Have you taken a good look at your accounting system recently? If not, it’s probably a good time for a review. Many companies think that their accounting system is in good shape, until they begin trying to use it as a tool to better manage their business. Experience clearly indicates that a good accounting system increases the chances of survival for the startup business and increases the chances of earning a large profit for the established business.

A good accounting system is made up of several components: robust accounting software, efficient accounting processes with the right checks and balances, educated accounting team, solid financial statements, and critical business indicators. Implementing a system that has all the major components can help to ensure your business gets accurate, reliable and consistent accounting information on a timely basis.

Accounting software is critical to a good accounting system

A software platform must not only be able to handle your business needs today but it must have the capability to grow with your changing business. Using an established software platform that is updated regularly by the software provider will help ensure the software can handle the needs of your changing business. It can also make it easier to transfer your accounting information to other software platforms and services for such things as payroll and taxes. A robust software platform can really help streamline your accounting processes reducing the time and resources needed to get the information your need.

Efficient Processes with Checks and Balances

Having efficient processes for data entry will help to reduce the time needed to complete your monthly financial close as well as help eliminate the chances of accounting fraud. Ensure you have the necessary data ready to perform the monthly close. Also, ensure you have the right number of accounts set up to adequately breakdown the business activity, use different accounts for frequent or substantial expenditures, use miscellaneous accounts for small expense items. Ensure you have processes in place to follow up on such things as outstanding accounts receivable. Separate accounting responsibilities such as accounts receivable, accounts payable, general accounting and disbursements. Having the right checks and balances in place by separating accounting responsibilities can help eliminate accounting errors and reduce the chances of accounting fraud.

Having a well educated accounting team is critical to getting accurate financial information

An educated accounting team is critical to getting accurate financial information. The team must have the critical accounting knowledge necessary to make the right accounting entries at the right time. They must be able to comprehend changes in the business and accounting regulations that impact the company’s financial statements. Additionally, the team must be able to understand the accounting software such that they can make the correct adjustments to the accounting structure for changes in the business.

Solid Financial Statements and Indicators

Most business owners are looking for financial information to help them more effectively manage their business. Having the right financial statements that are accurate, easy to understand and highlight the most important information are critical to the success of the business. Also, having a good set of indicators that accompany the financial statements helps highlight the key issues for the business owner to focus on. This dashboard of indicators is key to the business owner understanding business performance relative to company goals and the competition.

So take a closer look at your financial system, if it is not giving you the information you need in a timely manner, it’s time to make a change. Experience clearly indicates that an accurate accounting system helps increase the chances of business survival and earning a large profit.

Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.

Finding the right financing for your business can be a challenging task. However, if you understand a few of the basics when it comes to your financing options, you can reduce the amount of time it takes to find that financial partner and increase your chances of getting the right financing for your business.

Just like any industry there are many different financial resources, each with a different area of focus or specialty. The financial resource that is right for you depends on several factors:

• The industry your business is in.
• The stage of your business.
• The amount of financing you need.
• The time you need the financing.
• The amount of control of your business you are willing to give up.
• Your business and personal qualifications.
• How much you are willing to pay for the funds.

In financing, the risk reward trade-off holds true; the greater the risk the financial resource is taking, the greater the return they are expecting to receive from their investment. Understanding where your company and your financial resource are on the financing spectrum will help you determine if there is a good match between debtor and creditor.

Debt vs. Equity

One of the first questions you need to ask yourself when determining your capital requirements, are you willing to give up some ownership or control of your company? If you are, than you may be a candidate for equity financing, if you are not, then you are more likely a candidate for debt financing. In general, with debt financing, there is a clearly defined: loan amount, interest rate and term, and you are required to make periodic fixed principle and interest payments over the term of the loan whether your company is profitable or not. However, the financing resource does not have ownership of your company or the ability to directly control the direction of the company. In general, with equity financing, there are no fixed periodic principle and interest payments, and there are no fixed terms as to when the investment needs to be paid back. However, in return for their investment, you give the investor, an ownership stake in the company, a share of the company profits, and the ability to control the overall direction of the company.

Debt Financing

There are many types of debt financing including: loans, lines of credit, factoring, and purchase order financing.

Loans

Loans are typically used for financing the purchase of fixed assets such as buildings and equipment. They are generally provided by banks and finance companies, have a fixed term 3+ years, a fixed annual interest rate, and a fixed monthly principal and interest payment. They are typically secured by the fixed asset being purchased. Loans are typically made for 50% – 80% of the value of the fixed asset being purchased. In general, this type of debt financing is usually provided to companies that are breakeven or profitable and have been in business for 3+ years. Interest rates currently range from approximately 7% to 12% per year.

Lines of Credit

Lines of Credit are typically used for financing working capital needs and are used on as needed basis. They are expected to revolve on a regular basis, that is, you borrow money one month then pay it back with interest the next. They are generally provided by banks and finance companies and have: an upper limit of dollars that can be used at one time, a fixed term of 1 year, a variable annual interest rate, and a variable monthly payment depending on the amount of funds being used. They are typically secured by such things as accounts receivable and inventory. In general, this type of debt financing is usually provided to companies that are breakeven or profitable and have been in business for 3+ years. Interest rates currently range from approximately 7% to 12% per year.

Factoring

Factoring also used for financing working capital needs, is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor or finance company) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring is not a loan, it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three. Factors usually factor a limited number of invoices, for a limited time (30-60 days), and charge a fixed interest rate which ranges from 1%- 3% per 30 days and is collateralized by the accounts receivable. Invoices may be factored with or without recourse. In general, this type of debt financing can be provided to new and established businesses.

Purchase Order Financing

Purchase Order Financing also used for financing working capital needs, is a financial transaction whereby a business which has orders for its product, can get a loan from a financing company to purchase the materials and labor needed to produce the product which is needed to fulfill those orders. Purchase order financing is usually provided by finance companies. It has a limited term (30 -90 days), has a fixed interest rate which usually ranges from 1%-3% per 30 days and is collateralized by the materials. In general, this type of debt financing can be provided to new and established businesses.

Factoring and purchase order financing can be provided to new and established businesses.

Equity Financing

There are many types of equity financing including public stock and private stock.

Public Stock

Companies that issue public stock have the ability to raise large amounts of capital from a variety of investors all over the world. There stock is usually traded on a regular basis on public stock exchanges such as the New York Stock Exchange (“NYSE”) or the “National Association of Securities Dealers Automated Quotations (“NASDAQ”). They are regulated by the Securities and Exchange Commission (“SEC”). A publicly held company is required by the SEC to publicly disclose its financial performance in detail on a quarterly basis. As with equity financing, their investors, own a portion of the company, share in the company profits and can have control over the company direction by utilizing their voting rights.

Private Stock

Private Stock companies that issue private stock have the ability to raise capital from a limited number of accredited investors in the world. There stock is not traded on a regular basis on the public exchanges. However, they are regulated by the Securities and Exchange Commission. Unlike a publicly held company, a privately held company does not have to disclose its financial performance to the public. As with equity financing, their investors, own a portion of the company, share in the company profits and can have control over the company direction by utilizing their voting rights.

Angel Investment

Angel Investment is a private equity investment which is generally raised from a small group of accredited investors (high net worth individuals). This group of investors varies dramatically, but could be professionals, business owners or business executives. They could invest on their own or through angel investment groups. These investors usually invest in early stage companies that have the ability to grow rapidly. They usually invest between $25K and $1M and actively participate in management. In general, these investors concentrate their investments in industries they are familiar with. They may have previously worked in the industry, invested in the industry or owned businesses in the industry. In general, these investors prefer to exit their investment in approximately 5 years.

Angels invest between $25K and $1M in early stage companies that have the ability to grow rapidly.

