The ruling in a recent Supreme Court case could change your company’s requirement to charge sales tax on sales to customers who exist in a state in which your business has no physical presence, such as a store or warehouse. On June 21, 2018, the Supreme Court of the United States issued a ruling in the case of South Dakota v. Way Fair, Inc., in which they upheld South Dakota’s sales tax rule that any retailer, regardless of their location inside or outside South Dakota, with sales over $100,000 to or 200 transactions with, customers in South Dakota must charge and remit South Dakota sales tax on those sales.

Before this significant Supreme Court ruling, the prevailing law was determined in the 1992 case of Quill Corp v. North Dakota. In that ruling, the Court said that a business had to maintain a physical presence in a state in order to be responsible for collecting and remitting sales tax in that state. Because that case occurred in 1992, before the internet sales market was really established, states have been arguing that the physical presence standard is outdated. As time has passed and internet sales have boomed, this has created an unfair advantage for internet retailers who do not have to charge sales tax on their web sales, as opposed to brick-and-mortar businesses who do. States have also lost out on billions in sales tax collections on those internet sales. While states should have technically been collecting use tax from the customers on these out-of-state sales, the use tax is hard to enforce. Businesses who make out-of-state purchases are more likely to comply with use tax laws, but individuals are largely unaware of the use tax laws, so most use tax goes uncollected.

While this case ruled only on the sales tax laws of South Dakota, many expect this ruling to result in many states changing their sales tax rules to include sales where a retailer does not have a physical presence in that state, which could increase the sales tax compliance burden of many companies with internet based sales. This could create a hardship for these businesses, as the sales tax rules for what types of transactions are taxable, tax rates, and remittance are different among many states. Each state could also set their own sale and transaction thresholds for collecting and remitting sales tax to states in which a business has no physical presence. This may not impose such a hard burden on an internet based sales company such as Amazon, which many argue is capable of keeping up with all of the different rules. However, depending on how low states set their sale and transaction thresholds, this could place a large administrative burden on small- and medium-sized businesses with internet based sales.

The winners in this case will be the states, which could now open themselves up to billions of dollars in additional revenue, and brick-and-mortar businesses, who have taken a large hit recently because of the prevalence of online sales. However, some do not expect a large shift in buying habits, as the convenience factor of making purchases online could still outweigh shopping in traditional brick-and-mortar stores, even as the playing field is leveled in regards to sales tax.
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If your business sells to customers in states in which you are not currently collecting and remitting sales tax, you could be subject to the sales tax laws of those states now or in the near future as states change their laws as a result of the Way Fair case. Let us know if would like our help monitoring the sales tax laws of other states.

Every business experiences occasional cash shortages. When this happens, owners often assume they should go out and sell more. But this strategy can sometimes compound money troubles over the short run. Why? The answer lies in a concept known as the “cash gap.” Understanding this concept can help your business generate extra cash to meet working capital needs. Here’s how.

Focus on the balance sheet
The cash gap is a function of the timing difference between 1) when companies order materials and pay suppliers, and 2) when they receive payment from their customers. This difference can lead to cash shortages if the company doesn’t have extra savings, doesn’t qualify for additional bank financing or doesn’t want to draw on a line of credit. It’s also important to keep in mind that cash gaps funded by bank financing incur interest costs.

Boosting sales generally isn’t the solution, because, when cash is tight, selling more will often widen the cash gap. That’s because the company will need to front the incremental cost of sales while new orders are fulfilled, invoices are sent and customers remit payment. This concept explains why start-ups and high growth companies tend to experience cash shortages.

Finding hidden treasures
If the company finances its cash gap, shaving a day or two off the gap could save thousands of dollars in interest expense over the course of a year. Minimizing the cash gap requires you to focus on its underlying variables:

Inventory. There are numerous ways to minimize your investment in inventory. For instance, you might search the warehouse for slow-moving items and then either return stale items for credit, trade them with another supplier or competitor, or sell the items for scrap. You can also revise your company’s purchasing policies. For example, some materials and parts suppliers may agree to discounted bill-and-ship or consignment arrangements in exchange for exclusive or long-term contracts.

