How to Take Your Firm to the Next Level



If you’re an accountant, what’s the HABU (Highest And Best Use) of your time? Our advice: Don’t get bogged down by mundane tasks—it will stand in the way of tackling your true priorities. 

 

Taking your firm to the next level doesn’t have to be hard, according to a recent article by Clayton R. Weir.Technology can turn the trick.

 

When it comes to the digital revolution, the accounting profession is late to the party. While fintech has swept the financial services landscape, CPA firms are practically stuck in the floppy-disk stage. Unfortunately, accountants’ workloads have continued to expand, and the lack of automation is hindering efficiency.

 

The first step out of this hole is to reimagine your technology infrastructure to free up your accounting teams, so they can focus on vital, strategic projects—and not get tripped up by humdrum tactical tasks. Here are some easy first steps to take. 

 

Next Stop: The Cloud!

 

It’s time to ditch your on-premise infrastructure. Sure, it may have been necessary in the past, but now? Especially with the pandemic, remote work is crucial. Today your teams need to easily access information, with streamlined usability. Cloud computing can break down traditional organizational silos and increase collaboration across your entire business. Accountants can collaborate more closely with colleagues in other business branches, yielding much more inclusive decision-making. Did you know that 70 percent of European businesses are pushing for greater cloud adoption?

 

It’s API Time!

 

An API is an application programming interface, which connects computers or computer programs. When your firm adopts one, your teams will be amazed by their new-found power to access and share the data and insights they need to make smart decisions. They’ll reach a whole new level of efficiency where their products and services can communicate with one another and be included in your firm’s daily workflow. 

 

Let’s Automate!

 

Accountants are forever drowning in boring, repetitive tasks (did somebody say bookkeeping?) instead of tackling true priorities—such as making the all-important leap from compliance to advisory, which is vital to the continued health and wellbeing of the accounting profession. As a matter of fact, 58% of accountants state that automation boosts efficiency and productivity, because it delivers access to the real-time data necessary to deliver greater efficiency and improved performance.

Although it seems like magic, it’s technology. If your firm wants to step up to the next level, it’s not hard. And when you do embrace technology, you’ll wonder why you didn’t do it long before. It will immediately pay off with more efficient workflows and tighter teams.




Two-Part Series – “The Art of the Real Estate Tax Deduction”

real estate tax deduction

Recently Julio Gonzalez, Founder and CEO of Engineered Tax Services, wrote a comprehensive two-part series of articles about the art of the real estate tax deduction that was published by Tax Practice News. Both parts cover tax tools and strategies for real estate owners and investors to maximize their deductions. 

Julio shares his secrets collected over 20-plus years of helping real estate professionals reduce their taxes, boost their cash flow, and strengthen their financial position. As he declares in the opening:

 “How can you use real estate to build wealth? Most people don’t know it, but owning real estate can be a major step forward in creating and maintaining your personal wealth. You only have to know how to master the art of the real estate deduction. As an accountant, I’ve spent over 20 years involved in commercial real estate, and I have several valuable ideas I’d like to share with you.”

real estate tax deduction

Want to learn more? Part One covers:

  1. Writing off Your Depreciation
  2. The Power of Cost Segregation –

    Did you know? “If you own a property with a class life of 27 years, you sometimes get a sizeable bonus depreciation in year one. Bonus depreciation is allowable on any class life equal to or less than 20 years. As a result, by reallocating some of the building’s assets to a five- or 15-year lifespan, they would qualify for bonus depreciation. The 2017 Tax Cuts and Jobs Act allows for you to take an immediate deduction for the full costs in the first year. Think of it like an advance on a paycheck. Instead of waiting five or 15 years for the depreciation, you can take it all in year one.”

  3. Passive vs. Non-Passive Rule

Part Two of “The Art of the Real Estate Tax Deduction” covers:

  1. Basis Issues
  2. At-Risk Rules
  3. Excess Business Loss
  4. The Benefits of Real Estate Deductions –

    Did you know? “It almost sounds too good to be true—but it is. If you buy a property for $100,000, put down $10,000, get back $30,000 in bonus depreciation, and then collect rental fees on the property, the government is essentially buying that property for you. You get your $10,000 back, and your financial benefit is in excess of your outlay.” 

Both Part 1 and Part 2 were originally published by Tax Practice News. Below you will find a link to both parts of this informative two-part series every real estate investor should read! 

How Can Entertainers Save Money On Taxes?