Venture Capital Investment

A private equity investment which is generally raised from institutional investment groups. These investment groups vary in size from $50M to $5B. These investors usually invest in technology companies that have some initial sales and have the ability to grow rapidly. They usually invest between $1M and $50M and can actively participate in management. In general, these institutional investors concentrate their investments in certain industries they believe have the greatest potential for growth. These investors prefer to exit their investment in approximately 7 years.

Financial Partner Research

Before you begin contacting prospective financing sources, it is a good idea to do your research. Understand what industries your prospective financing resource has invested in, what type of financial products they have to offer, what size investments they generally make, what their investment risk profile looks like, and what other services they can offer such as management support and business development support. Much of this information can be obtained through referrals from your CPA, attorney or bank, by researching financial resource websites, by contracting your industry association and by interviewing your prospective financial resource.

Finance Package

Before you contact your prospective financing resource, you will also want to prepare your financing package, which usually includes: historical business tax returns, historical personal tax returns, historical business financial statements, interim business financial statements, aged accounts receivable and accounts payable reports, a personal financial statement, a business financial forecast, articles of incorporation, a use of funds statement and a business overview/plan. You only get one chance to make that good first impression on your financial resource, so take the time to do it right! Ensure you have a complete and accurate finance package that really presents your business in the best possible light. If you have never prepared a finance package before, get help from an expert! A good CFO or CPA firm can help you through the process.

Closing

Finding the right financing for your business can be a challenging task. However, if you understand the type of financing you need, how to locate that financial resource, and what information they will need from you, you can reduce the amount of time it takes to find that financial partner and increase your chances of getting the right financing for your business. A great financial partner can really have a positive impact on your bottom line!

 
Still need help determining the right type of financing for your business? Contact our experts at Pinnacle Business Solutions. Call us today (480) 980-3977.

Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.

Is your business financially weak? Is its financial position weakening each year? It may be surprising to learn that many business owners cannot answer these questions. If you would like to determine the financial health of your company, here are a few financial weakness indicators you will want to be on the look-out for:

1. Cash flow picture for business is unclear

Business owners need to understand how much cash flow their business is generating on a monthly basis. They also need to understand how much cash flow is being generated by day to day operating activities, investing activities and financing activities. This will help them determine, at the end of the day, if they are actually increasing or decreasing their cash in the bank. Furthermore, if their business is not increasing its cash in the bank, what areas need to be fixed.

2. Financial statements are not meaningful or inaccurate

It is very difficult to manage a business with inaccurate financial statements. It’s like driving your car in the dark without headlights. If your bank, investors or business partners are having trouble reading your financial statements, they may not be accurate. If your accounting staff has no formal education or training in preparing financial statements in compliance with Generally Accepted Accounting Principles (GAAP), there’s a good chance that your financial statements are not accurate. You may want to consider having a certified public accountant take a look at your financial statements so they can perform an audit or a review, and let you know what is not being done correctly.

3. Losing market share to your competition or unaware of position in marketplace

If your business is not growing as fast as your competitors, you may be losing market share. If you have no idea how your business is performing when compared to your industry, there is good chance your business is losing market share to your competition. It is important to take some time each year to benchmark your business performance against your competition. This will help you learn which business strategies are working and which ones are not. It will also help you ensure that you do not get surprised by changes in your competition and market.

4. Inefficient use of assets (people, capital equipment, intellectual property, inventory) or loss of assets

One way of measuring business performance is by measuring your business return on investment (“ROI”). This financial metric measures your business net income relative to the amount of investment you have in your business. There are two ways to improve this metric, increase the company net income by a greater amount than your investment, or reduce your investment by a greater amount than your reduction in net income. The key is to be regularly reviewing your business net income and investment. Is your company income increasing each year? Is your company efficiently utilizing all its assets? Is your business equipment being utilized greater than 90% of the time? If not, you may need to change your strategy to improve your business ROI.

5. Not getting paid on time

Is your business allowing customers to pay in the future for goods and services delivered today? If so, you will want to ensure you are regularly reviewing accounts receivable and making sure your customers are paying according to your business terms and conditions. If customers are not paying on time, this can very quickly have a negative impact on your business working capital. This can make it difficult to cover the necessary business expenses such as payroll, rent, insurance and utilities. Financially strong businesses measure and manage their accounts receivable turnover on a monthly sometime weekly basis.

6. No long term strategic plan for business

Small Business Administration (‘SBA”) studies show that 80% or more of businesses that have been in business for greater than 3 years have long term strategic plans. These strategic plans enable business owners to plan for growth, set goals, understand the market and competition and make the right investment in people and capital at the right time. These strategic plans can lead to faster growth, lower risk, increased profitability and a greater ROI for your business. If you do not have a plan for your business, you may be at a disadvantage.

7. No indicators in place to adequately monitor business performance

It is very difficult to improve something without measuring it first. Your business is no different. If you do not have indicators in place to track the key drivers of your business such as: sales, profitability, quality, customer service, R&D, cashflow, employees, you may find it hard to determine what is causing a downturn in your business or where the opportunities for future growth exist. The key is to identify those key drivers of your business, set goals for these drivers and monitor your performance relative to these goals, on a periodic basis.

8. Not achieving required return on business investments

Just like any other investment you might make, it is important that you get the required return on your business investments, one that is commensurate with the risk you as a business owner are taking.

For example, if you purchase a piece of equipment for $100,000, and your required annual rate of return is 20%, it is critical that the equipment is generating profit after paying all expenses of $20,000 or more each year. If you are not getting the required return on your business investments, you may be better off putting those investment dollars to use in a different area.

9. Not getting the lowest cost of capital or don’t have the capital needed to expand

If you are finding it difficult to find capital to grow your business or the capital you are able to obtain is very costly when compared to your industry averages, it may be because your business performance is trailing your industry. That is, your company’s profitability, liquidity and solvency ratios are weak. As a result, your business has increased risk associated with it. Increased risk translates into higher borrowing costs. Strengthen your business financial ratios to help reduce your cost of capital.

10. No strategic banking partner

Business owners need to ensure they have a solid team of business advisors to address their changing business needs as they grow. A business banker is a key member of that advisory team. Your business banker can help you plan for and manage the debt financing you will need for such things as working capital, equipment and building purchases, as well as banking and merchant solutions. If your business does not have a strategic banking partner, you may be at a disadvantage when compared to your competition.

11. Paying too much in taxes

If your business is paying more in taxes than your industry average. You may be missing out on a variety of federal and state business deductions and credit that apply to your business and industry. With tax laws changing on an annual basis it is even more important to have a tax advisor that understands your business, is helping you plan for your business growth and putting in place the appropriate tax plan to keep taxes at a minimum.

 
If your business is experiencing any of the financial weaknesses listed above, it is in your best interest to get the financial support you need to address these weaknesses as soon as possible! Your business can be financially strong and increasing its financial position each year! If your financial advisory team is not effectively managing these items, please let us know. We will get your business the results that it deserves. Call us today (480) 980-3977.

Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.

In these very challenging and uncertain times many businesses see their sales and profitability fluctuating dramatically. They see their customers delaying purchases or reducing the size of these purchases. They may also find that their ability to get financing has diminished. It is in these times that the need for sound financial management is even more important.

When it comes to financial management, many companies focus solely on sales and profitability. This is a good start, but does not comprehend the entire picture, especially as businesses mature from an internally funded startup to externally funded business. As businesses grow in size, take on more employees, purchase fixed assets, engage in long term contracts and take on larger customers they need to be thinking not only about revenues and profits, but also assets, liabilities, equity and cash flow. They need to be thinking about how their decisions are going to impact the company’s monthly cash flow; both short term and long term. They also need to be thinking about how these same decisions will impact the company’s financial position or balance sheet. Are these decisions increasing or decreasing business risk? Are they improving financial strength or worsening it?

