Business Equipment: Break Even Analysis

Break-even analysis is used to determine the break-even point for a business. This is where the total revenues equals total expenses. In other words, the break-even point is where a company produces the same amount of revenues as expenses either during a manufacturing process or an accounting period. Such analysis can be a very valuable analytical tool to determine if action must be taken to increase sales or decrease your costs. Some business owners do not know their break-even point and instead enter each month blindly. This can be extremely dangerous as you are unable to be proactive, only reactive. Leading a business down such a road may result in an inability to recover and ultimately the failure of a business.

Business_Graphs13A more non-traditional application for a break-even point is using the calculation to help determine if an additional capital expenditure is worthwhile. If you are considering making a large investment by purchasing a new piece of equipment you will require a more methodical decision-making technique to determine benefit. Break-even analysis can be one of those techniques. Purchasing a new piece of equipment may reduce your variable costs. However, it will increase your fixed costs, such as interest and depreciation. If the decrease in variable costs is not more than the extra in fixed costs, it is not a viable investment. In theory, your break-even point should be reduced with the purchase of new equipment.

There are some important considerations to be made when calculating your business’s break event point for a new piece of equipment. You must know what the fixed costs will be for the equipment, the new variable costs, and the associated sales. These are all the necessary parts of a break-even analysis. It all seems simple enough, but if you are looking to purchase this machine, you do not yet have it to know these things for certain. It is important to do as much research and have as much valuable information as possible. Keep in mind, the dealership selling the equipment wants to make a sale and may inflate some of the positive numbers. This may mean you will be working with averages which may be on the low end or high end. Nevertheless, this can be a very valuable tool in determining if it is a viable option. If your sales will have to be so high to cover the costs of a new machine, then it may not be worth it.

Like all calculations, it is vital to have quality and accurate general ledger numbers to compare and understand. Do not review the implications of a purchase from one side – the expense side. Instead, make sure you consider the overall impact. Break-even analysis is your big picture view.

By: Tara West, CPA, CMA

The Tax Implications of Fringe Benefits For Shareholders

An S Corporation is a very popular business entity with various tax advantages for shareholders. However, for two-percent shareholders, the IRS tax regulations for specific fringe benefits may be unclear. First, it is essential to first determine who is a two-percent shareholder. This is any person who owns (directly or indirectly on any day during the tax year) more than two percent of the outstanding stock of the total combined voting power.

Certain fringe benefits normally excluded from an employee’s taxable wages are required to be included when provided to any two-percent shareholder. If these fringe benefits are not included in the shareholder’s W-2 Box 1, then they are not deductible by the corporation.

The most common fringe benefits affected by such rule are health, dental, and vision insurance premiums paid under a corporate plan or the amounts reimbursed by the S corporation for premiums paid directly by the shareholder. If a company has established an HSA account and makes contributions on behalf of employees, this fringe benefit is typically excluded from their compensation. However, for a two-percent shareholder, these must be included in compensation. These premiums are subject to federal and state withholding, but not FICA or FUTA. The two-percent shareholder must take an above the line deduction for self-employed health insurance on their 1040 for the premium amount included in Box 1 of the W-2 from the S corporation.

Business_NotesA two-percent shareholder is not eligible to participate in a cafeteria plan, nor can their spouse or child. If a two-percent shareholder is permitted to participate, the plan may lose its tax-qualified status thus resulting in the provided benefits becoming taxable to all participating employees. As such, employees would not be able to make pre-tax salary reduction elections to obtain any benefits offered under the plan. Typically, such benefits may include dependent care assistance, adoption assistance, portions of health insurance premiums paid by the employee and health savings account contributions.

Other taxable fringe benefits can include qualified transportation, qualified adoption assistance, contributions to a medical savings account made by the employer, and qualified moving expense reimbursements. All of the above must be included as compensation for any two-percent shareholders. These fringe benefits are subject to FICA, FUTA, federal and state withholding.

