Why Inventory Management is Essential for Financial Reporting 

Inventory management is about knowing precisely what you’ve got, where it’s located, and when you need it. The goal is simple: keep the right amount of stock on hand at the right time—no more, no less. While this may sound easy, even small mistakes can make a significant impact. Your inventory isn’t just “stuff” on shelves—it’s directly tied to your financials. If inventory is poorly tracked, it can throw off your cost of goods sold (COGS), disrupt your cash flow, and reduce profitability. Conversely, getting it right gives you better control over your finances and helps you make smarter decisions for your business. 

Inventory and COGS: Why It’s So Important 

Your cost of goods sold (COGS)—what it costs to make the products you sell—is one of the key numbers on your income statement. Your inventory management practices heavily influence it. Here’s why: 

• Accuracy Matters: The more precise your inventory records are, the more accurate your COGS calculation will be, giving you a true picture of your financial health. 

• Inflated Inventory = Overstated Profits: If you overestimate your inventory, you can make your COGS look smaller, inflating your profits and giving you a misleading view of your business. 

• Undervaluing Inventory = Lower Profits: Conversely, undervaluing your inventory will increase COGS, making profits seem slimmer. 

Keeping your inventory accurate gives everyone—your team, investors, and stakeholders—a clear view of your business’s performance. 

Cash Flow: Keep Things Moving 

Inventory is often one of your most significant investments, and if it’s not carefully managed, it can hurt your cash flow: 

• Too Much Stock = Tied-Up Cash: Overstocking ties up cash in unsold inventory, which could be better spent elsewhere. Plus, extra stock means more storage costs, insurance, and possibly even markdowns if the products don’t sell. 

• Too Little Stock = Lost Sales: Running out of inventory means missed sales, unhappy customers, and a lost opportunity to generate revenue. 

• The Sweet Spot: The trick is to find the balance—enough stock to meet customer demand but not so much that your cash is stuck in unsold goods. When done right, this frees up money to reinvest in your business or handle other expenses. 

By managing inventory wisely, you can keep your cash flow strong and be able to invest in growth. 

Profitability: The Bottom Line 

Inventory management is more than just keeping products in stock—it’s crucial to running a smooth and profitable operation. It can transform how your business functions and improve your bottom line when done strategically. Innovative inventory practices help you save money by cutting waste, lowering storage costs, and avoiding overproduction. Accurate data lets you plan better, predict demand, and dodge unexpected hiccups. When your inventory is well-organized, you can react quickly to market changes, keeping your business flexible and ahead of the competition. 

How to Take Charge of Your Inventory 

Improving your inventory management doesn’t have to mean a massive overhaul. Small changes can make a big difference. Here’s how: 

1. Embrace Technology: Modern inventory software does the heavy lifting—tracking stock, reducing errors, and giving you real-time insights to make smarter decisions. 
2. Do Regular Audits: Comparing your physical stock to your records regularly helps catch discrepancies early before they become costly problems. 
3. Try Just-in-Time (JIT) Ordering: Instead of overstocking, order only what you need, when you need it. It’s a great way to free up cash and avoid excess inventory. 
4. Train Your Team: Equip your team with the skills and tools they need to manage inventory smoothly. A knowledgeable team keeps everything running like clockwork. 
5. Get Expert Advice: Your accountant can provide invaluable insights to refine your inventory strategy and align it with your financial goals. 

Final Thoughts 

Inventory management is frequently underestimated when it comes to maintaining the financial stability of a business. An organized and precise inventory system is crucial in influencing cash flow, profit margins, and overall business performance. By prioritizing accurate inventory control, you’re setting the stage for smoother operations, more precise financial insights, and improved profitability. 

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The IRS releases an annual ‘Dirty Dozen’ list featuring the top taxpayer scams for the coming year. The list is certainly not exhaustive of every potential pitfall out there, but it is an excellent place to start educating yourself (and your team if you’re a business owner). Here’s a summary of the 2023 IRS Dirty Dozen.

Employer Retention Credit Promoters: Businesses have been targeted by companies claiming to help them submit tax returns and adjustments to take maximum advantage of the Employee Retention Credit (ERC). These promoters collect a fee for preparation services, which is often tied to the value of the proposed credit. Usually, the targeted businesses don’t qualify for the credit, so when the adjustment claim is either rejected by the IRS or found to be incorrect during an audit, the business is out the funds paid to the promoter, as well as any monies received from the ERC they were not eligible for and potential IRS fees.

