Accounting Archives

2018 Tax Filing Considerations for Contractors

February 18, 2019 By JAK + CO.

Andrew F. Knutson - Tax Advisor St. Paul — Andy Knutson, CPA

For most contractors and construction-related businesses—particularly for those structured as pass-through entities—the 2018 tax season is anything but business as usual. With the Tax Cuts and Jobs Act (TCJA) on the books, there are several tax law changes that could impact your tax filing this year. Here are a few things to consider as you prepare your return.

Do you qualify for the qualified business income deduction?

One of the changes brought about by the TCJA was the qualified business income (QBI) deduction for pass-through entities, such as partnerships and S corporations. Only certain types of businesses qualify for the deduction; thankfully, most general contractors and subcontractors meet the requirements.

There are many phases to the calculation, but in general it is equal to 20 percent of the lesser of your flow-through business income or your taxable income. If a business owner’s taxable income exceeds $207,500 (or $415,000 if married filing jointly) you must also factor in wages paid by the company and the original cost of equipment and property owned by the business. Please talk to your tax advisor about this deduction, as it is highly complicated and the rules surrounding it were only recently finalized.

If you do qualify for the 20 percent deduction, consider this: The TCJA also limited the state income tax deduction and eliminated the production deduction, both of which were approximately 9 percent deductions (for high-income Minnesota taxpayers). So, although 20 percent sounds really great, in reality it’s only a 2 percent sway.

Should you change your accounting method?

Thanks to the TCJA, businesses with less than an average of $25 million in annual revenue over the last three years can now file tax returns on a cash basis. Previously, the threshold was $10 million ($5 million for C corporations). So, if you are a $10-million-a-year contractor who has been “stuck” on the accrual method of accounting, you now have an option to switch to cash.

Will you make the switch? A decision about whether or not to change your accounting method should never be made in haste. There are pros and cons to both methods, so it’s important to talk to your tax advisor to determine which is best for your business.

One more thing: The new $25 million threshold also applies to the use of percentage of completion for long-term contracts. This means you could have additional options for how you account for these, too.

Are you required to do a lookback interest calculation?

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Previously, businesses that had more than $10 million in average annual revenue over the prior three years were required to do a lookback interest calculation. Now, this threshold has increased to an average annual revenue of $25 million or more over the last three years. For many contractors, this provides even more of an incentive to be conservative in estimates, which is not only good practice but also desired by third-party users of financial statements.

Will you expense incidental inventory?

One of the new rules ushered in by the TCJA is the ability to elect to expense up to $2,500 of incidental inventory. If you make this election, it must be reflected on your internal books and records. The election may not be appropriate if you’re using GAAP financial statements.

Partner with an expert to file your 2018 return.

When it comes to tax filings, much has changed since last year. It’s important to not only be aware of the new deductions, rules, and thresholds but also how they could impact your tax burden in 2018 and beyond. If you haven’t already, ask your tax advisor to help you understand your options, so you can make the right filing for your business.

3 Must-Have Professionals for Your Estate Planning Team

January 25, 2019 By JAK + CO.

By Cindy McLagan, EA

Estate planning is the process of determining what will happen to your funds, assets, and general finances after your death. While it may not be the most pleasant thing to think about, JAK estate planning services helps ensure your wishes are carried out in the future.

A wise first step is to assemble a team of professionals who can help you through the estate planning process. Here are three must-have professionals for your estate planning team.

Financial advisor

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It’s likely your family may already have a relationship with a financial advisor. In the context of estate planning, your financial advisor’s role is to recommend and fund your investment, trust, and retirement accounts, as well as to assist in the proper titling of any non-retirement accounts you might own. Your financial advisor will also make sure the beneficiaries and secondary beneficiaries named on your retirement accounts are updated—a critical but often overlooked step. Often, your financial advisor can assist with life insurance, too.

A savvy financial advisor will understand not only how to manage your estate’s finances but also the importance of working closely with the following two professionals.

Estate planning attorney

Your estate planning attorney can create and prepare a will and a trust according to your wishes. In addition, this professional can draw up your durable power of attorney for your health care, verify your property titles, and make sure that assets you own in other states are properly titled. If you own a business, your estate planning attorney can create a legal document that ensures a plan for the succession of your business.

Finally, working with an estate planning attorney to create a will or trust can help your family avoid the hassle of probate court, which is a court that deals with the property and debts of the deceased. But if probate were to become necessary, your estate planning attorney can prepare and file all of the necessary court documents, relieving your executor of this often-stressful task.

