer via email/text the day before the confirmed appointment. Call two hours before the appointment. Include a picture of the person who will be arriving on the job in the email or the text.
  3. Job Assessment/Company Education – The company representative must have a professional appearance and arrive on time. They need to be trained with to ask the customer prepared questions. A package is delivered and reviewed with the potential customers with brochures focusing on unique sales proposition, testimonials and references, prepared document of how you work with the client to accomplish their goals.
  4. Presentation of Process – The representative should be trained on the company sales process and be able to show a graphic brochure to the potential customer on the project process.
  5. Presentation of Estimate – The key here is to supply the customer with Detail Detail Detail! – It is recommended that a company present an estimate on the visit… use an approach that allows for a range of pricing.
  6. Accept the Estimate – Be able to present the new customer a clear understanding of your payment schedule, change orders, exceptions, etc. Once the proposal is accepted, send a follow- up letter/card and email to thank the customer of the business and next steps. Include links to your website, Facebook, Google plus, Linked in, email, phone numbers, etc in the note. Ask the customer to join all social media sites and post a “Welcome” when they like or join your sites! Engage them early!
  7. Does Not Accept the Estimate – Move the Prospect to the Company Customer Email List

Tax-related identity theft occurs when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund. It presents challenges to individuals, businesses, organizations and government agencies, including the IRS.

Learning that you are a victim of identity theft can be a stressful event and you may not be aware that someone has stolen your identity. In many cases, the IRS may be the first to let you know you’re a victim of ID theft after you try to file your taxes.

The IRS combats tax-related identity theft with a strategy of prevention, detection, and victim assistance. The IRS is making progress against this crime and it remains one of the agency’s highest priorities.

Here’s what you should know about identity theft:

1. Protect your Records. Do not carry your Social Security card or other documents with your SSN on them. Only provide your SSN if it’s necessary and you know the person requesting it. Protect your personal information at home and protect your computers with anti-spam and anti-virus software. Routinely change passwords for Internet accounts.

2. Don’t Fall for Scams. The IRS will not call you to demand immediate payment, nor will it call about taxes owed without first mailing you a bill. Beware of threatening phone calls from someone claiming to be from the IRS. If you have no reason to believe you owe taxes, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1-800-366-4484.

3. Report ID Theft to Law Enforcement. If your SSN was compromised and you think you may be the victim of tax-related ID theft, file a police report. You can also file a report with the Federal Trade Commission using the FTC Complaint Assistant. It’s also important to contact one of the three credit bureaus so they can place a freeze on your account.

4. Complete an IRS Form 14039 Identity Theft Affidavit. Once you’ve filed a police report, file an IRS Form 14039 Identity Theft Affidavit. Print the form and mail or fax it according to the instructions. Continue to pay your taxes and file your tax return, even if you must do so by filing on paper.

5. Understand IRS Notices. Once the IRS verifies a taxpayer’s identity, the agency will mail a particular letter to the taxpayer. The notice says that the IRS is monitoring the taxpayer’s account. Some notices may contain a unique Identity Protection Personal Identification Number (IP PIN) for tax filing purposes.

6. IP PINs. If a taxpayer reports that they are a victim of ID theft or the IRS identifies a taxpayer as being a victim, they will be issued an IP PIN. The IP PIN is a unique six-digit number that a victim of ID theft uses to file a tax return. In 2014, the IRS launched an IP PIN Pilot program. The program offers residents of Florida, Georgia and Washington, D.C., the opportunity to apply for an IP PIN, due to high levels of tax-related identity theft there.

7. Data Breaches. If you learn about a data breach that may have compromised your personal information, keep in mind not every data breach results in identity theft. Further, not every identity theft case involves taxes. Make sure you know what kind of information has been stolen so you can take the appropriate steps before contacting the IRS.

8. Report Suspicious Activity. If you suspect or know of an individual or business that is committing tax fraud, you can visit IRS.gov and follow the chart on How to Report Suspected Tax Fraud Activity.

