How well do you know your customers? Which ones are the most profitable? Which ones take most of your time? Finding the answers to these questions can be worthwhile, because you may discover that the 80-20 rule, also known as the law of the vital few, applies to your business. The rule is a shorthand way of saying 80% of your profits come from 20% of your customers.
If you can identify that top 20%, you can focus your efforts to make sure this group remains satisfied customers. Sometimes all it takes is an appreciative phone call or a little special attention. Also, by understanding what makes this group profitable, you can work to bring other customers into that category.
Keep in mind that it’s not always profits alone that make a good customer. Other factors, such as frequency of orders, reliability of the business, speed of payment, and joy to deal with are important too. Ask your accounting staff and your sales staff. You’ll soon come up with a list of top customers.
There’s another way in which the 80-20 rule applies to your business. Very likely, 80% of your problems and complaints come from 20% or fewer of your customers. If you identify those problem customers, you can change the way you do business with them to reduce the problems. Consider changing your pricing for those customers so you’re being paid for the extra time and effort they require. Sometimes the only solution is to tell these customers that you no longer wish to do business with them.
The bottom line is that understanding your customers better will improve your business. Contact us if you need help analyzing customer profitability.
Last year a break valued by many charitably inclined retirees was made permanent: the charitable IRA rollover. If you’re age 70½ or older, you can make direct contributions — up to $100,000 annually — from your IRA to qualified charitable organizations without owing any income tax on the distributions.
Satisfy your RMD
A charitable IRA rollover can be used to satisfy required minimum distributions (RMDs). You must begin to take annual RMDs from your traditional IRAs in the year in which you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. (An RMD deferral is allowed for the initial year, but you’ll have to take two RMDs the next year.)
So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid out to you.
You might be able to achieve a similar tax result from taking the RMD payout and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation. This has two more possible downsides:
• The reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.
• If your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 50% of your adjusted gross income for the year. (Lower limits apply to donations of long-term appreciated securities or made to private foundations.) You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.
A charitable IRA rollover avoids these potential negative tax consequences.
Have questions about charitable IRA rollovers or other giving strategies? Please contact us. We can help you create a giving plan that will meet your charitable goals and maximize your tax savings.
When you change jobs and abandon vested amounts in your 401(k), your former employer has to follow IRS rules and plan provisions for dealing with your account balance. Pursuant to these guidelines, the 401(k) plan may have a “force-out” provision. That means when your vested balance is less than $5,000, you can be forced to take your money out of the plan.
Your former employer is required to give you advance notice of this rule so you can decide what to do with the money. Your choices are to cash out your account and receive a check, or roll your account balance into an IRA or your new employer’s plan.
What happens if you fail to respond to the notice? If your vested balance is more than $1,000, your former employer must transfer the money to an IRA. For balances under $1,000, you will either get a check or your former employer will open an IRA on your behalf.
Neither outcome is optimal, according to a report by the U.S. Government Accountability Office. If you receive the money, you’ll owe federal income tax. When the balance is transferred to an IRA, account fees may outpace investment returns and your balance will be eroded over time.
Protecting assets you worked for and earned is always a smart move. Call us for assistance.
Transcripts of your federal income tax return, tax account, wages and income, and record of account, as well as a verification of non-filing, are once again available for no charge online at the IRS website. Sign up to view, print, or download your transcript, or request that a transcript be mailed to you. Remember, transcripts only provide line-by-line information. If you need a copy of your original return, use Form 4506, Request for Copy of Tax Return, instead. Contact us if you have questions.
August 1, 2016, is the deadline for filing Form 5500 for retirement or employee benefit plans on a calendar year. (The usual due date of July 31, 2016, is a Sunday.) There are two updates to be aware of. First, Form 5500 includes new compliance questions that plan sponsors can skip when completing the form. Second, if you’re required to file at least 250 returns of any type with the IRS, including information returns (for example, Form W-2 and Form 1099), you may need to electronically file Form 5500-EZ for calendar year 2015.
The 2016 Global Fraud Study released recently by the Association of Certified Fraud Examiners shows that asset misappropriation occurred in more than 83% of the cases reported. Asset misappropriation includes billing and check tampering schemes. According to the study, billing schemes were most common, comprising slightly more than 22% of the cases, and check tampering schemes were the costliest, with a median loss of $158,000. Not surprisingly, businesses with poor internal controls, or no internal controls, were the most susceptible. Contact us for tips and suggestions for keeping your business assets safe.
The income tax credit for certain energy-efficient home improvements and equipment purchases was extended through 2016 by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). So, you still have time to save both energy and taxes by making these eco-friendly investments.
The credit is for expenses related to your principal residence. It equals 10% of certain qualified improvement expenses plus 100% of certain other qualified equipment expenses, subject to a maximum overall credit of $500, which is reduced by any credits claimed in earlier years. (Because of this reduction, many people who previously claimed the credit will be ineligible for any further credits in 2016.)
Examples of improvement investments potentially eligible for the 10% of expense credit include:
• Insulation systems that reduce heat loss or gain,
• Metal and asphalt roofs with heat-reduction components that meet Energy Star requirements, and
• Exterior windows (including skylights) and doors that meet Energy Star requirements. These expenditures are subject to a separate $200 credit cap.
Examples of equipment investments potentially eligible for the 100% of expense credit include:
• Qualified central air conditioners; electric heat pumps; electric heat pump water heaters; water heaters that run on natural gas, propane, or oil; and biomass fuel stoves used for heating or hot water, which are subject to a separate $300 credit cap.
• Qualified furnaces and hot water boilers that run on natural gas, propane or oil, which are subject to a separate $150 credit cap.
• Qualified main air circulating fans used in natural gas, propane and oil furnaces, which are subject to a separate $50 credit cap.
Manufacturer certifications required
When claiming the credit, you must keep with your tax records a certification from the manufacturer that the product qualifies. The certification may be found on the product packaging or the manufacturer’s website. Additional rules and limits apply. For more information about these and other green tax breaks for individuals, contact us.