Month: September 2016

What Drives SMBs’ Accounting Software Purchases?

Posted by Maria T. Rollins on September 30, 2016

Software Advice™, a trusted resource for software buyers across industries, recently published a trend report on accounting software purchases by small and midsize businesses (SMBs). SMB Accounting Trends Buyer Report – 2016 was based on hundreds of consultations the firm conducted with SMBs over the past year. The report provides excellent insights into what business owners should look for when considering buying an accounting software system to replace outdated software or manual entries (e.g., pen and paper or Excel spreadsheets).

prospective buyers current accounting methods — Prospective Buyers Current Accounting Methods

Software Advice analyzed a random sample of consultations and found that nearly 60% of SMBs are looking to replace their existing accounting software with a more advanced system, while roughly 30% are first-time buyers.

35% of buyers seeking upgrades are now using some version of QuickBooks. This comes as no surprise. In my experience working with SMBs, I’ve seen that software packages such as QuickBooks and Sage 50 (formerly Peachtree) are very popular because they are advertised as relatively inexpensive and easy-to-use. Though these solutions provide the basic financial information owners need to prepare their tax returns, they do have limitations on the following:

The number of user licenses and the ability to set user permissions
Inventory items and SKUs that can be tracked in the system
Capabilities for tracking edited/deleted transactions (audit trail)
Integration with operational, industry-specific software

SMBs Requirements for Advanced Functionality

According to the trend report, the majority of buyers desire greater system capabilities. Buyers want the new software solution to be able to:

Handle multiple entities
Consolidate data and accounts
Run payroll in-house

At KRS CPAs, we’ve noted that handling multiple entities is often a tipping point for businesses progressing from basis to advanced accounting solutions. When businesses try to perform the function with a solution that isn’t designed to support multiple entities, the process is time consuming and error-prone.

For example, inter-company transactions processed by larger software applications are handled in one entry. If the application doesn’t offer multi-entity access, then the entry must be recorded in each entity separately, which is time consuming and can result in mistakes.

Software Advice also reported that the 21% of buyers wanting to automate processes correlates with the same percentage currently managing their accounting with manual methods, such as Excel spreadsheets. These buyers are looking to improve efficiency by reducing time spent on manual data entry.

Financial Reporting Capabilities Are Crucial for SMBs

82% of buyers wanted financial reporting in their new software solution in order to measure key financial and performance metrics. I typically advise clients to ensure their new system has basic reports, including the balance sheet, profit and loss statement (P&L), and cash flow report. The P&L acts as the starting point for tax planning, while the balance sheet reports cash levels, debt and retained capital in addition to assets and liabilities.

Accurately tracking and reviewing this financial data on a regular basis gives business owners insight into financial history, department efficiency and the profitability of different ventures. This allows them to make more informed decisions regarding cash flows, budgets and projections.

Cloud Solutions Grow in Popularity

Another accounting trend SMBs should be aware of is the growing popularity of cloud-based solutions. Software Advice identified these benefits of moving accounting to the cloud:

Greater ease of access
Better security
Improved ease of use

I’ve also seen that cloud-based systems provide more integration and add-on options, which allows users to extend the reach of their existing systems to serve many industry-specific needs.

Ready to Get New Accounting Software?

If you’re ready to start evaluating accounting software, Software Advice offers an online accounting software questionnaire that can help you match your business needs with several products for you to assess.

Once you have your new software installed, KRS CPAs can help you set up your bookkeeping, accounting and financial reporting processes so that they deliver the insights you need to manage your business more effectively.

Why do investors want to participate in Zero Cash Flow deals?

Posted by Simon Filip on September 28, 2016

Hint: it’s about deferring taxes

Most zero cash flow Triple Net Lease (“NNN”) investments have two components. First, you purchase a high quality NNN investment with a long-term lease and a tenant with a high credit rating. Next, you obtain zero cash flow financing, where the rents from the tenant equals the debt service. This financing has an amortization period that is typically fixed to the term of the lease and a flat interest rate. Commonly, an investor will put between 10 and 20 percent down, and when the lease’s initial term ends, he or she will have a debt-free building.

Zero cash flow loans are highly leveraged and lenders require a strong credit tenant, which is why drug stores such as Walgreens and CVS are highly sought-after investments for these arrangements.

During the Lease Term

While the real estate investment is not providing current cash flow, the depreciation generated from these investments is structured to more than cover principal payments, leaving a net loss that can be used to offset other taxable income. Refer to my blogs on real estate professionals and passive loss limitations to determine if those losses can be used.

