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Accounting and Tax Planning

Accounting and Tax Planning

Items That Add Up

By Kathryn A. Sisson, CPA, MST

There are many changes that businesses and individuals should be aware of under The Tax Cuts and Jobs Act (TCJA), the most significant tax legislation in the U.S. in more than 30 years. Here are the 10 changes that will have the most significant impact this tax season.

Individuals

1. Tax Rates. The 2018 tax brackets have changed, resulting in lower tax rates for most individuals. For example, the 15% tax bracket has been reduced to 12% and the 25% bracket to 22%.

2. Income-tax Withholding. As a result of the lower taxes rates, income-tax withholding during 2018 also decreased for most individuals. This could result in underpayment of taxes for 2018, depending on your tax situation. Taxpayers should carefully review their withholding going into 2019 and discuss it with their tax professional.

3. Itemized Deductions. TCJA made several changes to itemized deductions as noted below.

Medical Expenses: TCJA lowered the threshold for the medical-expense deduction to 7.5% of AGI for 2017 and 2018. The threshold for 2019 is 10% for most taxpayers.

State and Local Taxes: TCJA limits the deduction for state and local taxes to $10,000 per year. This includes payments for state income tax, property tax, and excise tax. The same $10,000 limit applies regardless of whether you are a single taxpayer or if you are married and file a joint return. The deduction for taxpayers who are married and filing separate returns is limited to $5,000.

Kathryn A. Sisson

Kathryn A. Sisson

Mortgage Interest: Interest is generally deductible on original home acquisition debt up to $750,000. Home-equity interest is deductible only if the funds were used to improve the mortgaged property.

Charitable Donations: Donations are generally deductible up to 60% of AGI, up from 50%, for most donations. You could also consider giving directly from your IRA if you are over age 70 1/2 or gifting appreciated stock directly to a charity. Discuss with your tax professional in order to maximize your benefit.

Miscellaneous Itemized Deductions: TCJA has eliminated miscellaneous itemized deductions. These include deductions for unreimbursed employee business expenses, tax-preparation fees, and investment-advisory fees.

4. Increased Standard Deduction. One of the most significant provisions of TCJA is the near-doubling of the standard deduction for all taxpayers. For 2018, the standard deduction amounts are $24,000 for joint filers, $18,000 for head of household, and $12,000 for all other filers. The limitations on itemized deductions as noted above and the increased standard deduction amounts may make it less advantageous to itemize deductions.

5. Personal Exemptions. TCJA eliminated personal exemptions for 2018. For 2017, taxpayers received a personal exemption deduction of $4,050 per person. Therefore, a family of four received a deduction of $16,200 in 2017 that is no longer available under the new tax act.

Businesses

6. Tax Rates. A flat tax rate of 21% replaces the graduated tax rate brackets for C corporations that ranged from 15% to 39% in prior years.

7. Qualified Business Income (QBI) Deduction. A deduction of up to 20% of business income may be available to owners of pass-through entities. There are limitations based on several factors, including income of the taxpayer as well as the type of trade or business. The purpose of the deduction is to provide some parity between the new flat 21% corporate rate and the tax rates paid by owners of pass-through entities on their individual income-tax returns.

8. Depreciation. TCJA made significant changes to encourage businesses to expand and invest in new property; 100% bonus depreciation is now available for federal purposes, and the limitation on expensing certain assets has been increased to $1 million, with a $2.5 million investment limitation.

9. Business Credits. TCJA created a Family Leave Credit for employers making family-leave payments to employees. The credit is available only to employers who have a written policy in place for the payment and credit.

10. Deductions. Previously, the deduction for meals and entertainment was limited to 50% of expenses incurred. For 2018, 50% of meals are still deductible; however, entertainment expenses are no longer deductible.

Many of these changes are significant and warrant your full attention. As you approach tax season this year, seek the assistance of tax professionals, and do not follow your neighbor’s tax advice.

Kathryn A. Sisson, CPA, MST is a tax manager in the Commercial Services Department of Melanson Heath in Greenfield. She has 20 years of experience in public accounting and has been with Melanson Heath for 10 years. She has extensive experience in corporate and individual income-tax planning and review as well as financial-statement compilations and reviews. Her corporate experience includes working with businesses doing business in multiple states. She is also a QuickBooks ProAdvisor assisting many clients with general ledger systems and software training.

Accounting and Tax Planning

2018 Tax Planning (in 2019)

By Brendan Healy, CPA

Brendan Healy

Even though we’re into 2019, there are still tax-saving opportunities available for the 2018 tax year.

This article summarizes a number of options that businesses and taxpayers should consider to help minimize their tax burden when they file their 2018 tax returns. As with any tax-savings strategy, you should discuss these post-2018 year-end planning techniques with your tax advisor before implementing them.

Retirement-plan Contributions

Although some retirement plans needed to have been in place before Dec. 31 to be used for the 2018 year, there are plans that could be set up in 2019, funded, and then used as deductions for the 2018 tax return.

A simplified employee pension (or SEP) IRA, for example, can be set up after year-end and funded up to the due date (including extensions) of the taxpayer’s business.

New Opportunity-zone Funds

The new tax law created a significant tax incentive to encourage capital investment in certain locations that need development. If you sell an asset with a large capital gain, you may be able to defer that gain if you essentially reinvest that gain into an “opportunity-zone fund” within six months of that sale. If done properly, you wouldn’t recognize the tax gain until the latter of when your new investment is sold or Dec. 31, 2026. You can also get up to 15% of the deferred gain forgiven entirely for holding the investment for specified time period. And if you held the investment for an additional 10 years, you’d pay no tax on subsequent capital gains.

Capital-expenditure Tax Writeoff

The new tax law allows businesses to write off (or expense) larger amounts of fixed-asset purchases. The new law not only applies to personal property (machinery, equipment, computers, office furniture, etc.) but also increases the ability to write off certain real-estate improvements. It also increases the amount of tax deduction available for business-owned automobiles. These capital-expense writeoff elections are made at the time you file the tax return.

State Tax Planning

If you ship product to different states or if you sell over the internet across the country, there may be state tax-planning strategies available for your business. Certain businesses can take advantage of apportioning their revenue across several states. And if they do not have to file tax returns in those states, that apportioned revenue may never be subject to state income tax.