Runway

To borrow a term from my flight training, knowing your runway length is very important to a pilot. Pilots must know if they have adequate runway length to take-off or land their planes to ensure a successful flight. The longer the runway the more time the pilot has to implement: decisions, course corrections, emergency procedures, and survive. Applying this concept to businesses we look at a company’s monthly burn rate or expenses and compare that to how much cash or liquid assets they have in the bank. Dividing the cash by the monthly burn rate allows a business to understand how many months it can survive without sales or how long its runway is. The longer the runway or the stronger the businesses balance sheet, the more time a business has to be successful. Determining how long your runway should be will depend on your industry and your risk tolerance. It is also impacted by how quickly your company can change directions to adapt to its changing market. However, a good rule of thumb is to maintain a runway of between 12 and 24 months.

Working Capital

In many businesses, especially growing businesses, maintaining a strong balance sheet and adequate working capital is a challenge. However, with a good financial plan and sound financial controls a business can achieve a lot more success in this area. Having adequate working capital allows a business to have enough cash on hand to pay its short term liabilities such as: materials, payroll, rent and utilities. It also allows a business to continue to expand and do business with more customers and vendors. Conversely, a business that does not have a strong balance sheet and adequate working capital to pay its short term debt can find itself: cutoff by suppliers, losing employees, getting locked out of its office, just to name a few. Inadequate working capital can make it very difficult to operate on an ongoing basis.

Decision Making

Having a strong balance sheet enables a business to make decisions proactively instead of reactively. It gives the business more time to think through a decision and select an option that is in its best long term interest. Even though that decision may have a negative impact on the company’s cash position in the short term. It also allows a business to avoid unproductive time of managing dissatisfied vendors and customers that are not getting paid or paying on time.

Banks

From a banking perspective; having a strong balance sheet lowers risk. It can give the bank the assurance they need to write a business a loan, extend a line of credit, or provide it with other banking services. It also helps to ensure that the business will maintain the financial ratios required by its loan covenants. Adhering to loan covenants allows a business to remain in good standing with its lending institution and avoid having its notes or lines of credit reduced or cancelled. It also helps demonstrate to the bank that the business owner is in control of its business and has the ability to make principal and interest payments on any loan or line of credit. It also may allow the bank to provide the business with its most cost effective financing.

Survival

As most finance professionals know, “cash is king”. Having adequate cash in the bank and a long runway allows a company to sustain itself in a downturn or recession. It allows this business to be one of those left standing at the end of the day. It also allows a company to maintain its course when its competitors have to change theirs. It may allow you to: continue to market, hold on to top talent, retain key assets and avoid selling off assets at fire-sale prices. It also makes your business more attractive to those candidates seeking employment security. In many cases, having adequate cash in a downturn allows a business to potentially take advantage of its competitor’s weaknesses by: buying their business at deeply discounted prices, obtaining their customers, or buying their assets.

Not There Yet?

If you are one of those businesses that reads this letter and says, “…interesting information, but I don’t have a strong balance sheet”, then you could benefit from a plan to get you there.
It starts with research to determine what a strong balance sheet looks like for your industry.
What are those industry ratios for profitability, liquidity and solvency? What is ‘best in class’ for your industry? What will the ratios be in the future?

Use this information to establish your goals and then build a plan to get your business there over the next few years. Monitor your performance toward these goals each month to make sure you are staying on-track. Ensure that you understand the balance sheet impact of every major business decision before it is made. If you maintain focus and achieve these balance sheet goals, you will be building a stronger, more stable, more valuable business each year. You will also be building a business that is able to get the capital it needs to sustain long term growth.

Closing

Having a strong balance sheet can really make a difference with your business! It can give you the time you need to make good business decisions as well as give you the liquidity you need to operate your business on an ongoing basis. It can improve your position with your financial institution so that you get the capital you need to grow and help ensure your survival in an economic downturn. If you’re not there yet, that’s Ok, but make a plan to get there! In the end, you will have a stronger, more stable, and more valuable business!

If you have any questions regarding the financial issues discussed above or any other financial issues, please give us a call at (480) 980-3977.

Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.

The transportation industry is an exciting and fast paced industry. It is a cyclical industry that is capital intensive and contains many large and small industry participants. It is a high-volume business with relatively low gross and profits margins. The industry can be significantly impacted by changes in such things as fuel prices, tariff and duties and changes in US Gross Domestic Product. This industry can present challenges from a financial perspective to its participants. Some of these challenges include: cash flow management, profit management, bad debt, financing and reporting.

1. Cash Flow Management

The transportation industry has historically been a very high-volume business with very low gross margin and profit margins. This results in very large accounts receivable and account payable balances on an ongoing basis. If customers are slow to pay their invoices (i.e. >30 days), this can quickly present challenges from a cash flow perspective. If the documentation supporting each shipment gets lost or delayed this can also delay collection. If a shipment gets damaged and there is a claim regarding the shipment, collection can be delayed. Transportation business owners need maintain aggressive accounts receivable collection processes to ensure clients receive invoices and supporting documentation quickly, clients acknowledge receipt of outstanding invoices with supporting documentation, and payments are received within payments terms. Providing invoices and receiving payments electronically is highly recommended. Maintaining a positive relationship with vendors is also critical, ensuring that vendors are paid according to payment terms is key. Matching payment terms with vendors and customers can really help to maintain positive cash flow.

2. Profit Management

The transportation industry works on very low gross margins and bottom-line profit margins. As a result, it is critical that businesses in this industry operate as efficiently as possible. This includes effectively managing capital equipment such as trucks, ensuring they are being utilized 95%+ of the time, they are well maintained and utilize the most effective routes to deliver product from origin to destination. Maintaining the optimum number of trucks will also help to keep equipment license expense at a minimum. It also includes maintain good controls over indirect spending such as: people, insurance, rent, taxes. Maintaining highly productive employees is very important. Taking the time to hire they right people for the right position is critical. Also, ensuring they are well trained, motivated, have clear expectations and that they are delivering the desired results for the company. This industry is challenged by a higher than average rate of turnover which can be costly, so taking the time to ensure you have solid employee performance management processes in place can really impact the bottom line.

Reviewing insurance coverages on a regular basis is also important. Making sure you have the right insurance for your business today and into future and working with your insurance carrier to do everything you can to reduce your risk of loss, with such things as driver education/training, asset tracking and control, solid business processes. Many businesses in this industry have significant rent expense for warehouses and land. Business owners need to ensure they are utilizing their building and land efficiently, that they do not have excessive unused building and land. This will help keep rent expense, property taxes, insurance and utility expenses at a minimum. Use of technology in the transportation industry is also very important. Businesses should be evaluating the latest technology that can be used to more efficiently and effectively transport product from origin to destination. This could be items such as: GPS technology on all trucks, load tracking/routing software, and enhanced computer technology that enables electronic transfer of information with customers and vendors.

3. Financing

The transportation industry is challenged is several areas. Many participants a small sole-proprietors that are thinly capitalized. Many of its assets (i.e. trucks) are constantly moving all over the United States. The industry has a higher than average occurrence of bad debt and theft. There is a high turnover in truck drivers. There is a high turnover in transportation businesses. All of these characteristics make it challenging for industry participants to obtain low cost working capital financing. In many cases, the financing used in this industry is factoring, factoring can be a useful financing solution in the right situation (i.e. a new rapidly growing business). However, it can be a very expensive solution when compared to tradition bank financing. For example, a traditional bank revolving line of credit may range from 5% – 7% APR while a factoring solution may range from 12% – 36% APR. This expensive financing can really take a bite out of business profits. Business owners should work to position their business over time for traditional bank financing by improving business profitability, liquidity and solvency ratios. Improving business efficiency, increasing bottom line profit strengthening the balance and driving growth will make your business more attractive to traditional lenders. It can also put the company in a good position to: weather any downturn in the economy, cyclicality in the market, or impact from changing fuel prices.