Receivables. The faster a company can get money in the door, the smaller its cash gap will be. Your business can encourage faster payments from customers by sending out past-due reminder letters and following up with phone calls. Also evaluate invoicing procedures to minimize the days in receivables. Poor communication among billing, sales and production staff can cause invoicing delays.

Payables. Think of trade payables as a form of interest-free financing. But, beware, there are limits to how far a company can extend its payables. Slow-paying businesses may forgo early-bird discounts or receive less favorable treatment from suppliers, such as slower delivery, higher rates or cash-on-delivery terms. Delayed payments can also harm a company’s credit rating, as well as its reputation among its pool of eligible suppliers.

Put it to work for you
The cash gap can be a helpful management tool, because it pinpoints hidden treasures in your balance sheet. Put simply, companies with shorter cash gaps tend to experience fewer cash shortages and rely less on bank financing. Contact us for help measuring your cash gap and using it to manage working capital more efficiently.

​One of the driving factors of those pushing for tax reform was to lower income tax rates. So now that the Tax Cuts and Jobs Act has passed, how do the old and new individual income tax rates compare? While the number of tax brackets (7) remains unchanged, the tax rates were, in fact, lowered, as well as changes being made to the dollar thresholds of taxable income used to determine which rate(s) apply to taxpayers. Listed below is a comparison of the brackets and rates for ordinary income:

While the tax rates as a whole have decreased with the TCJA, there are a few specific levels of taxable income for which the top income tax bracket will actually increase. Married couples filing joint for example, with income levels between $400,000 and $416,701, will now have a top rate of 35%, whereas in 2017 it would have been 33%. Single filers as well have certain levels of income with a higher top tax rate in 2018 compared to 2017. Taxable income between $157,501 to $191,650 jumps from a rate of 28% to 32% and taxable income between $200,001 to $416,700 increases from 33% to 35%. These top tax bracket increases alone, however, are not something to get too worked up about, since there will still be an overall tax decrease due to the lower rates in the first several tax brackets on the way up to these higher brackets.

There are also other factors to consider when looking at taxable income and rates. While the near double increase in the standard deduction seems like a good deal for taxpayers ($6,350 to $12,000 for single filers and $12,700 to $24,000 for married couples), keep in mind that we lose the use of exemptions, which were $4,050 per taxpayer and dependent in 2017. A married couple with three children for example, would previously have had a combined standard deduction and exemptions of $32,950, whereas now they can only take the standard deduction of $24,000. The savings that would have been realized from the lower tax rates by this couple could be eliminated by the increase in income due to the removal of exemptions and other changes to taxable income.  At the same time, a couple in this situation may have seen a decrease in tax withholding from their paycheck which is great now, but if their tax rate decreases are eliminated by other increases in taxable income, they could have a balance due at the end of the year.

Taxpayers should also keep an eye out for certain levels of taxable income where they will likely get hit the hardest by taxes. Rates for single filers and married couples nearly double from 12% to 22% when taxable income reaches $38,701 and $77,401, respectively, and they also see a significant rate increase from 24% to 32% when income reaches $157,501 and $315,001, respectively.

Another item to note specifically for self-employed individuals and/or business owners is that the Qualified Business Income Deduction may begin to be phased out when income levels reach $315,000 for those that are married and $157,500 for singles. This new (and very impactful deduction) for business owners can completely phase out for certain business owners at $415,000 for married taxpayers and $207,500 for singles. If you fall into that higher income range, not only are you seeing a slight bracket rate increase, you could be losing a 20% deduction on your business income at the same time. Ouch! And you need to be careful along the way through the phase out amounts, since the loss of any portion of the QBID could cause one to fall into a higher tax bracket than planned causing a significant underpayment in estimated tax payments. If you are in this situation, you may want to consider using some tax planning strategies to reduce your taxable income below the various phase out levels. If reducing taxable income is not possible and your estimated income taxes for 2018 were based on taxable income below those thresholds, be aware that your income tax could increase significantly if your income rises above those levels.   

So given these facts, what should you change or how will you know where you end up compared to previous years? While some taxpayers may not have as much control over their taxable income as others, you might benefit from some tax planning strategies. Talking with your CPA throughout the year and especially prior to year end could help you take advantage of some of these planning opportunities.​

Every year is a journey for a business. You begin with a set of objectives for the months ahead, probably encounter a few bumps along the way and, hopefully, reach your destination with some success and a few lessons learned.