There have been significant changes this past year in the way states are allowed to (or not allowed to) tax out-of-state shipments entering their state. You should review your state income tax plan as well as your state sales tax reporting process in light of these new and significant changes.

Tax Credits

The tax law provides certain incentives to businesses by offering tax credits. The research and experimentation tax credit, for example, allows a business to convert a dollar of deduction into a dollar of tax credit. Since tax credits reduce taxes on a dollar-for-dollar basis, a tax credit is more valuable to the business than a tax deduction. So if the business is allowed to convert an expenditure into a credit, the tax savings could be substantial.

Many businesses (such as manufacturers or software companies) are not taking advantage of this tax credit that may be available to them.

Estate Planning and Gifts During Lifetime

The new tax law significantly increases the ability for families to transfer wealth upon death as well as allowing gifts during lifetime on a tax-free basis. Although estate and gift planning can get very complicated, the limits available today (which will expire in about seven years) are substantially higher than they have been in the past and allow for great flexibility in wealth-transfer planning.

Bottom Line

Just because 2018 is over does not mean we should stop thinking about tax-planning strategies for 2018 tax returns that will be filed over the next several months.

There are many tax incentives written into the tax law to encourage business and individual taxpayers to reinvest. It is up to you to make sure you are taking advantage of every one available to you and your business.

Brenden Healy, CPA, a partner at Whittlesey, is an expert in state and federal tax matters who consults with businesses and individuals and focuses his practice on closely held businesses in the real-estate, manufacturing and distribution, and retail industries.

Accounting and Tax Planning

Life in the Cloud Age

By Rebecca J. Connolly, CPA

Rebecca J. Connolly

Rebecca J. Connolly

If you’re anything like me, you wonder what a cloud is, besides the one I see when I look out my office window.

Most people resist change because they don’t know what it truly is, but let’s take a moment to ignore our instinct of ‘no’ and think about what this truly is and if it is right for your business. The cloud is not something you touch, but it is a tool in your corporate toolbox that you should consider using.

For business owners, the true questions are, what is cloud computing? How do I use it? Is it safe? And, why would I spend the money?

The true definition of cloud computing is confusing to most, but the information element is ease of use and availability. Many small-business owners need frequent access to their office network, and what if that office was fully accessible at your home computer?

There are many options that allow a business owner or worker to access their office computer, but cloud computing offers your business software to not be stored not on your laptop or desktop, but on an online solution that can help save the costs and late nights spent in the office.

I was skeptical as to how cloud computing would work and the true speed and efficiency of it, but I can travel all over the Northeast part of the U.S. for my clients and have everything available to me from any computer, including my laptop. How many of us are stuck carrying a laptop and waiting 15 minutes a day to load due to how large our software is? My laptop takes a minute or less to load due to minimal software being loaded on it because our office uses cloud computing.

You might ask, is cloud computing safe for my business? Nowadays we hear so often about data breaches that they are not shocking anymore, but just a thing of the times. So, let’s take a step back and think about how secure we are with our work computers, company data, and Internet access.

If you practice the gold standard of security, you don’t store any company files on your laptop itself, the laptop is backed up every day, and you do not use the internet except for required business activities. How many people do all three of these items? If you are part of the general population of business owners and workers, you put systems in place the best you can using your knowledge or your hired consultants’ suggestions. You then attempt to follow those processes and procedures, but again, you’re human, so maybe the local drive on your laptop is backed up only once at month at best.

Cloud computing could be your answer, or at least make you think about where your business stands and determine if you are losing time with your current work setup. Cloud computing has layers of security most people never think about, including frequent backups, two-factor authentication, and audit logs.

Another question people have once they partially understand the aspects of cloud computing is price. Now, I ask you, what is the price you are willing to pay to allow yourself and your workers access into your software securely at any time from any location?

The next question you should ask yourself is how much time, effort, and money are you losing using your current platform. Do you wait for your system to boot up for a long period of time every day, and so do all your employees? Is your current system secure, or do you just tell yourself it is so that you can sleep at night?

There are so many questions to ask here, but the first item to resolve when looking at how to move your company into the next phase of information technology is realizing that we know our business inside and out, whether it is making a product or providing a great service to our community. Just because we’re not experts in the field of cloud computing or technology in general does not mean that we couldn’t save time, money, and frustration, while also enhancing security, by looking into new technology to help the business grow.

Working in public accounting with many small-business owners allows me to realize there isn’t enough time in the day or week to allow for everything that needs to get done. Losing data and hard work because of a computer glitch or a bad information-technology setup is not only unacceptable, but also costly to businesses beyond price tags.

I’m not saying everyone needs to be using the cloud, because each business and every business owner is different. I am saying that it is prudent to take the time to access your current system, no matter how much time and effort it costs you, and evaluate if you are doing yourself and your business a disservice by not using cloud computing or a similar technology.

Rebecca J. Connolly, CPA is audit manager for the West Springfield-based accounting firm Burkhart Pizzanelli, certified public accountants; (413) 734-9040.

Accounting and Tax Planning

Five Hot Tax Topics

The Tax Cuts and Jobs Act represents a seismic shift within the broad realm of accounting and tax planning, and some of the aftershocks may not be felt, and fully understood, for some time. But some things are known, and individuals and businesses should understand their implications.

By Teresa Judycki

For better or worse, the Tax Cuts and Jobs Act was the most significant tax-law overhaul since the Reagan Administration, and there’s potential for more change on the way. With the breadth and depth of this law, it can be hard to determine what might be meaningful to you and your business.

This article will highlight five hot tax topics that may be particularly meaningful for this tax year.

Qualified Opportunity Funds

Taxpayers with large gains from sales of property to an unrelated person should be aware of Qualified Opportunity Funds. Enacted as part of the Tax Cuts and Jobs Act, a new Opportunity Zone program encourages investment in low-income community businesses.

Terri Judycki, CPA, MST

Terri Judycki, CPA, MST

The program allows individual and corporate taxpayers to defer tax on gains from the sale of stock or other assets by investing in an Opportunity Fund, which invests in businesses in Opportunity Zones. The tax is deferred until the earlier of Dec. 31, 2026 or the date the new investment is sold. To defer a gain, the taxpayer must invest within 180 days of the sale.