Phishing and Smishing Scams: Emails, texts, phone calls. These are all popular channels for scammers trying to obtain sensitive information from taxpayers by lying and saying they work for the IRS. Please remember that the IRS will always initiate contact with taxpayers by mail.

Online Account Assistance: The IRS Online Account tool provides helpful information to taxpayers. Scammers are using this as an opportunity to learn social security numbers and other sensitive information by calling and offering to help taxpayer set up their online accounts. This can lead to identity theft and a big headache for taxpayers trying to sort everything out.

Fuel Tax Credit Promoters: Like the Employee Retention Credit promotors, Fuel Tax Credit promoters claim that the taxpayer is qualified for the credit when they may not be. These scammers usually charge a big fee to assist the taxpayer in submitting these claims.

Fake Charity Scams: Major disasters like hurricanes, floods, and wildfires can lead to an increase in counterfeit charities to dupe taxpayers. When these disasters occur, people want to help those affected. Scammers take advantage of this generosity by using fake charities as a front for stealing money and private information. Be sure to take the time to thoroughly research any organization before donating.

Shady Tax Preparers: Common warning signs of a shady tax preparer include charging a fee based on the size of the refund or refusing to sign the form as a preparer as required by law. Make sure you’re using a trusted and knowledgeable tax preparer.

Social Media Trends: While this may seem unsurprising to most, it bears repeating – you can’t always trust what you hear on the internet. Social media can circulate misinformation quickly, including ‘hacks’ for getting a bigger tax refund. These trends usually involve lying on tax forms or creating false income. The IRS reminds taxpayers that falsifying tax documents is illegal and penalties are involved.

Spearphishing Email Scams: Bad players have been sending email requests to tax preparers, and payroll and human resources teams to try and gain sensitive client and employee data like W-2 information. These requests can look like they’re from a potential new client, and the scammers then use the data they collect to submit a series of false tax refund filings and collect on the tax returns. Businesses can protect themselves with these cybersecurity tips.

Offer in Compromise Mills: Promoters target taxpayers that owe the IRS money by offering to settle their debts with the IRS at a steep discount for a fee. Many times, the targeted taxpayers don’t meet the technical requirements to obtain an offer, meaning they still owe the IRS the same amount and are paying excessive fees to these companies. Taxpayers can check their eligibility for an Offer in Compromise using this free IRS tool.

Charitable Remainder Annuity Trust Schemes: Promoters can misuse Charitable Remainder Annuity Trusts and monetized installment sales by misapplying the rules, leaving filers vulnerable. These types of schemes are often targeted at wealthy taxpayers.

Tax Avoidance Schemes: The IRS warns taxpayers to be wary of anyone claiming to reduce their taxes owed drastically or even to nothing. This could include micro-captive insurance arrangements, international accounts, and syndicated conservation easements.

Be diligent with your information, teach your employees how to recognize scams, and be sure to discuss any changes in tax strategy with your trusted tax professional. If anyone contacts you with a claim that seems too good to be true, it probably is.

The post The Top 12 Tax Scams to Avoid According to the IRS appeared first on Walter Shuffain.

Businesses can use the standard mileage rate to calculate the deductible costs of operating qualified automobiles for business, charitable, medical, or moving purposes. Keep reading for the updated mileage rates and some reminders for mileage reimbursements and deductions.

Standard mileage rates for cars, vans, and pickups or panel trucks are as follows:

*Moving miles reimbursement for qualified active-duty members of the Armed Forces 

Important Reminders and Considerations 

When reimbursing employees for miles driven, keep the following in mind:

• • The Tax Cuts and Jobs Act (TCJA) prohibits employees from writing off unreimbursed business mileage. Companies that fail to make up for this reimbursement could face legal consequences.
  • Taxpayers using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or claiming a Section 179 deduction may not also use the business standard mileage rate for the same vehicle.
  • Taxpayers can calculate the actual costs of using their vehicle rather than accepting the standard mileage rates. Actual expense methods often provide different results than standard mileage. Talk with your CPA to determine the best method for you.
  • While the IRS standard mileage rate helps hold businesses accountable, it does not account for fluctuations in vehicle-related expenses in different regions of the country.
  • The Fixed and Variable Rate (FAVR) allowance is an alternate method for businesses whose employees use their vehicles for work. This method can help businesses avoid over-or underpaying employees for using their vehicles for business purposes.
  • Mileage reimbursement rates apply to gasoline, diesel-powered, electric, and hybrid-electric vehicles.

