How to reduce inventory risk in your business

How to reduce inventory risk in your business

Study the balance sheet of most retail or manufacturing businesses, and you'll find inventory near the top of the asset list. Accountants define inventory as raw materials, supplies, work in progress, and finished goods. It's the stuff sitting on shelves, parked in the lot, or being produced in the factory – merchandise that managers expect to sell in the normal course of business. Buying, storing, handling, and insuring that stuff is expensive. As a high-value asset, inventory often represents a significant risk, and mitigating that risk is crucial to maintaining profitability.

To reduce inventory risk in your business, consider the following:

*                 Too many or too few goods. Nothing beats a comprehensive and consistently applied inventory tracking system for making sure you don't overbuy from vendors or underestimate the needs of your customers. The best information systems will capture detailed sales histories and forecast demand with reasonable precision. In addition, regular contact with customers may help to identify emerging demand or dissatisfaction with existing products. These conversations, in turn, can influence your inventory purchase decisions.

*                 Obsolescence. Most inventory declines in value over time. To mitigate this risk, a manager should track revenue data and regularly move inventory via special promotions, discounting, and sales. Paying to hold and insure obsolete merchandise drains profits. Make room for fresh inventory by creatively moving the inventory that's already on your shelves.

*                 Damage. Managers should identify the causes behind frequent damage. Perhaps employees need better training in handling goods; perhaps more stringent policies need to be set. Some retailers, for example, limit the number of boxes that can be stacked on pallets. Maybe the company's packaging is not sturdy enough, or a change of suppliers is warranted. Knowing why your inventory is being broken is the first step to reducing that risk.

*                 Theft. Establishing physical safeguards – locks, lighting, fences, cameras, and the like – can help protect merchandise, whether it's housed in the store or warehouse. Taking time to perform thorough background checks on employees may also reduce fraud risk. Hiring an independent auditor to review inventory levels is often a good preventive control, a control that sometimes ferrets out theft. If employees know that management routinely checks the company books and counts inventory, they may be less likely to shuffle goods from the warehouse to their homes or engage in "creative" accounting.

Discuss money before you marry

Discuss money before you marry

Couples often enter into marriage without ever having had a serious discussion about financial issues. As a result, they find themselves frequently arguing about money. If you are planning a wedding, here are some steps you can take to get your marriage off to a good financial start.

*                 Premarital financial discussions. You and your intended might enjoy the same movies and the same kinds of food, but are you financially compatible? Take some time to discuss your finances before you tie the knot. Talk about your assets, your debts, your credit ratings, and your financial attitudes, including your spending and saving habits. Do you share the same goals, such as having children, buying a home, or continuing your education? How will you finance your dreams?

How will you handle your finances as a married couple? For example, who will pay the bills? Will you maintain joint or separate checking accounts? If you maintain separate accounts, how will you split your expenses?

*                 Premarital financial counseling. Every couple needs to work out their own style for handling money. Call upon your accountant to assist you in setting up a budget, controlling your taxes, and mapping out a financial plan for your future.

*                 Premarital legal counseling. If you have substantial assets, discuss the merits of a premarital agreement with your attorney. If your partner has substantial debt, ask your attorney how you can protect yourself from his or her creditors.

Perhaps you plan on buying a house together or combining financial accounts. Your attorney can advise you on the best way to hold title to your assets.

Discussing your finances before you say "I do" may increase your chances for living happily ever after. Give us a call if you would like assistance in this area.

A Quick Recordkeeping Guide

A Quick Recordkeeping Guide

Is your file cabinet overflowing? Do you hesitate to purge tax information because you're not sure what to keep and what to discard? Here's a quick guide to help you cut through the clutter.

*                 Expenses. Substantiation for deductions includes charitable donation acknowledgments, receipts for employee business expenses, and automobile mileage logs. Retain these at least seven years after you file the return claiming them.

