Tighten up billing and collections to mitigate economic uncertainties

While many economic indicators remain strong, the U.S. economy is still giving business owners plenty to think about. The nation’s gross domestic product unexpectedly contracted in the first quarter of 2022. Rising inflation is on everyone’s mind. And global supply chain issues persist, spurred on by events such as the COVID-19 lockdowns in China and Russia’s invasion of Ukraine.

Obviously, these factors are far beyond your control. However, you can look inward at certain aspects of your own operations to see whether there are adjustments you could make to mitigate some of the financial challenges you might face this year.

One fundamental aspect of doing business is billing and collections. Managing accounts receivable can be challenging in any economy. So, to keep your company financially fit, you should occasionally revisit and tighten up billing and collections processes as necessary.

Resolve issues quickly

The quality of your products or services — and the efficiency of order fulfillment — can significantly impact collections. You literally give customers an excuse not to pay when an order arrives damaged, late or not at all, or when you fail to timely provide the high-quality service you promise. Other mistakes include incorrectly billing a customer or failing to apply discounts or fulfill special offers.

Make sure your staff is resolving billing conflicts quickly. For starters, ask customers to pay any portion of a bill they’re not disputing. Once the matter is resolved, and the product or service has been delivered, immediately contact the customer regarding payment of the remainder.

Depending on the circumstances, you might request that some customers sign off on the resolution by attaching a note to the final invoice. Doing so can help protect you from potential legal claims.

Bill on time, use technology

Sending invoices out late can also thwart your collection efforts. Familiarize yourself with the latest industry norms before setting or changing payment schedules. If your most important customers have their own payment schedules, be sure they’re officially set up in your system, if possible, so invoicing doesn’t go awry if a new employee comes on board.

Of course, technology is also important. Implement an up-to-date accounts receivable system that, for example:

  • Generates invoices when work is complete,
  • Flags problem accounts, and
  • Allows you to run various useful reports.

Look into the latest ways to transmit account statements and invoices electronically. Emphasize to customers that they can safely pay online, assuming you allow them to do so.

Last, regularly verify account information to make sure invoices and statements are accurate and going to the right place. Set clear standards and expectations with customers — both verbally and in writing — about your credit policy, as well as pricing, delivery and payment terms.

Set the ground rules

Sometimes you might feel at the mercy of your customers when it comes to cash inflows. Yet businesses get to set the ground rules for incentivizing and pursuing timely payments. We can help assess your accounts receivable processes, suggest key metrics to track and explore actions you might take to help ensure customers pay on time.

© 2022


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Caring for an elderly relative? You may be eligible for tax breaks

Taking care of an elderly parent or grandparent may provide more than just personal satisfaction. You could also be eligible for tax breaks. Here’s a rundown of some of them.

1. Medical expenses. If the individual qualifies as your “medical dependent,” and you itemize deductions on your tax return, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction. The test for determining whether an individual qualifies as your “medical dependent” is less stringent than that used to determine whether an individual is your “dependent,” which is discussed below. In general, an individual qualifies as a medical dependent if you provide over 50% of his or her support, including medical costs.

However, bear in mind that medical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI).

The costs of qualified long-term care services required by a chronically ill individual and eligible long-term care insurance premiums are included in the definition of deductible medical expenses. There’s an annual cap on the amount of premiums that can be deducted. The cap is based on age, going as high as $5,640 for 2022 for an individual over 70.

2. Filing status. If you aren’t married, you may qualify for “head of household” status by virtue of the individual you’re caring for. You can claim this status if:

  • The person you’re caring for lives in your household,
  • You cover more than half the household costs,
  • The person qualifies as your “dependent,” and
  • The person is a relative.

If the person you’re caring for is your parent, the person doesn’t need to live with you, so long as you provide more than half of the person’s household costs and the person qualifies as your dependent. A head of household has a higher standard deduction and lower tax rates than a single filer.

3. Tests for determining whether your loved one is a “dependent.” Dependency exemptions are suspended (or disallowed) for 2018–2025. Even though the dependency exemption is currently suspended, the dependency tests still apply when it comes to determining whether a taxpayer is entitled to various other tax benefits, such as head-of-household filing status.

For an individual to qualify as your “dependent,” the following must be true for the tax year at issue:

  • You must provide more than 50% of the individual’s support costs,
  • The individual must either live with you or be related,
  • The individual must not have gross income in excess of an inflation-adjusted exemption amount,
  • The individual can’t file a joint return for the year, and
  • The individual must be a U.S. citizen or a resident of the U.S., Canada or Mexico.

