Welcome to R&A CPAs' Newsletter
Welcome to the first issue of our e-newsletter. We will send our newsletter on Thursdays, every four weeks.
Each issue will contain valuable information to help you manage your business and personal finances more effectively and profitably. Subjects will include tax planning and savings, business finance and management ideas, personal finance, retirement planning and more.
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R&A CPAs Named a Top 400 Firm for 2019
R&A CPAs has been named a Top 400 Firm for 2019 by INSIDE Public Accounting (IPA). It is the second consecutive year R&A has achieved this distinction. This annual ranking gathers surveys and analytical data from firms across the United States. The R&A team, comprised of over 50 accounting professionals, is honored to be recognized once again by INSIDE Public Accounting.
R&A CEO Tom Furrier said, “We consistently strive to provide our clients with exceptional consultative and comprehensive financial support through proactive tax, assurance, and accounting solutions that help them meet their goals and achieve success. This award exemplifies the great work our team does every day.”
INSIDE Public Accounting is owned and operated by the Platt Group. The Platt Group helps firm leaders and their firms achieve their full potential. IPA publishes two award-winning publications: the IPA newsletter and the annual IPA National Benchmarking Report, along with in-depth reports focused on information technology, human resources, and firm administration.
What Changes with the New Taxpayer First Act?
The Taxpayer First Act of 2019 is redesigning how the IRS works with taxpayers, even though it may take a while for many of the provisions to take effect.
Some experts have highlighted the following aspects of the bill as especially important:
An independent appeals process. Taxpayers and small businesses will be able to challenge the IRS' position without undertaking the cost and expenses of court. IRS Office of Appeals will be an independent unit that grants taxpayers access to case files. Taxpayers will be able to protest if denied an appeal.
Innocent spouse treatment. The new law requires the US Tax Court to take a fresh look at innocent spouse cases without taking previous decisions into account.
Modification of procedures for issuance of third-party summons. This is an important protection for taxpayers, especially small-business owners. It discourages the IRS from bypassing the taxpayer and contacting third parties instead — such as financial institutions — for information. The IRS should give taxpayers a meaningful opportunity to provide the information it is seeking prior to its contacting third parties. In practice, the IRS should provide the taxpayer with an understanding of what the issue is, what information is being requested and how the requested information relates to the issue.
Office of the National Taxpayer Advocate (NTA). The Taxpayer First Act has taken a strong approach with the NTA's issuance of Taxpayer Advocate Directives (TAD), which focus on systemic problems taxpayers deal with. Once a directive has been issued by the advocate, the IRS should comply within 90 days. The NTA's Annual Report will identify any TAD that is not honored by the IRS.
Credit card payments. The IRS is now allowed to directly accept credit and debit card payments for taxes; the taxpayer must pay any processing fees. The Act also requires the IRS to try to minimize processing fees when entering into contracts with the credit card companies.
Whistleblower reforms. The Act provides whistleblowers protections from retaliation and allows for better communication with whistleblowers about the status of their claims.
Cybersecurity and identity protection. The IRS will now have to let taxpayers know whether it suspects there is evidence of identity theft. The agency will explain to taxpayers how to file a report with police and how to protect themselves against additional harm resulting from the theft.
Rep. Kevin Brady (R-Texas), ranking member of the Ways and Means Committee, was quoted as saying about the Act that it "levels the playing field to ensure taxpayers have the same information as the agency, better protects our taxpayers' information, and reins in past IRS abuses to guarantee families and local businesses never have to fear having their accounts and property seized without fair and due process."
As with many new laws, it will take some time to see what the specific effects are. The legal provisions are complex and will require interpretation over time. We'll be keeping an eye on the developments.
The Finances and Taxes of Car Leasing
Leasing and buying each have advantages and disadvantages, just like renting or buying a house. The most obvious difference is that with a lease, you get a new car every few years and don't have to deal with selling the car. If you like having the newest technology and the most up-to-date safety features, leasing might give you the freedom to make periodic upgrades without breaking the bank.
When you buy a car, each payment you make builds equity, and once you pay off the loan, the car's yours, and you can sell it or donate it. If you buy the car outright without a loan, you save even more money.