*                 Income. The same seven-year rule also generally applies to common tax forms such as 1099s showing interest, dividends, and capital gains from banks or brokerages, and Schedule K-1s from partnerships and S corporations. The IRS recommends holding on to your W-2s until you start collecting social security.

Tip: Shred interim income reports once you've compared the totals to annual forms.

*                 Retirement accounts. You may have to calculate the taxable portion of distributions, so keep records detailing your contributions until you've recovered your basis.

*                 Tax returns. The statute of limitations is usually three years but can be six years if underreported income is involved. In cases of fraud or when no return is filed, the IRS has an indefinite time period for assessing additional tax.

As a general rule, keep federal and state returns a minimum of seven years.

For additional information, including how long you should store business papers and payroll reports, please call. We'll be happy to help you establish a records retention schedule.

Watch year-end mutual fund transactions

Watch year-end mutual fund transactions

The income tax effects of mutual funds can be complex, and poorly timed purchases or sales can create unpleasant year-end surprises.

Mutual fund investors (excluding qualifying retirement plans) are taxed based on activities within each fund. If a fund investment generates taxable income or the fund sells one of its investments, the income or gain must be passed through to the shareholders. The taxable event occurs on the date the proceeds are distributed to the shareholders, who then owe tax on their individual allocations.

If you buy mutual fund shares toward the end of the year, your cost may include the value of undistributed earnings that have previously accrued within the fund. If the fund then distributes those earnings at year-end, you'll pay tax on your share even though you paid for the built-up earnings when you bought the shares and thus realized no profit. Additionally, if the fund sold investments during the year at a profit, you'll be taxed on your share of its year-end distribution of the gain, even if you didn't own the fund at the time the investments were sold.

Therefore, if you're considering buying a mutual fund late in the year, ask if it's going to make a large year-end distribution, and if so, buy after the distribution is completed. Conversely, if you're selling appreciated shares that you've held for over a year, do so before a scheduled distribution, to ensure that your entire profit will be treated as long-term capital gain.

If you're considering buying or selling mutual funds and would like more information about the tax effects, give us a call.

Managing AGI could protect tax breaks

Managing AGI could protect tax breaks

How close to the edge are you when it comes to tax phase-outs? As you begin your fall tax planning, consider the effects of these benefit-limiting provisions. Knowing how close you are to the "edge" can help preserve tax breaks for 2015.

Many phase-outs are based on modified adjusted gross income, or MAGI. MAGI is the adjusted gross income shown on your tax return as "modified" by adding back certain deductions. The "add-backs" vary with specific phase-outs. That means you might have to choose between conflicting opportunities. For instance, if you have a child in college this semester, the American Opportunity Credit and the Lifetime Learning Credit may be on your mind. Both benefits are education-related, yet the qualifying rules differ – including the MAGI threshold.

Here are some common federal tax benefits with MAGI phase-outs.

*                 Education credits. The American Opportunity Credit is a partially refundable, dollar-for-dollar reduction of your tax bill, with a maximum of $2,500 per student. This year the credit starts to shrink when your MAGI reaches $160,000 if you're married filing jointly ($80,000 if you're single). The credit disappears completely when your MAGI is greater than $180,000 for joint returns ($90,000 if your filing status is single).

For 2015, the Lifetime Learning Credit begins to phase out at $110,000 when you're married filing a joint return and $55,000 when you're single. Once your MAGI reaches $130,000 (married) or $65,000 (single), the credit is no longer available.

*                 Retirement plans. Phase-outs affect retirement planning too. The deduction for contributions to your traditional IRA is limited when you are eligible to participate in your employer's plan and your MAGI exceeds $98,000 ($61,000 when you're single).

While Roth IRA contributions are not tax-deductible, the amount you can contribute for 2015 begins to phase out when your MAGI reaches $183,000 and you're married filing jointly ($116,000 if you're single).

