Tax planning: Keeping it or giving it to Uncle Sam
Another year goes by and I hope 2019 operating results met your expectations and beat the budgeted profit as well. If that is the case pat yourself on the back because we all know the effort required to hit the numbers, especially after maneuvering the monthly ups and downs associated with the various departments throughout the year. I have always marveled at how equipment dealers balance all the balls they have in the air and still make the numbers work. That is one of reasons I LOVE this business, and the people in it.
If your operating the business properly your Balance Sheet and Income Statements should be 90% cleaned up by the end of the year, awaiting a few final adjustments before the financial package is presented to your auditors with a March 15 deadline for their report. The same goes for the tax returns which should also meet the March 15 and April 15 deadlines so that all the tax issues are behind you and you can concentrate on 2020.
The point here is that management needs to plan for 2020 starting in October or November of 2019. Waiting for the year end close to find out you did six months after the year end just does not cut it any longer. Department heads need to concentrate on what is working and fix what it not, with this process beginning on Day 1 of the new year. Some of the issues facing management on January 1 of every year are as follows:
THE CASH BALANCE
Is it adequate for what you have planned? Can we generate cash faster? Are invoices processed as quickly as possible? Are you using digital billing and collection methods to reduce the cash cycle? Are the credit and collection policies current for your business today? Is the cash flow from operations in the upper 25% quartile?
INVENTORY
We are talking new, used and parts inventories. How to the turns and GP% compare to the MHEDA Disc Report? Do you have a list of what to get rid of? Do you have an annual valuation of what the used units are worth in terms of OLV? Is there phantom value when the OLV is compared to the used book values, or perhaps a loss if units are overvalued. Knowing what to expect in profit from new, used and parts inventories is a must on Jan 1 of each year. The sales department need meaningful budgets that generate cash flow for the reporting period.
RENTAL FLEETS
Both long-term and short-term fleets. Are you ready for the new lease accounting GAAP rules that will have rental customers asking about their leases and how much of the lease payments are for the unit and how much for maintenance? Better be ready. The OLV comparison applies here as well regarding short-term rental units. Bankers need to know if OLV values exceed book value.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Are we shopping our purchases as often as we can? Technology is making purchases cheaper. Interest rates are down. Have we discussed rates with our lenders? I have encountered new ways to purchase company insurance. New ways to make money from Rental Equipment Insurance purchases that benefit both dealer and customer. Ways to offer value via certificate tracking programs that benefit both dealer and customer. Question every purchase. Find the hidden value in AP and ACCRUED EXPENSES.
DATA DIVING
Check your performance against competitors in your territory. Join a 20 Group and actively participate. Rouse Analytics has a program to compare competitors in a territory by getting access to member data files and working up averages for various profit and cash flow drivers so that they can compare each member of the group against the group data. This is an amazing tool. You can zero in on every line item in sales, costs and gross profits. 20 groups provide a similar comparison only with non-competitive locations.
There is a lot that can be done to make money in the material handling business if you can operate in the upper profit quartile. Trying to catch up to dealers in that level is something else again. But, I have found a very competitive marketing and advertising program on the market that will (1) build your company a website and update it as need be; (2) help build your data base and flag it for certain type of prospects and products; and (3) get you up to speed on all media avenues required by your type of business. All for $350 a month! The dealer must supply what they want included in the website, email blasts and the social media account, but they will show you how to do that. This could be a great tool when trying to try out a new marketing program for a special profit or service.
If you follow up on some of these ideas, you will find yourself making more money which brings us to the TAX PLANNING portion of this column. Make more money and pay more taxes. How about make more money and keep more money? I like the latter thought better and I am sure you do as well.
At our One-Day Dealer Conference in September we had some of the brightest tax folks available with expertise regarding equipment dealers and rental companies. One portion of the presentation, which I mentioned last month has to do with the Wayfair decision requiring sales tax collections on goods shipped into a state even though the seller has no presence in the state. Needless to say, this gets a bit crazy, but the exposure is real even down to what is called the RESPONSIBLE PERSON RULES whereby personal liabilities may apply for any officer, director or employee who knows of and has responsibility to comply with individual state tax laws.