This brief overview provides a glimpse into the complexities which may be encountered as a two-percent shareholder of an S Corporation. If your organization utilizes a payroll service, make sure such information is conveyed so a proper W-2’s can be submitted. If payroll is being completed in-house and additional guidance is necessary, please contact a payroll specialist at William Vaughan Company for assistance.

Placing an Accurate Value on a Closely Held Business

The business you own may make up most of your net worth. When you consider the future disposal of your interest in the business — wholly or partially — it will be essential to determine an accurate value for the business.

Disposal can take many paths. Perhaps you will plan to retire and transfer ownership to a family member or to sell all your interest to an outside party. You also may decide to sell your ownership interest to your employees through an Employee Stock Ownership Plan (ESOP). With any plan to change your ownership arrangement (including a merger, acquisition, or buy-sell agreement), you will need to establish a reliable value for your interest.

Business_Graphs8That’s important because you don’t want to sell your business for less than it is really worth. An accurate valuation lets you negotiate realistically with buyers. Misunderstandings can be avoided and time saved.

If you someday dispose of your business through a gift or it is transferred at your death, determination of a realistic and accurate value will ease the calculation of gift and estate taxes. If your death is unexpected, a valuation can be even more important. Control of many a family business has been lost because of forced asset sales to satisfy estate tax obligations. With accurate advance knowledge of the worth of your business, you may be able to use insurance or other strategies to assure that your estate will have sufficient liquidity to handle estate taxes.

No standard method exists to determine value because each business is different. But valuation professionals and the IRS typically use a group of factors when they fix the value of an operating business. These factors include the company’s:

  • Nature and history
  • Economic outlook
  • Annual budget, sales history, and sales projections
  • Financial condition and stock book value
  • Capacity for earnings
  • Ability to pay dividends
  • Previous stock sales and block size being valued

The general economic outlook may also be a consideration, as well as the prices of stocks of similar, publicly held companies.

Usually valuation professionals examine a combination of the above factors to determine an appropriate value. A factor that may control the valuation of any size corporation may not be nearly as important when valuing another corporation whose type of business is different. When determining valuation, each closely held corporation is unique.

Any valuation report you receive should be both well documented and comprehensive, with confidential treatment for any company information. You should be able to rely on your valuation professionals for their full support if any question is raised about the valuations of your business. Their support should extend to reporting to your Board of Directors and defending their work in court or to the IRS.

Is It Time To Review Your Estate Plan?

When you are busy living your life, you’re probably not putting much thought into your estate plan.  Ensuring the proper disposition of your money and property should be a priority. Even if there is no meaningful change in your life, it’s smart to review your estate plan document to ensure it still addresses all your concerns and reflects your wishes.

Five-year Follow-up
As a general rule, it’s a good idea to give your estate plan a thorough review every five years. Your legal and financial professionals can help you check your plan and assess whether it still meets all your goals. Among other matters, you may should review the following:

  • The values of your personal and business assets. If values have changed significantly, you may need to adjust your estate plan accordingly.
  • Accounts are titled jointly.
  • Beneficiary designations to make sure they are still appropriate.
  • Bequests you’ve made for charitable contributions to see if they need to be increased or decreased depending upon your current situation.

Annual Assessments
You and your financial professional also may want to give your estate plan a once-over each year. You’ll want to make sure that your plan is still tax effective if there have been any changes to the federal and/or your state’s tax law. Current economic and investment market conditions also could have an impact on your estate planning.

Each and Every Event
Big changes in your life could mean having to make a big change to your estate plan. So, if you’ve recently married or divorced, you should review your plan. The marriage or divorce of a child or grandchild also may prompt a review. The birth or death of a family member could have an impact on your will and your current beneficiary designations. And, if you retire or receive a sizable inheritance, you probably should review your plan.

Are Social Security Benefits Taxable?

It depends. If your income exceeds certain tax law thresholds, a portion of your Social Security retirement benefits will be subject to federal income taxes.

The Thresholds

The IRS uses your “provisional income” to determine the percentage of benefits subject to tax. Generally, provisional income includes your modified adjusted gross income plus tax-exempt interest and half of the Social Security benefits you received during the year.