During the term of the NNN investment, principal payments will gradually grow. Once they exceed depreciation, you may be subject to phantom income, which is taxable. (See my previous blog on phantom income.) Prior to reaching this point, an investor should consider disposing of the asset (possibly through a like-kind exchange) or refinancing the property. If you have already reached the point in a zero cash flow deal where principal payments exceed depreciation, tax planning should be undertaken to minimize income taxes.

End of Lease Term

If an investor retains ownership until the end of the lease, the loan will be satisfied and the building will be owned without any debts. If there are options in the lease, it’s possible that the tenant exercises the option and the property will generate cash flow with no debt service. On the other hand, if the tenant decides to move out, it’s reasonable to assume the building will still have value.

While many investors acquire NNN properties for steady cash flow, that is not the only reason investors should consider a NNN deal. Astute investors use NNN investments as a way to minimize their tax exposure. Zero cash flow deals do not provide current cash flow, but can offer tax savings through depreciation deductions and appreciation of the real estate in the long-term.

KRS CPAs can help you establish tax savings with NNN investments. Give us a call at 201-655-7411 or email SFilip@KRScpas.com.

Set the Standard of Value in Shareholder and Partnership Agreements

Posted by Gerald A. Shanker on September 26, 2016

Defining “value” can help you avoid negative consequences

Do the valuation provisions of your shareholder or partnership agreement specify a standard of value? If they do, is the standard of value “fair value,” “fair market value,” or something else? If the standard of value is not fair value or fair market value, does the agreement define the standard of value to be used in the event a valuation of the business is required?

The Internal Revenue Service defines fair market value as “The price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.

Depending on the characteristics of the ownership interest being valued, minority and marketability discounts may be applied in valuing the ownership interest under the fair market value standard. The amounts of these discounts are fact sensitive, but discounts between 30% and 40% are not uncommon.

The impact of Brown v. Brown

The fair value standard was created in New Jersey in the case of Brown v. Brown 348 N.J. Super. 466, which is basically fair market value without discounts. The Court’s logic in this divorce case was that since the business was not being sold, the nontitled spouse should not suffer discounts in the distribution of marital property.

I have also been involved in a situation in which the agreement used the term “value” without definition. The parties in that dispute spent a significant amount of money on professional fees that resulted in an arbitrator deciding on a definition.

As you can see, the use of the single word “market” in the standard of value may have a huge impact on the valuation result. What does your agreement say, and is that what you intend? Although discussing this issue and updating business agreements may be uncomfortable for some, it is far better than ignoring this issue, because doing so may very likely end up in litigation.

Will Your Taxable Gain Be Calculated Properly? Make Sure You Are Using The Correct Basis

Posted by Simon Filip on September 14, 2016

The rules for basis, or the value of an asset used for computing tax gain or loss when an asset is sold or transferred, can be complicated. Here’s what you need to know.

Background on Basis

When a taxpayer sells an asset, such as shares of stock, capital gains tax may be owed on the difference between the purchase price (basis) and the sales price. For inherited assets, taxpayers receive “step up” tax basis to the value at the time of the benefactor’s death. The Internal Revenue Code allows certain inherited property to receive a new tax basis equal to the fair market value of the property as of the date of death. This means if appreciated inherited property is sold immediately, there will be no capital gain, or later, all pre-inheritance appreciation is excluded from taxation.

taxable gains differ for inherited versus gifted assets Property gifted during a taxpayer’s lifetime receives a carryover basis, that is, the gift recipient takes the same basis as that of the donor. This means the recipient of the gift takes the same tax basis in the property as it had when owned by the decedent. Consequently, the increase in value of the property that occurred during the decedent’s lifetime is subject to federal and state taxes when the property is sold.

Basis for Real Estate

Current law provides that the income tax basis of real estate owned by a decedent at death is adjusted (“stepped up” or “stepped down”) to its fair market value at the date of the decedent’s death. Real estate which is gifted causes the donees to have the same tax basis in the gifted real estate as that real estate’s basis would have been in the hands of the donor. There is an exception if the tax basis is greater than the fair market value at the time of the gift.

Partnership Interests

Adjustments to basis do not only occur as a result of death. When a taxpayer purchases an existing partner’s partnership interest, the amount paid becomes the basis for the purchaser’s partnership interest (“outside” basis). The new partner assumes the seller’s share of the partnership’s adjusted basis in its property (“inside” basis), commonly referred to as stepping in the shoes of the partner or capital account. If the partnership’s assets have appreciated substantially, the difference between the new partner’s inside and outside basis can be substantial.