As far as Wayfair is concerned, every company should get a report from their accounting firm (from a person with expertise in this area) to explain where taxes need to be collected and submitted regarding Wayfair, what registration forms need to be submitted to those state, and when tax exemption forms can be used and kept on file by the sellers. I would also suggest a section in the report regarding the RESPONSIBLE PERSON RULES and which states have statutes that could put company employees at risk for not collecting or paying in the sales taxes to the states. I suggest this is a prudent expenditure because the states are not kidding about these statutes. In short, cover your butts.
The TAX CUTS AND JOBS ACT OF 1917 (TCJA) has been on the scene for a couple of years now. Your 2018 returns were filed using these new tax laws. 2019 returns will be the second year using TCJA. The changes made in 2017 were quite dramatic and complex and seem to hit equipment dealers in many ways. When dealing with such dramatic changes I always like to review the first return impacted by the changes (2018) to see if the tax results match what was anticipated, and at the same time see if any changes are necessary for the 2019 (2nd Year) returns. There probably will be. Post 2017 changes to the TCJA also need to be taken into consideration as well.
We asked Steve Pierson (my dealer and rental tax pro) to review TCJA as it now stands at the September conference. He outlined the IMPORTANT CONSIDERATIONS AND ELECTIONS as follows:
A-AFS Conformity Rule
B-Bonus Depreciation now applies to both new and used property
C-Interest Deduction Limitation for companies with average receipts over $26 million
D-Qualified Business Income deduction
E-Accrual to Cash Basis Election for companies less than $26 million in receipts.
F-Decision to Break S Corporation Election and vice versa
“A” required recognition of income when the right to that income is fixed. It is related in some regards to the new Revenue Recognition GAAP standards.
“B” You still have both 179 and Bonus Deprecation available. The original version of TCJA contain language pertaining to leasehold improvements and building improvements being 100% deductible as Bonus Depreciation. This has since been reversed but you still have 179 available for these types of costs.
“C” Limitation of 30% of taxable income before interest and depreciation (179 not counted as depreciation for this purpose). Excess interest can be carried forward. Determined on entity by entity basis.
“D” A 20% of taxable income deduction related to income derived from flow-through entities. There are restrictions and limitations, so this is one area that needs an annual review as well as planning for the subsequent year.
“E” Cash Basis Tax Accounting should be reviewed if you meet the gross receipts test. The Books do not change only the tax accounting. What basically happens is AR and accrued expenses are reversed. If your AR balance is greater than accrued expenses and AP you could wind up eliminating your 2019 taxable income and maybe even create an NOL to carry forward. If you meet the criteria and didn’t really consider this option last year, you may want to take a harder look at this option.
“F” Several S-Corp dealers jumped at the 21% corporate bracket, when this decision required some serious research to determine if that move is right for existing shareholders. Maybe yes and maybe no. You can covert back to an S-Corp but you must wait 5 years to do so. One of the main issues results from creating C-Corp retained earnings which could be subject to a double tax thus offsetting the 21% benefit.
So far, we talked about planning for 2020. Planning and execution that starts on January 1, 2020, rather than waiting for the 2019 annual report and tax return to indicate what needs repairing. We suggested ways to reduce insurance costs, interest expense, and marketing costs. Also mentioned a way to increase income from both Rental Equipment Insurance and Certificate Tracking. And on top of all that a way to reduce Wayfair exposure and income taxes.
Need any help with these issues, let me know. I can put you in touch with one of the speakers from the Conference. Oh, by the way the 2020 the One Day Dealer Conference will be Thursday, September 17th at the Wintrust Banking Center in Rosemont, Illinois. Watch for the 2020 Conference details in an upcoming issue of Material Handling Wholesaler.
Hope you are ready for 2020!
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