Entertainers Save Money on Taxes

An interesting thing happened in Hollywood during the pandemic. Many stars moved out of Los Angeles and migrated to states like Texas (such as radio personality Joe Rogan and the former Dawson’s Creek star James Van der Beek).  In news stories, they usually stated it was to get away from the rat race and general craziness of L.A. (“To get back to basics,” they declared publicly. “To return to a simpler way of life. You know, to be with real people for a change.”) 

But there may have been another, more prosaic reason for their move: states like Florida, Nevada, Tennessee, and Texas don’t impose income tax, compared to California’s 13.3% income tax rate.

Yes, entertainers are different from you and me, but maybe not for the reasons you think: they can have more complex tax problems, especially when they work in more than one state. By necessity, many entertainment professionals, such as touring musicians, actors, TV anchors, athletes, and film crew members, have to work in many states and cities around the United States—and that means they have to pay a slew of state and local taxes (in addition to federal taxes). That entails filing non-resident tax returns, reporting income to each state, and paying taxes.

The Challenge of Out-of-State Taxes: Keep Records!

Usually, we owe taxes in our home state, where we spend most of our time; it’s where we own our home, register our car, or vote. If you also work in another state and have to pay its taxes, some states allow workers to avoid double taxation via reciprocal agreements. But there’s a catch. Let’s say you’re from New York but moved to Florida to escape taxes; yet you spend the majority of your time still in New York. Unfortunately, the tax man can easily catch you out by examining your credit card purchases. (Did you know that the IRS has its own Entertainment Audit Technique Guide?)

That’s why it’s crucial to keep records of all your out-of-state work if you’re a mobile entertainer; make a note of the number of days you spent in each state and municipality. You may also want to consider checking the “single” box on your employer’s tax form when you start a new job, even if you’re married; this will prevent additional taxes from being withheld from your paycheck.

And it gets more complicated. If you worked in the same state last year, you can avoid tax penalties by checking your previous tax return. If you withhold or make estimated tax payments equal to 100% of last year’s net income tax, you won’t trigger penalties. But what if you never worked in that state before? Then you have to download a blank tax return from the state’s website and try to estimate your taxes, based on your projected earnings for the year. 

And inter-state taxes can be knotty. If you’re a member of a California-based crew and you have to relocate to Georgia for a new shoot, you must withhold Georgia taxes and file a non-resident return.  But you’ll get a credit for the taxes paid on your California return. In this case, working out of state doesn’t damage your tax situation, because Georgia’s tax rate is lower.

Yet if you’re a member of a Georgia-based crew who must move to California for a production, you may end up with a bigger tax bill, because you can’t claim a full credit for higher California taxes paid on your Georgia return.

Let’s Not Forget City Taxes

Now you can see why it can be helpful to consult a tax professional in these matters. The complexity increases if we turn our attention to city taxes. According to the Tax Foundation, almost 5,000 jurisdictions impose local taxes across the U.S., with many in Ohio and Pennsylvania. Several major cities have mandated local taxes, such as Detroit, New York, Philadelphia, San Francisco, and St. Louis. For instance, Philadelphia currently charges a 3.4481% wage tax for non-residents. And although many states have arranged it so taxpayers don’t get hit by double taxes, the same doesn’t apply to inter-city taxes.

Seek Professional Tax Advice

As you can gather from what I’ve said, complying with all of the varying levels of U.S. tax law isn’t simple—rules vary from state to state and city to city, and traveling entertainers are expected to maintain strict records of how much might be owed to whom. That’s where it can be helpful to consult a tax professional well-versed in these complex edicts. If you’re wondering how I happen to know about such matters, it’s because I run a business called Engineered Tax Exchange, which specializes in helping celebrities, athletes, and entertainers make informed tax decisions for future financial planning. 

But I should add that first and foremost, it’s most important to choose the tax advisor you feel most comfortable with.  And if you happen to be a traveling entertainer, thank you for giving your best to us every day to entertain us and raise our spirits!

When Gutting, Don’t Trash the Interior—Donate It to Charity for a Substantial Tax Break

donate tax break

Waste is a terrible thing. And it’s a serious issue when too many people in the building and construction industry don’t realize that when they gut a building, they just shouldn’t dump all the interior contents in a landfill to compound toxicity—donate them to a charity like Habitat for Humanity for the use of others and get a sizeable tax break!

As a professional tax specialist, I’ve been involved in the building and construction industry for over 20 years, and let me inform you—it’s heartbreaking to see that so many builders are buying properties, tearing out the guts of the building, and sending the components to a landfill. This is an incredible waste. What they fail to realize is, they can donae these components to a deserving charity or organization. For example, Habitat for Humanity will be happy to come out to remove the sinks, floors, bathrooms, and other interior fittings and reuse them for homes they build. This is a much better alternative to sending all this material to a landfill, which simply hurts our country by damaging its environment. There are many other charities also willing to accept donations of these components (which I’ll go into later), which you can report to the IRS.

donate tax break

What Can You Donate When Renovating?

