Testing Your Costing Data
Feb 10, 2016
When is the last time you took leftovers out of the fridge and conducted the ever so popular “smell test”? Believe it or not, we conduct the “smell test” on a daily basis. We may smell a baby to determine if a diaper change is necessary, or you may smell your child’s breath to see if they truly brushed their teeth like the said. While this is a method we use to determine if something “passes the test,” have you ever considered areas of life where we conduct (not so literal) smell tests?
For example, when educating my 8-year-old on subtraction, I explain the answer cannot be bigger than the number from which you are subtracting. The number can be the same, if subtracting zero, or smaller. However, if the end result is larger than the number subtracted, there is an error. To me, this is a great example of applying the “smell test” to a given scenario.
Are there areas of your personal or professional life where you knowingly applied such a test? What are they?
I am working with a client who would like to update their cost system. Several years ago, when we established the system, we did not have a lot of actual data to build from or support the model. Over time we have produced more and more extremely valuable real-time data. However, we have never linked our cost model with this data for validation. Counter-intuitive processes have been occurring and as a result, management has asked us to determine the cause.
We have determined part of the issue involves assumptions being built upon years of assumptions. Actual data from the past year was not compared to see how close the model delivered. In addition, last year’s actual information was not utilized to develop the current model with the current year’s assumptions. The future was built upon years and years of assumptions, which most certainly resulted in numerous inaccuracies. Now irrelevant information has been developed and used.
Upon being hired, we recognized the current methods were not passing the “smell test.” We hired 24 additional employees and our sales were expected to increase by 10%, yet our model told us labor hours would be 30% less than the prior year! Management said they have become more efficient and plan to develop even greater efficiencies in the coming year, but wow!
It is critical to take the time to step back and evaluate your data. Does this make really sense? Is this the end result I anticipated? If not, then why not? You can build your own “smell tests” into your model which force you to consider key points for operational and financial growth. Use formulas to help you recognize areas of concern.
Categories: Cost Accounting
Tax Breaks for Ohio Residents
Feb 10, 2016
Attention all Ohioans, if you are a small business owner then you are probably already familiar with Ohio’s Small Business Deduction. This deduction enacted in 2013, provides tax breaks to Ohio’s small business owners. For the 2014 tax year, this deduction allowed small business owners an exclusion from their Ohio taxable income of up to 75% on the first $250,000 of their qualified small business income. However, this calculation was subject to apportioning rules for income earned outside of the state of Ohio. For example, in 2014, if a married couple owned a small business and collectively earned $200,000 then they qualified for a deduction from their Ohio taxable income base of $150,000 ($200,000 x 75%). However, if only 80% of this income is attributable to Ohio then their deduction is reduced to $120,000 ($200,000 x 80% x 75%).
Conversely, for the 2015 tax year, Ohio has elected to keep the original deduction, but no longer require the calculation to be limited to Ohio apportioned income. Meaning, the taxpayer in the example above will now be able to take the full $150,000— regardless of how much of the income is sourced outside of Ohio. In addition, any business income beyond the deduction will now be taxed at a graduated rate capped at 3%, which is much lower than residents have paid in the past.
The good news is this new twist in the legislation may now provide for a larger deduction! Even better, this deduction is scheduled to increase for the 2016 tax year (and onwards) to 100% of the first $250,000 of a taxpayer’s eligible small business income! This allows you to keep your money working for you.
Courtney Elgin, CPA
Categories: Other Resources
Communication Among Manufacturing Departments
Feb 05, 2016
Today, I visited a client who has concerns about their costs and whether or not they are driving decision making more than should be allowed. More importantly, the client is even more concerned about the accuracy of their costs. Management has assumed because they had outdated information, their costs were automatically inaccurate. After careful review, we determined this is not the case.
While meeting with the scheduling manager, we learned there is a substantial amount of valuable information available. The manager is tracking the efficiency and average run times of all machines, people, and parts. He knows, in real time, if a standard is inaccurate and updates the information accordingly.
To be honest, the information available is some of the best I’ve seen. Unfortunately, the controller was not aware this information being noted and was easily accessible. Since our firm is now engaged in the process, we will make certain the two communicate.
