Futrli Forecasting and Reporting

New IRS FAQs on Section 199A

On April 11, likely after you filed your tax return, the IRS updated its Section 199A frequently asked questions (FAQs) by increasing the number of questions and answers from 12 to 33. The IRS often publishes FAQs on its website to help educate you on various tax law provisions. Section 199A is no different: the IRS has been updating its FAQ website with additional questions and answers on the new qualified business income (QBI) tax deduction.

 We noted three of the FAQs that help fill in some holes in the final Section 199A regulations but will cause problems for many taxpayers. In fact, there will be taxpayers who will need to file amended tax returns because of the FAQs.

  

FAQ 29: QBI Subtractions for Partnerships

  

In this FAQ on partnerships, the IRS hints at the following:

·        Unreimbursed partnership expenses and business interest expenses reduce QBI in some, if not all, circumstances.

 

·        Traditional IRA contributions based on self-employment income don’t reduce QBI (since the IRS didn’t include them), while SEP, SIMPLE, and qualified plan deductions do reduce QBI.

 

FAQ 32: QBI in Final vs. Proposed Regulations

In FAQ 32, the IRS clearly states that the definition of QBI is the same in both the proposed and the final regulations. Since the definition was clarified in the final regulations, this was a surprise to many. 

 

And what this means is that you reduce QBI by the self-employed health insurance deduction, the one-half of self-employment tax deduction, and the qualified retirement plan deductions.

 

 FAQ 33 Has to Be Wrong

FAQ 33 states that an S corporation shareholder who owns more than 2 percent may have to reduce QBI at both the entity (S corporation) and the shareholder (1040 tax return) levels. 

 We don’t agree with the double subtraction indicated in IRS FAQ 33, for three reasons:

  

1.     The final regulations state that you reduce QBI “to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction.” Unlike the proprietorship, the S corporation reduces its business income by reimbursing or paying for the health insurance that it puts on the more than 2 percent shareholder’s W-2. 

2.     Under Notice 2008-1, the self-employed health insurance deduction for the 2 percent S corporation shareholder requires that you include the insurance cost as shareholder wages. The wages reduce QBI.

3.     And income from the trade or business of being an employee is not QBI.

 

Website Is Not an Authority 

If you don’t like the positions taken on the IRS’s FAQ website, then there’s one silver lining: FAQs don’t constitute an authority for tax return positions.

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When the Second Office in the Home Is a Principal Place of Business

When possible, you want to claim that your office in your home qualifies as a principal place of business because this classification

  • gives you the home-office deduction, and

  • eliminates commuting from your home to your regular office.

Current law gives you two ways to claim your office in the home as a principal office:

  • First, as a principal office under the rules that the Supreme Court finalized in Soliman

  • Second, as a principal office under the alternative after-Soliman rules, wherein lawmakers added this alternative: “... the term principal place of business includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business”

Question for you: If you have an office downtown where you spend 40 hours a week, can you claim that you have an office in your home that qualifies as a principal office if you spend only 12 hours a week working in the home office? If you said no, you are not alone. But you would also be wrong.

With the administrative or management rule, you can have your principal office in your home with 12 hours of work a week, even when you work at your other office for 40 hours!

If you are ready to implement tactics like this in your business model, contact our team by clicking the button below.

IRS Section 199A Final Regs Shed New Light on Service Businesses

Remember, new tax code Section 199A offers you a 20 percent tax deduction gift if you have

  • pass-through business income (such as from a proprietorship, a partnership, or an S corporation), and

  • 2018 taxable income of $315,000 or less (married, filing jointly) or $157,500 or less (filing as single or head of household).

But once your taxable income is greater than the relevant amount listed above (which Section 199A calls a “threshold”), your Section 199A tax deduction becomes more complicated. Under the rules that apply to this new Section 199A tax deduction, the tax code creates two types of businesses:

  • Business that are in favor and can realize the new deduction regardless of taxable income.