9. Combating ID Theft. Over the past few years, nearly 2,000 people were convicted in connection with refund fraud related to identity theft. The average prison sentence for identity theft-related tax refund fraud grew to 43 months in 2014 from 38 months in 2013, with the longest sentence being 27 years. During 2014, the IRS stopped more than $15 billion of fraudulent refunds, including those related to identity theft. Additionally, as the IRS improves its processing filters, the agency has also been able to halt more suspicious returns before they are processed. So far this year, new fraud filters stopped about 3 million suspicious returns for review, an increase of more than 700,000 from the year before.

10. Service Options. Information about tax-related identity theft is available online. The IRS has a special section on IRS.gov devoted to identity theft and a phone number available for victims to obtain assistance.

In addition, if you have any questions about identity theft and your taxes, you can always call the office. Help is just a phone call away.

Got kids? They may have an impact on your tax situation. Here are eight tax credits and deductions that can help lower your tax burden.

  1. Dependents: In most cases, a child can be claimed as a dependent in the year they were born. Be sure to let us know if your family increased this year and we’ll take a look at whether you can claim the child as a dependent this year.
  2. Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.
  3. Child and Dependent Care Credit: You may be able to claim this credit if you pay someone to care for your child under age 13 while you work or look for work. Be sure to keep track of your child care expenses so we can claim this credit accurately.
  4. Earned Income Tax Credit: The EITC is a benefit for certain people who work and have earned income from wages, self-employment, or farming. EITC reduces the amount of tax you owe and may also give you a refund.
  5. Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt a child.
  6. Coverdell Education Savings Account: This savings account is used to pay qualified expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free.
  7. Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar for dollar, unlike a deduction, which reduces your taxable income.
  8. Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.

As you can see, having children can make a big impact on your tax profile. Make sure that you’re getting the appropriate credits and deductions by speaking to a tax professional today.

I was ready to crawl into bed after a long day when my phone rang. The call was from a contractor named Marty whom I’d worked with several years earlier. He didn’t sound good. In fact, he was calling from his hospital bed following a bad accident in his company truck. His truck had been totaled, and he’d been in intensive care for several days.

“If I’m hard to understand,” he said, “it’s because my jaw is wired shut. On top of that, my leg’s broken, I have back problems, and it looks like I’ll be laid up for a while. I can’t work. I’ve lost my company. I’ve lost everything.”

I remembered this contractor as being a man of high integrity. He was good at what he did, and his customers liked him. I think he called me because he just needed someone to talk to. His wife had had to take a second job in an effort to save their home. I felt horrible for Marty.

I asked him about insurance. He was fortunate that his health insurance would cover his medical expenses, and his vehicle insurance would pay off the truck. But there was no cash for the mortgage, the utilities, or the groceries.

Marty had three employees: a part-time office helper, a young contractor-in-training, and a trained technician. In the first few days of Marty’s hospitalization, no one knew what to do or where to find anything. Although his wife tried, she didn’t know enough about the business to be of much help.

Marty had to resort to sending calls to a competitor. I asked if he thought he could get his old customers back once he had recovered.

“Doubt it,” was his reply.

Marty’s business evaporated.

He Owned a Job

Some of you reading this know beyond a doubt that if this happened to you, you’d be in the same spot. It’s not a pretty picture.

Here’s the upshot: Marty didn’t own a business; he owned a job. And a crappy job, at that. He worked long hours, rarely took a vacation, charged too little, had no retirement plan, had no help with government and supplier paperwork and hassles, and had no margin for error.

What could Marty have done differently? There are several parts to the answer.

Running a Business

Most contractors are great at what they do. They’re reliable, trustworthy, fair, and they truly care about their customers. They do a great job in the field. In fact, it’s in the field that they shine.

The problem is, most have not invested the same amount of time, energy, commitment, and education into becoming a smart business owner. It takes just as much skill to run and operate a successful business as it does to repair faucets and unplug toilets.

If you’re like most contractors I’ve known, you started out with your pickup truck and a few tools, applying your knowledge in the best way you knew how. Because you did a good job and because customers relied on you and told friends and neighbors about you, your business grew. It grew gradually until one day you realized you needed help, more and better equipment, and possibly added financing to get it all done.