4. Bad Debt

The transportation industry is also characterized by many small sole proprietors such as truck drivers, owner operators and freight brokers. These sole proprietors can be very thinly capitalized. One or two loads that do not go as planned (i.e. damaged in shipment) can be devastating to these sole proprietors even sending them into bankruptcy or out of business. Transportation business owners need to recognize this risk and take measures to limit their exposure in this area. Some things that can be done to reduce this risk include regular credit checks on all vendors and customers, establishing tight credit limits on all vendors and customers, and aggressive collection efforts on all outstanding balances, no or limited advances to vendors. They can also consider taking security deposits from some customers who have a history of poor performance. Once the business owner has extended credit to one of these customers or vendors, they have put themselves into a challenging position. Collection and legal actions can be expensive and time consuming and even if you are successful in a getting a judgement, it still has to be collected. If the sole proprietor does not have the funds to pay or declares bankruptcy, the business owner is still not going to receive payment.

5. Reporting

Reporting and record keeping can be a challenge in the transportation industry. Especially with the large number of small owner operators and trucking companies. Many of these small owner operators and trucking companies don’t have the systems and processes in place to provide accurate, timely, electronic, information regarding their business or their shipments. This can present challenges for the transportation companies they do business with. IRS and state reporting can be delayed or inaccurate, these transportation companies can also run into problems with independent contractor reporting to the IRS.
Transportation companies that ship product across the US can also quickly find themselves subject to tax reporting in multiple states. It is critical that companies proactively manage their exposure in these areas by maintaining a good accounting system with a record of all sales by state and detailed information on customers and vendors including business name, address, tax ID and license information. These issues can be time consuming to address and result in significant fines and penalties to the transportation company.

Conclusion
The transportation industry is an exciting and fast paced industry. It is a cyclical industry that is capital intensive and contains many large and small industry participants. It is a high-volume business with relatively tight gross margin and profits margins. The industry can be significantly impacted by changes in such things as fuel prices, tariff and duties and changes in US Gross Domestic Product. This industry can present challenges from a financial perspective to its participants. Some of these challenges include: cash flow management, profit management, bad debt, financing, reporting. Business owners that are able to effectively manage these challenges can really improve their bottom line!

If you have any questions regarding the financial issues discussed above or any other financial issues, please give us a call at (480) 980-3977.

Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.

Necessity may be the mother of invention but, could a recession be the mother of innovation? If we take a look at history we can make a strong case for just that! More than half of the 2009 Fortune 500 Companies were founded in a recession. Many of the world’s leading, multibillion-dollar corporations, from General Electric to Microsoft, were founded during economic downturns. Hewlett Packard, Fedex, CNN, Fortune Magazine, Revlon Cosmetics, Hyatt, Burger King, and Cliff Bar were all founded during recessions. In general, operating costs tend to be cheaper in a recession. Talent is easier to find because of widespread layoffs. Competition is usually less fierce because, honestly, many players are taken out of the game.

According to a study conducted by the Ewing Marion Kauffman Foundation, “challenging economic times often serve as the rebirth of entrepreneurial capitalism, leading to the creation of much-needed new jobs.” Recessions can also help executives figure out how to improve products, services, and processes internally and for customers. Ideally, the creative thinking that’s needed to weather the storm of an economic downturn can lead to new markets and revenue streams. Innovation originates from challenges.

Here are 5 tips you may want to consider to position your company for growth in a recession:

#1. Leverage Your Strengths

In this market, it is important to focus on your core competencies. What do you do best or better than your competition? Stay focused on these key areas by continuing to measure your performance in these areas on a regular basis. Communicate regularly with your top customers and keep your staff focused on exceeding your customer’s expectations. These customers will be the customers that sustain you through this recession. Continue to market and drive additional sales in your target market. You need to continue to fill the pipeline with new customers as some of your existing customers just won’t survive recession.

#2. Streamline Your Operations

In addition, to staying focused, it is important to understand the key drivers of your business and improve them. Embrace the idea of continuous improvement. How can you get more output out of the same resources? Review each of these key drivers in more detail and explore creative ways for improving them. Challenge your staff to evaluate their areas and come up with ideas for doing things better, faster or cheaper. Some examples of this may include evaluating new and faster ways for getting and closing sales. How could we get more sales with the same human and capital resources? Is there an opportunity to utilize technology to generate sales more quickly? Is there a way to close deals and ship product faster?

#3. Maintain Cash Flow

Understand your businesses cash flow picture. Is your cash position improving or deteriorating? Look for ways to improve your cash flow position. Some examples of this might include making your expenses variable where possible, so that you incur expenses only when you generate revenue. Other ways may include matching your cash inflows with your cash outflows, by minimizing inventory positions, aligning credit terms with customers and suppliers. Keep a close eye on the credit you extend to customers, especially if the customer’s financial position is weak or weakening. Require payment upfront for new customers and only consider providing credit to those customers that have a solid track record of paying their bills on-time.

You can also improve cash flow by increasing turnover. Increasing accounts receivable turnover or how quickly you collect your sales as well as how quickly you turnover your inventory can really make a difference to your cash flow. The faster you turn your sales and inventory into cash the better your cash flow. Higher turnover also helps to reduce your risk of bad debt and inventory obsolescence. The more you can build up your cash reserves, the longer you will be able to sustain your company in a protracted recession and have the cash you need to take advantage of market opportunities.

#4. Position Yourself to Take Advantage of Market Opportunities

Recessions can create opportunities for those businesses with the financial strength and vision to move quickly. Keep an eye on your competition, understand who is doing well and who is struggling to stay afloat. Understand who is servicing their customer well and who is not. If you position yourself correctly, you may be able to take advantage of some of these changes in your market. You may be able to buy all or a portion of your competitors at deeply discounted prices. You may be able to pursue some of those unsatisfied customer. You may also be able to pick up some of their top talent to round out your own team and position you for growth as the market rebounds. Recognize that these types of markets foster creative thinking, so be open to opportunities to partner with suppliers, customers and even competitors to create new business models.

#5. Communicate

It’s important is these market to stay positive and communicate. Communicate with your staff, so they know where the company is headed and can help you identify those next big opportunities. Encourage innovation among your staff, let them know that you value their opinion. Reward good ideas. Communicate with your financial resources, so they understand your position and your plan to be successful. Let your financial partners know that you have their interests in mind and need their support to be successful. The more you communicate with your financial partners, the more they will understand your business and your market, and the more they will be willing to work with you if things don’t go exactly as planned.

Conclusion

Recession could be the mother of innovation. So stay focused on what you do best, look for ways to streamline your operations, keep a close eye on your cash flow, put yourself in a good position in your market and communicate. It could really make a difference in your bottom line.

 

 

Note: The information contained in this material represents a general overview of accounting and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.

Business financial strength is of vital concern to business owners, corporate managers, investors and lenders. Efficiency and cost control are keys to success in many companies throughout the United States and the world. There are many ways to measure the financial strength of a company. The key is identifying the right measurement tools for the company, taking into consideration: the industry, stage of life cycle, time horizon, business objectives, and economic conditions. It is also important to understand your company’s financial performance relative to its industry as all companies compete in the marketplace on a local, regional, national or international level. In general, the financial strength of a company can be measured in three key areas: profitability, liquidity and solvency.

