Business Strategy Archives

Pass-Through Deductions: What It Is and Who Qualifies

January 18, 2020/by Team

One of the best small business-friendly aspects of the Tax Cuts and Jobs Act (TCJA) is the 20% deduction you can take on your income tax if your business is a pass-through entity. Here’s what you need to know about it.

What Is the Deduction

The TCJA was passed in 2017 and first applied to 2018 tax returns. Provision 199A of that law states that you can deduct 20% of your “qualified business income” which was earned from a “qualified trade or business.”

What Is a Pass-Through Entity

Any business structure that allows you to receive income as an “owner’s draw” rather than as a regular employee is a pass-through business. The money is “passed through” from the company account to your personal account. You only pay income tax on it with your personal return; you don’t have to file a separate return for the business.

Pass-through entities include:
• Sole proprietorship
• Partnership
• LLC (limited liability corporation)
• S-Corporation

However, there are some restrictions.

Taxable Income Restriction

• Less than $157,500 (single, married filing separately, head of household) or $315,000 (married filing jointly): you qualify for the full 20% deduction.
• $157,500 – $207,500 or $315,000 – $415,000, respectively: your deduction may be less.
• More than $207,500 or $415,000, respectively: you are not eligible for the deduction.

Specified Service or Trade Restrictions

What your business does may disqualify it from the deduction. Here’s the list of excluded fields, as issued by the Treasury Department in August 2018:

• Health
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Any business where the principal asset is the reputation or skill of one or more of the employees or owners
• Any business that consists of investing and investment management, trading or dealing in securities, partnership interests or commodities

But don’t give up if you see your business in one of these categories, because there are numerous exceptions. For example, in the Health category, healthcare providers who provide services directly to patients — such as doctors and dentists — are not eligible. On the other hand, health clubs, spas, medical research companies, and those who sell pharmaceuticals or medical devices may qualify for the deduction.

In the case of businesses who both provide services and sell products, eligibility is determined by sales:
• Less than $25 million in gross receipts and less than 10% of your business comes from disqualified services; or
• More than $25 million in gross receipts and less than 5% of your business comes from disqualified services

Employee and Property Restrictions

There are two further conditions that could affect how much of a deduction you can take. They are:
• Business that pay W-2 wages
• Business that owns “qualified property” such as real estate or other tangible assets that can be depreciated

If your business fits either of these descriptions, your deduction will be the lesser of:
• 20% of qualified business income (or the “tentative deduction”); or
• The greater of:
o W-2 wages paid x 50%; or
o W-2 wages paid x 25% + the unadjusted basis (cost) of your qualified property x 2.5%

Still confused about the pass-through deduction? Your xendoo small business expert can clear things up, answer your questions, and help you get every tax break you deserve.

7 Steps for Retailers to Reduce Inventory Shrinkage

July 1, 2017/in eCommerce, Taxes /by Team

Inevitably, somewhere between the manufacturer and the cash register, some of your merchandise disappears. Every retailer has this problem; in fact, it adds up to more than $42 billion in annual losses nationwide. The three biggest causes of shrinkage are administrative errors, employee theft, and customer theft. Here’s how to counteract them.

1. Use a good inventory management system.

Wherever human beings are doing the counting, organizing, and recording, errors are sure to happen. Choose software that:

Organizes product and vendor information
Integrates with your POS system so that inventory data is automatically updated after every transaction
Generates accurate purchase orders

2. Tighten up your inventory receiving process.

To minimize mistakes:

Cross-check against the PO at the time of delivery
Call the vendor within 24 hours to resolve inconsistencies
Tag and label merchandise immediately

3. Record sales consistently.

Any currently available POS system will do this automatically.

4. Take physical inventory.

It’s the only way to reveal discrepancies between what your inventory software says you have and what you have. Cross-reference the manual counts against software records to see where shortages are occurring, for example with a particular cash register or employee, or during the same shift and day every week.

5. Train employees in loss prevention.

Letting everyone know that you have a strong plan to stop theft can deter both employees and customers.