  • Business that are out of favor. The tax code calls the out-of-favor business a “specified service trade or business.”

If you own an out-of-favor specified service trade or business, you suffer a zero Section 199A tax deduction on that business’s out-of-favor income when you have 1040 taxable income greater than $415,000 (married, filing jointly) or $207,500 (filing as single or head of household). 

With taxable income greater than the $315,000/$157,500 threshold and less than the $415,000/$207,500 upper limit, Section 199A reduces the tax deduction available to your out-of-favor specified service trade or business.

This brings us to the question: What if your taxable income is above the limit, but your pass-through business has one part that’s out of favor and another part that’s in favor? You will like what the rules have done for you if you are in this situation. The new regulations make it clear that it is possible for you to benefit from the de minimis rule.

The rule. If the trade or business has annual gross receipts of $25 million or less, it is an in-favor business if it gets less than 10 percent of its gross receipts from an out-of-favor specified service trade or business, such as (among others) law, consulting, accounting, and health care. If gross receipts are greater than $25 million, substitute 5 percent for the 10 percent.

De Minimis Example 1


Green Lawn LLC sells lawn care and landscaping equipment and also provides advice and counsel on landscape design for large office parks and residential buildings. 

The landscape design services include advice on the selection and placement of trees, shrubs, and flowers and are considered under Section 199A an out-of-favor consulting business. 

Green Lawn LLC separately invoices for its landscape design services and does not sell the trees, shrubs, or flowers it recommends for use in the landscape design. Green Lawn LLC maintains one set of books and records and treats the equipment sales and design services as a single trade or business.

Green Lawn LLC has gross receipts of $2 million, of which $250,000 is attributable to the landscape design services, a consulting business. Because consulting services are 10 percent or more of total gross receipts, the entirety of Green Lawn LLC’s trade or business is an out-of-favor specified service trade or business.


De Minimis Example 2


Veterinarian LLC provides veterinarian services performed by licensed staff and also develops and sells its own line of organic dog food at its veterinarian clinic and online. The veterinarian services are in the out-of-favor specified service trade or business of health care.

Veterinarian LLC separately invoices for its veterinarian services and the sale of its organic dog food. It maintains separate books and records for its veterinarian clinic and its development and sale of dog food. Veterinarian LLC also has separate employees who are unaffiliated with the veterinary clinic and work only on the formulation, marketing, sales, and distribution of the organic dog food products. 

Veterinarian LLC treats its veterinary practice and the dog food development and sales as separate trades or businesses for purposes of Sections 162 and 199A. It has gross receipts of $3 million. Of the gross receipts, $1 million is attributable to the out-of-favor veterinary services. 

Although the gross receipts from the services in the field of health care exceed 10 percent of Veterinarian LLC’s total gross receipts, the dog food business is a separate, in-favor business.

Note that Animal Care wins because it has two trades or businesses, which it proves with its financial books and its separation of its employees. 

Green Lawn LLC, in the previous example, failed because it had one business only, which it also proved by the way it kept its books.

If you would like to learn more about how to implement strategies like this in your business, contact our team by clicking the button below.

How To Turn Risks Into Business Opportunities

How to turn risks into business opportunities.

Opportunity will never be without risk. Flipping that on its head (the good old glass half full), though, there’s also no risk without opportunity. It’s a point to consider. If you dig deep enough into any risk, there’s a slightly dusty opportunity you can clean up and use

Think long-term

Say you adopt a puppy (bear with us). Immediate repercussions include a ruined carpet and more than a few widowed socks. But long-term, it’s companionship, entertainment and an invaluable welcome home every day. Opportunities can exhaust money and time and you might not see a return on investment immediately. Thus, timing is critical. With our forecasting technology, we model different timings and deduce the best time for you to make a move. The ultimate message: think long-term, but do so responsibly.

Was that really necessary?