For example, if a taxpayer sells appreciated securities for $1 million at a $700,000 gain, tax on the $700,000 could be deferred until Dec. 31, 2026 (or earlier if the investment is sold prior to that date) by investing $700,000 in a Qualified Opportunity Fund within 180 days of sale. Capital gains on the new investment are exempt from tax if the investment is held for more than 10 years. Opportunity Funds may be a multi-investor fund or a single-investor fund established by a taxpayer to invest in projects he or she selects.

While there are a few multi-investor funds, many are hesitant to promise tax deferral until the IRS issues proposed regulations in this area, but September news is that the proposed rules are being reviewed and should be issued soon.

Foreign Accounts

For taxpayers with unreported income from foreign accounts, the Streamlined Filing Procedures (SFP) are still available. The Offshore Voluntary Disclosure Program ended Sept. 28, 2018.

Under SFP, taxpayers who can certify that the failure was non-willful can file amended returns and pay a reduced penalty. The IRS also has procedures in place for filing delinquent information returns reporting the existence of a foreign account when there has been no unreported income.

For example, a life-insurance policy with Sun Life may have a cash value that’s now increased to more than $10,000. That is a ‘foreign account’ that must be reported or could be subject to penalties. Consider reviewing any asset that is a foreign account and ensuring that tax filings are current, because penalties are confiscatory and may include criminal penalties.

The civil penalties for willful violations are capped at the greater of $124,588 or 50% of the amount in the account.

Employee Parking

I hoped to be able to provide you with specifics related to employee parking, but that guidance has not been issued as of the date of this writing. Perhaps there will be guidance by the time you are reading this article.

As a reminder, the Tax Cuts and Jobs Act provides that no deduction is allowed for the expense of a qualified transportation fringe, which includes van pools, transit passes, and qualified parking. Qualified parking is parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by commuter highway vehicle or carpool. Tax-exempt organizations are subject to tax on the expense. But what is the ‘expense’ of qualified parking? At the 2018 AICPA Not-for-Profit Industry Conference, a speaker said that guidance had not yet been issued, because those in Treasury could not agree on the meaning of the law.

The cost of a parking permit is easy to quantify, but the law encompasses all expenses of providing parking. There are some practitioners who think a portion of depreciation on a parking lot owned by the business could be disallowed. Some others think the IRS may require apportioning office rent if the lease entitles the tenant to a certain number of parking spaces. As the law applies to amounts paid or incurred after Dec. 31, 2017, it affects computation of taxable income for entities with fiscal years ending in 2018. There are many practitioners hoping for retroactive repeal or postponement.

State and Local Tax Itemized Deduction

In August, the IRS issued proposed regulations in response to state legislation intended to circumvent the $10,000 limit on the state and local tax itemized deduction. A few states have enacted or considered enacting programs permitting state residents to make contributions to state agencies or charities in exchange for state and local tax credits that could be applied to income or property taxes.

In the proposed regulations, IRS restates the general rule that charitable deductions must be reduced by anything of value received in return for the charitable donation. The proposed rules, applicable to contributions made after Aug. 27, 2018, provide that, if a taxpayer receives a tax credit in return for a donation, the tax credit is a benefit to the taxpayer that must reduce the charitable contribution deduction.

It is important to note that these rules apply to programs created in response to the Tax Cuts and Jobs Act as well as to pre-existing programs, such as the Massachusetts program that provides tax credits in exchange for gifts of conservation land.

There has been no response from the IRS to the Connecticut strategy; Connecticut now imposes tax on a pass-through entity instead of on the individual partner or shareholder, which should result in shifting the deduction away from the individual who is subject to the $10,000 limit. The shareholder or partner should now be able to report his or her share of the entity’s income net of the state tax.

Trusts that pay taxes are also subject to the $10,000 limit, but a trust does not have to share the beneficiary’s $10,000 limit, providing a potential benefit.

Alimony

Finally, for those who will be divorced soon, the tax consequences of alimony differ for payments under instruments finalized after Dec. 31, 2018.

Before the Tax Cuts and Jobs Act, alimony was deductible by the payor and taxable to the payee. This resulted in shifting income from the higher-earning spouse paying the alimony to the former spouse who may be in a lower tax bracket. Alimony payments finalized after Dec. 31, 2018 will no longer be deductible by the paying spouse and no longer included in the income of the recipient spouse. There are some workarounds such as division of property where the spouse in the lower tax bracket receives property with the greatest unrealized gain or by using a Qualified Domestic Relations Order to shift retirement assets (along with the tax burden) to the lower-income spouse.

While this change will not affect pre-2019 alimony instruments, it may apply if the parties modify the pre-2019 agreement and state in the modification that the new rules are to apply. If this law change will impact you, be sure to discuss its effects with your attorney.

If you have any questions about the material featured in this article or how it might apply to you specifically, be sure to consult your tax professional or CPA.

Terri Judycki is a senior tax manager with Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3510; [email protected]

Accounting and Tax Planning

New Rules of the Road

By Julie Quink, CPA

Tax-IncentivesIn 2018, nonprofit organizations face implementation of the first major overhaul of accounting standards in two decades. The goal of the overhaul is to improve the communication of financial results for donors and other outside stakeholders and to emphasize transparency in financial reporting.

With these changes, nonprofit organizations can expect significant changes in financial reporting practices. Donors and outside stakeholders can expect enhanced information on liquidity, access to cash and endowments.

What are the significant financial reporting changes for nonprofits?

Some of the major changes in the new standards encompass net asset classification, liquidity and availability, investment returns, reporting of functional expenses, and presentation of statement of cash flows.

Net Assets

The new accounting standards focus on the existence or absence of donor restrictions as opposed to the type of restriction. The new rules provide for two classes of ‘net assets’ — with donor restrictions and without donor restrictions. Previously, nonprofits have reported three required classes of net assets — unrestricted, temporarily restricted, and permanently restricted.

Julie Quink, CPA

Julie Quink, CPA

For underwater endowments, in which the fair value of the endowment at the reporting date is less than the original gift or the amount required to be maintained by the donor or by law, the cumulative amount of losses is netted in assets with donor restrictions under the new classifications. Previously, the accumulated losses were included in unrestricted net assets.

Disclosures relative to underwater endowments now encompass the aggregate amount of original gifts required to be maintained, endowment spending policies, and discussion of actions taken or strategy relative to the underwater status of the endowment. For the nonprofit, a concern may be that the status of and strategy of managing underwater endowments is highlighted in the new financial-statement disclosures.