The middle of the year is the perfect time to stop for a breather. A midyear review can help you and your management team determine which objectives are still “meetable” and which ones may need tweaking or perhaps even elimination.

Naturally, this will involve looking at your financials. There are various metrics that can tell you whether your cash flow is strong and debt load manageable, and if your profitability goals are within reach. But don’t stop there.

3 key areas
Here are three other key areas of your business to review at midyear:

1. HR. Your people are your most valuable asset. So, how is your employee turnover rate trending compared with last year or previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.
2. Sales and marketing. Are you meeting your monthly goals for new sales, in terms of both sales volume and number of new customers? Are you generating an adequate return on investment (ROI) for your marketing dollars? If you can’t answer this last question, enhance your tracking of existing marketing efforts so you can gauge marketing ROI going forward.
3. Production. If you manufacture products, what’s your unit reject rate so far this year? Or if yours is a service business, how satisfied are your customers with the level of service being provided? Again, you may need to tighten up your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals.

​Necessary adjustments
Don’t wait to the end of the year to assess the progress of your 2018 strategic plan. Conduct a midyear review and get the information you need to make any adjustments necessary to help ensure success. Let us know how we can help. 

After building a successful business, many business owners decide that they want to transfer their ownership to their children. Too often, those owners assume that a transfer to children will go smoothly and simply, requiring little more than informing their kids of the date they’ll be taking the reins. Owners who make this assumption commonly realize that without planning, they can harm their businesses, their business exits, and their long-term relationships with their families.

Without proper Exit Planning, ownership transfers to children can produce negative consequences in three areas of your life.
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1. Money
It’s likely that your children don’t have the capital to purchase their shares of ownership outright. This means that when transferring to a child, you’ll likely need to accept a promissory note and rely on your child to maintain or grow the company to receive your business’ full sale value. If something goes wrong, such as your child not having the ability to run the company as successfully as you did, you may receive less than what you expected from the transfer of your ownership interest. Since the goal of an Exit Plan is to position you to exit with financial security, transferring ownership to a child without a thoughtful plan can threaten that goal.

Another common money-related problem concerns how you’ll parse your assets between your business-active children and non-business-active children. Transferring ownership shares to non-business-active children can lead to two problems. First, it can create resentment among any business-active children, because those children have worked hard to build the business, only to watch a sibling who did nothing to build the business get a share of their hard work. Second, it can make non-business-active children feel forced to do something they have no interest in doing to receive their share. In both cases, your company’s cash flow can be affected, potentially harming your ability to exit your business with financial security.

2. Time
Ownership transfers to children usually require owners to wait longer before receiving full sale value. This means that your finances may be exposed to general business risk for longer. If the company or economy experiences a downturn, you might need to wait longer than you had anticipated to receive the full sale price, which can affect your post-exit plans.

Another time factor that many owners overlook relates to how much time they’ll need to spend training their children or refereeing squabbles between them. If your children aren’t ready to run the business without your help, you may find yourself doing more work for longer, which can prevent you from doing other things you want or need to do to achieve your exit goals. Additionally, if you need to mediate fights between children—whether it’s related to who should do what within the business, or asset allocation between business-active children and non-business-active children—you may end up spending more time cleaning up messes or, worse, end up having to take the reins back to prevent your children from doing permanent damage.
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3. Values
Although many owners assume that their children will run the business similarly to how they ran it, this isn’t always the case. If a child decides to run your business differently than you, it can create discord or amplify existing friction among your family members. This can cascade into problems that affect the money you receive and the time you spend in the business.

Differing values can also create hard feelings among in-laws, who might feel that you aren’t treating their interests fairly. In the worst scenarios, in-laws can use access to grandchildren as bargaining chips to get what they think they deserve out of your ownership transfer.
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Business owners often fail to identify the consequences of a poorly coordinated ownership transfer to children until it’s too late. If you’re considering transferring your ownership to your children but aren’t sure whether you’ve addressed these potential problems, contact us today.