Profitability

Profitability measures a company’s ability to generate profit or positive net income for a given level of sales or investment. If a company is not profitable it eventually becomes insolvent and may require reorganization or liquidation. The greater a company’s ratio of net income to sales or investment, the stronger it is. One example of a financial ratio that measures a firm’s profitability is the profit margin ratio which measures the amount of net income a company generates relative to the amount of sales it generates. Another example of a financial ratio that measures profitability is return on investment or ‘ROI’ which measures a firm’s profitability relative to the amount of capital invested to generate that profitability.

Liquidity

Liquidity measures a company’s ability to utilize its resources available to meet its short term commitments. If a company cannot meet its short term commitments on time, it eventually becomes insolvent and may require reorganization or liquidation. The greater the ratio of resources available to short term commitments, the stronger the company. One example of a financial ratio that measures liquidity is the current ratio. The current ratio measures the size of a company’s current assets (i.e. assets that can be converted into cash in less than 12 months) to the size of its current liabilities (debts that have to be paid in less than 12 months). Other liquidity ratios measure the company’s working capital required for the level of sales generated. One example of a financial ratio that measures this characteristic is the accounts receivable turnover ratio, which measures the size of sales relative to the size of average accounts receivable.

Solvency

Solvency measures a company’s ability to meet its interest and principal payments on long term debt and similar obligations as they come due. If a company cannot make payments on time, it becomes insolvent and may require reorganization or liquidation. One example of a financial ratio which measures a firm’s long term solvency is the debt ratio. This ratio measures the amount of long term debt financing as a proportion of its overall capital structure. In this case the greater the ratio of long term debt to overall capital the great the solvency risk and the weaker the company.

Key Drivers of Your Business

As we mentioned above, there are many ways to measure the financial strength of a company. The financial metrics mentioned above are a few of the key metrics used to measure performance. The key is to identify the right metrics for your business. One way to identify these metrics is to identify the key drivers of your business and then identify those financial metrics that will help you track these key drivers. For example, in one industry one of the key drivers may be sales growth and profitability, while for another industry the key drivers might be cost control and liquidity. The former may want to utilize more profitability metrics to track performance, while the latter may want to utilize more liquidity metrics to track performance.

Keep It In Context

It’s important to measure financial performance in some context. Understand how your financial performance compares to your industry average and best in class. Are you doing better or worse you’re your competition? Understand how your financial performance compares to historical trends. Is your company gaining financial strength or losing financial strength over time? Understand how your financial performance compares to your long range plan. Is your company on-track to achieving its long term financial goals or do you need to make some course corrections to get back on track? By making these comparisons you will clearly understand how your company is performing in the marketplace. You will also be better able to identify those changes you need to make to be successful.

In addition to increased profitability, liquidity and solvency, companies that put programs in place to aggressively measure and improve financial strength can benefit tremendously. These benefits can include greater access to debt and equity capital, lower cost of capital, increased growth, increased market share, increased flexibility and ability to respond faster to changes in the market.

Conclusion

Business owners can no longer afford to manage by gut feel. Business owners need to monitor the financial strength of their companies relative to their marketplace on an ongoing basis. Placing increased focus on the key areas of business profitability, liquidity and solvency can really have a positive impact on your financial strength and bottom line!

 

 

Note: The information contained in this material represents a general overview of accounting and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.

President Trump signed the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017. This $1.4 trillion tax cut was expected to lower taxes for middle-class Americans and bring back jobs to the United States. One of the new provisions in this act was the creation of “Qualified Opportunity Zones” under Internal Revenue Code 1400Z-1 and 1400Z-2. These Qualified Opportunity Zone provisions could provide businesses, projects, and commercial property in eligible low-income census tracts, attractive financing for economic development. They could also provide opportunities for investors, individuals and corporations, to defer tax on current capital gains, significantly increase tax basis in their current investments, and abate all future tax on capital gains from these investments.

A “Qualified Opportunity Zone” is a population census tract that is a low-income community that is designated as a qualified opportunity zone. The governor of each state and the US Treasury Department certify the qualified opportunity zones within a state. In Arizona, portions of: Phoenix, Scottsdale, Glendale, Tempe and Mesa have been designated as Opportunity Zones.

This new tax provision provides an effective deferral mechanism for short and long-term capital gains from current investments in nearly all asset classes including stocks and other securities. Unlike Section 1031 “like-kind” deferral, qualified opportunity zones will provide: (i) the ability to invest only the gain rather than the entire current investment, (ii) a broader range of investments eligible for the deferral, (iii) a potential basis step-up of 15 percent of the initial deferred amount of investment, and (iv) an opportunity to abate all taxation on capital gains post-investment.

The new provision allows taxpayers to defer the short term or long-term capital gains tax due upon a sale or disposition of property if the capital gain portion of the sale or disposition is reinvested within 180 days in a “qualified opportunity fund.” A “Qualified Opportunity Zone Fund” is a corporation or partnership that invests at least 90 percent of its assets in qualified opportunity zone property.

If the investment is maintained in the “qualified opportunity fund” for five years, the taxpayer will receive a step-up in tax basis equal to 10 percent of the original gain. If the investment is maintained in the “qualified opportunity fund” for seven years, the taxpayer will receive an additional five percent step-up in tax basis. A recognition event will occur on Dec. 31, 2026, in the amount of the lesser of (i) the remaining deferred gain or (ii) the fair market value of the investment in the “qualified opportunity fund.” Investments maintained for 10 years and until at least Dec. 31, 2026, will allow for an exclusion of all capital gains, from post-acquisition gain on the investment in a “qualified opportunity fund”, to be excluded from gross income. For an investment maintained longer than 10 years and upon a sale or disposition of the investment, the new provision also allows the taxpayer to elect the basis in the investment to be equal to the fair market value of the investment.

Example
John Taxpayer bought stock in XYZ Corporation in 2010 for $20,000, and today it is worth $40,000. John thinks XYZ Corporation stock has topped out and he wants to sell; selling will cause John to realize $20,000 in capital gain. Before Opportunity Funds, there were only two choices: (1) continue to hold the stock and defer the gain/tax, or (2) sell and pay over $4,000 in income tax. Now there is a third choice – the Opportunity Fund. If John sells his XYZ Corporation stock for $40,000, and reinvests the $20,000 gain in an Opportunity Fund, he gets to keep his original investment of $20,000 and pay no taxes*. If John leaves his $20,000 in the Opportunity Fund for 10 years and it increases in value to $40,000, he gets the post-acquisition gain of $20,000 in year 10 entirely tax free.

*The deferral of tax on John’s initial $20,000 gain is good until 2026 and then the gain must be recognized, but with certain advantages explained in detail below.

John receives three benefits from his Opportunity Fund Investment:

1) Capital Gains Tax Deferral until 2026 – Because he rolls his initial gain into an Opportunity Fund, John does not pay tax on the $20,000 gain today. He does pay the tax in 2026, but in the meantime his $20,000 gain has been invested and is earning a return.

2) Basis Step up of 15% – Not only does John keep his $20,000 gain invested and earning a return for 8 years, the gain that John pays tax on in 2026 is reduced by 15%. Rather than paying tax on $20,000 of gain on his XYZ Corporation stock, he will pay tax on only $17,000.

3) 100% Capital Gains Exclusion – If John leaves his $20,000 invested in the Opportunity Fund for 10 years, his gain on the $20,000 is tax free. In our example, if John’s Opportunity Fund investment appreciates at 7% per year, then in year 10 John would receive back his $20,000 initial investment, plus an additional $20,000 in tax-free capital gains.