One point to consider, even before considering the technicalities, is whether the risk is really necessary. With the labyrinth-like web of business advice constantly feeding us on and offline, it’s difficult to not feel inclined to jump into every platform and path. Yes, there are an innumerable amount of articles telling you that LinkedIn is the best social media site for businesses and will do wonders for you. But, if you own a small store selling kids toys, LinkedIn really isn’t your best bet. With our reports and bespoke alert barrier, we can highlight the gaps in your business, helping you to fix the problems that really matter.

Look for bitesize alternatives

Let’s consider building a website. Building a good quality site is hard work and a big risk. However, there are alternatives to shelving your online presence for a later date. For now, a Twitter or Facebook page could be sufficient, as a low cost, low commitment alternative. This is a small step towards building your online presence. When the time for a website comes, you’ve already got an established following and a source of traffic.

Silent but deadly

The easiest way to fall victim to risks is a simple lack of awareness. Before you make a move, map out the potential risks (and solutions!) and rate them by likelihood and potential destructive power. In that position, you can start minimizing the risks that each one poses and compare alternate paths. Using our scenario planning platform, we can model potential actions, big and small, to see the effect on your business.

(Not a) solution: never take risks

Risks and opportunities are growth fuel. Always playing it safe is a risk in itself. As we said earlier, every opportunity has some kind of risk, and we can confirm, the head-in-the-sand approach isn’t productive. Full stop. Regardless of how fast you are growing, you’re limiting yourself if you’re not considering every risk as an opportunity. Growing too fast and playing it safe is a recipe for overwhelm. Whilst your popularity and order volume is expanding, you can’t afford to sit still. Refusing to risk growth opportunities leaves you with a too small factory, not enough staff and far too many customers. In the same fashion, if you’re growing very slowly, or not at all, it’s probably due to your lack of risk-taking. Especially in today’s world, you need to stand out. Standing out itself is a risk. It’s so easy to lag behind, with an overwhelm of new companies and technologies.

Tax Reform’s New Qualified Opportunity Funds

Qualified opportunity funds are a new tax-planning strategy created by the Tax Cuts and Jobs Act tax reform. 

The new funds have the ability to defer current-year capital gains, eliminate some of them later, and then on the new investment make capital gains tax-free. To put the benefits in place, you need to navigate some new rules and time frames.

Example: On December 1, 2018, you sell $8 million of stock with a cost basis of $3 million for a long-term capital gain of $5 million. 

  • Within 180 days, you invest the $5 million gain in a qualified opportunity fund.

  • You make an election on your 2018 tax return to defer the $5 million in long-term capital gain income, meaning no taxes on this gain in 2018.

  • On December 31, 2026, your qualified opportunity fund has a basis of $750,000 (15 percent of the deferred $5 million capital gain), since you held it for at least seven years.

  • Let’s assume the fund has a fair market value of $7 million on December 31, 2026. You’ll have a deemed sale on December 31, 2026, and recognize $4.25 million in income, computed as follows:

    • $5 million, which is the lesser of the deferred gain ($5 million) or the fair market value of the fund ($7 million), less

    • $750,000, the basis in the fund.

  • On January 1, 2027, your basis in the qualified opportunity fund is $5 million ($750,000 original basis plus $4.25 million of deferred gain recognized and taxed in 2026).

  • If you sell the qualified opportunity zone fund in August 2028 for $10 million, then your basis in the fund is $10 million and you recognize no taxable gain on the sale, since you held it for more than 10 years.


Overall, you have a total of $10 million in gains from these transactions: $5 million from 2018 and $5 million in 2028. Using the qualified opportunity fund investment strategy, you


  • temporarily defer $4.25 million of long-term capital gain from 2018 to 2026, and

  • permanently exclude from tax $750,000 of long-term capital gain from 2018 and $5 million of gain in 2028.


For this strategy to make great financial sense, you need (a) appreciation in your qualified opportunity fund and (b) to hold the investment for at least 10 years so that the appreciation is tax-free to you when you sell your investment.