In addition, the federal "saver's" credit for contributing to retirement plans phases out when your 2015 MAGI is more than $61,000 and your filing status is married filing jointly ($30,500 for singles).

*                 Other phase-outs. The phase-out for the exclusion of social security benefits from taxable income is calculated on the amount of your MAGI over the base amount of $32,000 when you're married filing jointly. The base amount is $25,000 when you're single.

Phase-outs also reduce personal exemptions, itemized deductions, and the alternative minimum tax exclusion.

Contact our office for guidance in managing your income for maximum tax breaks.

Miscellaneous deductions could cut your tax bill

Miscellaneous deductions could cut your tax bill

If you itemize deductions, you may be able to deduct some of the miscellaneous expenses you pay during the year. These miscellaneous deductions can be taken only if their total exceeds two percent of your adjusted gross income. Deductions include such expenses as the following:

*                 Unreimbursed employee expenses.

*                 Job hunting expenses (in your same line of work).

*                 Certain work clothes and uniforms.

*                 Tools needed for your job.

*                 Union or professional dues.

*                 Work-related travel and transportation (not commuting costs).

IRS publishes tips for amending returns

IRS publishes tips for amending returns

If you discover an omission or error made on your already filed tax return, you may need to file an amended return. Here are some IRS tips for amending returns.

1.               Use Form 1040X. You must file a paper amended return; this form can't be e-filed.

2.               File an amended return to correct errors or change your original filing.

3.               Don't file an amended return to correct math errors or to attach forms you forgot to attach originally. The IRS will mail a request for the forms and will automatically correct math errors.

4.               You generally have three years from the original filing date to file an amended return.

5.               If you're filing for multiple years, you must file a separate Form 1040X for each year.

6.               If you're due a refund from your original filing, wait until you've received the original refund before you file Form 1040X for an additional refund.

7.               If you owe more tax with Form 1040X, pay it as soon as possible to avoid added interest and penalties.

8.               You can track the status of your filed Form 1040X with the IRS's "Where's My Amended Return?" tool at www.irs.gov

Will your child have to file a tax return?

Will your child have to file a tax return?

Your child may have to file a 2015 income tax return depending on several factors, including the total amount of income he or she received. For instance, if wages are the only source of income, your child can generally earn up to $6,300 during 2015 before a federal tax return is necessary. However, unless your child can claim an exemption from withholding, a return may be required even when wages earned are lower than the filing requirement. That's because filing is the only way to claim a refund of overpaid taxes. In addition, self-employment income, tips, and interest, dividends, and stock sales can affect the filing requirement. Contact us if you want details.

Tax Tip: Consider making tax-free gifts

Tax Tip: Consider making tax-free gifts

If you are in a position to give, making annual gifts can be an excellent strategy for reducing both your estate and income tax liability. Doing your gift-giving well before year-end is especially smart if you are giving income-producing property. You will then remove more income from your 2015 tax return. The annual tax-free limit for 2015 gifts is $14,000 to as many individuals as you like.

Back to school? Check this tax credit

Back to school? Check this tax credit

If you or a member of your family is off to college this fall, you may be eligible for the American Opportunity Tax Credit. Eligible students may take this credit for the first four years of higher education. The credit can be up to $2,500 annually. Expenses that qualify for the credit include tuition, fees, and related expenses. Forty percent of the credit is refundable, meaning you may be able to get up to $1,000 of the credit as a refund even if you don't owe any taxes.

IRS gives worker classification criteria

IRS gives worker classification criteria

Since independent contractor payments are not subject to payroll taxes, there is a temptation to classify some employees as independent contractors when they should not be. The IRS uses certain criteria to help determine who should be classified as an employee subject to payroll taxes and eligible for employee benefits. Here's a partial list –

*                 Who controls when, where, and how the work is to be done?

*                 Who sets the working schedule?

*                 Is the payment by the hour or by the job?

*                 Whose tools will be used to accomplish the work?

*                 Does the contractor provide services to the general public?