Tax professional

Needless to say, the U.S. tax system is very complex, especially when it comes to estate taxes. Although the federal estate tax exemption in 2019 is $11.4 million, many states, including Minnesota, have much smaller exemptions, which could trigger the need for your family to file an estate return. The tax professionals at JAK can assist with this as well as the interpretation of and compliance with tax laws.

A qualified tax professional is able to direct you in a tax efficient manner to accomplish your goals. They also understand that estate planning is about much more than taxes and can use their experience to direct you and your family.

Tax professionals are also one of the critical professionals who will guide the personal representative or executor of an estate with closing responsibilities such as obtaining a federal ID number, setting up an estate account, tax filings and paying the final distributions to beneficiaries.

It’s never too early to build your estate planning team.

If you haven’t started the estate planning process, consider reaching out to a financial advisor, an estate planning attorney, and a tax professional as soon as possible. Although their roles may overlap in some areas, it’s in your best interest to enlist all three in order to get the most accurate and up-to-date information and advice. Working together and with you, these professionals can help to clarify and facilitate your estate planning wishes, giving you and your family peace of mind for the future.

If you have questions about estate tax planning, feel free to give us a call. Our Twin Cities based estate planning specialists are here to answer any questions you have. We also work closely with many financial advisors and estate planning attorneys and would be happy to provide a referral if needed.

Meet Our Newest Accountants

December 19, 2018 By JAK + CO.

There’s a lot going on at JAK as we head into a new year. One item on our to-do list we’re particularly excited about is to “introduce our newest staff accountants.” Yes, that’s right—within the past few months, we’ve added three new members to our tax and accounting team. Read on to get acquainted with Scott Litchy, Sara Tomee, and Ricky Herrera.

Scott Litchy | Staff Accountant | JAK + Co. — **Scott Litchy**

Scott is a former collegiate baseball player who’s always been one of those “numbers guys.” Fun fact: he used to love helping his dad with the family’s taxes, even as a youngster. Since joining JAK, Scott has felt right at home helping clients with the numbers behind their businesses. When he’s not playing amateur baseball or watching sports, he loves being outdoors with family and friends.

Sara Tomee | Staff Accountant | JAK + Co. — **Sara Tomee**

Sara describes accounting as “the language of business.” She sees her role as a translator—one who can help clients better understand the financial aspects of their businesses. Born in Thailand, Sara now considers Minnesota home. She particularly enjoys the many opportunities for biking,camping, and canoeing the Land of 10,000 Lakes provides.

Ricky Herrera | Staff Accountant | JAK + Co. — **Ricky Herrera**

A Los Angeles native, Ricky is known for his sunny disposition and glass-half-full approach—in addition to his accounting skills. If a business owner is grappling with a tax or business snafu, he’s quick to find a solution. Inspired by their recent West-to-Midwest road trip, he and his girlfriend love seeing new sights, often with five terrier mixes in tow!

At your service

Scott, Sara, Ricky and the entire JAK team would love to help you make 2019 a year for the books. To learn more about our Twin Cities based CPA firm, our team, or our work with individuals and businesses like yours, please give us a call today.

Supporting you with a strong tax and accounting team
As you well know, hiring talented people is critical to delivering exceptional service. We’re excited the skills and experience each of these individuals bring to our clients. As you look ahead into 2019, know there’s a strong team at JAK ready to support you. Whether it’s complying with the new revenue recognition standard, or maintaining your job schedule ,or understanding tax reform, we can help you spend less time dealing with the numbers—and more time focused on projects.

Why Maintaining Your Job Schedule Is Good Business

December 12, 2018 By JAK + CO.

Jason J. Loven - CPA Firm Minneapolis — By Jason J. Loven

A job schedule—also known as work-in-progress or WIP schedule—is a subsidiary ledger that tracks actual costs and billings per project. Ideally, your job schedule should be updated and reconciled with the general ledger at least once a month. But in the fast-paced contracting world, it can be tempting to fall behind on these tasks.

Unfortunately, not maintaining your job schedule can have consequences that stretch beyond a single project. Here are three reasons why maintaining your job schedule on a monthly basis is simply good business.

1. Errors and instances of over/under billing on your job schedule can affect your gross profit.

Reconciling your job schedules with your general ledger each month is a smart way to identify errors on your job schedule or general ledger. Common mistakes include posting direct job costs to an indirect or overhead account, posting costs to the wrong job, or forgetting to include costs associated with small miscellaneous jobs, such as callback, carryover, and warranty work in the cost of sales. It also allows you to review over/under billings and their causes. For instance, is an under billing an indication the job isn’t going well, or is it that your billings aren’t being sent out in a timely manner? Regularly maintaining your job schedule can help you get to the bottom of it and make billing adjustments if needed. Without the proper adjustments, your gross profit and bottom line are likely to be inaccurate.

