Tax Accounting Guide to Prepare Your Business for 2016

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As 2015 comes to an end, businesses should not only wrap up their tax accounting but prepare for the new fiscal year as well. Tying off loose ends and cutting back on losses can significantly help your business start strong for the coming year.

We’ve listed some smart and tax-saving moves you can do before the year ends, as well as a checklist of focus areas and resolutions you can work on when it comes to financial and accounting management for 2016.

Chapter I. 2015 Year-End Smart and Tax-Saving Moves for Businesses

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While several business-related tax extenders such as Research & Development tax credits, bonus depreciation, and Section 179 expensing expired at the end of 2014, and their fates are still uncertain, there are still a number of year-end money-saving strategies you can apply to your business to minimize taxes.

Here are the smart strategies that can aid in reducing your taxes in 2015, and potentially increase your income in 2016.

1.     Accelerating or deferring income can give tax breaks.

Simply states:

  • A business should consider accelerating income in 2015 if it will be in a higher bracket in 2016.
  • A business should consider deferring income until 2016 if it will be in a higher bracket in 2015. One also should defer income if this will preserve its qualification for the small corporation AMT exemption for 2015.

NOTE: Businesses that didn’t reach that threshold taxable income of $1million or more in any of the three preceding tax years are accounted for as NOT considered large corporations.

Businesses not qualifying as large corporations have an incentive for deferring income into (or accelerating deductions from) 2016. If such shifting of income or deductions let the corporation avoid reaching the $1 million thresholds in 2015, it can use the 100%-of-last-year’s-tax safe harbor in 2016.

Here are ways you can do it:

  • Your business can take a 2015 deduction for some bonuses not paid till 2016. An accrual basis business can take a deduction for its current tax year for a bonus not actually paid to its employee until the following tax year if (1) the employee doesn’t own more than 50% in value of the business, (2) the bonus is properly accrued on its books for the current tax year, and (3) the bonus is actually paid within the first 2 1/2 months of the following tax year (for a calendar year taxpayer, within the first 2 1/2 months of 2016).
  • Your business can defer the inclusion of certain advance payments. Accrual-basis taxpayers may defer including in gross income advance payments for goods until the tax year in which they are properly accruable for tax purposes—if the income inclusion for tax purposes isn’t later than the taxpayer’s accounting method for financial reporting purposes.

2.     Domestic production activities deduction (DPAD)

Section 199 Deduction. If your business qualifies for the DPAD for its 2015 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies.

If it does, find ways to increase 2015 W-2 income such as accelerating salaries or bonuses related to domestic production gross receipts in the last quarter of 2015, so you can increase the amount of this deduction to offset income—from domestic manufacturing and other local production activities.

Qualified production activities include manufacture, production, growth, or extraction of qualifying production property (i.e., tangible personal property such as clothing, goods, or food, as well as computer software or music recordings) by a taxpayer, either in whole or in significant part within the U.S.; construction or substantial renovation of real property in the U.S., including residential and commercial buildings and infrastructure such as roads, power lines, water systems, and communications facilities; and engineering and architectural services performed in the U.S. and relating to the construction of real property.

3.     Purchase new business equipment.

Section 179 Expensing. This is the perfect time to buy new equipment or property for your company, as you can elect to expense (tax reduction) the entire cost of most new equipment—up to a maximum of $25,000 for the first $200,000 of property placed in service by December 31, 2015. Keep in mind that this deduction cannot exceed net taxable business income.

Section 179 Depreciation. You must also consider the timing of purchase equipment as you might increase your tax benefit if you buy equipment at the right time. The tax rules for depreciation include “conventions” or figuring out how many months of depreciation you can claim.

There are three types of conventions namely half-year, mid-month, and mid-quarter.

  • The half-year convention applies to all property except residential rental property, nonresidential real property, and railroad gradings and tunnel bores unless the mid-quarter convention applies.

All property that you’ve begun using during the year is considered as “placed in service” (or “disposed of”) at the midpoint of the year. This means that regardless of when you started using (or dispose of) the property, you treat it as if you began using it in the middle of the year.

  • The mid-month convention applies only to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all assets placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month.
  • The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40 percent of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule does not apply, and you treat all equipment put in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.

Book-Tax Conformity Election. Businesses may take advantage of the “de minimis safe harbor election” to charge to expense the costs of inexpensive assets and materials and supplies.

The cost of a unit of property cannot exceed $5,000 if the taxpayer has an applicable financial statement (AFS); $500 if there’s no AFS. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($500 or less per purchase or per invoice).

4.     Business Energy Investment Tax Credit

Business energy investment tax credits are solar energy systems (passive solar and solar pool-heating systems excluded), small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems.

If these are placed in service on or before December 31, 2016, businesses can apply for these as tax reductions.