To review your organization’s mileage reimbursement policy and any alternate methods for calculating appropriate reimbursement amounts, reach out to our team of knowledgeable professionals today.

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Corporate tax rates

While corporate tax rates would stay the same under BBB, the proposal includes a 15% minimum tax on book income for corporations reporting more than $1 billion in profits. For corporations with foreign parents, the minimum tax would apply to profits of more than $100 million.

The legislation would also impose a 1% excise tax on the fair market value of any publicly traded U.S. corporation’s stock that the corporation repurchases during the year.

BBB would also change the Foreign-Derived Intangible Income (FDII) deduction and Global Intangible Low-Taxed Income (GILTI) regime, increasing the taxes paid by most, if not all, U.S. multinational corporations.

Applying the Net Investment Income Tax to Trade or Business Income

The net investment income tax (NIIT) levies a 3.8% surtax on net investment income derived from interest, dividends, capital gains, and income from passive activities. NIIT applies when a taxpayer’s modified adjusted gross income (AGI) exceeds a threshold of $200,000 for single filers or $250,000 for married couples filing jointly.

Currently, trade or business income earned by pass-through business owners who materially participate in the business is not subject to NIIT. BBB proposes eliminating that exception for taxpayers with modified AGI greater than $400,000 ($500,000 if married filing jointly).

Limitations on interest expense deductions

The Tax Cuts and Jobs Act of 2017 limited the amount of interest a business can deduct to interest income plus 30% of its adjusted taxable income for the year. The BBB would further limit interest deductions for U.S. members of multinational groups that issue consolidated financial statements. The draft legislation describes the limitation as an “allowable percentage” of 110% of the corporation’s net interest expense.

Paid Family, Medical Leave Requirements

The U.S. is the only industrialized country without federally mandated paid parental leave, but BBB seeks to change that. The legislation guarantees four weeks of paid leave to all workers who are:

• New parents,
• Dealing with a serious medical condition of their own, or
• Caring for a loved one with a serious medical issue.

Employers would not have to foot the bill for that paid leave. States with an existing paid family medical leave mandate equal to or better than the federal benefit would be reimbursed for what it would have cost to cover workers in the federal program.

Employers that voluntarily offer paid leave equal to or better than the federal benefit would be reimbursed for the lesser of:

• 90% of the national average cost of paid leave benefits, or
• 90% of their insurance premium

All other public and private-sector employees would be covered by a public program run by the Social Security Administration.

Investing in small business

Build Back Better also allocates about $3.385 billion to support small businesses by improving access to capital, including:

• Additional funding for SBA 7(a) loans
• Reduced or waived fees for new SBA 7(a) and 504 loan borrowers with loans of $2 million or less
• Additional investments into the Small Business Investment Company (SIBC) program
• Establishing a national network of “uplift incubators” to spur economic development in underrepresented communities
• Additional funding for cash grants to growth accelerators assisting small businesses focused on technology
• Providing funding for grants to help minority-owned businesses launch and expand operations

Although the House passed a version of the Build Back Better bill in November 2021, negotiations over the bill stalled in the Senate, so none of the above proposals have been turned into law as of this publication.

At this point, it’s impossible to say which proposals will survive and in what form, but it is worth keeping an eye on as key portions, like workforce support, are expected to eventually pass. If you have questions in the meantime, please reach out to your tax advisor.

The post Build Back Better May Be Stuck, but How Could It Impact Business Owners? appeared first on Walter Shuffain.

The Employee Retention Credit (ERC) was introduced in 2020 to help businesses that have been affected by the COVID-19 pandemic. Since its release, it has been expanded and modified to help more businesses. Despite all of this, many businesses that are eligible for the credit haven’t filed for it. Did the pandemic impact your business? Don’t assume your business is ineligible. Keep reading to learn more.

What is the Employee Retention Credit?

