Expense Creep – 3 Simple Steps to Improve Business Profitability

Expense Creep – 3 Simple Steps to Improve Business Profitability

As a time goes by, normal expenses for a business tend to “creep up” and begin to erode a portion of profits. Has this happened to you and your business?

Below are three simple steps to improve the profitability of your business:

  1. Identify general ledger expenses as one of the following:
    • Discretionary. These are expenses that could be eliminated and it would not directly affect the operations of the business.
      • Examples – Entertainment/tickets, sponsorships and 401(k) match.
    • Controllable. These are expenses monitored by management and can be controlled to increase profitability. 
    • Examples – Supplies, office related expenses and labor. 
      • Management of these expenses is an important area to examine for expense creep.
    • Non-controllable Expenses. All remaining expenses should be classified in this bucket. They are not discretionary and cannot be controlled by management.
  2. Now that you have properly identified expenses, we recommend examining each of the discretionary expenses and determining if the incurrence is adding value to the business. If not, consider either eliminating or reducing the expense amount moving forward.
  3. Finally, you should review each of the controllable expenses. Identify what is the appropriate amount or percentage each expense should maintain. We recommend creating a system to monitor and report expenses and compare them to the pre-determined goal.

“What gets measured gets managed, and what gets managed gets improved.”

This simple exercise is a very effective way for your business to better manage expenses and reduce the effect of expense creep. If you would like assistance implementing a program such as this, please contact a Smith Schafer professional.

Transportation Industry: Tips to Managing your Fleet & Saving Money

Transportation Industry: Tips to Managing your Fleet & Saving Money

Whether your transportation company has one or dozens of vehicles on the road, smart management can save you money. Familiarity with tax laws, simple maintenance steps, and high-tech solutions can reduce the costs of operating your fleet and keep it safer.

START WITH TAXES

One of the best ways to save money is to spend some time with financial and accounting professionals. Deductions make a major difference in the cost of operating a fleet. Smith Schafer has the experience and understanding of the transportation industry to make a positive difference in your future success. Our Transportation Group, comprised of numerous professionals, is committed to serving over 100 Minnesota transportation entities.

Depreciation

  • Depreciation deductions are allowed on vehicles used for business purposes, including passenger cars, light trucks, and vans.
  • The various rules surrounding depreciation can be complex, but Smith Schafer professionals are here to help you simplify your options.

Operating Costs

  • Routine operating costs deductible to the extent of their business-use percentage.
  • These costs typically include:
    • Gasoline
    • Oil
    • Maintenance
    • Insurance
    • Registration and License fees

Leases

  • Monthly lease payments are deductible to the extent of their business-use percentage.
  • Limitations apply to certain passenger cars, light trucks, and vans.
  • Operating costs of leased vehicles are also deductible to the extent of their business-use percentage.

Mileage

  • Whether you buy or lease, it is important to keep good records of business miles driven for tax purposes.

Beyond tax savings, simple maintenance can keep your costs down and your safety record up. Here are five tips to managing your fleet:

  1. Tires
    • Check the air pressure of your tires daily when they are cold and fill if necessary. Low air pressure causes stress and irregular wear that can result in loss of control.
    • Inspect tires every 30 days for wear and evidence that the suspension isn’t aligned properly.
    • Rotate tires regularly to help achieve more uniform wear. The guideline for tire rotation is approximately every 6,000 miles.
  2. Gas
    • Avoid premium gasoline unless necessary. If your vehicles do not specifically require an upgraded fuel, buy regular unleaded.
  3. Maintenance
    • Shop around when you hire out routine maintenance. Costs can vary as much as 50% depending on which shop you use. Consider doing in-house maintenance. Your business can be more productive if your vehicles continue to run during normal hours and are serviced by staff mechanics after hours.
  4. Insurance
    • Keep your fleet in a garage or parked under a carport. As a result, it will help keep them in better condition and if garaged, may lower your insurance cost.
    • Shop for insurance. Re-bid your insurance policy to make sure you’re getting the best deal.
  5. Safety
    • Encourage safety. Run a motor vehicle report on every driver in the company. Revoke driving privileges for those with multiple infractions. Consider rewarding those with good records.

Questions?

What’s driving your business? You should have an advisor on your side to take a tax efficient, customer-centric approach to managing the top and bottom line and everything in between. Transportation has been a key practice area of ours since 1971. Contact us today to learn more about how we can help while providing accurate, timely and professional financial advice.

What Makes a Good Valuation Report?

What Makes a Good Valuation Report?

Most owners already have a predetermined number in their mind when the time comes to establish the value of a company. They often think the value should equal a multiple of earnings or annual sales. However, this method is rarely accurate and is unlikely to maintain merit if the company is sold or involved in litigation. A good business valuation is not only about determining an accurate and reasonable value, but also about being able to defend it if needed with a clear and concise explanation supporting the conclusions.