How to figure which makes the most financial sense for you? Consider the following factors:
- Your monthly cash flow. Leasing a car often has a lower monthly payment compared with financing a car with the same loan terms. With a lease, you're paying for the depreciation of the car during those years rather than the whole vehicle cost. If you need access to more cash every month, leasing may be more favorable.
- Available savings for a down payment and initial fees. Most lease agreements have low down payments, or perhaps you can get the dealer to waive the down payment. You'll pay less for sales tax on a lease — tax is calculated in most states on only the monthly payments, not the total cost of the car. With the lower down payment, a lease may have a smaller impact on your budget and cash balance.
- How much you drive. If you drive more than 10,000 or 15,000 miles per year, depending on the lease agreement, you'll have to pay extra for each mile. Many leasing companies charge 15 to 20 cents per mile for additional miles, but you could pay less — 10 cents per mile — if you buy the miles up front when you negotiate the lease. Although the extra-mileage penalty sounds daunting, if you were to trade in a car you bought, you'd also be penalized for above-average mileage.
- How hard are you on your car? If you think it's likely you'll be getting dings and scratches on your car or have a high risk of damage to it from kids' activities or other hazards, a lease may not be for you — wear-and-tear fees typically cost three months' lease payments.
- Whether you drive the car for business. Whether you own or lease, you can take a business deduction for your vehicle if you meet IRS rules, and leases may offer some advantages in that case. However, the deduction rules and calculations are complicated, so be sure to consider the implications in your situation before you make a decision.
- Insurance. When you lease a car, you may be required to get more insurance coverage than you want. Leasing companies have their own standards for what qualifies as acceptable insurance, which may be higher than what you'd personally deem necessary.
Buying a car is almost always cheaper in the long run, according to most calculations. The longer you own the car, for the most part, the more you save by buying. Consider how much flexibility will matter to you. But the decision always comes down to your budget and your driving needs.
Do a Paycheck Checkup
Who should do a paycheck checkup? Everyone! But those in the following categories may be especially vulnerable to changes:
- Parents who claim the Child Tax Credit.
- Taxpayers who usually itemized deductions before the new tax reform went into effect.
- Those who received a large refund or paid a large tax bill before the Tax Cuts and Jobs Act (TCJA).
- Two-income families.
- Workers who held two or more jobs during the year.
- Self-employed or gig economy workers.
Here are some more details for those who may be at high risk for tax adjustments:
Two-income families and people with multiple jobs may be more vulnerable to under- or over-withholding following the tax law changes. Do a paycheck checkup to determine whether the correct amount of tax is withheld.
If you have children and claim the Child Tax Credit, you could find that your tax refund is significantly larger with the new TCJA. If in the past you found that your income was too high to receive any benefits from the Child Tax Credit, you may now qualify. However, if you're earning more money, you may have hit phase-out limits. Either way, you may need to adjust withholding so you don't have a big bill, or excessive refund, when you file.
If you itemized deductions, you may find that you're not paying enough tax through withholding because the TCJA limits some popular tax deductions you used to claim. Having too little tax withheld could result in an unexpected tax bill or even a tax penalty when you file your next return. During the paycheck checkup, you'll adjust your tax withholding to spread out the additional amount you'll owe across the remaining paychecks this year.
In fact, many people who itemized in the past may not need to anymore, radically changing their tax situation.
If you're self-employed and pay quarterly estimated tax payments, you may need to raise or lower the amount of tax you pay each quarter.
Any life change — getting married or divorced, buying a home, or having a baby — should make you consider doing a paycheck checkup. In fact, the TCJA limited some popular home-related deductions, so be sure you budget for that.
The mismatch between what you're having withheld from your pay and what you might owe on your next tax return could be significant. You might be overpaying the IRS. If you want your withholding to more closely match your anticipated tax owed, you should file a new Form W-4, with the Single box checked and increased allowances. To make things even more complicated, the IRS is redesigning Form W-4. A new one will probably be available at the end of 2019.
Your best bet is to keep in close touch with us. Don't wait until April is upon you, but reach out now so the next tax season doesn't yield any surprises.
Smart Practices to Ferret Out Fraud
In your fight against fraud, your own internal practices are your first line of defense. Consider budgets. Budgets can provide insight into how management expects a company to perform in the near future. Sharing information provides an informal fraud screen to manipulating financial results.