Clearly, the scheduling department did not realize the data they collected could worthwhile for the accounting department. In any manufacturing business, it is critical to understand what each department does and what information they have on hand to help make the business run more efficiently. It is the job of a controller to be knowledgeable about the financial data in each department. If you are a controller, make it a point to engage each department on a regular basis. Monthly, or even quarterly reviews or meetings can make a significant impact and make you job that much easier. Communicating effectively and sharing information can ultimately make or break a business.
Categories: Cost Accounting
Tax Considerations for Self-Employed
Feb 04, 2016
If you’re in business for yourself, you know how challenging it can be to run your business and keep on top of your tax situation. Here’s a refresher on the tax rules you need to be aware of if you’re a self-employed sole proprietor or are thinking of becoming one.
Income Taxes
As you probably know, sole proprietors do not file a separate federal income-tax return for the business. Instead, they summarize their business income and expenses on Schedule C of their personal income-tax returns.
Be sure to keep complete records of your income and expenses. Deducting all your ordinary and necessary business expenses will help minimize your tax liability. If you have losses, these are generally deductible against your other income, subject to special rules relating to hobby losses, passive activity losses, and activities for which you were not “at risk.”
Self-employment (SE) Taxes
Any self-employed person who has net earnings of at least $400 from the business is subject to SE taxes on those earnings. SE taxes generally track the Social Security and Medicare taxes paid by employees and their employers and are partially tax deductible.
For 2016, the SE tax rates are:
- Social Security – 12.4% of the first $118,500 of net SE earnings
- Medicare – 2.9% on all net SE earnings, plus an additional 0.9% on earnings in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases
Quarterly Estimated Tax Payments
Your net SE income will be taxable whether or not you withdraw cash from your business account. Moreover, you may be subject to penalties if you fail to make appropriate quarterly estimated tax payments.
Home Office Deduction
If you work out of your home, you may be able to deduct a portion of the costs incurred to maintain your home. You also may be able to deduct commuting expenses incurred to travel from your home office to another work location.
Health Insurance Costs
When tax law requirements are met, you may deduct your health insurance premiums as a trade or business expense, including premiums paid for your spouse, dependents, and children under the age of 27.
Retirement Plan
If you don’t already have a tax-favored retirement plan, you may want to consider establishing one. Contributions to the plan would be tax deductible, within certain tax law limits. Types of retirement plans available to sole proprietors include solo 401(k) and simplified employee pension (SEP) plans.
Categories: Other Resources
New FAFSA Rules For Financial Aid
Feb 02, 2016
Colleges and universities seem to be sending out acceptance letters earlier and earlier each year. Students are often accepted but have no idea how much financial aid for which they may qualify. The Free Application for Federal Student Aid, or FAFSA is available for completion on January 1 of each year and helps determine a student’s eligibility for financial aid. A portion of the FAFSA requires information from the just-ended year’s income tax returns for both the student and his/her parents. Often times, the information needed to prepare tax returns does not arrive until much later in the tax season, thus resulting in the tax returns being filed much closer to April 15. Students completing the FAFSA early on are asked to use estimated amounts, and then at a later date file reports with the corrected amounts. As a result, those students who wait to file their FAFSA forms may find themselves losing out on valuable financial aid dollars to students who filed much earlier.
However, this ritual will change this fall due to changes in the FAFSA rules effective for the 2017-2018 school year. The FAFSA website will open three months earlier—in October of 2016. More importantly, students will report income from an earlier tax year i.e. the 2017-2018 application will request tax data from 2015. The FAFSA online site has an IRS Data Retrieval Tool, which can pull the income tax data directly from the IRS into the FAFSA form.
Due to the changes, the 2015 income tax information will impact financial aid calculations for two years, both the 2016-2017 and the 2017-2018 FAFSA applications. For a summary of key dates during the transition check out the Department of Education’s website.
The changes are designed to allow students to complete the application and apply in a timely manner, and encourage colleges to provide information on financial aid at an earlier date.
By: George Monger, CPA
Categories: Other Resources