6 Key Valuation Report Elements

Below is a list of the most common elements included in a well written business valuation report:

  1. Assignment Identification – The valuation professional should identify:
    · The company’s name
    · Size of the subject interest (number of shares or percent)
    · Intended purpose
    · Effective date
    It is important to identify the intended purpose of the report such as gift or estate, buy/sell agreements, financing, or litigation. The purpose will dictate the standard of value, such as fair market value, fair value, strategic value or liquidation value. The standard of value should be clearly stated. Note: Appraisals are only valid for the purposes and dates listed in the report.

  2. Business Description – In this section, the valuation professional should clearly articulate their understanding of the business. Specifically, this should include the nature of the company’s operations, including strengths, weaknesses, opportunities and threats. If the professional does not understand the company completely, it is possible there will be errors or omissions. Either of those may damage the authenticity of the report.

  3. Industry and Economic Trends – External factors affect future cash flow and perceptions of risk, which, in turn, impacts how much a company is worth. This section supports the experts understanding of the environment in which the company currently operates.

  4. Financial Analysis – Past performance may provide valuable insight into future cash flow. Value is impacted by how well (or how poorly) a company has performed in the past – or relative to other companies in the same industry. Sometimes the company’s financial statements require adjustment for discretionary or nonrecurring items or even for unusual accounting practices to arrive at “normalized” cash flows. Since a valuation is of future value, the report should also include a forecast of future operations or at least address company expectations for the future.

  5. Valuation Methods – Appraisers generally consider three approaches when valuing a business:
    · Cost
    · Market
    · Income
    This section should include a clear explanation of which methods were applied to the subject company and why. Different methods or combinations of methods may often be used in the same situation, so this section is important. This area should provide detailed descriptions of the calculations underlying the appraiser’s conclusion.

  6. Discounts and Other Considerations – Some valuation assignments call for discounts. The most common are discounts for
    · Lack of control
    · Marketability
    Other discounts, such as voting, key person, and blockage discounts, may also apply. This section of the valuation report should discuss which discounts are appropriate and why. It should provide empirical evidence to support the discount rates chosen. Comprehensive reports will provide nontraditional sources of valuation evidence, such as previous transactions and offers, loan applications, past appraisal reports and rules of thumb, reconciled against the values derived under the appraiser’s methodology.

Questions?

Business valuations may be conducted only once or twice during a company’s life cycle. As a result, it is important to understand how the valuation will be conducted and what elements the report should include. If you have questions about valuation reports or need a business valuation for your company, Smith Schafer can help.

Smith Schafer works with business owners, in multiple industries, to uncover the true value of their companies’ tangible and intangible assets.

401(k) Plan Tips from a CPA Firm

401(k) Plan Tips from a CPA Firm

A 401(k) plan is one of the best options available to help employees save for retirement. However, these plans will only be successful if managed properly. Below are tips for effective and efficient management of your company’s 401(k) plan.

Plan Management Responsibilities

Fiduciary Responsibilities

  • As fiduciaries, you are responsible for the best interest of plan participants. The plan should have an oversight group who meets regularly to review plan features, monitor service providers, discuss investment options and review processes related to the plan. Minutes of these meetings should be documented and maintained with other audit documentation.

Over Reliance on Service Providers

  • Plan management and/or trustees are required to monitor the management and performance of all service providers with which the plan has contracted. Plan management and/or trustees should make sure all responsibilities in all areas of the plan are clearly understood and stated between the plan fiduciaries and the plan service providers.

Plan Effectiveness

  • It is important to educate your employees on the benefits and provisions of the plan. Knowing all of the options makes it easier for employees to enroll in the plan and to subsequently increase their savings amount.

Fidelity Bond Coverage

  • The Department of Labor requires those who handle retirement plan funds must be covered by a fidelity bond. This is not the same as the plan sponsor’s crime or D&O policy. The fidelity bond covering the plan, must specifically name the plan as a covered party, cannot have a deductible, and must cover at least 10 percent of plan assets (with a maximum of $500,000 of coverage). The bond must also be issued by an authorized surety company. A list of these approved companies may be found on the Department of Labor website.

Plan Operations

Investment Policy Statement

  • Your plan should maintain a written investment policy statement. This statement provides the general investment goals and objectives of the plan and describes the strategies the investment manager should employ to meet these objectives.

Discretionary Contributions

  • Plan management should document any discussions and eventual decisions regarding discretionary employer contributions to the plan. Generally, this issue should be addressed annually.

Use of Forfeitures

  • Forfeitures are typically used to reduce future employer contributions or pay reasonable plan expenses. Forfeitures may also be allocated among remaining participants as an additional contribution. The plan document will specify how forfeitures are to be used. Plan management should ensure forfeitures are utilized on a regular basis and in accordance with the plan document.

Required Minimum Distributions

  • Required minimum distribution rules require a participant to withdraw a portion of his or her funds from the plan at a certain rate once they reach the later of age 70½ or retirement. Plan management should ensure participants and former participants are aware of this requirement so the required minimum distributions are timely paid.

Retirement Plan Audits

Personnel Files

  • One of the focal areas of any retirement plan audit is the review of personnel files. Plan management should ensure these files are complete, including hire and termination date, pay rates, loan and hardship withdrawal support, and any other important benefit elections. Files should also be clean, organized and consistent in order to ensure documentation is maintained to be in compliance with the plan document and all participants are treated consistently.