4. Dependent care credit. If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally can’t take care of him- or herself, you may qualify for the dependent care credit for costs you incur for the individual’s care to enable you and your spouse to go to work.

Contact us if you’d like to further discuss the tax aspects of financially supporting and caring for an elderly relative.

© 2022


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The ins and outs of Series EE savings bond taxation


Many people own Series E and Series EE bonds that were bought many years ago. They may rarely look at them or think about them except on occasional trips to a file cabinet or safe deposit box.

One of the main reasons for buying U.S. savings bonds (such as Series EE bonds) is the fact that interest can build up without the need to currently report or pay tax on it. The accrued interest is added to the redemption value of the bond and is paid when the bond is eventually cashed in. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. The difference between the bond’s purchase price and its redemption value is taxable interest.

Series EE bonds, which have a maturity period of 30 years, were first offered in January 1980. They replaced the earlier Series E bonds.

Currently, Series EE bonds are only issued electronically. They’re issued at face value, and the face value plus accrued interest is payable at maturity.

Before January 1, 2012, Series EE bonds could be purchased on paper. Those paper bonds were issued at a discount, and their face value is payable at maturity. Owners of paper Series EE bonds can convert them to electronic bonds, posted at their purchase price (with accrued interest).

Here’s an example of how Series EE bonds are taxed. Bonds issued in January 1990 reached final maturity after 30 years, in January of 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest was taxable in 2020.

A $1,000 Series EE bond (paper) bought in January 1990 for $500 was worth about $2,073.60 in January of 2020. It won’t increase in value after that. The entire difference of $1,573.60 ($2,073.60 − $500) was taxable as interest in 2020. This interest is exempt from state and local income taxes.

Note: Using the money from EE bonds for higher education may keep you from paying federal income tax on the interest.

If you own bonds (paper or electronic) that are reaching final maturity this year, action is needed to assure that there’s no loss of interest or unanticipated current tax consequences. Check the issue dates on your bonds. One possible place to reinvest the money is in Series I savings bonds, which are currently attractive due to rising inflation resulting in a higher interest rate.

© 2022


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Inflation enhances the 2023 amounts for Health Savings Accounts

The IRS recently released guidance providing the 2023 inflation-adjusted amounts for Health Savings Accounts (HSAs). High inflation rates will result in next year’s amounts being increased more than they have been in recent years.

HSA basics

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $5,000 for self-only coverage, and $10,000 for family coverage.

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2022-24, the IRS released the 2023 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2023, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $3,850. For an individual with family coverage, the amount will be $7,750. This is up from $3,650 and $7,300, respectively, for 2022.

In addition, for both 2022 and 2023, there’s a $1,000 catch-up contribution amount for those who are age 55 and older at the end of the tax year.

High deductible health plan defined. For calendar year 2023, an HDHP will be a health plan with an annual deductible that isn’t less than $1,500 for self-only coverage or $3,000 for family coverage (these amounts are $1,400 and $2,800 for 2022). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, for 2022).

Reap the rewards

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and can be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors.

© 2022


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Cordasco in the News





Check out Rob Cordasco’s most recent interview in Financial Advisors Magazine “Clock is Ticking for Midyear Moves”.

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Tax issues to assess when converting from a C corporation to an S corporation

Operating as an S corporation may help reduce federal employment taxes for small businesses in the right circumstances. Although S corporations may provide tax advantages over C corporations, there are some potentially costly tax issues that you should assess before making a decision to switch.

Here’s a quick rundown of the most important issues to consider when converting from a C corporation to an S corporation:

Built-in gains tax

Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within 5 years after the corporation becomes an S corporation. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.

Passive income

S corporations that were formerly C corporations are subject to a special tax if their passive investment income (such as dividends, interest, rents, royalties and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.

LIFO inventories

C corporations that use LIFO inventories have to pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.

Unused losses

If your C corporation has unused net operating losses, the losses can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.

There are other factors to consider in switching from C to S status. Shareholder-employees of S corporations can’t get the full range of tax-free fringe benefits that are available with a C corporation. And there may be complications for shareholders who have outstanding loans from their qualified plans. All of these factors have to be considered to understand the full effect of converting from C to S status.

There are strategies for eliminating or minimizing some of these tax problems and for avoiding unnecessary pitfalls related to them. But a lot depends upon your company’s particular circumstances. Contact us to discuss the effect of these and other potential problems, along with possible strategies for dealing with them.