5.     Small Business Health Care Tax Credit

Employers with 25 or fewer full-time employees (2015 average annual wage: $51,600) may qualify for a tax credit to help pay for their employees’ health insurance. The credit is 50 percent (35 percent for non-profits).

6.     Dividend Planning

You can issue corporate dividends to shareholders to reduce accumulated corporate profits and earnings.

These strategies will not only minimize tax liabilities and reduce taxes but can also help generate long-term income—if applied annually.

Chapter II. Checklist: Financial and Accounting Management Focus Areas for 2016

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After you have carried out your year-end tax-saving strategies, it is now time to reflect on your company’s finances and look into areas for improvement in your financial and accounting management system.

Here’s a checklist of the areas you need to focus on:

GAAP Compliance

Your company should strictly follow and be updated with the Generally Accepted Accounting Principles (GAAP). If not, it should be your priority for 2016 to help improve your financial and accounting management. This is crucial if you’re planning to apply for more investments or sell your business as an exit strategy in the future, as potential investors or buyers will be looking into your GAAP-compliance.

Accounts Receivable

Part of ensuring that your business stays afloat is to have a streamlined and efficient collections process. This gives you better control over your cash flow and a clearer status of your finances.

Payroll

Payroll would include W2 forms that need to be received by your employees by the end of January. If you struggle to beat deadline after deadline every year, it’s time to check your payroll process and have it streamlined for efficiency.

Payroll entails a lot of filling out forms, filing, and issuing payments that keep you on your toes all the time. You need to decide to be proactive all throughout the year when it comes to this area. But, with a streamlined payroll process, this will be an easy thing to oversee.

1099s

You should aim to keep your 1099 process updated continuously throughout the year. This helps you avoid cramming in January when you should be preparing ahead and not looking back and filing tax papers from last year.

This can easily be done by collecting 1099s along the way—before you issue payments, rather than trying to figure out who you need them from at the end of the year, and have to chase down people who are likely preoccupied with the holidays.

Tax Savings

It’s ideal to be mindful of potential tax savings throughout the year to maximize its potential, rather than to squeeze in the last year-end tax-saving strategies mentioned above in the final quarter of the year. This will also help you estimate your tax, adjust expenses accordingly, and prevent high taxes next year.

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Fraud Control

A big part of financial and accounting management is fraud control. You should have regular internal audits of your financial procedures to help identify vulnerable areas for frauds or errors, as this will help improve your security protocol to reduce risk, and even prevent bigger problems to happen.

Budget & Savings

The need for a business budget is a critical business planning tool, considering that budget is extremely effective in making sure your business has adequate cash flow, as well as ensuring financial success.

Once the budget has been created, monthly actual revenue amounts can be compared to monthly budgeted amounts.

If actual revenues fall short of budgeted revenues, expenses must be cut. And don’t do this at the beginning of the year, year-end is the best time for business owners to meet with their accountants to budget revenues and expenses for the following year.

Chapter III. New Year’s Accounting Resolutions You Can Adapt for Your Business

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Upon identifying critical areas in your financial accounting and management system, it’s time to set some goals to help keep your system in place and efficiently running.

Here are some resolutions you can adapt for your business:

1.     Have a proper accounting system.

Regardless of business size, you still need to have a good accounting system—whether an accounting software or hiring a bookkeeper to keep your books in order. This doesn’t only help tax filing easier but also generates efficiency, improves productivity and profitability, assists in overseeing cash flow, and increases revenue.

An accounting system is inclusive of a filing system, monitoring of income and expenses (cash flow), and an audit and control system.

An enormous chunk of this system will involve a lot of redundant but significant work such as filing of receipts, listing down of receivables and expenses, and issuances of receipts, etc. This mundane but essential task can be outsourced to free up resources (time and manpower) that your company can direct towards core business activities.
Automation will also help reduce time and error potential. However, one needs to be versed with the machine and software that comes with automation.

2.     Chase up late payments promptly.

Cash is king, and late payments have a great impact on your company’s cash flow, as it directly affects your operations. One of your resolutions should include a payment collection that ensures late payers are chased immediately.

While this may seem like a harsh treatment towards potential or existing loyal customers, you can be honest with your clients by emphasizing clearer payment terms and its due dates, so you can be assured that your customers know when they have to pay you and then these terms.

Of course, when clients are in genuine difficulty, you can give them more time to pay. But, being strict about your payment terms will help you deal with customers who repeatedly fail to pay you on time for no reason.

If it helps, you can invest in a specialist invoicing or accounting software that will send out automatic reminder emails to customers when they don’t meet your payment deadlines.

You may find this easier and quicker than chasing them manually and saves you the hassle of enduring an annoying phone call, though, you might have to give them a call now and then.

3.     Estimate your income tax every month and set money aside for payment.

This is important, so you can efficiently manage cash flow. It is better to pay taxes in installments to avoid penalties and making one huge payment when the tax due date arrives.

