Doubling Production Should Cut Costs in Half, Right?
Sep 24, 2014
While it seems logical to think if you are able to double production that your costs would be cut in half. However, in most cases this assumption is wrong! I was talking to a client the other day who had this exact scenario. He allocates his overhead based on machine hours. He has one machine and one product that he is able to produce two at once. All of his other machines and products are produced normally. He was concerned that in his quoting his costs would be cut in half since he doubled his production.
I explained to him that since his overhead is allocated based on machine hours and he was not changing the number of machine hours then his costs were not changing. I also clarified that if he cut his machine hours in half since he was doubling his production, he would in actuality be increasing the cost he would need to recover per machine hour. This was frustrating to him as it seemed quite counterintuitive. The more we discussed the theory, the more he understood.
I explained to him if his ability to increase the production was continuous, then we may need to review our overhead allocation base. Perhaps allocating on machine hours would eventually not make sense, but for now since the large majority of his manufacturing remained the same, then his allocation base should also remain the same.
It is important any time you are experiencing changes and/or doing quoting, that you think about how different production methods will effect your status. What may seem logical at first glance, may not seem so productive once you invest the time to think about its effects. Luckily the production manager did not agree with my client and that pushed him to call me. Otherwise, he may have made a notable mistake in his quoting!
Categories: Cost Accounting
Real Estate Investment: 1031 Exchange
Sep 24, 2014
What is a 1031 exchange (also called a like-kind exchange) and why would you want to do it? If you own investment real estate you may have already engaged in this activity and reaped the benefits, but for others just getting into real estate investment this may be a new topic of conversation.
A 1031 exchange is a swap of one investment asset for another. If done under the rules of 1031 you will in most cases be able to defer any tax due at the time of exchange, which allows your investment to grow tax deferred. You can roll any gain on the swap over into the new investment asset until you actually sell that investment asset for cash at which time you would then recognize any gain.
There are special rules that apply when depreciable property is exchanged. It can trigger gain known as depreciation recapture that is taxed as ordinary income. In general if you swap one building for another building you can avoid this recapture.
Some general guidelines regarding this provision: It is only for investment and business property, most 1031 exchanges are for real estate. Properties are of like-kind if they are of the same nature or character, this can have a broad interpretation. If you receive cash after the exchange is complete this cash may be taxed as partial sales proceeds and is generally considered capital gain.
This is a general overview and there are many other rules and regulations to complete a successful 1031 exchange transaction for which you would want to consult your accountant.
By: Christine Schultz, Accountant
Categories: Uncategorized
7 Most Common Tax Mistakes
Sep 24, 2014
Have you been waiting a long time for your refund only to find out it is delayed by a mistake listed below? You are not alone. Below is a list of the 7 most common mistakes on tax returns.
- Your return was sent in unsigned – If you file your return electronically, you won’t have to worry about this mistake as the return requests an electronic signature prior to submitting. However, if you mail your return and forget to sign it, the IRS will deem the return as not valid and will send you a notice to correct the mistake.
- Your return has an incorrect social security number – If you submit a tax return with an incorrect social security number for anyone listed on your return the IRS will kick this back to you to correct the error.
- Your return shows an incorrect name – This may seem silly but is actually a common error. This frequently happens after a person has changed their name after a marriage or other reasons. The name filed on the return does not match what the IRS shows in their system and in turn the tax return will be rejected.
- The return shows the wrong filing status – The filing status of Married or Single are usually pretty simple to figure out. The confusion sometimes lies in whether a person should file single or head of household. This happens frequently with divorced parents who have minor children.
- Your return claims incorrect credits or deductions – The tax code is becoming more complex each year. It is easy to mistakenly claim a deduction or a credit on a return that a taxpayer may not qualify for or to miss out on claiming something that they may be eligible for. The IRS has found that the credits/deductions that are most often incorrect are: the Earned Income Tax Credit, the Child and Dependent Care Credit, and the standard deduction. If you are filing on your own without the help of a tax advisor it is important to read the instructions carefully to determine what credits and deductions you may or may not be eligible to claim.