The goal of the change is to simplify tracking and reporting of donor restrictions and also to enhance disclosures on the nature, amounts, and types of donor restrictions.

Liquidity and Availability

Quantitative and qualitative information is required under the new standards relative to liquidity and availability of liquid assets, which are typically cash and investments.

The qualitative disclosures require analysis of how the organization manages its liquid assets to meet cash needs for expenditures within one year of the statement of financial-position date. The quantitative information regarding the liquid assets and their availability to meet the current-year needs can be presented on the face of the financial statements or in the notes to the financial statements.

Donors, grantors, creditors, and other stakeholders want to understand that these nonprofit organizations that they are evaluating have adequate financial resources to meet obligations as they become due. For the nonprofit organization, a concern is that this liquidity information can highlight potential liquidity shortfalls, which may affect future donations and grants.

Investment Returns

Investment income is to be reported net of internal and external investment expenses. This has been an optional presentation under current standards. The requirement to disclose investment expenses net in investment income has been removed. The netting of fees against income does not suggest that nonprofits should not still manage and monitor investment fees, but assists in eliminating the burden of trying to identify embedded investment fees.

Functional Expenses

Currently, only health and welfare organizations are required to report expenses by function. Under the revised standards, all nonprofits must report expenses by function and must disclose the methodology used for the allocations to program and overhead expenses in the notes to the financial statements.

Nonprofit organizations should have been allocating expenses to programmatic and administrative expenses even though not required to detail the expenses by function. The requirement for functional reporting and disclosures may require nonprofits to review their allocation policies for consistency.

Statement of Cash Flows

The new rules continue to allow nonprofits to choose the method, direct or indirect, by which they present operating cash flows. The new guidance does eliminate the need to add an indirect reconciliation if using the direct method in presenting operating cash flows.

By streamlining the requirements, it is believed that the statement of cash flows will be a more useful statement and result in a reduction of costs to the nonprofit to prepare the financial statements.

Conclusion

The new accounting and reporting standards are intended to provide more transparency to donors and other stakeholders. These changes may, however, have a significant time and financial impact on nonprofit organizations as they implement the new requirements.

Julie Quink, CPA is the managing principal of Burkhart, Pizzanelli, P.C., specializing in the accounting and consulting aspects of the practice. She is also a certified fraud examiner.

Accounting and Tax Planning Sections

Upping the Ante

By Kristina Drzal Houghton, CPA, MST

It’s June. This is generally not the time to be thinking about taxes. In reality, though, businesses and individuals should always be contemplated taxes and how to reduce their burden. And the Tax Cuts and Jobs Act signed into law late last year gives people even more to think about.

Kristina Drzal Houghton

Kristina Drzal Houghton

The Tax Cuts and Jobs Act, (TCJA), signed into law on Dec. 22, 2017, brought the biggest changes to both individual and corporate taxes that we’ve seen in the past 30 years. These changes were primarily effective for tax years 2018 and after. For many reasons I’ll highlight in this article, these changes make starting your planning early extremely important.

I will briefly acknowledge that the TCJA reduced the C-corporation tax rate to a flat 21%, from the previous maximum rate of 34%. Additionally, there were changes made to U.S. taxation of income earned abroad by U.S. C-corporations and their affiliates.

The focus of this article will revolve around planning for individuals and small businesses.

Where to Start

I would suggest having an accountant run mock 2018 returns as a starting point. Running those future numbers can flag potential issues. That said, state revenue departments and the Internal Revenue Service have had little time to process the changes, so much remains in flux. The IRS and states haven’t decided how some provisions of the new tax law will be calculated yet. I expect that the IRS and states will start to share their 2018 guidance later this summer. In the meantime, here are some suggestions:

Rework Your Withholding

The new law means that the W-4 you filled out, however many years ago, may need to be adjusted. The IRS encourages everyone to use the Withholding Calculator, available on irs.gov, to perform a quick ‘paycheck checkup.’ Remember, the new tables don’t reflect all the changes that may affect a taxpayer next year, so they are a somewhat blunt tool.

The calculator helps you identify your tax withholding to make sure you have the right amount of tax withheld from your paycheck at work.

If workers leave their W-4s as is, they could wind up withholding too little, which can bring penalties, or they may get a smaller-than-expected refund next year. Workers in higher tax brackets who receive large bonuses could see a higher tax bill next season if they don’t tweak W-4s, since one of the ways employers can set the withholding rate on ‘supplemental income’ such as bonuses in the new law is to use a flat rate of 22%.

Think About Deduction Planning

A big change that could affect many taxpayers is the tax overhaul’s controversial cap on state and local income tax (SALT) deductions, a provision Democrats have labeled a war on blue-state Americans. The deduction, which used to be unlimited, will be capped at $10,000 next year. The new law’s near-doubling of the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly does mean fewer will itemize.

States were busy devising workarounds to keep those residents from seeing a big spike in federal taxes next year, but the IRS recently informed taxpayers that proposed regulations will be issued addressing the deduction of contributions to state and local governments and other state-specified funds, for federal tax purposes. The proposed regulations will make clear that the Internal Revenue Code, not the label used by states, governs the federal income-tax treatment of such transfers.

As a result of the decreased SALT deduction and the increased standard deduction, the tax benefit from charitable contributions may be lost if the standard deduction exceeds itemized deductions. One strategy for people who regularly donate to charity is to bunch up into one year what they would have given over multiple years. For those who itemize, charitable donations remain deductible on federal returns and can help lift married taxpayers who file jointly above the $24,000 standard deduction hurdle.

By putting a few years’ worth of donations into a donor-advised fund — many financial-services firms have units that offer them — you can take the deduction the year you put the money in, but distribute the money to charity over multiple years. For taxpayers older than 70½ who are taking required distributions from an IRA, they should consider making distributions to charities directly from their IRA.

Mortgage and Home-equity Loan Deductions

The new tax law lowered the amount of deductible interest expense on ‘acquisition indebtedness.’ For new loans made after Dec. 14, 2017, the maximum interest is limited to a mortgage ceiling of $750,000; previously, this was $1 million. It also eliminated the interest deduction on loans, such as home-equity loans, that are not used to ‘buy, build, or substantially improve’ a home.