Transaction Documentation

  • Two common areas where documentation can be lacking are hardship withdrawals and loan withdrawals. Hardship withdrawals must be specifically allowed by your plan document and must be for an immediate and heavy financial need of the employee. Hardship withdrawals are meant to be a last resort after all other resources have been used. Plan management is responsible for verifying these criteria and maintaining any documentation related to these withdrawals.
  • Loan withdrawals must also be specifically allowed by your plan document. These withdrawals are commonly processed by a plan’s third party administrator; however, plan management is still responsible for monitoring the status of these loans for default or early payoff. All documentation relating to loan withdrawals should also be maintained by plan management.

Questions?

Retirement plan compliance is complex, requiring help from trusted professionals who understand the challenges, rewards and opportunities associated with effective retirement planning. For more information about the above tips or to learn about how we can help, please contact a Smith Schafer professional.

School Bus Companies: IRS Audits and Fuel Tax Credit Q & A

School Bus Companies: IRS Audits and Fuel Tax Credit Q & A

Over the past 45 years, we have dealt with several IRS audits involving the fuel tax credit claimed by our school bus company clients.

BELOW ARE FREQUENTLY ASKED QUESTIONS WE HEAR FROM SCHOOL BUS COMPANY OWNERS:

Q: What fuel and what vehicles qualify for the fuel tax credit?

A: Gasoline and diesel fuel used in school buses and qualified local buses qualify.

Q: What is the definition of a school bus and a qualified local bus for fuel tax credit purposes?

A: Many states have their own definition for what is a school bus. For example, Minnesota’s definition of a school bus is published under Minnesota statute 169.011 subdivision 71.  However, the federal fuel tax credit does not use a state statute for their definition.

The Federal statute does not give a specific definition as to what a school bus is. However, over the years, it has become apparent that the bus looking vehicle with accordion doors is the starting point. The fuel tax credit is available for vehicles registered as a school bus with the state where the vehicle is licensed.

The school bus fuel tax credit is not available for traditional passenger vehicles, such as mini vans or other automobiles registered as a van or private automobile. The smaller vehicles must be modified by installing the accordion doors and other safety modifications, in order to qualify for the fuel tax credit. For example, a standard Dodge Grand Caravan painted yellow is not a school bus for federal fuel tax purposes.

Note: the publications do not define the fuel credit as available for fuel used in any vehicle used to transport school students; it specifically says bus (school bus). “In a school bus means fuel used in a bus engaged in the transportation of students or employees of schools.”

In a qualified local bus means fuel used in a bus meeting all the following requirements:

  • It is engaged in furnishing (for compensation) intracity passenger land transportation available to the general public.
  • It operates along scheduled, regular routes.
  • It has a seating capacity of at least 20 adults (excluding the driver).
  • It is under contract with (or is receiving more than a nominal subsidy from) any state or local government to furnish the transportation.

We have several clients using traditional automobiles for the services to transport students. We have not taken fuel tax credit for school transportation on traditional automobiles, but do for school buses and qualified local buses.

Q: What is the difference between a qualified local bus and a school bus?

A: A qualified local bus is eligible for the fuel tax credit when it is a vehicle other than a traditional school bus and is used to transport people. A school bus is generally the traditional “yellow bus” which has the distinctive accordion doors and school bus safety features you would recognize such as a 65 or 77 passenger school bus. A qualified local bus is a bus which does not qualify as a school bus, but has a seating capacity of at least 20 adults excluding the driver.  

Q: What information is needed?

A: We begin each year by asking our clients about the gasoline gallons and then the diesel gallons used during the prior year in their school buses, what we call a “yellow bus.”  Then we ask the same question for their qualified local bus fuel usage.

Q: Why do the gallons and type of fuel matter?

A: There are different rates of fuel tax credit available based upon if the vehicle is a school bus or a qualified local bus and the type of fuel used. 

Q: Do you need a vehicle fueling log and/or receipts to obtain credit?

A: As we have gone through the audits over the years, the IRS has asked for a listing of the company vehicles, the fuel type and the seating capacity of each. If there are vehicles other than school buses or if qualified local buses that may have used fuel out of the tanks at the terminal, fuel cards or logs by vehicle have been asked for. The process typically includes providing fuel invoices from bulk deliveries plus fuel receipts for fuel purchased at the pump to prove that federal fuel taxes have been paid and reconciling the gallons claimed as a fuel tax credit against the total gallons purchased.   

Q: How do I claim the fuel tax credit? What is the deadline for filing a claim?

A: Generally, the filing is done annually along with your company’s business income taxes using Form 4136 (for tax credits), but you may also file annually on fuel and any other applicable excise taxes (for rebate payments) using Form 8849 along with the appropriate attachment (schedule 1 in your case). If you want to file quarterly you can use Form 720. 

Questions?

Transportation has been a key practice area of Smith Schafer’s for more than 45 years. We have qualified professionals to assist you with identifying and claiming these credits. For more information on tax strategies that may benefit your business contact the Smith Schafer Transportation Team.We look forward to speaking with you soon.