Individuals with provisional income between $25,000 and $34,000 and married couples (filing jointly) with provisional income between $32,000 and $44,000 are taxed on up to 50% of their benefits. And up to 85% of benefits are taxable for individuals with provisional income over $34,000 and married couples with provisional income over $44,000.

As these thresholds are not adjusted for inflation, more taxpayers tend to be affected as overall income levels increase. For example, according to the IRS, the number of taxpayers with taxable benefits in 2012 was about one million more than in 2011.

Minimizing the Tax Bite

If you are collecting Social Security, be aware that certain actions, such as taking a large retirement account distribution or recognizing capital gain from the sale of a second home, could push your provisional income past a threshold and/or increase your overall tax rate.

To help lessen the impact of taxes on your benefits, you might consider:

  • Structuring a vacation home sale or traditional individual retirement account (IRA) distribution so that income is received over more than one year
  • Liquidating assets in a taxable investment account rather than a retirement account if it will mean recognizing only a small capital gain or you have capital losses on other transactions that would offset the gain

Going Green Can Have A Tax Benefit

Thinking about installing a renewable energy system in your residence? Uncle Sam offers individual taxpayers a federal income-tax credit equal to 30% of the cost of qualified residential energy-efficient property (REEP) placed in service in 2015 or 2016.

What Systems Can Qualify?

Credit-eligible property includes:

  • Solar electric
  • Solar water heating
  • Geothermal heat pump (uses ground or ground water as a thermal energy source for heating or cooling)
  • Small wind energy (generates electricity using a wind turbine)
  • Fuel cell (generates electricity from hydrogen and oxygen through an electrochemical process)

Energy_Solar (2)The credit covers the cost of both the equipment and its installation, including labor and any piping or wiring necessary to connect it to your home.

The system must meet specified standards for energy efficiency. You should obtain a certification from the manufacturer that the component you are purchasing meets the relevant requirements for the REEP credit. Note that the manufacturer’s certification is different from the U.S. Department of Energy’s Energy Star label; not all products with the Energy Star label meet the credit requirements.

When available, the tax credit is quite generous. For example, let’s say you spend $6,000 in 2015 on a home solar water heating system that meets all requirements for the REEP tax credit. After considering the $1,800 credit ($6,000 × 30%), the system costs you only $4,200.

Restrictions

The home you are installing the equipment in must be located in the United States and you must use it as your residence. The credit is not available for equipment used to heat a swimming pool or hot tub.

Solar, geothermal, or wind energy property can qualify for the credit whether it is installed in your principal residence or another residence. The credit for fuel cell property is limited to equipment installed in your principal residence.

As for cost, the tax law generally places no dollar limits on the credit. However, there is an exception for fuel cell property: The maximum credit is $500 for each 0.5 kilowatt of capacity.

Some states and public utilities offer incentives to encourage the purchase of energy-efficient property. Certain types of incentives may require an adjustment to your purchase price or cost for credit calculation purposes.

Home Repairs May Save You From Paying Tax On The Sale

The paint. The dust. The torn-up room. Home improvement projects may not be high on your list of enjoyable events. However, when you’re ready to sell your house, any money you have spent on fixing it up may save you from paying tax on the sale.

The Home-sale Exclusion

Home2You probably know a married couple is entitled to $500,000 of tax-free gain ($250,000 for singles) on a home sale if they’ve used the house as a principal residence for two out of the five years prior to the sale. Taxable gain is the difference between your basis in the home (essentially, your cost) and the selling price. So, for most people, the exclusion eliminates or severely reduces any tax on a home sale. But not for all.

That is where home improvements could come into play. If you’ve kept good records, you can increase your home’s basis by adding in remodeling costs. Generally, any work that adds to your home’s value or extends its life counts toward your basis.

What Counts?

Examples of eligible expenditures include:

  • Putting in a patio, deck, or swimming pool
  • Finishing a basement or attic
  • Landscaping
  • Adding a room or fireplace
  • Vinyl or aluminum siding or similar exterior improvements like masonry work
  • Storm windows and doors
  • New plumbing or heating system
  • Air conditioning

Simple repairs, such as painting or fixing broken gutters and windows, don’t get added to your basis. However, if repairs are scheduled as part of a home improvement project, the entire cost of the renovation can be added to your basis.