Creating budgets may require input from multiple department heads. Would-be thieves may be deterred knowing that managers and coworkers in other departments are paying attention to what they're doing.
Once a budget is finalized, you'll want to pore over variances to find causes for differences between the actual and budgeted performance. Let's say actual wages significantly exceeded budgeted wages. The difference may be due to wage increases, productivity declines, greater downtime, unexpected demand for the firm's goods or services, or a combination. But has someone added a nonexistent employee to the payroll?
How about analyzing variances? Yes, this can lead to fraud detection — paying attention to variances related to inventory and purchase pricing. If you find differences between actual and budgeted pricing for supplies, what could be happening?
- Kickbacks — someone is taking a cut from a vendor who inflates prices.
- Fictitious vendors — the payments go to the thief; no inventory is received and so the company has to spend more money to restock inventory.
- Purchase of subpar materials.
- Fewer units are found than were ordered.
Inventory variances like these raise red flags. But what about the reverse? What if you find an unanticipated price jump for a critical component that you'd expect to lead to a purchase price variance? If there isn't any difference found, you may be experiencing financial reporting fraud.
You should also look at "contribution margin," which is the difference between a unit's sale price and its variable costs. This margin is often used to make pricing decisions: calculate the break-even point and then evaluate profitability. Contribution margin analysis can detect fraud schemes — skimming or inventory theft.
The solution lies in a contribution income statement: A profit and loss statement initially computes a gross margin — revenues less variable and fixed manufacturing costs. A contribution income statement calculates contribution margin — revenues less variable manufacturing and non-manufacturing costs. The contribution margin as a percentage of revenue should remain fairly consistent over time.
Ah, but what if it's dramatically lower than usual? Could fraud be to blame? Maybe an employee is understating revenue to hide skimming. The margin falls because the variable costs are related to the actual sales, not to falsely lower sales.
The points made here are to be used as indicators. If you suspect fraud, it's the time to call in a forensic accounting specialist to gather evidence. R&A CPAs has experts who can help.
How to Manage the Home Office Deduction
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters and applies to all types of homes. There are basically two methods for deducting the portion of your home you use for business: the simplified method and the regular method.
The simplified method grants a flat deduction for each square foot of the home you use as dedicated workspace. The regular method requires you to determine the actual expenses associated with the home office. Some of the common expenses that may be included are mortgage interest, insurance, utilities, property taxes, and depreciation. The regular method may give you a bigger deduction, but it requires more work, and the difference may not be worth it.
Are you eligible?
No matter which method you choose, you still have to meet stringent requirements to take the deduction. There are two basic requirements for your abode to qualify as a deduction:
- Use is regular and exclusive.
- It's the principal place you conduct business.
If you conduct business at a location outside your home, but also use your home substantially and regularly to conduct business, you may still qualify for a home office deduction. The home office can be a room in your house or a freestanding structure — a studio, garage or barn — if it's used exclusively and regularly for your business.
The IRS is serious about "exclusive." If you use a den for your work from 9 a.m. to 5 p.m. and then your family uses it in the evenings to watch TV, you are not allowed to deduct it. However, the IRS does not require physical partitions. If there is a 5' x 5' part of your living room that you use exclusively for business, you are good to go.
The IRS grants a couple of very narrow exceptions to the exclusive rule: using part of your home to store sales samples or to provide licensed day-care services. In both cases, special rules and calculations apply to claiming the exemption.
OK for employees?
Many freelance workers take advantage of the home office deduction, but there has long been a common misconception that employees cannot take this deduction. But in fact, they have been able to —provided they could pass additional tests:
- Your business use must be for the convenience of your employer.
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
If the use of the home office was merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
These rules may still be posted on the IRS site. However — and this is key — these old rules for employees with home offices may be moot. The tax reform bill largely eliminated this deduction for employees. (For the self-employed, however, tax reform doesn't change the home office deduction.)
No matter what your situation, don't hesitate to take the deduction if you meet the IRS requirements. In the past, many workers who were qualified avoided taking the deduction, fearing it would automatically trigger an audit. Because of the prevalence of the home office, this is not true now, if it ever was! Don't miss this valuable tax break. However, IRS guidance is complicated and the rules can be subtle. Our tax professionals can advise you if you think you might be entitled to the home office deduction.