Mastering Work Life Balance

Having a better work/life balance brings benefits to every part of your life. A reduction in stress allows you to improve yourself, your relationships and your experiences, not to mention your health. This increases your efficiency, contentedness and productivity - breathing new life into your job or taking your outside world to new heights.

So, what’s the golden formula for succeeding in every area of your life? Truth be told, it’s not one size fits all but, we have a few pointers that will get you started.

Plan to succeed

Having a plan means you can set your intention for the day and focus on what needs to be prioritized - increasing productivity. It’s said that unfinished and unaccounted for projects and tasks plant themselves deeper into our subconscious than completed tasks. Unticked to-do lists jump out to bother us whether we’re meant to be in work mode or not. With a good plan, tasks aren’t unfinished, they are ‘in progress’.

We’ll set you up with tools that help you to prioritize your tasks, with a clear outcome to your actions. The best plan for your business can then be created, incorporating the projects, paths and growth moves that you know will have the best outcomes for your business.

This gives you guaranteed time away from work. Friday nights will be revolutionized, as you’ll have a firm action plan to tie up any loose ends. Therefore, you won’t find yourself checking your phone for emails all night. Double win.

Don’t be a martyr

‘I need to do everything and I need to complete it all myself.’ Does this sound like you? The martyr is a common workplace character, much to the detriment of the individual - and sometimes the business.

Sharing your vision, intentions and past journey with your team is a great form of motivation and can be a great source of ideas and questions for you. Collaboration inside of and between teams provides a pool of ideas, fresh perspectives and knowledge.

This is the recipe for the best end result. Of course, you’ll need to be wary of having too many cooks in the kitchen but, a good balance should be found to avoid having a solo cook one sandwich away from burnout.

Create boundaries

Should you be checking your emails at 9PM? Probably not. Volkswagen, back in the golden days of the Blackberry, led the revolt against communications outside of working hours back in 2012, pausing email servers between 18:15 - 07:00

Constant access to work might feel like we’re getting ahead of the game but, in reality, it means we never quite switch off. Instead of staying up all night worrying about your finances, hand it over to us.

Schedule do not disturb times or bedtime modes and get to your messages when you’re refreshed and enjoying your morning coffee. Our alerting tools mean we can let you know when you’re reaching an agreed threshold in your bank account, preventing any overspends. And, of course, we’ll let you know when things are going well too!

Work for you

Whether you feel it’s your home or work life that’s sitting on the back burner, take some time to invest in limiting and optimizing your time spent on one, in order to leave enough time and energy to be invested into the other. Make the most of all areas of your life - for yourself and for everyone around you.

How To Nail The Next Steps In Your Business Journey

It’s easy to find yourself constantly working in your business, rather than on your business. In an ever-changing environment, it’s hard to keep up with what’s happening today.

A chance to sit down and carefully plan out where you’d like to be in 12 months becomes a ‘would like to have time to do’, rather than something you actually have time to do.

That’s where we come in. Our purpose is to increase the growth and success of your business. Tell us where you’d like to go and we’ll tell you where you are, warn you of any roadblocks and make sure you’re always taking the best route.

Before taking your first steps

Taking your next steps requires you to always be up to date with your current position. Knowing what’s wrong today helps you build your plan going forward around fixing those issues.

But, how do you keep up in an ever-changing business with so much already on your plate? We receive live data on your business so can set up bespoke alerts to show you as soon as your business is, or isn’t, hitting certain criteria. Financial or not.

Where are you heading?

What does your ultimate destination look like? Creating your ‘perfect business’ may be an impossible feat, but having that destination in mind ensures that you’re moving in the right direction. Despite deviations and unexpected turns, your ultimate aim is likely to remain constant.

Whether it’s to provide a service that helps excel other businesses or provide quality products for your customers, you need to know what the purpose of your business is.

So you know where you want to go. But how do you get there?