New College Savings Plan Uses

The new tax law expands the allowable use of tax-exempt 529 college savings plans for education costs that accrue while your child is between kindergarten and high-school graduation. This added allowable use is limited to $10,000 per year per beneficiary. But be careful — while some states automatically follow the federal code, others choose to decouple from certain parts of it. So, while the U.S. government may say you can use 529 money for K-12 expenses, a state may consider such a withdrawal a non-qualified distribution and could tax the earnings and charge you penalties.

Section 199A Pass-through Optimization

Section 199A, which is a new section of the tax code arising from the Tax Cuts & Jobs Act of 2017, introduces a 20% deduction on qualified business income (QBI) for the owners of various pass-through business entities which include S-corporations, limited liability companies, partnerships, and sole proprietorships — or, really, any business that is not a C-corporation.

The QBI deduction will provide big tax breaks for many business-owning clients, but unfortunately, the new deduction is highly complicated, and it may take some time before the IRS can even provide more meaningful guidance on how it will be applied. However, the reality is that the planning opportunities created by IRC Section 199A are tremendous, and practitioners are already eagerly exploring how they can help clients reduce their tax burden through creative strategies around the QBI deduction.

Business owners will generally fall within one of three categories when it comes to the QBI deduction:

• Business owners below their applicable threshold amount — which is $157,500 of taxable income for all filers except joint filers, and $315,000 for those filing jointly — can enjoy a QBI deduction for the lesser of 20% of their qualified business income or 20% of their taxable income. It does not matter what type of business is generating the income, nor is there a need to analyze W-2 wages paid by the business or depreciable assets owned by the business. The QBI deduction is what it is.

• Business owners over their applicable threshold who derive their income from a ‘specified service’ business (i.e., some specialized trade or service business) — which includes doctors, lawyers, CPAs, financial advisors, athletes, musicians, and any business in which the principal asset of the business is the skill or reputation of one or more of its employees — will have their QBI deduction phased out. The phase-out range is $50,000 for all filers except joint filers, and $100,000 for those filing jointly. Once a business owner’s taxable income exceeds the upper range of their phase-out threshold ($207,500 for individuals and $415,000 for married filing jointly), they cannot claim a QBI deduction for income generated from a specialized trade or service business. Period. End of story. ‘Do not pass go, do not collect $200.’

• Business owners over their applicable threshold who derive their income from a business that is not a specialized trade or service business may also have their QBI deduction at least partially phased out, but the full deduction may be ‘saved’ based on how much they pay in W-2 wages and/or how much depreciable property they have in the business. Business owners with qualified business income from non-specified service businesses whose taxable income exceeds the upper range of their phase-out threshold can still take a QBI deduction equal to or less than the greater of:

1. 50% of the W-2 wages paid by the business generating the qualified business income; or

2. 25% of the W-2 wages paid by the business generating the qualified business income, plus 2.5% of the unadjusted basis of depreciable property owned by the business.

A careful analysis of the rules above will lead one to realize that, when it comes to maximizing a business owner’s opportunity for a QBI deduction, strategies will fall into one of three main buckets:

• Income-reduction strategies, such as trying to lower taxable income by increasing deductions or spreading out the income over multiple taxpayers, to stay below the income threshold where the specified service business or wage-and-property tests kick in;

• ‘Income alchemy’ strategies, where we try to transform income derived from a specified service business into income derived from a company that is not a specified service business, to avoid the phase-out (for those over the income threshold); and

• Business strategies, such as changing an entity, revisiting compensation models, and revisiting business assets, to more favorably characterize business income in the first place.

Relook at Filing Separate Returns for Married Couples

The tax code has long limited married couples filing separate returns from taking advantage of a number of tax breaks, either by barring those tax breaks entirely under the ‘married filing separately’ status, or phasing them out at very modest income thresholds. As a result, in the past, it’s rarely been a tax-efficient move for married couples to file separate returns, except in highly unusual circumstances. That will likely still be the case for most married couples, but the creation of the QBI deduction does tilt the balance somewhat for some couples.

Should You Revoke S-corp Status?

The hot question since the passage of the Tax Cuts & Jobs Act of 2017 and Section 199A is, “should I revoke S-corp status and go to C-corp?” The answer is no.

While the TCJA reduced C-corporation tax rates to 21%, the QBI reduces the maximum rate on pass-through income to 29.6% (80% of 37%). Previously, the maximum tax rate on pass-through income was 39.6% plus the effect this income had on itemized deduction and personal exemption phase-outs, producing an even greater effective rate.

This rate exceeded the prior maximum C-corporation rate of 34%. Owners elected to operate their businesses in pass-through entities for many reasons beyond the current year’s tax. None of these considerations have changed.

For most small businesses and their owners, the key point is to acknowledge that TCJA creates a tremendous number of planning opportunities. New strategies with QBI will certainly continue to be developed with time and further guidance from the IRS, but even in the present, there exists enough reasons to reach out to your advisors and have them help them reduce your tax liabilities.

Kristina Drzal Houghton, CPA, MST is a partner and director of the Taxation Division at Holyoke-based Meyers Brothers Kalicka; (413) 536-8510.

Accounting and Tax Planning Sections

The Fraud Triangle

By Julie Quink, CPA

Julie Quink

Julie Quink

As a culture, we generally believe that people are honest and are trustworthy. Failures like Enron and WorldCom, whose combined fraud losses totaled $46 billion, have raised an awareness of the costs of fraud and have highlighted the need for management to understand and monitor the business risks within their organizations.

What Is Fraud?

Fraud is an intentional act that results in misrepresenting financial information (lying) or misappropriation of assets (stealing). The misrepresentation of financial information typically encompasses misstating earnings to meet market or company expectations and to meet compensation-plan benchmarks. Misappropriation of assets is the taking of company assets, whether cash and equivalents, inventory or supplies, for personal benefit and use.

Statistics indicate that:

• 10% of employees would never, ever commit fraud;

• 10% of employees are actively exploring ways to commit small-scale fraud against their employer, which could include padded mileage and expense reports, small-scale theft of supplies and other materials; and

• 80% of employees would never commit fraud unless certain factors are present.

The factors that would provide the motivation for 80% of employees to consider committing fraud are termed the Fraud Triangle. These factors include:

• Pressure — a financial need created by gambling addictions, substance and alcohol abuse, family illness, or extramarital affairs;

• Opportunity — the ability to access cash or items easily convertible to cash (inventory); and

• Rationalization — the feeling of entitlement or the feeling that there is no other way to financially meet the pressure unless taken from their employer.