© 2022


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Businesses looking for outside investors need a sturdy pitch deck

Is your business ready to seek funding from outside investors? Perhaps you’re a start-up that needs money to launch as robustly as possible. Or maybe your company has been operating for a while and you want to pivot in a new direction or just take it to the next level.

Whatever the case may be, seeking outside investment isn’t as cut and dried as applying for a commercial loan. You need to wow investors with your vision, financials and business plan.

To do so, many businesses today put together a “pitch deck.” This is a digital presentation that provides a succinct, compelling description of the company, its solution to a market need, and the benefits of the investment opportunity. Here are some useful guidelines:

Keep it brief, between 10 to 12 short slides. You want to make a positive impression and whet investors’ interest without taking up too much of their time. You can follow up with additional details later.

Be concise but comprehensive. State your company’s mission (why it exists), vision (where it wants to go) and value proposition (what your product or service does for customers). Also declare upfront how much money you’d like to raise.

Identify the problem you’re solving. Explain the gap in the market that you’re addressing. Discuss it realistically and with minimal jargon, so investors can quickly grasp the challenge and intuitively agree with you.

Describe your target market. Include the market’s size, composition and forecasted growth. Resist the temptation to define the market as “everyone,” because this tends to come across as unrealistic.

Outline your business plan. That is, how will your business make money? What will you charge customers for your solution? Are you a premium provider or is this a budget-minded product or service?

Summarize your marketing and sales plans. Describe the marketing tactics you’ll employ to garner attention and interact with your customer base. Then identify your optimal sales channels and methods. If you already have a strong social media following, note that as well.

Sell your leadership team. Who are you and your fellow owners/executives? What are your educational and business backgrounds? Perhaps above everything else, investors will demand that a trustworthy crew is steering the ship.

Provide a snapshot of your financials, both past and future. But don’t just copy and paste your financial statements onto a few slides. Use aesthetically pleasing charts, graphs and other visuals to show historical results (if available), as well as forecasted sales and income for the next several years. Your profit projections should realistically flow from historical performance or at least appear feasible given expected economic and market conditions.

Identify your competitors. What other companies are addressing the problem that your product or service solves? Differentiate yourself from those businesses and explain why customers will choose your solution over theirs.

Describe how you’ll use the funds. Show investors how their investment will allow you to fulfill your stated business objectives. Be as specific as possible about where the money will go.

Ask for help. As you undertake the steps above — and before you meet with investors — contact our firm. We can help you develop a pitch deck with accurate, pertinent financial data that will capture investors’ interest and help you get the funding your business needs.

© 2022


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AI for small to midsize businesses isn’t going away

Artificial intelligence (AI) has made great inroads into certain sectors of the U.S. economy. However, it hasn’t reached many small to midsize businesses (SMBs) in a major way … yet.

In 2021, AI analysis firm Unsupervised published a survey of 520 SMB owners that found 48% of them still found AI too cost prohibitive. Forty percent said their businesses lacked the staff expertise to use it. But the survey also found that one in five owners were implementing some form of AI, and 20% of respondents already using AI believed it had increased their profitability.

Defining the term

People sometimes confuse AI with data analytics or the application of intense mathematics. It’s so much more. AI generally refers to using computers to perform complex tasks typically thought to require human intelligence — for example, image perception, voice recognition, decision-making and problem solving.

Several types of technologies fall under the AI umbrella. One is machine learning, which applies statistical techniques to improve machines’ performance of a specific task over time with little or no programming or human intervention. Another is natural language processing, which uses algorithms to analyze unstructured human language in documents, emails, texts, conversation or otherwise. And a third is robotic process automation, which automates time-consuming repetitive manual tasks that don’t require decision-making.

Finding uses

Going back to the survey above, 28% of SMB owners said they were still determining precisely how to implement AI. The answer for your company depends on what you do and which technologies you rely on. Here are some examples of how businesses can use AI:

HR. AI software can significantly expedite the hiring process by soliciting and screening candidates. It can narrow the field and save interviewing time, freeing up HR staff to deal with other issues that require human attention. AI also might reduce the risk of discrimination claims because human subjectivity plays less of a role in the process.

Communications. Chatbots and other tools make it easier to maintain efficient and effective communications with customers and prospects. Specifically, these tools can respond to frequently asked customer service questions, allowing front-facing employees to focus on more targeted or complex issues.