Habitat for Humanity lists eight items that it considers ideal for donation, but they should all be undamaged:

  1. Sinks, toilets, and bathtubs
  2. Cabinets
  3. Working appliances such as stoves, refrigerators, dishwashers, and washing machines: welcomed by Habitat for Humanity, home salvage shops, the Salvation Army, and Goodwill .
  4. Doors and windows
  5. Lumber
  6. Tiles and wood flooring
  7. Lighting fixtures: in high demand 
  8. Door handles and cabinet knobs1

The Growing Deconstruction Movement: Take It Apart

A fascinating 2016 Washington Post article highlighted a new development in the disposition of gutted building interiors—the expanding deconstruction movement in the United States. With deconstruction, a house is taken apart, piece by piece, down to the foundation. It’s been estimated that 85 to 90 percent of a house can be recycled or repurposed.2 If you’re the property owner, you can claim everything you remove from the house and donate to a qualified 501(c)3 charity as a donation at fair market value. 

According to Patrick Smith, president and chief executive of NoVaStar Appraisals in Fredericksburg, Va., if you’re an average taxpayer who pays out approximately 30 percent for both state and federal taxes, you could realize an actual cash value of $39,450 on a $131,500 tax deduction.3

Here comes the paradox: on the surface, it cost more to deconstruct a building’s interior than to simply gut it—but you more than recoup your losses with your tax deduction.  According to Marishane Stahl, co-owner of the custom home building company Stahl Homes in Vienna, VA, while it might take a week to demolish an average house and cost $8,000 to $11,000, it would take two weeks to deconstruct the same home at a cost up to $24,000. On top of that, appraisal services can cost from $1,500 to $3,500.4 (The appraisal should be undertaken by a qualified deconstruction appraiser, who is different from a standard real estate appraiser.)

But here’s the payoff. The Washington Post article cites the case study of a D.C.-area homeowner who decided to deconstruct an older home. But while her pre-reconstruction bill amounted to about $23,000, the fair value of her donated building materials was estimated to amount to between $120,000 to $140,000.

Who among us would not be willing to make a $23,000 investment to achieve a $120,000-$140,000 tax break?

Where Should I Donate?

You can donate building materials, architectural salvage, and tools to such organizations as the Habitat for Humanity ReStore, Community Forklift, and the Loading Dock; you have the option of either dropping off your donations or having them picked up. 

Also consider local salvage shops and salvage yards. You can check in your community for local deconstruction organizations (like the Recycled Building Network, or ReBuild, in Springfield, VA,), and they can direct you to a grateful recipient.

You can also place these unwanted items from gutted buildings on the street, so people who need them can easily collect them.

Why Should I Donate?

First off, there’s an obvious reason why you should donate the inside of a gutted building—enlightened self-interest. You can achieve major tax savings and greatly free up your cash flow.

But there’s another reason: doing good by doing well. Donating and deconstruction not only make superior business sense, but they also help our communities, they help our economy, and they help to preserve our environment.

For every job created by traditional demolition, deconstruction creates six to eight jobs.6 Diverting building waste from landfills also has a major, positive environment impact. Construction and demolition waste constitute approximately 20% – 40% of America’s solid waste stream; 90% of that amount is generated by demolition. In 2015, the U.S. alone generated 548 million tons of construction and demolition waste.7

And if you’ve ever watched a demolished building blow up, you know that an explosion of dust, solid particles, and other potentially hazardous materials are instantly released into the air.  (Think downtown Manhattan during 9/11.)  Deconstructing a building is much more beneficial for the environment because it eliminates the release of dangerous air pollution.

In the words of a great American, Benjamin Franklin: “Waste not, want not.” It’s almost a sin to throw out so much valuable material when a) it can prove such an economic benefit to others, b) it’s much better for our environment, and c) it can put substantial dollars in your pocket. Who can argue with those reasons?

References

What Employees Fringe Benefits Are Taxable?

fringe benefits

It’s a topic that has been in the news lately. Exactly what constitutes taxable fringe benefits for employees?Which are perfectly legal perks, and which are to be avoided?