An important yet often overlooked factor of this is how you’re moving. Sprinting in a general direction is little improvement on having no direction at all.

We continually receive data on your business and closely monitor key elements to keep us up to date on where you’re moving, which factors are slowing you down and which are leading you astray.

Where do you want to grow?

The important factor to consider is whether expenses outweigh benefits. Is it the best time to take on that extra member of staff, or should you wait a few months? We can tell you that. How much Christmas stock will you need this year? We can tell you that, too.

We can model your business’ possible futures and mould your growth plan to optimize both the best and worst case scenarios.

As your advisors, we’ll be keeping your business under continual surveillance, with insights into the past, present and future, to grow your business to the best it can be.

If you are looking to take advantage & act on the knowledge you accumulate in these blogs, schedule an appointment with me to learn more about the implementation of these strategies in your business model.

2018 Last-Minute Vehicle Purchases to Save on Taxes

Two questions

  1. Do you need a replacement business car, SUV, van, or pickup truck?

    2. Do you need tax deductions this year?

If you answered “yes” to both questions, here are some ideas for you to consider:

1. Buy a New or Used SUV, Crossover Vehicle, or Van with a GVWR Greater than 6,000 Pounds

Let’s say that on or before December 31, 2018, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits: 

  • Bonus depreciation of 100 percent (new, thanks to the TCJA)

  • Section 179 expensing of up to $25,000

  • MACRS depreciation using the five-year table

  • No luxury limits on vehicle depreciation deductions

2. Buy a New or Used Pickup with a GVWR Greater than 6,000 Pounds

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2018, then this newly purchased vehicle gives you four big benefits.

  • Bonus depreciation of 100 percent

  • Section 179 expensing of up to $1,000,000 

  • MACRS depreciation using the five-year table

  • No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

  • a GVWR of more than 6,000 pounds, and

  • a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.


Short bed

If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. It’s still eligible for the $25,000 SUV expensing limit plus 100 percent bonus depreciation. See Section 1 above for how this works.

3. Buy a New or Used Qualifying Cargo or Passenger Van with a GVWR Greater than 6,000 Pounds

A new or used cargo or passenger van bought and placed in service on or before December 31, 2018, can qualify for four big tax benefits:

  • Bonus depreciation of 100 percent

  • Section 179 expensing of up to $1,000,000 

  • MACRS depreciation using the five-year table

  • No luxury limits on vehicle depreciation deductions

Cargo van

To qualify for full Section 179 expensing, the cargo van must

  • have a GVWR of more than 6,000 pounds,

  • fully enclose the driver compartment and load-carrying area, 

  • not have seating behind the driver’s seat, and 

  • have no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.

If the van passes the GVWR test but fails one of the other qualifying tests listed above, the law deems it an SUV. 

Passenger van

If the van has a GVWR of greater than 6,000 pounds and seats more than nine people behind the driver’s seat, it is a tax law–defined passenger van, not an SUV, and it qualifies for full Section 179 expensing of up to $1,000,000 and 100 percent bonus depreciation.

4. Buy a Depreciation-Limited New or Used Car, SUV, Truck, or Van

If you or your corporation buys and places in service a new or used passenger vehicle such as a car (or a pickup, SUV, or van with a GVWR of 6,000 pounds or less) on or before December 31, 2018, then you or your corporation may claim up to $8,000 in bonus depreciation. 

Tax reform increased the 2018 luxury passenger vehicle depreciation limits to

  • $10,000 for the first taxable year in the recovery period.

  • $16,000 for the second taxable year in the recovery period,

  • $9,600 for the third taxable year in the recovery period, and

  • $5,760 for each succeeding year in the taxable period.

Here’s how this works: Say you buy a car. You add the $8,000 in bonus depreciation to the $10,000 car limit, for a 2018 limit of $18,000. To get to this limit, you can use a combination of bonus depreciation and regular depreciation. You reduce the $18,000 limit by any personal use.