Growing companies can also use AI tools to automate communications with vendors and employees. Doing so ensures the timely delivery of information and minimizes the chance of costly or embarrassing human errors.

Cybersecurity. Every company, no matter how big or small, faces the threat of hackers and ransomware schemes — and the risk has grown only more intense in recent months.

In fact, given the sheer number of cyberthreats out there, and the virtually infinite ways that cybercriminals can vary their attacks, AI is fast becoming an essential defensive tool. For example, through machine learning, AI can devise “classification algorithms” to detect spam and malware.

Proceeding with caution

AI for business — including SMBs — isn’t going away. Does this mean you should throw caution to the wind and spend exorbitantly on an AI solution today? Not at all. Like any technology initiative, an AI implementation project should involve careful research into your needs and a prudent budget. We can help you weigh the costs vs. benefits of any tech upgrades you’re considering.

© 2022


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Deciding between cash and accrual accounting methods

Small businesses may start off using the cash-basis method of accounting. But many eventually convert to accrual-basis reporting to conform with U.S. Generally Accepted Accounting Principles (GAAP). Which method is right for you?

Cash method

Under the cash method, companies recognize revenue as customers pay invoices and expenses when they pay bills. As a result, cash-basis entities may report fluctuations in profits from period to period, especially if they’re engaged in long-term projects. This can make it hard to benchmark a company’s performance from year to year — or against other entities that use the accrual method.

Businesses that are eligible to use the cash method of accounting for tax purposes have the ability to fine-tune annual taxable income. This is accomplished by timing the year in which you recognize taxable income and claim deductions.

Normally, the preferred strategy is to postpone revenue recognition and accelerate expense payments at year end. This strategy can temporarily defer the company’s tax liability. But it makes the company appear less profitable to lenders and investors.

Conversely, if tax rates are expected to increase substantially in the coming year, it may be advantageous to take the opposite approach — accelerate revenue recognition and defer expenses at year end. This strategy maximizes the company’s tax liability in the current year when rates are expected to be lower.

Accrual method

The more complex accrual method conforms to the matching principle under GAAP. That is, companies recognize revenue (and expenses) in the periods that they’re earned (or incurred). This method reduces major fluctuations in profits from one period to the next, facilitating financial benchmarking.

In addition, accrual-basis entities report several asset and liability accounts that are generally absent on a cash-basis balance sheet. Examples include prepaid expenses, accounts receivable, accounts payable, work in progress, accrued expenses and deferred taxes.

Public companies are required to use the accrual method. But small companies have other options, including the cash method.

Tax considerations

Thanks to the Tax Cuts and Jobs Act (TCJA), more companies are eligible to use the cash method for federal tax purposes than under prior law. In turn, this change has caused some small companies to rethink their method of accounting for book purposes.

The TCJA liberalized the small business definition to include those that have no more than $25 million of average annual gross receipts, based on the preceding three tax years. This limit is adjusted annually for inflation. For tax years beginning in 2021, the inflation-adjusted limit is $26 million. For 2022, it’s $27 million. Under prior law, the gross-receipts threshold for the cash method was only $5 million.

In addition, for tax years beginning after 2017, the TCJA modifies Section 451 of the Internal Revenue Code so that a business recognizes revenue for tax purposes no later than when it’s recognized for financial reporting purposes. So, if you use the accrual method for financial reporting purposes, you must also use it for federal income tax purposes.

For more information

There are several viable reasons for a small business to switch to the accrual method of accounting. It can help reduce variability in financial reporting and attract financing from lenders and investors who prefer GAAP financials. But, if you’re eligible for the cash method for tax purposes, you may want to switch to that method for the simplicity and the flexibility in tax planning it provides. Contact us to discuss your options and pick the optimal method for your situation.

© 2022


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Selling mutual fund shares: What are the tax implications?

If you’re an investor in mutual funds or you’re interested in putting some money into them, you’re not alone. According to the Investment Company Institute, a survey found 58.7 million households owned mutual funds in mid-2020. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

What are the basic tax rules?

Let’s say you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax. However, most taxpayers will pay a tax rate of only 15%.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One challenge is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

When does a sale occur?

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. Although it may not seem like it, each time you write a check on your fund account, you’re making a sale of shares.

How do you determine the basis of shares?

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then, add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis:

  • First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
  • Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on April 1, 2018.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
  • Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.

As you can see, mutual fund investing can result in complex tax situations. Contact us if you have questions. We can explain in greater detail how the rules apply to you.

© 2022


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