The disparity between the inside basis and outside basis can deprive the incoming partner from depreciation deductions. To remedy this situation, the partnership may make a 754 election, which allocates the purchase price or fair market value of the partnership interest to the new partner’s share of partnership assets. If this election is made, additional depreciation and amortization resulting from the basis adjustment is specially allocated to the new partner, giving him or her additional tax deductions. A 754 election must be made by the partnership. Once made, it is binding on all future transfers of partnership interests.

The rules related to tax basis in assets upon death and purchase are complex and should be reviewed with a tax adviser. Contact me at sfilip@krscpas.com if I can assist you.

Is Your Business Ready for 2017?

Posted by Gerald A. Shanker on September 12, 2016

Budget Projections Offer a Road Map to Success

I know that many businesses do not prepare projections, and among the ones that do, many do not use them to monitor results. Many believe that one of the most important steps in achieving personal goals is to write them down. Preparing and monitoring a budget for your business is similar to a person listing his or her goals. It introduces accountability, and can be used as a road map for the upcoming year.

How to prepare a budget projection

Using Microsoft Excel, list the months in columns across the top with a total column after December, and income and expense accounts on the left. Add a line for total expenses, and below that a line for net income. Insert formulas to sum total expenses and annual total income and expenses in the column to the right of December.

How much money do you want to make? Start the projection by entering the net income for each month of the year. Next, enter projected monthly expenses for each month of the year. Hint: the current year monthly financial statements will be a big help in estimating future expenses. Now, enter a formula in each month of the sales line that adds net income and total expenses. Based on projected expenses and budgeted net income, this will show you the monthly sales necessary to achieve this profitability. Is this sales number realistic and achievable? If not, which expenses can be reduced? Does your business offer some products and services that are more profitable than others? Preparing projections will force you to deal with these issues, and help you understand what drives the profits in your business.

Monitoring business performance

This process is not as overwhelming as it may seem. It will become much easier once you do it, and it is a valuable tool for monitoring business performance. If you need help, contact your CPA firm; they have all the necessary historical data and the expertise in preparation of financial projections.

Cybersecurity Mistakes You Cannot Afford To Make

Posted by Maria T. Rollins on September 2, 2016

Companies can’t afford to be asleep at the wheel when it comes to protecting personal and corporate data. Below are the five common mistakes you can’t afford to make when it comes to protecting assets from cyber-attacks.

Mistake #1: Assuming you’re not a target

Protect yourself from cyber attacks Whether large or small, organizations in every industry are vulnerable to attack. The stories that make the news headlines are usually about theft of credit card data or personal identity information. As a result, companies that don’t handle this type of data often believe they are not a target. All companies need to recognize this risk and work to detect and prevent the devastating damage cyber-attacks can cause. While developing your plan, consider your organization’s response if it does happen to you. This will help you react faster and potentially minimize the negative effect of a data breach.

Mistake #2: Approaching security as just an IT Issue

Many attacks come from the inside of an organization as a result of misuse, theft or loss of devices. A company-wide security policy including employee education, policies and procedures should be developed specifically for your business operations and employee device usage. Regular “audits” of the policies should be conducted to ensure compliance at all levels within the organization.

Mistake #3: Neglecting to understand and update your network

Organizations may never be able to prevent every attack; networks are too expansive and there are many opportunities to breach software. However, failing to understand the structure of your company’s network and where company data flows to and from will prevent you from knowing what to protect. Once you have determined what needs to be protected and systems are in place to protect your data, continued monitoring, testing and updating is necessary to avoid an increased opportunity to invade your systems.

Mistake #4: Relying on anti-virus technologies

Anti- virus technologies are very helpful but are not sufficient to prevent advanced attacks. Hackers are at their game non-stop and have evolved their tactics faster than anti-virus technologies can react. Updates to anti-virus and malware software are necessary, but strong data security policies, testing and monitoring are also needed.

Mistake #5: Failing to use strong passwords

Passwords should be unique and complex. It is easy to use the same password for many different applications and quite often this is what many people do. The cyber attackers know this. Unique passwords for each application are best. Your passwords should be complex. Never use words like “password” or “football”. “12345” is not a good password either. Your password should contain a combination of letters (upper and lower case), numbers, capital letters and symbols. Phrases using symbols, for example Th3king&! (The king and I) is a way to remember a complex password.

As you can see there is no one security solution to protecting your company’s data. Data security must consider the data and system as well as internal and external users. Your plan should also consider your plan of action if there is a cyber-attack and breach of company data. A good action plan can limit the exposure and damage a data loss may cause.