Deducting Business & Entertainment Expenses

A lot of business is done outside of the office — over lunch, on the golf course, etc. Tax law allows deductions for business meals and entertainment expenses only if specific requirements are met. Even then, deductions are generally limited to 50% of the cost.

General Rules

Meal and entertainment expenses can qualify for the 50% tax deduction if they are directly related to business. Example: You have a dinner meeting with your customer to discuss the schedule for a new project. Because the purpose of the meeting is to talk about the project — a revenue generating activity for your firm — the meal is directly related to your business.

Business_Mixer1What if you don’t “talk business” while you are entertaining a customer, client, or prospect? The expense may still qualify for a deduction if a substantial, bona fide business discussion takes place before or after (on the same day as) the meal or entertainment activity. Example: You and your client meet at your office to discuss a business matter. Afterward, you treat the client to lunch and a ball game. In this case, 50% of your expenses are potentially deductible because they are associated with the active conduct of your business.

To support your deduction, you should have records of the time, place, and business purpose of the activity; who attended and their business relationship; and the amount spent.

When the 50% Limit Does Not Apply

In some cases, meal and entertainment expenses are fully deductible. Expenses that may qualify for a 100% deduction include:

  • The cost of occasional recreational and social activities primarily for the benefit of employees, such as an annual summer picnic
  • Amounts treated as employee compensation (for example, the cost of an all-expenses-paid vacation for your company’s top-grossing salesperson)
  • Amounts paid for tickets to charitable sporting events, such as a golf fundraiser

Taxpayers must meet various requirements to qualify for these deductions. If you have questions or concerns about how these deductions may affect your business, please reach out to your William Vaughan Company representative.

Deductions and Documentation for Charitable Contributions

Before filing your 1040, you will need to compile the charitable contributions you made throughout the year. The IRS allows you to deduct both cash and noncash donations on your schedule A, along with other itemized deductions. There are specific rules for cash contributions. These can be made by way of a cash, check, electronic funds transfer, debit or credit card, or payroll deductions. You will need to keep proper documentation in case your contribution is questioned.

In order for your donation to be deductible, it must be donated to a “qualified” organization. These include nonprofit groups, public charities, and educational institutions. If you are unsure about the qualifications of an organization, you can use an IRS app to help you determine the validity.

If you donate to a charity but receive a benefit in return, such as dinner or merchandise, then you can only deduct the amount that exceeds the fair market value of the benefit. For example, if you pay $100 for an event and receive a dinner that is worth $30, then your deduction will be $70. That $70 is the difference between the $100 you paid and the $30 value of the dinner.

NonProfit_GivingVarious rules apply regarding documentation based on your donation being over $250. If your donation is under $250, all you need is a bank record, such as a print out of your monthly bank or credit card statement. You could also use a canceled check. If you cannot provide such, you may use a written letter from the charitable organization with your name, the amount donated and the date on which you donated. If you have a payroll contribution you can use your paystub, W-2, or a letter from your employer with the amount and date you donated. In addition, you may be required to present a pledge card or other documentation with the name of the charitable organization.

If your cash donation is over $250, you will required additional information above and beyond your bank statement. A written letter from the charitable organization along with a description of any goods or services provided will be obligatory. If you received any benefit from your gift, then the letter must state what was provided and the value of that benefit. You may deduct the net amount.

You do not have to combine separate donations to the same organization when determining if your gift is over $250. For example, if you make a monthly donation to the same organization of $40 for a total of $480 for the year, this is not considered a gift over $250. You are permitted to treat each donation separately. If you have two separate donations to the same organization which over $250 then you will need documentation for each.

If you require assistance in determining your contribution status or have questions about gifting to a local charity, please feel free to a William Vaughan Company representative today (419) 891-1040.

By: Brittany Jennings, Staff Accountant