Defining “Real Estate Investor” and “Real Estate Dealer”

The first good news is that you can be both real estate investor and real estate dealer with respect to your real estate portfolio.

 

The next good news is that you are in control, and by knowing just a few rules about dealer and investor classifications, you can do much to increase your net worth.

 

Let’s take a quick look at how big a difference you can make in the tax bite. Say you have a $90,000 profit on the sale of a property.

 

·         Dealer taxes could be as high as $46,017.

·         Investor taxes could be as high as $18,000.

 

The investor potentially saves a whopping $28,017 in taxes.

 

You, the individual taxpayer, can be both a dealer and an investor! The law does not cut you in half or anything. No, the law simply looks at each property in its respective light. But you need to make the light shine on your properties by making a clear distinction in your books and records as to which properties are investment properties and which are dealer properties.

 

Should you fail to make the distinction, you place yourself at the mercy of the IRS. (The word “mercy” does not exist in the tax code, so expect a very unhappy result if you rely on mercy.) The courts look at your intent in buying and holding the property. Your books and records help establish that intent.

 

Dealer property is property you hold for sale to customers in the ordinary course of a trade or business. The more properties you buy and the more properties you sell during a calendar year, the greater the chances that you are a dealer with respect to those properties.

 

Properties that you buy, fix up, and sell generally are dealer properties. Also, properties that you subdivide have a great chance of being dealer property, except when those subdivisions are done under the very limited rules of Section 1237.

 

Where the dealer’s principal purpose for owning property is to sell it to customers in the ordinary course of business, the investor’s purpose in owning property is to

 

·         have it appreciate in value, and/or

·         produce rental income.

 

Each property stands alone with respect to its status as a dealer or an investment property. Thus, you (the individual taxpayer) or your corporation may own both dealer and investment properties. If you have both types of properties, make a clear distinction in your books and records as to which properties are investment properties and which are dealer properties.

If you’d like to learn more about how increase your net worth by simply making a few changes to your books and records, hit the contact button in the top right corner of our website and schedule a call with us today.

MAXIMIZING YOUR 20% QUALIFIED BUSINESS INCOME (QBI) DEDUCTION AS AN S-CORP WITH REASONABLE COMPENSATION

You’ve probably heard of the 20% deduction to Qualified Business Income (QBI) afforded by Section 199A created by the Tax Cuts and Jobs Act of 2017. What you probably haven’t heard of is how to legally maximize your pass-through income subject to the QBI deduction because you’re still obligated to pay yourself Reasonable Compensation as a corporate officer.

The IRS doesn’t allow you to arbitrarily decide your minimum salary; the IRS requires that you’re able to prove your pay is reasonable every year. Reasonable Compensation is defined by §162-7(b)(3) as the “amount as would ordinarily be paid for like services by like enterprises under like circumstances.” This means the specific tasks you perform, your time spend on each task, and your proficiency level (among other experience factors) must be benchmarked against market rates for other employees within your industry who hold a similar position.

For instance, in the David E Watson, P.C. V. United States of America (2010) case, Mr. Watson was an accountant who had paid himself a salary of $24k in 2002 while he realized a profit of $203,651. Due to Mr. Watson’s facts and circumstances, his Reasonable Compensation was deemed to have been $91,044. A similar scenario occurred for 2003 as well. He had no documentation and had conducted no research, thus a portion of his income was reclassified and over $48k in taxes, penalties and interest were assessed as a result. He would’ve only paid about $20k in taxes had he originally paid himself a Reasonable Compensation.

Likewise, if we simplify a bit and assume Mr. Watson had realized the same combined profit and salary in 2018 totaling $227,651 while paying himself a Reasonable Compensation of $91,044, he would be entitled to a QBI deduction of $27,321. However, if he overpaid himself to the halfway mark ($159,348) between Reasonable Compensation and his combined profit and salary, his QBI deduction would only result in a deduction of $13,660.70. Assuming Mr. Watson would be in the 2018 married filing jointly tax bracket of 24%, this difference would represent an avoidable tax liability of $3,279 just due to an excessive salary causing a decreased QBI deduction.