The ERC allows businesses to claim a refundable credit for qualified employee wages and related expenses if there was a significant disruption to business because of the pandemic. That disruption is measured in a quarterly reduction of gross revenues – 50% reduction in 2020 vs. 2019; and only 20% reduction in 2021 vs. 2019. In addition, there is a “safe harbor” test that allows you to look back a quarter. For example, if your 4th quarter 2020 revenues were down 20% compared to the 4th quarter 2019, you are eligible for the first quarter of 2021, regardless of the first quarter test outcome.

The second disruption is a government shutdown – complete or temporary. For example, a restaurant limited to 75% seating capacity by the governor’s mandate has experienced a partial shutdown.

If you experienced EITHER one of these disruptions, you might be eligible for the employee retention credit.

Eligibility for 2020 includes businesses with 100 or fewer full-time equivalent employees in 2019, in which all wages qualify whether the business was open or (partially) closed because of governmental orders. For businesses with more than 100 employees, only wages paid to employees when they weren’t providing services because the pandemic are eligible.

For 2021 the full-time equivalent threshold increased to 500 employees in 2019.

For 2020 the credit is 50% of the first $10,000 of eligible employees’ earnings for the year – up to $5,000 per employee for the year.

For 2021 the credit is 70% of the first $10,000 of eligible employee earnings per QUARTER – up to $28,000 per employee for the year.

What new guidance was released?

The IRS released Notice 2021-49  on August 4, 2021, which provided additional ERC guidance.

• The ERC was expanded to include wages paid through December 31, 2021.
• “Recovery startup businesses” launched after February 15, 2020, have been added to the definition of eligible businesses.
• Clarifying the definition of a full-time employee, including whether wages paid to full-time equivalents are considered eligible.
• Determining if tips should be considered qualified wages.
• Outlining whether wages paid to majority owners and their spouses are considered qualified.

Keep in mind, the ERC is a complex tax credit with ever-changing guidelines and requires interpretation. Reach out to our professional tax team, who are familiar with the credit and most up-to-date guidelines.

What if I missed filing for the ERC?

While some of the newer guidelines are retroactive, others only apply to wages paid more recently. In most cases, employers can file a correction to their quarterly tax documents to receive appropriate credit for qualified wages paid. Keep in mind that wages included in Payroll Protection Plan (PPP) forgiveness are not qualified (no double-dipping).

We have noted a longer processing time for amended returns. This means you’ll see benefits of the credit faster by filing for it with your quarterly returns; however, it could take 90 to 120 days for amended returns.

How can my business receive help?

If you’re like many businesses and need help understanding the ERC and the recent changes, reach out to our team of qualified professionals for help! We look forward to helping you!

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Preparedness takes many forms, from creating a disaster plan, complete with supply kits and evacuation routes, to safeguarding your business with communication templates and IT backup. This article will explore the steps business owners can take both before and after a disaster strikes to protect their company, employees, clients, and the community.

Before Disaster Strikes

• Acknowledge and accept. Perhaps you live in an area that is rarely hit by nature’s wrath – don’t be lulled into a false sense of security due to a lack of recent activity. Disaster preparedness is something you can’t fully appreciate until you need to use it. Having a plan in place costs virtually nothing but can save you everything.
• Have a conversation. It’s important to begin your preparedness campaign at a table with key members of your organization as soon as possible. The emergency planning process will take time to design and implement. We advise hosting a few brainstorming sessions to discuss every aspect of disaster recovery – from assets to communications to continuity of services. It’s important to educate yourself on the kind of emergencies that could affect your business and develop an operations plan for each. Take the time to review potential blind spots and fortify your information systems.  Consider the following vital points.
  • Make sure your records are regularly updated and that current and critical projects are available from the cloud at all times.
  • Document your assets both in writing and with pictures.
  • Review federal and state laws regarding payroll during a disaster and determine if your payroll provider has a fiduciary bond in place.
  • Designate one or two-point persons to reach out to employees, clients, and agencies like the IRS and your insurance company report in the event of a disaster. Include contingency plans for communicating without landlines and cell towers and review emergency texting solutions.
  • Preparation only goes so far – to make sure all your hard work doesn’t have a fatal glitch, set up a time during non-business hours to practice an emergency drill.
  • Once you’ve had an opportunity to discuss your emergency plans, it’s time to put it in writing. Be sure to review and update your emergency plan at least once per year.