While Qualified Opportunity Zone Funds appear to offer some significant tax advantages, they are still very new. Although the US treasury and IRS are charged with monitoring the program, their oversight mechanisms aren’t fully set up yet. That means that anyone could create a fund and solicit investors. There’s no guarantee that the projects will fit within the Qualified Opportunity Zone requirements or that the project will be successful. As always, you must perform your due diligence to make certain that you understand how the program works and whether your investment meets the Qualified Opportunity Zone requirements.

One of the new provisions in the JCJA was the creation of “Qualified Opportunity Zones.” under Internal Revenue Code 1400Z-1 and 1400Z-2. These Qualified Opportunity Zone provisions could provide businesses, projects, and commercial property in eligible low-income census tracts attractive financing and what could amount to a substantial long-term subsidy for economic development. They could also provide opportunities for investors, individuals and corporations, to defer tax on current capital gains, significantly increase basis in their current investments, and abate all future tax on capital gains from these investments.

Please let us know if you have questions concerning Qualified Opportunity Zones or any other tax compliance or planning issues.   Call us today (480) 980-3977.

Paul J. Beckert MBA, CPA

Note: The information contained in this material represents a general overview of tax and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.

Pinnacle Business Solutions L.L.P.

Individual Tax Engagement Letter

2018

CLIENT NAME:

STREET ADDRESS:

CITY, STATE ZIP:

 

Subject: Preparation of Your Individual Tax Returns

 

Dear CLIENT NAME:

 

Thank you for selecting Pinnacle Business Solutions to assist you with your tax affairs. This letter confirms the terms of our engagement with you and the nature and extent of services we will provide.

 

We will prepare the 2018 federal and all state income tax returns you request using information you provide to us. We may ask for clarification of some items, but we will not audit or otherwise verify the data you submit. We’ve enclosed an “Organizer” to help you gather the information required for a complete return. If you use the Organizer, it will help you avoid overlooking important information and contribute to efficient preparation of your returns. That helps keep the cost of our services as low as possible.

 

It is your responsibility to provide information required for preparation of complete and accurate returns. You should keep all documents, canceled checks and other data that support your reported income and deductions. They may be necessary to prove accuracy and completeness of the returns to a taxing authority. You are responsible for the returns, so you should review them carefully before you sign them.

 

Unless we are otherwise advised, you are responsible for confirming that personal expenses, if any, are segregated from business expenses and expenses such as meals, travel, entertainment, vehicle use, gifts, and related expenses, are supported by necessary records required by the IRS and other taxing authorities. At your request, we are available to answer your questions and advise you on the types of supporting records required.

 

You are responsible for determining your state or local tax filing obligations with any state or local tax authorities, including, but not limited to, income, franchise, sales, use, or property taxes. You agree that we have no responsibility to research these obligations or to inform you of them. If upon review of the information you have provided us and other information that comes to our attention, we believe you may have an obligation to file additional tax returns, we will notify you of this in writing and ask you to contact us. If you ask us to prepare these returns, we will confirm this in a separate engagement letter and delineate the additional charges for this service.

 

We will prepare the above referenced tax returns solely for filing with the Internal Revenue Service (“IRS”) and state and local tax authorities as identified above. Our work is not intended to benefit or influence any third party, either to obtain credit or for any other purpose.

 

You agree to indemnify and hold our firm and its partners, principals, shareholders, officers, directors, members, employees, agents or assigns (collectively, “firm,” “we,” “us,” or “our”) harmless with respect to any and all claims arising from the use of the tax returns for any purpose other than filing with the IRS and state and local tax authorities regardless of the nature of the claim, including the negligence of any party.

 

Our work will not include any procedures to discover defalcations or other irregularities. The only accounting or analysis work we will do is that which is necessary for preparation of your income tax returns.

 

We will use our judgment to resolve questions in your favor where a tax law is unclear assuming there is reasonable justification for doing so. Whenever we are aware that an applicable tax law is unclear or there are conflicting interpretations of the law by authorities, we will explain the possible positions that may be taken on your return. We will follow the position you request, provided it is consistent with our understanding of the current tax code, laws, regulations and their interpretations. If the IRS or state tax authorities later contest the position taken, there may be an assessment of additional tax, interest, and penalties. We assume no liability for and you hereby release us from any such additional tax, interest, and penalties or other fees and assessments.

 

Penalties of as much as $100,000 can be imposed on you for failing to disclose participation in “reportable transactions,” that is, certain arrangement the IRS has identified as potentially abusive. We will insist that all such transactions be properly disclosed.  See Appendix A for a schedule of listed transactions.

 

The IRS and many states impose penalties for substantial understatement of tax. To avoid the substantial understatement penalty, you must have substantial authority to support the tax treatment of the item challenged by the IRS or adequate disclosure of the item. A completed IRS Form 8275 or 8275-R, which discloses all relevant facts, may be required to be attached to your tax return to meet the adequate disclosure requirement. A disclosed tax position that meets the reasonable basis standard must have some authority supporting the position and be more than just arguable.

 

Your returns may be selected for audit by a taxing authority. Any proposed adjustments are subject to appeal. In the event of a tax examination, we can arrange to be available to represent you. Such representation will be a separate engagement for which an engagement letter will be provided to you. Fees and expenses for defending the returns will be invoiced in accordance with terms we agree on for that engagement.

 

We require an advance payment of 50% of our estimated fee before beginning our work. Please submit your payment with your trial balance and other supporting data. We will contact you via the e-mail address you provide (or mailing address, if no valid e-mail address is provided) to advise you when the returns are completed and available for filing. You agree that the advance payment is fully earned as of the date we provide you with this notice. Payment of the remaining balance will be due within 7 business days of the date of our e-mail or letter. Once we have verified receipt of your valid payment, we will either provide you with the completed returns for filing or file the returns electronically on your behalf.

 

Our professional fee for the services outlined above will be estimated at $xxx. This fee is based upon the complexity of the work to be performed and our professional time to complete the work. Additionally, this fee depends upon the availability, quality, and completeness of your records. You agree that you will deliver all records requested by our staff to complete this engagement on a timely basis.

 

In the event your records are not submitted in a timely manner, or are incomplete or unusable, we reserve the right to charge additional fees and expenses for services required to correct the problem. If this occurs, we will contact you to discuss the matter and the anticipated delay in completing our engagement prior to rendering further services.

 

We will be offering a new service this year at no additional charge to you, it is called “Intuit Link”.  Intuit Link will allow you to more efficiently communicate with us via the Intuit Link portal.  This easy to use portal is used to securely transfer documents and information between your company and Pinnacle Business Solutions. Intuit Link can also be used to provide periodic reminders to Pinnacle Business Solutions and its clients to ensure that the necessary information is submitted to Pinnacle Business Solutions and that your income tax filing is submitted on time.  This service will be optional for all clients.  You will be able to choose whether or not you want to utilize this new service.

 

We will also be offering the Intuit eSignature service this year.  This service will allow for the more efficient signature of all legal documents needed prepare and file your tax return.  This service will be optional for all clients. You will be able to choose whether or not you want to utilize this service.  The additional charge for this service will be $5 per eSignature.

 

Another new service we will be offering this year is Intuit Pay-By-Refund which is offered through our partner Refund Advantage.  This service will allow you to pay your tax preparation fees out of your federal tax refund.  This service will be optional for all clients.  You will be able to choose whether or not you want to utilize this new service.  The fee to utilize this service will be $50/return.

 

 

We will bill you for our professional fees, expenses and out-of-pocket costs as of the date we deliver our work product you. Payment is due upon receipt of the billing statement. If payment is not received by the due date, you will be assessed interest charges of 2.33 % per month on the unpaid balance.

 

You agree that in the event your payment of tax is not received by the due date of the tax return, we will not be responsible for your failure to meet government and other filing deadlines, for any penalties or interest that may be assessed against you resulting from your failure to meet the deadlines, and for any other damages (including, but not limited to consequential, indirect, lost profits, or punitive damages) incurred by you as a result of the late filing or non-filing of the tax returns.