2. Project managers rely on job schedules to deliver on-time, on-budget work.

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Your job schedule is a critical project management tool. An updated, accurate job schedule allows a project manager to consistently monitor and track a job’s profitability—key to a successful delivery. Job schedules also provide a way to continually compare a job’s actual costs to estimated costs, which is, of course, valuable information to have when bidding out future jobs.

3. Outside users expect to see accurate job schedules.

Job schedules are typically laid out in an Excel spreadsheet and should include columns for year-to-date (YTD) billings and costs and prior-year (PY) billings and costs. If you’re not updating your job schedule and reconciling it with your revenue and costs of sales in your general ledger, it’s nearly impossible to verify that you’ve accounted for everything. This could lead to inaccurate billings adjustments and misleading information. Whether your outside users are internal executives or external stakeholders or sureties, handing over an inaccurate job schedule won’t put you in the best light.

Job schedule maintenance: A good business practice to start today.

Updating your job schedule and reconciling it with your general ledger each month can help you get an accurate picture of your gross profits and better manage your cash flow. And that’s good business! We understand, however, that worrying about your job schedule can be overwhelming, especially if you’ve already fallen behind. If you’re unsure of how to best maintain your job schedule or would like recommendations for going forward, please know the Twin Cities CPA firm of JAK is here to help.

Capital Lease or Operating Lease? 4 Questions to Ask

November 12, 2018 By JAK + CO.

By Stephanie Loiland, CPA

Many companies choose to lease assets for a period of time instead of buying them outright. If you’re in this situation, it’s important to know whether you’re dealing with a capital lease or an operating lease. That’s because the type of lease will affect how you record it—and the payments you make to it—in your books.

A few additional differences between capital and operating leases to consider: Capital leases affect your balance sheet, which means they can also impact your covenants and ratio calculations. Also, capital leases allow the leased asset to be capitalized. If an asset is capitalized, it could possibly qualify for an accelerated depreciation option such as bonus depreciation or Section 179, providing you with a larger deduction in the year you sign the lease. Operating leases, on the other hand, require less administrative time to account for them and do not affect the balance sheet.

Not sure if a lease is capital or operating? Here are four questions that can help you determine its classification. If you answer “yes” to any of the questions, the lease is a capital lease. If you answer “no,” it’s an operating lease.

#1 – Is there a transfer of ownership?

If the lease states that your company retains ownership of the leased asset at the end of the lease, it’s a capital lease. In this case, the lease acts as a loan for you to purchase the leased asset.

#2 – Is there a bargain purchase option?

Many leases contain an option to buy out the leased asset at the end of the lease. If this option is less than the expected fair market value of the asset at the end of the lease, it represents a bargain purchase option. Leases that include a bargain purchase option are capital leases. The most common example of this type of lease is a $1 ending purchase option.

#3 – Does the lease period equal or exceed 75 percent of the asset’s useful life?

If the lease in question does not contain #1 and #2 above, the length of the lease is compared to the economic life of the leased asset. If the lease period is equal to or exceeds 75 percent of the leased asset’s useful life, it’s a capital lease. Your company’s capitalization policy should provide guidance on the length of life used for the type of asset being leased.

#4 – Does the present value of the minimum lease payments exceed 90 percent of the asset’s fair market value?

If the lease does not contain any of the above features, the present value of the minimum lease payments should be compared to the fair market value of the leased asset. The present value of the lease payments can be calculated by inputting the total amount of lease payments to be paid over the life of the lease into a present value calculator. The fair market value of the leased asset is equal to its cash price. If the calculated present value of the lease payments is equal to or exceeds 90 percent of the asset’s fair market value, the lease is a capital lease.

What to know about recording the lease and lease payments

Operating leases are simple to record. The payments are recorded each month as an expense in a lease expense account; no asset or liability is recognized on the balance sheet.

Capital leases, however, require the value of the leased asset to be capitalized and recorded as a fixed asset on the balance sheet. This fixed asset is depreciated over time like any other fixed asset purchase. The related lease obligation is also recorded as a liability on the balance sheet and payments are applied to the obligation with a portion segregated for interest expense.

Lease classifications will change in the coming year—stay tuned!

A new lease standard effective for years beginning after December 15, 2019, will change the classification of leases. As this effective date approaches, the small business CPA firm of JAK, will provide more information on what you can expect. In the meantime, if you have questions about lease classifications or the new standard mentioned here, please don’t hesitate to call.