After Disaster Strikes

• Be prepared for the practical steps that follow a disaster. Accounting rules remain firmly in place after a disaster. Following these steps can help you limit economic harm to your business and better position you to claim financial relief through your insurance company, the IRS and other sources.
  • Account for inventory losses as soon as possible. When it comes to reporting losses on your tax return, don’t forget to adjust for insurance reimbursements.
  • Account for property damage. If your business sustains any damage that was not reimbursed by insurance, you may be able to claim a deduction on your taxes.
  • Keep payroll in motion or resume payments as soon as possible. You are legally obligated to pay your people, even if your lights are out. Review local, state and federal laws concerning how you should prioritize payroll in the wake of catastrophe.
  • Review tax extensions. Deadline extensions vary, depending on the tax and type of disaster, and payments aren’t necessarily included in the extensions.

Some disasters come with little to no warning, but a business with a preparedness plan can help mitigate total devastation and be better positioned to serve their community well. Share your plan with your employees and remind them to review the plan often. Consulting with your financial advisor in this capacity is also a good idea as business situations and tax laws change regularly.

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With all of these changes, putting a system in place to accurately track business food and entertainment expenses becomes essential. Best practices should include requesting detailed receipts and separately tracking which costs fall under the 50 percent deduction, 100 percent deduction, or not deductible categories.

In addition to keeping excellent records, below are some additional things to keep in mind about the business meal and entertainment deduction rules, including a helpful chart highlighting the deduction category particular meal and entertainment expenses fall under.

Meal and entertainment expense changes

Under the TCJA, the IRS no longer allows businesses to deduct most entertainment expenses even if they were a cost of doing business. Food and beverage related to entertainment venues are only covered with detailed receipts separately stating the cost of the meal.

Another change from the TCJA is that spouse or guest meals are not covered from travel unless the business employs the person. So, if your spouse accompanies you on a work trip, their meals are not deductible for the business.

The Consolidated Appropriations Act of 2021 (CAA) has temporarily increased the deduction for business meals provided by restaurants to 100 percent for tax years 2021 and 2022. Not all meals are created equal, however. The 100 percent deduction is only available for meals provided by restaurants, which the IRS defines as: “A business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” Prepackaged food from a grocery, specialty, or convenience store is not eligible for the 100% deduction and would be limited to a 50% deduction.

Also, note that the expenses must be considered ordinary (common and accepted for your business) or necessary (helpful and appropriate) and cannot be considered lavish or extravagant. An employee of the business or the taxpayer must be present during the meal, as well.

A quick guide to business meal deductions

If you need help establishing a system to better track expenses or seek clarification on whether certain expenses are tax-deductible, give our team of CPAs a call today.

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Set a retirement date

Here is your first question: When do you plan to quit working? You may have a general idea of the age range when you would like to retire, but now is the time to set a precise date. That gives you a timeline to work with, which will make all your other planning easier.

Consider your options

The next essential question: Who do you expect will take over your business? Many companies make one of two choices: either someone buys the company from you or a family member or employee takes over as chief executive when you retire. It is important to consider which one is the most realistic option so that you can ensure a smooth transition down the road. Depending on your plans, there are different steps you should take now to ensure a smooth transition.

If you plan to sell

If you are going to sell your company to another business or individual, you will need an accurate idea of what it is worth. You should get a business appraisal when you are ready to sell; but it may be a good idea to get one now, even if there are many years until your planned retirement. An appraisal can help to spot your company’s strengths and weaknesses so you can analyze how those attributes impact its overall worth.

The information in the appraisal can be used to make changes that improve operations, sales and revenues and make you a more competitive player in the marketplace. Those steps will help increase your company’s value and its appeal to potential buyers at the time you decide to sell.

If you plan to promote from within

It is always a good idea to have a current idea of your company’s worth, but there are also other necessary factors to consider if you are hoping that someone within your company will one day take over the reins of leadership. The first question, of course, is who will that person be? Is there a very talented younger employee who you believe could one day take over? If so, begin grooming him or her now. This includes introducing the employee to key clients, increasing his or her level of responsibility and including the person in decision making whenever possible.

Even if you expect to sell your business, it is a good idea to have a promising future leader ready to take over the reins. In most cases, a potential buyer will be happy to see that there is someone in place to carry on.

There are many possible exit strategies available to small business owners. No matter which you choose, it will be a good idea to have an accurate sense of the company’s worth and to have a strong management team in place. Our firm’s professionals can help you develop a strategy to suit your business. Call us today.

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