6. Improve pre-employment screening.

The reality of retail is that employee turnover is high and company loyalty usually low. Besides, employees have less supervision and easy access to your valuables. Do your due diligence in hiring people with no history of dishonesty, including nationwide criminal background checks and verification that resumes are complete and truthful.

7. Install a security system.

Large, visible cameras act as warnings to thieves to pick an easier target. They also help catch and convict criminals after thefts occur.

Inventory shrinkage is a challenge that will never go away. And that means your efforts towards loss prevention can never stop either. Success lies in ongoing processes and continuous attention to keep your merchandise right where it belongs.

3 Great Cash Flow Ideas for Retailers

June 25, 2017/in Accounting /by Team

What do a used book store, garden nursery, and boutique clothing shop all have in common?

No, this isn’t the set up to a joke. Unfortunately, all three types of businesses are at risk of failing if their cash flow isn’t in good shape. According to the Small Business Administration, “inadequate cash reserves” is a top reason small businesses close their doors for good.

So whether you sell novels, shovels, or dresses with ruffles — if you’re a retailer, cash flow is king.

What exactly is cash flow?

Think of it like a checking account. Cash flow looks at all the money coming in and out of your business each month. If there’s more coming in than going out, you’re in the green! If you’re spending more than comes in, read on. That means your cash flow is negative and your business could be in trouble

Here are three simple ways to get your cash flowing in the right direction.

1. Bundle products

If you sell several accessories apart from your core offering, try packaging them together with a small discount. This can also be an effective way of clearing out dead stock while creating goodwill with your customers, who feel like they’re walking away with a great deal.

2. Understand the risks of discounting

If you do decide to bundle products or offer another type of sale, make sure you know exactly how that will impact your bottom line. You should know the profit margins on every product you sell and your overall cost basis – it’s the only way to determine if you’ll break even with the sale or take a loss.

3. Encourage repeat business

Offering perks or freebies to returning customers helps create loyalty and makes it easier for them to choose you over other options. Go old school with a punch card, get creative with a contest, or print an offer on receipts that are good for a future purchase.

If you’re struggling to determine the state of your cash flow, it could be time to call in for some backup. With xendoo’s suite of affordable bookkeeping and consulting services, you’ll be able to spend more time at the “cash-out” bringing the cash.

6 Ways to Cut Overhead Costs

February 1, 2017/in eCommerce /by Team

Every business has to spend money in order to make money. Here’s how to keep those ongoing expenses from getting too high and impacting your bottom line.

Take a fresh look at every single expense.

Chances are, some of them have become a habit but can now be either eliminated or achieved in a more cost-effective way.

Re-negotiate supplier and vendor contracts.

There may be things in there you don’t need anymore.
On the other hand, you may find that buying more services from one company costs less than piecemealing it out to several suppliers.
Ask for a better deal from existing suppliers.
Shop around for more favorably priced suppliers.

Allocate more marketing efforts to free or low-cost channels.

Word-of-mouth and tell-a-friend promotions to existing clients.
Social media campaigns.
Strategic partnerships with other local businesses.
Employee sales competitions.
Testimonials from satisfied clients.

Centralize purchasing.

One person in the company should handle it all, from office supplies to phone/internet providers to equipment rentals. This person will:

Prevent duplications, unexpected shortages, and confusion.
Be good at wangling better deals, concessions, and discounts.
Shop around for the best offers.

Re-think your office space.

Do you really need to be leasing so much space?
Do you have too much inventory/equipment on hand, taking up storage space?
Is there another space available that offers equally good access for current and prospective clients at a lower rate?

Control labor costs.

Avoid paying overtime by fine-tuning scheduling or converting to part-time employees.
Reduce turnover and hiring expenses by maintaining a happy, fulfilling work environment.
Cross-train employees to fill more than one role.
Prevent time theft with an app that tracks actual hours worked.

Solving the overhead problem is all about baby steps. Chip off a bit here, a bit there, and keep a year-round watch on expenses. It will all add up to some nice, healthy profit margins.

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