 

We will retain copies of records you supplied to us along with our work papers for your engagement for a period of seven years. After seven years, our work papers and engagement files will be destroyed. All of your original records will be returned to you at the end of this engagement. You should keep the original records in secure storage.

 

To affirm that this letter correctly summarizes your understanding of the arrangements for this work, please sign the enclosed copy of this letter in the space indicated and return it to us at the address below.

 

We appreciate your business. Please call if you have questions.

 

Sincerely,

 

 

_____________________________________________________

Paul J. Beckert, President, Pinnacle Business Solutions L.L.P.

 

 

Accepted By:  _________________________________________

 

_________________________________________

 

Date:  ________________________________________________

 

 

Appendix A

Listed Transactions

 

1. Revenue Ruling 90-105 – Certain Accelerated Deductions for Contributions to a Qualified Cash or Deferred Arrangement or Matching Contributions to a Defined Contribution Plan
2. Notice 95-34 – Voluntary Employee Beneficiary Association
3. ASA Investering Partnership v. Commissioner -Transactions similar to that described in the ASA Investering litigation and in ACM Partnership v. Commissioner
4. Treasury Regulation § 1.643(a)-8 – Certain Distributions from Charitable Remainder Trusts
5. Notice 99-59 – Corporate Distributions of Encumbered Property (BOSS)
6. Step-Down Step Down Preferred/Fast Pay Stock §1.7701(1)-3
7. Revenue Ruling 2000-12 – Debt Straddles
8. Notice 2000-44 – Inflated Partnership Basis Transactions (Son of Boss)
9. Notice 2000-60 Stock Compensation Stock Compensation Transactions
10. Notice 2000-61 – Guam Trust
11. Notice 2001-16 – Intermediary Transactions
12. Notice 2001-17 – §351 Contingent Liability
13. Notice 2001- 45 – §302 Basis-Shifting Transactions
14. Notice 2002-21 – Inflated Basis “CARDS” Transactions
15. Notice 2002-35 – Notional Principal Contracts
16. Common Trust Fund Straddles (Notice 2003-54), Pass-Through Entity Straddle (Notice 2002-50), and S Corporation Tax Shelter Transaction (Notice 2002-65)
17. Revenue Ruling 2002-69 – Lease In / Lease Out or LILO Transactions
18. Revenue Ruling 2003-6 – Abuses Associated with S Corp ESOPs
19. Notice 2003-22 – Offshore Deferred Compensation Arrangements
20. Notice 2003-24 – Certain Trust Arrangements Seeking to Qualify for Exception for Collectively Bargained Welfare Benefit Funds under § 419A(f)(5)
21. Notice 2003-47 – Transfers of Compensatory Stock Options to Related Persons
22. Notice 2003-55 – Accounting for Lease Strips and Other Stripping Transactions
23. Notice 2003-77 – Improper use of contested liability trusts to attempt to accelerate deductions for contested liabilities under IRC 461(f)
24. Notice 2003-81 – Major/Minor Tax Avoidance Using Offsetting Foreign currency Option Contracts
25. Notice 2004-8 – Abusive Roth IRA Transactions
26. Revenue Ruling 2004-4 – S Corporations ESOP
27. Revenue Ruling 2004-20 – Abusive Transactions Involving Insurance Policies in IRC 412(i) Retirement Plans
28. Notice 2004-20 – Abusive Foreign Tax Credit Transactions

 

29. Notice 2004-30 – S Corporation Tax Shelter Involving Shifting Income to Tax Exempt Organization
30. Notice 2004-31 – Intercompany Financing Through Partnerships
31. Notice 2005-13 – Sale-In Lease-Out transactions
32. Notice 2007-57 – Loss Importation Transaction
33. Notice 2007-83 – Abusive Trust Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to Provide Welfare Benefits
34. Notice 2008-34 – Distressed Asset Trust (DAT) Transaction

 

Pinnacle Business Solutions L.L.P.

Business Tax Engagement Letter

2018

CLIENT NAME:

STREET ADDRESS:

CITY, STATE ZIP:

 

Subject: Preparation of Your Business Tax Returns

 

Dear CLIENT NAME:

 

Thank you for selecting Pinnacle Business Solutions to assist you with your tax affairs. This letter confirms the terms of our engagement with you and the nature and extent of services we will provide.

 

We will prepare the 2018 federal and all state income tax returns you request using information you provide to us. We may ask for clarification of some items, but we will not audit or otherwise verify the data you submit. We’ve enclosed an “Organizer” to help you gather the information required for a complete return. If you use the Organizer, it will help you avoid overlooking important information and contribute to efficient preparation of your returns. That helps keep the cost of our services as low as possible.

 

It is your responsibility to provide information required for preparation of complete and accurate returns. You should keep all documents, canceled checks and other data that support your reported income and deductions. They may be necessary to prove accuracy and completeness of the returns to a taxing authority. You are responsible for the returns, so you should review them carefully before you sign them.

 

Unless we are otherwise advised, you are responsible for confirming that personal expenses, if any, are segregated from business expenses and expenses such as meals, travel, entertainment, vehicle use, gifts, and related expenses, are supported by necessary records required by the IRS and other taxing authorities. At your request, we are available to answer your questions and advise you on the types of supporting records required.

 

You are responsible for determining your state or local tax filing obligations with any state or local tax authorities, including, but not limited to, income, franchise, sales, use, or property taxes. You agree that we have no responsibility to research these obligations or to inform you of them. If upon review of the information you have provided us and other information that comes to our attention, we believe you may have an obligation to file additional tax returns, we will notify you of this in writing and ask you to contact us. If you ask us to prepare these returns, we will confirm this in a separate engagement letter and delineate the additional charges for this service.

 

We will prepare the above referenced tax returns solely for filing with the Internal Revenue Service (“IRS”) and state and local tax authorities as identified above. Our work is not intended to benefit or influence any third party, either to obtain credit or for any other purpose.

 

You agree to indemnify and hold our firm and its partners, principals, shareholders, officers, directors, members, employees, agents or assigns (collectively, “firm,” “we,” “us,” or “our”) harmless with respect to any and all claims arising from the use of the tax returns for any purpose other than filing with the IRS and state and local tax authorities regardless of the nature of the claim, including the negligence of any party.

 

Our work will not include any procedures to discover defalcations or other irregularities. The only accounting or analysis work we will do is that which is necessary for preparation of your income tax returns.

 

We will use our judgment to resolve questions in your favor where a tax law is unclear assuming there is reasonable justification for doing so. Whenever we are aware that an applicable tax law is unclear or there are conflicting interpretations of the law by authorities, we will explain the possible positions that may be taken on your return. We will follow the position you request, provided it is consistent with our understanding of the current tax code, laws, regulations and their interpretations. If the IRS or state tax authorities later contest the position taken, there may be an assessment of additional tax, interest, and penalties. We assume no liability for and you hereby release us from any such additional tax, interest, and penalties or other fees and assessments.

 

Penalties of as much as $100,000 can be imposed on you for failing to disclose participation in “reportable transactions,” that is, certain arrangement the IRS has identified as potentially abusive. We will insist that all such transactions be properly disclosed.  See Appendix A for a schedule of listed transactions.

 

The IRS and many states impose penalties for substantial understatement of tax. To avoid the substantial understatement penalty, you must have substantial authority to support the tax treatment of the item challenged by the IRS or adequate disclosure of the item. A completed IRS Form 8275 or 8275-R, which discloses all relevant facts, may be required to be attached to your tax return to meet the adequate disclosure requirement. A disclosed tax position that meets the reasonable basis standard must have some authority supporting the position and be more than just arguable.