Otherwise honest employees may commit fraud under these circumstances.

Indicators that an employee may be committing fraud include the appearance that the employee is living beyond their lifestyle, suspected or known substance or alcohol abuse, and resistance to relinquishing control of duties to others.

Common Ways Fraud Occurs

Generally, misrepresented financial results are accomplished through fictitious transactions or adjustments recorded in accounting records.

Fraud is an intentional act that results in misrepresenting financial information (lying) or misappropriation of assets (stealing).”

The most common ways that an individual can misappropriate funds are:

• Creating fictitious employees on the payroll system and generating payroll checks that the fraudulent employee cashes — the ghost- employee scheme;

• Creating fictitious vendors and generating checks to the fraudster for goods and services never received by the company — the ghost-vendor scheme; and

• Taking customer checks or cash before being deposited into the bank and modifying the accounting records to conceal the theft.

Preventing Fraud

According to the 2018 Report to the Nations published by the Assoc. of Certified Fraud Examiners, 50% of fraud and corruption cases are detected by a tip. Meanwhile, weaknesses in internal control are responsible for nearly 50% of all frauds, and losses are up to 50% higher when collusion of fraudsters exists.

When considering effective prevention and detection techniques, it is critical to:

• Implement a whistleblower policy that provides a mechanism for confidential communication of suspected impropriety;

• Assess areas of risk and evaluate internal controls over the most susceptible business cycles, including cash receipts, cash disbursements, and payroll; and

• Review financial and operational trends to determine routine and unusual patterns.

Simple techniques to strengthen internal controls over significant business cycles include the receipt of unopened bank statements by owner for independent review of monthly activity, and varying of procedures relative to the review the payroll journals or signing of vendor checks, if another individual is typically responsible for those areas. Inquiry and observation, such as camera systems, in areas that pose a concern may act as a deterrent for the occurrence of fraud due to the mere fact that someone is reviewing activity or inquiring.

When techniques fail to prevent and detect fraud, it is important to gather and review evidence. It is recommended that legal counsel be involved in suspected fraud and investigations at the onset. Legal counsel will likely engage an accountant to assist in the review of evidence and documents.

Business owners and management cannot afford not to be aware of fraud indicators and assess the associated risks within their own organizations. Awareness of who puts your organization at risk, review of trends, and simple monitoring tasks can assist in preventing fraud losses, which can create significant, unplanned costs for an organization.

Julie Quink, CPA is the managing principal of Burkhart, Pizzanelli, P.C., specializing in the accounting and consulting aspects of the practice. She is also a certified fraud examiner.

Accounting and Tax Planning Sections

A Time to Plan

taxplanningbw1117a

It’s never a bad time for companies to assess their tax situation and plan ahead, but with the end of 2017 approaching — and plenty of uncertainty over potential tax reform clouding the picture — it’s an especially good moment to start formulating a strategy to save tax dollars down the line. Here’s a checklist of actions based on current tax rules that may help businesses do just that.

By Kris Houghton, CPA

Taxes and the possibility of tax reform have been in the news so frequently, many are just tuned out on the subject. However, with year-end approaching, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next.

Kristina Drzal-Houghton

Kristina Drzal-Houghton

For many years, experts have suggested the approach of deferring income until next year and accelerating deductions into this year to minimize taxes. This time-honored approach could turn out to be even more valuable this year if Congress succeeds in enacting tax reform that reduces business tax rates beginning next year in exchange for slimmed-down deductions.

Regardless of whether tax reform is enacted, deferring income also may help you minimize or avoid AGI-based phaseouts of various tax breaks that are applicable for 2017. Except in general terms, I will refrain from comparing the current tax laws to proposed legislation since its enactment in its current form is very speculative.

Regardless of whether tax reform is enacted, deferring income also may help you minimize or avoid AGI-based phaseouts of various tax breaks that are applicable for 2017.”

The following is a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end.

Year-end Tax-planning Moves for Businesses and Business Owners

• Businesses should consider making expenditures that qualify for the business-property-expensing option.

For tax years beginning in 2017, the expensing limit is $510,000, and the investment-ceiling limit is $2,030,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, air-conditioning and heating units, and qualified real property-qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and medium-sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment.

What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it), regardless of how long the property is held during the year, can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.

• Businesses should also consider making expenditures that qualify for 50% bonus first-year depreciation if bought and placed in service this year (the bonus percentage declines to 40% next year). The bonus-depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2017.

• Businesses may be able to take advantage of the ‘de minimis safe-harbor election’ (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies. To qualify for the election, the cost of an item of property can’t exceed $5,000 if the taxpayer has a certified audited financial statement along with an independent CPA’s report. Otherwise, the cost of an item of property can’t exceed $2,500.

• Businesses contemplating large equipment purchases also should keep a close eye on the tax-reform plan being considered by Congress. The current version contemplates immediate expensing — with no set dollar limit — of all depreciable asset (other than building) investments made after Sept. 27, 2017, for a period of at least five years. This would be a major incentive for some businesses to make large purchases of equipment in late 2017.

• A corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. This could certainly be the case if Congress succeeds in dramatically reducing the corporate tax rate, beginning next year.

• A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small-corporation AMT exemption for 2017. Note that there is never a reason to accelerate income for purposes of the small-corporation AMT exemption because, if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

• A corporation (other than a ‘large’ corporation) that anticipates a small net operating loss for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.

• If your business qualifies for the domestic production activities deduction (DPAD) for its 2017 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2017 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic-production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2017, even if the business has a fiscal year. Keep in mind that the DPAD would be abolished under the tax-reform plan currently before Congress.

Year-End Tax-planning Moves for Individuals

• Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

• The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).

Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed individuals must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000.

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable to discuss year-end trades with a qualified advisor.

• Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy could enable you to claim larger deductions, credits, and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher-education tax credits, and deductions for student-loan interest. Postponing income is also desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that, in some cases, it may pay to actually accelerate income into 2017.

• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2017.

• It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way. This could cut as well as defer your tax if Congress reduces tax rates beginning in 2018.

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don’t pay your credit-card bill until after the end of the year.

• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017 if you won’t be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.

• Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal-exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.

• You may be able to save taxes by applying a bunching strategy to pull ‘miscellaneous’ itemized deductions, medical expenses, and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.

Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70½, the first distribution calendar year is the year in which the IRA owner attains age 70½. Thus, if you turn age 70½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018 — the amount required for 2017 plus the amount required for 2018.

Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income-tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.

• Make gifts sheltered by the annual gift-tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income-tax brackets who are not subject to the kiddie tax.

• If you were affected by Hurricane Harvey, Irma, or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty-loss rules and eased access to your retirement funds. In addition, qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas aren’t subject to the usual charitable deduction limitations.

These are just some of the year-end steps that can be taken to save taxes. Consider meeting your tax advisor to discuss your unique tax situation so they can tailor a plan that will work best for you.


Kristina Drzal-Houghton, CPA, MST is the partner in charge of Taxation at Holyoke-based Meyers Brothers Kalicka, P.C.: (413) 536-8510.

Accounting and Tax Planning Sections

Tax Incentives for Business Owners

By Brenden Healy, CPA

Brenden Healy, CPA

Brenden Healy, CPA

Whether we like it or not, taxes are a part of any business strategy. From the federal level on down, tax obligations go side-by-side with running a business. And while the economy is getting better for much of the country, business owners need to continue to improve their bottom line. One good way to strengthen business cash flow is by taking advantage of tax credits or tax incentives. Business owners sometimes do not harvest these opportunities, most often because they don’t know about all the options available to them or because they don’t fully understand the requirements.

Capturing these benefits requires knowing to look for them, which can be an issue in the diverse tax rules of the IRS or state taxing authorities. Here are some tax opportunities that every business owner should know about:

• Research and Development Tax Credit: This credit was introduced as an incentive to encourage new innovation in the U.S., but remains one of the most overlooked tax opportunities out there. There’s a lot of misconception that a research-driven credit must be limited to modern, large tech firms that are putting out new products. However, the purpose of this credit is to fuel innovation and development, which is relevant to a variety of industries, of all sizes. Recent changes in IRS regulations have opened up this tax credit to many industries. Manufacturing, investment-management services, software development, and even construction are major industries that can take advantage of this tax-savings opportunity, but it can be applied to other industries in certain scenarios.

• Export Sales: The IRS allows companies that produce goods in the U.S. and then export them outside the border to take advantage of a reduced tax rate for some of the profits relating to those export sales. This is accomplished by converting the business income related to the exports into long-term capital-gain income, which is usually taxed at about half the normal business tax rate.

• Write-Off of Asset Purchases: This incentive is one of the most beneficial ones for small businesses. The IRS continues to allow generous write-offs for purchasing equipment, machines, computers, etc. through the Section 179 tax-expensing election with a 2017 deduction limit of about $500,000, or the 50% ‘bonus’ depreciation deduction, which could be used after that spending cap is reached.

• New IRS Capitalization-policy Rules: Just by making a special election on the tax return, a small business can adopt a policy of expensing items purchased during the year, up to $2,500 for each item. As an example, if a business buys 10 computers for $1,500 each, it could expense the full $15,000 of computers under this capitalization policy rule.

• Roof Repairs and Other Building Maintenance Costs: The IRS is also allowing real-estate owners to take advantage of writeoffs relating to building maintenance items. Under new IRS rules, certain roof repairs and other building maintenance items can be expensed in the year they are completed, instead of capitalizing those costs and depreciating them over a 39-year period of time, which was the old requirement.

• ‘Segregation’ of Building Costs for Tax Expensing: When a business owner buys a new building or makes significant improvements to a building, there can be ways to expense those costs faster than the normal, 39-year depreciation life that the tax law allows. By identifying certain costs such as non-structural items, wall coverings, or specialty lighting, the IRS allows the building owner to expense these costs at a faster rate. Thus, performing a ‘cost-segregation study’ can create large tax writeoffs up front instead of waiting 39 years to recover the investment.

• Compensation and Retirement Planning: The IRS also allows business owners to put away large amounts towards their retirement as well as the retirement of key employees of the business. By properly designing a compensation strategy and deferred-compensation planning options, business owners can take care of their key employees while saving tax money.

Leveraging tax incentives can greatly help buffer a company’s bottom line, but more often than not, business owners don’t know what’s available to them. It’s crucial that business owners have open conversations with their accountant about the work of the company to see if there are opportunities available. While these programs can be complex and difficult to navigate, they can save a business a significant amount of money.


Brenden Healy, CPA, is a partner at Whittlesey with significant experience in consulting with business owners to identify tax incentives and strategic planning for their future.

Accounting and Tax Planning Sections

A Different Kind of Number Crunching

sixsigmadpart3Since its introduction more than 30 years ago, the data-driven process-improvement methodology known as Six Sigma has been most closely associated with the manufacturing sector. But, as recent initiatives undertaken by the accounting firm Meyers Brothers Kalicka clearly show, this ‘lean’ concept can be utilized by companies in any business sector to improve efficiency and buy employees time — literally.

Melyssa Brown joked that when she earned her green belt in Six Sigma last year, she was disappointed when all that arrived in the mail confirming that accomplishment was a piece of paper, a certificate.

“I was thinking, hoping that maybe there would actually be a green belt — I could use an accessory like that,” she told BusinessWest, tongue firmly planted in cheek, adding quickly that just about everything else about Meyers Brothers Kalicka’s deep dive into this data-driven process-improvement methodology has been about what she and others at the Holyoke-based accounting firm expected.

And then some.

Our interaction with the client is better, and our delivery of services to the client is better. And internally, it has put everyone on the same page; it’s put everyone together behind a commitment to move forward and not stand still, because you can’t grow that way.”

Indeed, they were expecting that incorporation of this lean, quality-control program, developed by Motorola in 1986 and popular within the manufacturing sector, would be intense, time-consuming, and somewhat difficult because it constituted a significant change in how things were done.

They were right.

But they also expected it would achieve real results and provide powerful evidence that Six Sigma can work in the service sector as well as it does in the realm of manufacturing. And they were right again.

“Our interaction with the client is better, and our delivery of services to the client is better,” Brown, a senior manager in the auditing department at MBK, said of the net gains from the firm’s investments in Six Sigma. “And internally, it has put everyone on the same page; it’s put everyone together behind a commitment to move forward and not stand still, because you can’t grow that way.”

Elaborating, Brown said that, through Six Sigma, the company has been able to chart how the all-important time of partners, associates, and others at the firm is spent, with a critical eye toward making processes more efficient, thus essentially providing personnel with more time with which to better serve clients and serve more of them, critical elements in any company’s efforts to increase profits and improve market share.