This is where having an efficient accounting system proves to be an advantage. It is easier to have a good estimate when your balance sheet of assets and liabilities is correct and updated consistently.

4.     Review your supplier and customer list.

It’s a good practice to review your supplier and customer lists routinely.

First, review your suppliers by evaluating the products and services they provide, and whether they deliver on time or go the extra mile for you.

Are you given valuable customer service? Compare them with other suppliers and see if you can get vendors who deliver the same—or even better products or services at a better price.

You’ll also need to review your customer list. While it is a delicate balance deciding between keeping difficult customers or letting them go, remember that it’s always your choice to deal with whoever you like since it’s your business.

However, also keep in mind that problematic customers don’t go away, as they just keep representing themselves in the form of different customers.

You need to have a better procedure and temperament when it comes to dealing and chasing payments from demanding customers.

5.     Get some help from an expert accountant.

Businesses must have an accountant because he helps your business in all financial aspects, not just computing for your taxes and tax returns.

If you already work with one, resolve to work more closely with him and get the most of the services he offers. Take advantage of his knowledge and experience to identify new cost savings and better manage your budget—just remember that they will need access to your accounts data. And if your accountant can’t add additional value, maybe you should add an extra resolution about finding a new one!

An expert accountant should provide invaluable advice about financially managing your new business and keeping it tax compliant. He should also inform you about tax strategies that can save your business time and money.

Chapter IV. Outsource Your Tax Accounting for 2016: How Your Business Can Benefit

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Tax accounting has long been one of the most outsourced functions in the accounting and payroll industry.

Aside from the fact that this is a specialized task needing experts that are updated with current tax laws and requirements, most companies these days have gone global. Thus, their in-house tax accounting departments have to deal with complex reporting requirements in different areas around the world, just to meet compliance standards. This prevents them from focusing on more important aspects of their jobs such as strategic planning, monitoring, and evaluation.

Outsourcing has been a critical factor in today’s multinational industry set-up for businesses, and this includes tax accounting. While companies differ with their reasons when it comes to deciding to outsource, it is, without a doubt that they still get to reap all the benefits by working with a qualified and trusted outsourcing partner.

Whether it’s to downsize manpower, free up the time of in-house accounting professionals to focus on more valuable tasks, or ultimately save on resources—outsourcing gives your business the following benefits:

1. Outsourcing your tax accounting allows you to concentrate on key financial accounting and management procedures that are more aligned to your core business.

Chances are, if your business isn’t in the accounting industry, preparing and filing tax returns are tedious and laborious tasks that you just have to deal with out of compliance.

By delegating it to a partner, you get more of your valuable time back, and you can focus more on your core business activities. Finance in-house employees can focus more on keeping bookkeeping updated or chasing up invoices/payments as well.

2. Outsourcing helps you save money.

There are three ways outsourcing tax accounting can help you save money. It will reduce the resources needed to hire tax accountants in-house, and entrusting this function to a tax expert can help you learn how to save more money when declaring your liabilities.

And since you’re working with experts, their expertise is being updated with current laws, requirements, and most importantly, deadlines and due dates—helping ensure that you don’t incur penalties due to non-compliance or late submissions.

Think about this when you cannot justify outsourcing this function, more so when you’re just starting or running a small business.

3. Outsourcing allows you choose services you need.

Accounting firms offer a broad range of services that enable you to choose the ones that can specifically be beneficial to your business.

You can even just outsource a particular task, such as tax accounting, and keep other services in-house.

And since you are outsourcing, you save yourself the effort by scaling or downsizing the need for the service as required. This is especially useful for small to medium-sized enterprises.

4. Outsourcing tax accounting is better accounting.

This statement might be controversial but allow us to explain.

To maintain and build their business, accounting outsourcing providers need to be at their best game every time.

This means they only hire the most talented and qualified people in the industry to deliver service to their clients, and that they invest in recent technological advances related to accounting systems to help them meet global standard compliance requirements.

This also means that they are the ones responsible for training their people about the latest in technology and updating them with the latest tax regulations and laws.

Imagine how much money, time, and effort you get to save just for this benefit alone. It translates to a better accounting system provided by a partner.

Tax accounting is a laborious but essential task involved in any business, and usually dependent on an organized, efficient, and updated accounting system and comprehensive financial management reports.

Aside from the tedious tasks involved, it is also directly affected by continuously revised tax laws that differ per country—adding more complexity when it comes to computing for taxes.

Consider hiring a tax expert or certified public accountant (CPA) to handle your tax accounting. Infinit’s team of experienced finance and accounting outsourcing analysts will prepare all of your tax return, ensuring that you are paying no more tax than is necessary.

Throughout the year, we will monitor tax law revisions and discuss changes that affect you. We will recommend tax-saving strategies and serve as your advocate in tax matters. Contact us for more information.