How does this relate to you? If you’ve maintained status quo and you’re overpaying yourself excess salary to provide for lifestyle expenses in lieu of periodic distributions, your tax bill is far bigger than what it should be. Thus, you need to upgrade your accounting relationship and work with us to conduct a Reasonable Compensation test and help you create a tax plan to save you thousands of dollars in taxes every year going forward.

WHAT IS THE PURPOSE & VALUE OF BOOKKEEPING?

Financial reports help produce your tax returns.

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So your books should align with the tax laws.

Bookkeeping is a tax compliance necessity.

At a high level, the bookkeeper reconciles:

Accounts Receivable & Payable

Asset, Income & Expense Accounts

Bank, Credit Card & Loan Accounts

Equity Contributions & Distributions

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Financial reports also help you develop strategy.

Your resulting net profit includes income taxes.

You should be planning strategy accordingly. 

You can grow more efficiently when planning ahead.

You can grow more profitably when planning ahead.

But you need to know how well you’re performing.

Decisions should be based upon accurate reports.

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We use cloud software to automate accounting functions.

Software helps reduce admin and improve audit quality.

We have reduced accounting costs by 20-50%+ for many.

We can almost always improve financial reporting quality.

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WANT TO REDUCE BOOKKEEPING COSTS, IMPROVE FINANCIAL REPORTING QUALITY & ACHIEVE TAX COMPLIANCE?


WHY YOUR CONSTRUCTION FIRM NEEDS A JOB COST ACCOUNTANT

In today’s environment, the role of a cost accountant in a construction organization is essential to success, and more importantly, is vital to avoiding failure. That may sound extreme, but in many circumstances, competition is so fierce and margins are so thin, reliable financial information and analysis certainly can make the difference between success and failure.  Job costing is the process of assigning costs to custom products or services. Direct materials and direct labor are traced to individual jobs, and production overhead is allocated.

Job costing is a type of accounting which tracks the costs and revenues by job and enables standardized reporting of profitability by job. Every customer job has different costs, and that’s where job costing and a cost accountant will show value. A cost accountant works with relevant data from previous jobs to assist managers in building an estimate to get the customer’s business.  Once the job is won, a cost accountant will work with the project manager to track costs accurately so the firm generates a reasonable profit.

Managers within construction firm may not understand how costs are allocated to individual jobs. They may misinterpret cost information and rely on irrelevant information. A cost accountant works to not only produce relevant information for each job decision, but also assists managers in understanding appropriate uses of cost information.  When a cost accountant and manager work together in estimating the costs of a job and in keeping current job costs down, the firm will see more profit for each job.

In addition to direct costs incurred on a job, such as materials and contracting services, a cost accountant will properly allocate indirect costs to a job so there is a better understanding on all the costs associated with a job.  In job costing, direct costs are tracked by job and overhead costs are allocated to individual jobs.  An understanding of direct and indirect costs and how each affects profit will help the construction firm create more comprehensive and accurate bids on future work.

If a bid is made on a job, but does not accurately take into account the indirect costs associated with that job, the profit made on the job will be overstated.  Using irrelevant or incorrect cost information to build a bid will cause a firm to earn less profit than expected with no real way of identifying the reason why.  Indirect costs include all production costs except direct materials and direct labor.  The salary of the manager overseeing the job, or the insurance required on the job site is all indirect costs that need to be allocated to the job to properly calculate the profit.  Cost accountants are trained to not only associate direct costs to the correct job, but to also correctly allocate indirect costs to a job and present accurate financial statements for the firm.

Cost accounting is a valuable tool you use to reduce and eliminate costs in a business.  The right cost accountant will work with your construction firm to properly account for both direct and indirect costs and increase the overall profit of each job.