First of all, what’s the definition of a fringe benefit?  Sometimes referred to as an employee benefit or perk, it’s a form of payment, which includes property, services, cash, or cash equivalent, in addition to payment for the performance of services (salary). Under the Internal Revenue Code, all income is taxable unless an exclusion applies. Some examples of excludable fringe benefits are health insurance, certain travel expenses, and certain educational assistance.1

fringe benefits

For example, it’s a fringe benefit if you let an employee drive a business vehicle to commute to and from work. But please note—this person who performs services for you doesn’t have to be your employee; they can work as an independent contractor. 2

In addition, a benefit may fall under the jurisdiction of more than one Internal Revenue Code section. For example, under Code Section 127, education expenses up to $5,250 may be excluded from tax. Under Code Section 132, education expenses exceeding $5,250 may be excluded. Even if someone other than the employee, such as a spouse or a child receives the benefit, the employee must be taxed for the benefit their employer provides on an employee’s behalf. 3

Generally, fringe benefits are included in an employee’s gross income, although there are some exceptions. These benefits are subject to income tax withholding and employment taxes. Fringe benefits include: 

Taxable fringe benefits include bonuses, company-provided vehicles, and group term life insurance (if coverage exceeds $50,000). 5

The IRS views most fringe benefits as taxable compensation; employees would report them exactly as they would their standard taxable wages, displayed in Form W-2 or Form 1099-MISC. 6

If a benefit is taxable, the employer must report it on Form W-2 as wages, and by and large, it’s subject to federal income tax withholding, Social Security, and Medicare taxes. But let’s say the employee’s wages aren’t normally subject to Social Security or Medicare taxes.  Let’s say the employee is covered by a qualifying public retirement system. Then these taxes wouldn’t apply to any fringe benefits the employee received.7 

For example, bonuses are always taxable, because they’re classified as income under Code Section 6. As I mentioned before, all income is taxable, unless an exclusion applies. For instance, because qualified health plan benefits are excludable under Code Section 105, they’re not listed on form W-2 in wages. 8 

How are taxable fringe benefits valued? They’re included in wages at their fair market value. If the employer’s cost to provide a benefit is less than the value to the employee, you should reduce a benefit’s taxable amount by any amount paid by or for the employee.9

What are nontaxable fringe benefits? They can include adoption assistance, on-premises meals and athletic facilities, disability insurance, health insurance, and educational assistance. In most instances, nontaxable fringe benefits are excluded from federal income tax withholding, Social Security, Medicare or federal unemployment tax (FUTA). Often there’s no need to report them on a W-2 form. But you must be aware of the conditions under which these benefits are deemed nontaxable, since they can vary on a case-by-case basis.10

This brings us to another topic—the subject of taxable fringe benefits is very complex, and sometimes special circumstances apply that wouldn’t occur to a layman. For that reason, I’d recommend consulting IRS guidelines, as well as a very proficient CPA who’d well-versed in this field, to avoid potential pitfalls. The IRS offers this very helpful webinar, in addition to this webpage, and this article is a good source for its detailed lists of taxable and nontaxable fringe benefits.

Save 20% of Your Payroll with Julio Gonzalez – Management Blueprint Podcast

management blueprint podcast

In this episode of the Management Blueprint Podcast, Julio Gonzalez, Founder and, CEO of Engineered Tax Services and I talk about tax engineering, tax incentives for small to medium-sized businesses, and work opportunity tax credits.

Being Engaged With Tax-Saving Strategies with Engineered Tax Services’ Julio Gonzalez

the thoughful entrepreneur podcast

Listen to Julio Gonzalez, Founder and, CEO of Engineered Tax Services discuss tax-saving strategies on The Thoughtful Entrepreneur Podcast.

Calling for IRS Guidance – Do Service Firms Qualify for R&D Tax Credits?

irs

There’s been a disturbing change in precedent as practiced by the IRS: IRS audits of research and development (R&D) tax credit claims by service providers, such as architecture and engineering (AE) companies, have become inconsistent over the last couple of years. In fact, IRS audit actions appear to be reversing the long-standing precedent for the type of activities that qualify for the credit. Up to now, service providers have qualified for the R&D credit as long as they satisfied a four-part criterion (outlined below).

First off, what is the R&D tax credit? It was established by law in 1981 to act as an incentive to spur U.S. research and economic competitiveness and made permanent in 2015. It remains critical to the growth of U.S. innovation. To qualify, research must entail activities that satisfy a broad four-part test. The activity must include the elimination of uncertainty, the process of experimentation, be technological in nature, and have a qualified purpose (the business component test).

Historically, two main groups benefit from the credit: manufacturers and service providers. Nearly half of taxpayers who claim the credit are manufacturers, while nearly one-third of taxpayers who claim the credit are service providers–most of which are small businesses in the fields of architecture, engineering, construction, and computer software design.