Getting more specific, Brown said MBK has undertaken a few Six Sigma projects, both involving client interaction, the time spent accumulating needed information for tax and audit work, and efforts to bring more efficiency to those efforts.

Melyssa Brown

Melyssa Brown says MBK’s Six Sigma projects have effectively given employees at the firm more of that most precious commodity — time.

“To do audit and tax work, you clearly need to get information from the client — we need some numbers to work with,” she explained. “It comes down to, when you have that interaction, how it’s done, and how it’s followed up.”

In short, there were inefficiencies with all those steps in the process, she went on, and, therefore, some diligent work was undertaken to mitigate them.

“From these processes, we’ve put structures in place to help us monitor and conduct better interactions with the client, because that’s what’s important to them — and us,” she went on, adding that the goal was and is to make these interactions easier for the client and more productive for the firm.

Fast-forwarding a little, Brown said the firm has created an online portal, or drop box, if you will, for client information that can be accessed by all those servicing that particular client. This innovation has significantly reduced the time, trouble, and anxiety involved with collecting and accessing that data, as will be explained in more detail later.

As noted, the company’s experience shows how Six Sigma can be applied to businesses not traditionally associated with this methodology, said Brown, who was a member of a panel that delivered that very message to assembled members of the Employers Assoc. of the NorthEast several weeks ago.

“Everyone has a back office,” Brown explained. “And while people think of Six Sigma in terms of manufacturing processes, those back-office functions can be made more efficient as well.”

For this issue and its focus on accounting and tax planning, BusinessWest departs from more traditional discussions about taxes, audits, legislation, and compliance, and takes a hard look at a different form of number crunching.

Time Is of the Essence

Brown told BusinessWest she became the company’s point person on Six Sigma … well, because each senior manager at the firm has a ‘niche,’ as she called it, and at that moment in time, she didn’t have one.

So Six Sigma became her niche.

Backing up a little, Brown said she and others at the firm were in attendance for a presentation on Six Sigma presented by a consultant and hosted by CPA America, a trade organization the firm has belonged to for some time. That seminar came about just as the firm was aggressively exploring methods for achieving process improvement, thus bolstering the bottom line.

“We had tried several other ways to become better at improving efficiency,” she explained. “But we needed that outside person’s view of what the best course of action might be.”

Brown underwent green-belt training, which introduces an overview of the key concepts, in Ohio, and took on a project involving one of her clients to earn that aforementioned certificate in 2016.

Summing up what’s been happening at the firm since, Brown said MBK has essentially embraced ‘lean,’ a concept that, as noted earlier, is usually associated with manufacturing, but can be applied to virtually any business sector.

Lean is a transferable and systematic approach for discovering, analyzing, prioritizing, and correcting time-wasting activities that exist in business processes, Brown told BusinessWest — and her audience at the EANE roundtable in May.

Elaborating, she said ‘lean’ is a mindset, or a culture, to reduce waste, something that exists in every operation and can be reduced — but only, in most all cases, through careful analysis of data and development of new ways to do business.

And, as Brown noted, this approach can generate positive results not only on the factory floor, but also in back-room operations such as billing and accounts receivable, accounts payable, payroll, monthly reconciliations, and financial reporting.

With that, she returned to the projects undertaken by MBK, and specifically that online portal she discussed. It came about through the Six Sigma process of analyzing a specific process or method of doing business, taking it apart, and putting it back together again — without the wasted steps, energy, time, and profit.

To get her points across, she undertook an exercise in ‘before and after.’

“Before, we would send a list of needed information via e-mail, in Word or Excel, and the client would either send us documents via e-mail, save it to a jump drive, or find some other way to get it to us,” she explained. “But it was never really clear if we had a certain piece; we would say, ‘do we have an accounts-receivable list?’ and they would say, ‘yes, you have it,’ and someone here would say, ‘I don’t think I do.’”

Now, with the online portal, such exchanges are a thing of the past, she went on, and so is the time lost looking for information or trying to verify whether the firm has it or not.

The bottom line, as they say in this business, is that the firm can now serve clients better and more efficiently, and use the time saved to serve other clients or solicit new ones.

And all of these things can be measured.

“In the end, our goal in this is to issue financial statements to clients earlier or get tax returns done and out to the client sooner than we used to, and we can measure this,” she explained.

Meanwhile, the system improvements are enabling individual service providers to make better use of their time, she went on, adding that, in many cases, it is now possible to do some audit-preparation work in October or November, thus creating more time during the extremely hectic months and weeks prior to April 15.

“You’re getting a head start on the client,” she noted, “which frees us up during tax season, when we’re all a little stressed.”

The end result, she said, is the creation of more time.

“Before, we may have thought that we needed to hire more people to get the work done,” she noted. “Now, we can get the same amount of work done with fewer hours and the same amount of people — or more work, because you’re taking on new projects with the time that you’ve saved.”

Looking forward, Brown said the firm is looking at other ways to put Six Sigma to use.

Indeed, after projects involving the tax and audit functions, the company is looking at possible initiatives involving billing and administration and making them more efficient.

“There are lots of opportunities — you just have to crack open the shell,” said Brown, who told BusinessWest that this is her general advice to all those who own or manage service businesses.

She noted that too many businesses in this sector are not embracing Six Sigma, in part because they don’t fully understand how it can be applied to their sector. But once educated to the contrary, many are put off by what amounts to a considerable commitment to this culture in terms of time, expense (usually, a consultant must be hired and new technology acquired), and needed buy-in from everyone at the company.

Those willing to make such a commitment, she said, should take the dive.

“This can’t be the flavor of the month,” she explained. “The tone at the top has be, ‘we’re going to make this work — this is our new way of doing business and operating.’”

It All Adds Up

As noted, Brown doesn’t have an actual green belt, like the ones awarded to those engaged in the martial arts.

But through the firm’s implementation of Six Sigma principles, she and others at MBK have something far more meaningful — additional time, the most precious commodity that exists in business today.

It came about through hard work and a deep dive into processes and ways of doing business, with an eye toward continuous improvement.

Historically, such words, phrases, actions, and, yes, results have generally been restricted to the world of manufacturing. But as Brown noted and MBK has shown, any service business can generate the same types of positive outcomes.

They just have to crack open the shell.

George O’Brien can be reached at [email protected]