- Your return shows an incorrect bank account number – Many taxpayers request their refunds to be directly deposited into their bank accounts. However, if the bank account number entered on the return is incorrect the IRS will not be able to transfer for your refund and your return will be sent back to correct the issue.
- Your return has math errors – This mistake can happen if you are filing your tax return with paper and pen. The IRS has found that people filing in this manner are 20 times more likely to make those mistakes over those that electronically file. If you are using paper and pen it is very important to double-check your work before submitting your return. In addition, filing by paper takes the IRS considerable more time to process your return and identify the mistakes before the return is sent back to you. If your return is electronically filed, any math errors will be rejected and returned back to you immediately allowing you to resubmit your return with the correction.
For any additional information regarding these mistakes please contact our office.
By: Kristin Metzger, CPA
Categories: Uncategorized
Ten Things You May Not Know About an LLC
Sep 23, 2014
You probably know of several businesses whose formal names end with the acronym LLC. And you probably also know that LLC stands for limited liability company. Here are ten things you may not know.
- An LLC generally protects its owners from personal liability for business obligations in much the same way a corporation does, but an LLC is not a corporate entity.*
- Like a corporation, an LLC can do business in multiple states, although an LLC must be organized in a specific state.
- The owners of an LLC are called “members.” There is no limit on the number of members an LLC can have, and members don’t necessarily have to be individuals. Members’ management roles are typically spelled out in an operating agreement.
- Upon formation of an LLC, the members contribute cash, property, or services to the LLC in exchange for LLC shares or units.
- An LLC may borrow money in its own name and is responsible for repayment of the debt.
- An LLC is usually treated as a partnership for federal income-tax purposes. (The remaining four points assume partnership treatment.)
- Like partners, LLC members are not considered employees of the company. However, an LLC can have non-member employees.
- LLC members are taxed directly on company income. The LLC itself doesn’t pay federal income taxes.
- If an LLC has a loss, its members generally can deduct their share of the loss on their own tax returns.
- For tax purposes, an LLC’s income and losses are divided among its members according to the terms of their agreement. Tax allocations must correspond to economic allocations of profit and loss.
An LLC is but one structure you might consider using for a business venture. We can help you determine which type of arrangement will best meet your objectives.
- Each state has its own laws governing LLCs. Consult with an attorney before establishing an LLC.
Categories: Uncategorized
Filing Taxes: Together or Not Together?
Sep 20, 2014
One of the more common strategies married couples consider when thinking of ways to reduce taxes is whether or not they should file their tax returns separately, rather than jointly. While this strategy may be a common consideration, it is not as common for this strategy to actually be implemented. Following are a few reasons why “together” is usually the best option for most married couples when filing their taxes.
First, taxpayers filing separately are subject to the higher tax brackets earlier than taxpayers filing their returns as single. For example, in 2014, a taxpayer filing as single can earn up to $186,350 before being subject to the 33% tax bracket. However, a married filing separately taxpayer can only earn up to $113,425 before being subject to this tax bracket.
Also, filing separately eliminates the flexibility of deductions that taxpayers would have if they were to file their returns jointly. With a joint filing, taxpayers can decide to use either itemized deductions or the standard deduction, based on which method offers the most benefit. Even though taxpayers filing separately are still able to choose which deduction they take, the method that one spouse uses also becomes the method the other spouse must use. This means that if one spouse uses itemized deductions, the other spouse must also use itemized deductions, even if the standard deduction would have been more beneficial. Additionally, filing separately eliminates the opportunity for taxpayers to take various other deductions and credits. These include adoption expenses, child and dependent-care costs, educational tax credits, and interest paid on student loans.
While filing jointly is often the best option for married couples, there are some cases in which filing separately can be more beneficial. As a result, it is important to keep organized records and send all necessary documents to your tax advisor so that a proper analysis of your situation can be made.
By: Ruben Becerra, Staff Accountant
Categories: Uncategorized