 

A Change in Precedent

Despite this longstanding precedent, recent audit denials for architecture and engineering research claims are reflecting a very different position by the IRS, which now argues that “services” do not qualify for the R&D tax credit. This dramatic break in precedent has an outsized impact on small businesses that lack the resources to fight IRS denials. While the IRS’s stated reason for disallowances has varied from case to case, a consistent theme from IRS examiners in the Small Business/Self-Employed division argues that services provided by architecture and engineering firms cannot meet the “qualified purpose” portion of the four-part test because their research lacks an identifiable “business component.” 

This new position is concerning, given that the IRS Code clearly defines the term “business component” as a product, process, computer software, technique, formula, or invention. In the past, the IRS has allowed design drawings to qualify as the business component, since the term “technique” is synonymous with the term “blueprint” or “design drawing.”  

However, in many recent cases, the IRS has ignored the terms “technique” and “formula” in R&D claims for service providers altogether. While no court cases have addressed this issue directly, there have been cases involving service firms that took the R&D credit where neither the IRS nor the courts questioned whether service providers can qualify for the credit; this shows service providers aren’t inherently disqualified from taking the credit. 

 

A Request for IRS Guidance

The architecture and engineering industry in the U.S. employs millions of Americans conducting essential research and development activities that are vital to achieving U.S. advancements and innovations in clean energy, safe and modernized infrastructure, and health-conscious building design and construction in a post-pandemic world. 

This is exactly the type of innovation and R&D expertise that political leaders on both sides of the aisle want to continue to foster here in the U.S., and it’s clear that IRS guidance that’s consistent with the longstanding Congressional intent for the type of U.S.-based innovation this credit was designed to promote is needed to ensure this industry can achieve our next generation of safe, reliable, and sustainable infrastructure goals. 

If the IRS is allowed to unilaterally change the R&D credit’s applicability to the AE service industry, it stands to set a dangerous precedent that will damage U.S. innovation, as well employment and wages in this critical sector, and it could potentially prove inflationary to the construction industry. 

It’s for this reason that I’ve teamed up with tax professionals to formally request the IRS include clarifying guidance for computing and substantiating the qualifying research activities performed by service firms, such as architecture and engineering firms, under I.R.C. § 41 in its Priority Guidance Plan for 2021-2022.

Specifically, we’re asking for the IRS to provide formal guidance in the form of a Revenue Procedure or Ruling modeled after the 2012 IRS Guidance for Computing and Substantiating the Credit for Increasing Research Activities Under Section 41 of the IRS Code for Activities in Developing New Pharmaceutical Drugs and Therapeutic Biologics.

Under this proposal, guidance could be developed that creates a “checklist” of activities conducted by taxpayers in the AE field that qualify for the research credit and that are subsequently certified to appropriately compute the credit. As in the pharmaceutical industry’s guidance model, if a taxpayer meets the criteria and makes the appropriate certification with their tax returns, an audit would be unnecessary.

This approach would ensure the research tax credit is consistently and fairly applied to a critical industry and, importantly, would alleviate the considerable amount of time and resources the IRS SB/SE exam function is currently spending auditing research tax credits for these small businesses, freeing up valuable IRS audit personnel to address other important Administration tax priorities. 

This type of approach is in the best interest of the U.S. government and taxpayer, and we’re encouraged that the groundswell of bipartisan support to protect and improve this critical research tax incentive will lead to fair and clear IRS guidance that allows these important small businesses to continue to deliver the R&D innovations our country is relying upon.  

 

Physical Infrastructure Tax Proposal Aims To Advance Energy Efficiency, With A Potential Catch

forbes
Forbes

Recently Sen. Ron Wyden (D-Oregon), chairman of the Senate Finance Committee, reintroduced the Clean Energy for America Act (CEAA). Of interest to those in the energy efficiency community — ranging from commercial real estate to tax, architecture, engineering and construction — the legislation proposes to continue to build on the tax code’s energy-efficiency provisions, recognizing the critical need to focus on both energy demand and supply in addressing the climate and carbon emissions reduction.

Op-Ed: Jeff Bezos Is Trying To Takeover The Accounting World And Must Be Stopped

the published reporter

WEST PALM BEACH, FL – Just when you thought Jeff Bezos’ thirst for power over every aspect of our daily lives had been satiated, he’s now set his sights on the world of accounting. Business Insider recently reported that Bezos has put $100 million behind Pilot, a startup that aims to dominate the world of accounting and tax services for small and mid-size businesses in the United States. 

This investment, which has helped the company earn a valuation of $1.2 billion, has Pilot on pace to be the country’s largest accounting firm. As someone who has been in the business for nearly 30 years as the CEO of Engineered Tax Services, this is unheard of and completely unprecedented.