So, what’s the problem?

No Plan

The problem is, the business is not operating based on a plan. The practical side of the business was flourishing, while the other side (planning, management, and communication) was lacking.

This was Marty’s main problem.

Marty never thought about future goals. He had just taken one day at a time and hoped everything would turn out okay in the end.

Where are You?

Where are you in that spectrum? Do you know where you’re going? Do you know how to get there?

Let’s back up for a minute. You may be saying, “Hey Lynn, what does any of this have to do with communication?”

Glad you asked!

The crux of the matter is this: you cannot communicate what you don’t know. You cannot communicate what you have not identified and clarified for yourself. You cannot communicate fuzzy thoughts and ideas. It’s time to pay attention to the core elements of what it takes to create an asset – not just a go-to-work-everyday job.

Being a good businessperson is no harder than being a good contractor. Both have to do with learning and commitment. Realize that the effects of poor management can be devastating to the performance of a company. Many business owners blame employees for poor service, financial losses, and low-quality products, when the fault lies in poor management, poor planning, and poor communication.

You need a Business Plan that will guide you in your daily, quarterly, and annual business. It is the basis of building a business that will deliver you a return on your investment in your business but also drive the behaviors to build a team, drive financial performance, market and sell to differentiate your company from competitors, document and use processes that are teachable and trainable, and become a leader that communicates goals and the vision of your company.

A Business Plan should include the following content:

  • An Executive Summary: Your executive summary is a snapshot of your business plan as a whole and touches on your company profile and goals.
  • A Company Description: Your company description provides information on what you do, what differentiates your business from others, and the markets your business serves.
  • A Market Analysis: It is essential for you to research your business industry, market and competitors.
  • Organization & Management: Every business is structured differently. Find out the best organization and management structure for your business.
  • Service & Products: What do you sell? How does it benefit your customers? What is the product lifecycle?
  • Marketing & Sales: How do you plan to market your business? What is your sales strategy?
  • Financial Projections: This section is usually recommended if you are looking for funding, however it is a healthy exercise to estimate sales, expenses, overhead, and budgets. This becomes a measurement against actual performance and can be adjusted over time as part of the updating process of the plan.

Is your business making money or profit? I want to clarify that increasing sales does not equal profit. Contractors operate on thin profit margins, and one unforeseen issue on a job can mean you are working for NO PROFIT!

As a business owner, you need to at least make a return on the financial investment in your company that is equal to any other financial vehicle in the marketplace. Profits are essential for funding growth and to build cash assets to protect the company from economic and market downturns.

Let’s start with the Return on Sales (ROS) ratio. ROS provides insight into how profitable company sales are.   It is the Net Profit divided by Gross Sales. The Plumbing & HVAC service contractor’s ROS average is 2% according to First Research®.   Essentially for every $100,000 in sales, contracting businesses generate on average $2,000 in Net Profit.

The Return on Investment (ROI) ratio shows how much owners are making on investments in a business. The owner should compare this ratio to other market investments, such as mutual funds, stocks, bonds, etc., to see if your investments are better left in the company or put into other market investments. This ratio is the Net Profit of a current period divided by the Net Worth at the beginning of a year. The First Research® Industry Profile dated February 2014 shows the industry average is 15.8% for Plumbing & HVAC Service Companies. The goal of monitoring this ratio is to make sure the current return is comparable to or better than any other investment. The Dimensional Matrix Book 2012 and 2013 from Standard & Poor’s shows the S&P 500 return on investment was 16% and 32.4% respectfully. A good benchmark is the S&P 500 to understand how your investment in your company is measuring against the market as a whole. Your goal is to achieve or exceed the market if possible. If you do not achieve the target consistently, you need to understand the reason for not making the grade. This tells the owner if the business investment is eroding or increasing in returns.

In addition to having your bookkeeper give you a P&L statement and a balance sheet, you need a monthly KPI Dashboard report. It’s the key ratios of your financial statements that provide historical and current insight into your business health. As the company owner, you need to become familiar with the performance-to-drive cash flow, pay debt, finance capital investments, as well as management of assets and profitability.