 

Your returns may be selected for audit by a taxing authority. Any proposed adjustments are subject to appeal. In the event of a tax examination, we can arrange to be available to represent you. Such representation will be a separate engagement for which an engagement letter will be provided to you. Fees and expenses for defending the returns will be invoiced in accordance with terms we agree on for that engagement.

 

We require an advance payment of 50% of our estimated fee before beginning our work. Please submit your payment with your trial balance and other supporting data. We will contact you via the e-mail address you provide (or mailing address, if no valid e-mail address is provided) to advise you when the returns are completed and available for filing. You agree that the advance payment is fully earned as of the date we provide you with this notice. Payment of the remaining balance will be due within 7 business days of the date of our e-mail or letter. Once we have verified receipt of your valid payment, we will either provide you with the completed returns for filing or file the returns electronically on your behalf.

 

Our professional fee for the services outlined above will be estimated at $xxx. This fee is based upon the complexity of the work to be performed and our professional time to complete the work. Additionally, this fee depends upon the availability, quality, and completeness of your records. You agree that you will deliver all records requested by our staff to complete this engagement on a timely basis.

 

In the event your records are not submitted in a timely manner, or are incomplete or unusable, we reserve the right to charge additional fees and expenses for services required to correct the problem. If this occurs, we will contact you to discuss the matter and the anticipated delay in completing our engagement prior to rendering further services.

 

We will be offering a new service this year at no additional charge to you, it is called “Intuit Link”.  Intuit Link will allow you to more efficiently communicate with us via the Intuit Link portal.  This easy to use portal is used to securely transfer documents and information between your company and Pinnacle Business Solutions. Intuit Link can also be used to provide periodic reminders to Pinnacle Business Solutions and its clients to ensure that the necessary information is submitted to Pinnacle Business Solutions and that your income tax filing is submitted on time.  This service will be optional for all clients.  You will be able to choose whether or not you want to utilize this new service.

 

We will also be offering the Intuit eSignature service this year.  This service will allow for the more efficient signature of all legal documents needed prepare and file your tax return.  This service will be optional for all clients. You will be able to choose whether or not you want to utilize this service.  The additional charge for this service will be $5 per eSignature.

 

Another new service we will be offering this year is Intuit Pay-By-Refund which is offered through our partner Refund Advantage.  This service will allow you to pay your tax preparation fees out of your federal tax refund.  This service will be optional for all clients.  You will be able to choose whether or not you want to utilize this new service.  The fee to utilize this service will be $50/return.

 

 

We will bill you for our professional fees, expenses and out-of-pocket costs as of the date we deliver our work product you. Payment is due upon receipt of the billing statement. If payment is not received by the due date, you will be assessed interest charges of 2.33 % per month on the unpaid balance.

 

You agree that in the event your payment of tax is not received by the due date of the tax return, we will not be responsible for your failure to meet government and other filing deadlines, for any penalties or interest that may be assessed against you resulting from your failure to meet the deadlines, and for any other damages (including, but not limited to consequential, indirect, lost profits, or punitive damages) incurred by you as a result of the late filing or non-filing of the tax returns.

 

We will retain copies of records you supplied to us along with our work papers for your engagement for a period of seven years. After seven years, our work papers and engagement files will be destroyed. All of your original records will be returned to you at the end of this engagement. You should keep the original records in secure storage.

 

To affirm that this letter correctly summarizes your understanding of the arrangements for this work, please sign the enclosed copy of this letter in the space indicated and return it to us at the address below.

 

We appreciate your business. Please call if you have questions.

 

Sincerely,

 

 

_____________________________________________________

Paul J. Beckert, President, Pinnacle Business Solutions L.L.P.

 

 

Accepted By:  _________________________________________

 

_________________________________________

 

Date:  ________________________________________________

 

 

Appendix A

Listed Transactions

 

1. Revenue Ruling 90-105 – Certain Accelerated Deductions for Contributions to a Qualified Cash or Deferred Arrangement or Matching Contributions to a Defined Contribution Plan
2. Notice 95-34 – Voluntary Employee Beneficiary Association
3. ASA Investering Partnership v. Commissioner -Transactions similar to that described in the ASA Investering litigation and in ACM Partnership v. Commissioner
4. Treasury Regulation § 1.643(a)-8 – Certain Distributions from Charitable Remainder Trusts
5. Notice 99-59 – Corporate Distributions of Encumbered Property (BOSS)
6. Step-Down Step Down Preferred/Fast Pay Stock §1.7701(1)-3
7. Revenue Ruling 2000-12 – Debt Straddles
8. Notice 2000-44 – Inflated Partnership Basis Transactions (Son of Boss)
9. Notice 2000-60 Stock Compensation Stock Compensation Transactions
10. Notice 2000-61 – Guam Trust
11. Notice 2001-16 – Intermediary Transactions
12. Notice 2001-17 – §351 Contingent Liability
13. Notice 2001- 45 – §302 Basis-Shifting Transactions
14. Notice 2002-21 – Inflated Basis “CARDS” Transactions
15. Notice 2002-35 – Notional Principal Contracts
16. Common Trust Fund Straddles (Notice 2003-54), Pass-Through Entity Straddle (Notice 2002-50), and S Corporation Tax Shelter Transaction (Notice 2002-65)
17. Revenue Ruling 2002-69 – Lease In / Lease Out or LILO Transactions
18. Revenue Ruling 2003-6 – Abuses Associated with S Corp ESOPs
19. Notice 2003-22 – Offshore Deferred Compensation Arrangements
20. Notice 2003-24 – Certain Trust Arrangements Seeking to Qualify for Exception for Collectively Bargained Welfare Benefit Funds under § 419A(f)(5)
21. Notice 2003-47 – Transfers of Compensatory Stock Options to Related Persons
22. Notice 2003-55 – Accounting for Lease Strips and Other Stripping Transactions
23. Notice 2003-77 – Improper use of contested liability trusts to attempt to accelerate deductions for contested liabilities under IRC 461(f)
24. Notice 2003-81 – Major/Minor Tax Avoidance Using Offsetting Foreign currency Option Contracts
25. Notice 2004-8 – Abusive Roth IRA Transactions
26. Revenue Ruling 2004-4 – S Corporations ESOP
27. Revenue Ruling 2004-20 – Abusive Transactions Involving Insurance Policies in IRC 412(i) Retirement Plans
28. Notice 2004-20 – Abusive Foreign Tax Credit Transactions

 

29. Notice 2004-30 – S Corporation Tax Shelter Involving Shifting Income to Tax Exempt Organization
30. Notice 2004-31 – Intercompany Financing Through Partnerships
31. Notice 2005-13 – Sale-In Lease-Out transactions
32. Notice 2007-57 – Loss Importation Transaction
33. Notice 2007-83 – Abusive Trust Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to Provide Welfare Benefits
34. Notice 2008-34 – Distressed Asset Trust (DAT) Transaction

 

 

Tax Organizer

Business Return

Please provide the following information for your business:

 

1. Prior years federal income tax return (if new client)
2. Prior years state income tax return (if new client)
3. Current year financial statements by month to include (cash and accrual basis):
   1. Income Statement
   2. Balance Sheet
   3. Cash Flow Statement
4. Fixed asset list
5. Fixed assets purchased during the current year
6. Fixed assets sold during the current year
7. List of notes receivable or notes payable (with terms) initiated during the year
8. List of notes receivable or notes payable (with terms) terminated during the year
9. A list of all stock issued or purchased during the year
10. A list of all dividends declared or paid during the year
11. A list of all extraordinary items
12. Articles of Incorporation / Operating Agreement / Amendments