ABA Tax Accounting: January 2016

(651) 300-4777, (612)424-1540, (651) 621-5777

Friday, January 29, 2016

The Earned Income Tax Credit: Often Missed

The Earned Income Tax Credit has helped workers with low and moderate incomes get a tax break for 40 years. Yet, one out of every five eligible workers fails to claim it. Here are some things you should know about this valuable credit:

Review Your Eligibility. If you worked and earned under $53,267, you may qualify for EITC. If your income or family situation has changed, you should review the EITC eligibility rules. You might qualify for EITC this year even if you didn’t in the past. If you qualify for EITC you must file a federal income tax return and claim the credit to get it. This is true even if you are not otherwise required to file a tax return. Don’t guess about your EITC eligibility. Use the EITC Assistant tool on IRS.gov. The tool can help you find out if you qualify for the credit. It can also estimate the amount of your EITC.

Know the Rules. You need to understand the rules before you claim the EITC, to be sure you qualify. It’s important that you get this right. Here are some factors you should consider:

If you are married and file a separate return you do not qualify for EITC.
You must have a Social Security number that is valid for employment for yourself, your spouse, if married, and any qualifying child listed on your tax return.
You must have earned income. Earned income includes earnings from working for someone else or working for yourself.
You may be married or single, with or without children to qualify. If you don’t have children, you must also meet age, residency and dependency rules. If you have a child who lived with you for more than six months of 2015, the child must meet age, residency, relationship and the joint return rules to qualify.
If you are a member of the U.S. Armed Forces serving in a combat zone, special rules apply.

Lower Your Tax or Get a Refund. If you qualify for EITC, you could pay less federal tax, no tax or even get a refund. EITC could be worth up to $6,242. The average credit was $2,447 last year.

Combining e-file with direct deposit is the fastest and safest way to get your refund. If you would like any additional information please feel free to contact me.

Amare Berhie, Senior Tax Accountant

(651) 300-4777, (612)424-1540, (651) 621-5777

Tax Changes for 2016: Alternative Minimum Tax (AMT)

Tax Services- Exemption amounts for the AMT, which was made permanent by the American Taxpayer Relief Act (ATRA) are indexed for inflation and allow the use of nonrefundable personal credits against the AMT. For 2016, the exemption amounts are $53,900 for individuals ($53,600 in 2015) and $83,800 for married couples filing jointly ($83,400 in 2015).

If you would like any additional information please feel free to contact me.

Amare Berhie, Senior Tax Accountant

(651) 300-4777, (612)424-1540, (651) 621-5777

Thursday, January 28, 2016

Exemptions and Dependents: Top Tax Facts

Most people can claim an exemption on their tax return. It can lower your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top some tax facts about exemptions to help you file your tax return.

1. Exemptions Cut Income. There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $4,000 for each exemption you claim on your 2015 tax return.

2. Personal Exemptions. You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:

· Had no gross income,

· Is not filing a tax return, and

· Was not the dependent of another taxpayer.

3. Exemptions for Dependents. You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Get Publication 501 on IRS.gov. Just click on the Forms & Pubs tab on the home page.

4. Report Health Care Coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:

· Have qualifying health insurance, called minimum essential coverage, or

· Have an exemption from this coverage requirement, or

· Make a shared responsibility payment when you file your 2015 tax return.

· Visit IRS.gov/ACA for more on these rules.

5. Some People Don’t Qualify. You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.

6. Dependents May Have to File. A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like total income, whether they are married and if they owe certain taxes.

7. No Exemption on Dependent’s Return. If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person as your dependent.

8. Exemption Phase-Out. The $4,000 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income. See Publication 501 for details.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

If you would like any additional information please feel free to contact me.

Amare Berhie, Senior Tax Accountant

(651) 300-4777, (612)424-1540, (651) 621-5777

31 countries signed multilateral competent authority agreement to exchange CbC reports

On January 27, finance ministers and top officials from 31 countries signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (the Agreement), according to an OECD press release. This is the first signing ceremony for the Agreement to facilitate the automatic exchange of annual country-by-country (CbC) reports as recommended by the OECD in its final report on transfer pricing documentation under the G20/OECD base erosion and profit shifting (BEPS) project.

Background on CbC reporting. In 2015, the OECD recommended a new three-tiered standardized approach to transfer pricing documentation under Action 13 of the BEPS project. The approach was formally endorsed by G20 leaders in the same year.

Referred to as a “minimum standard,” the recommended approach would require multinational enterprises (MNEs) with annual consolidated group revenue equal to or exceeding €750 million to prepare and submit the following documents:

(1) A master file with high-level information about global business operations and transfer pricing policies that would be made available to all relevant tax administrations;

(2) A local file with detailed transactional transfer pricing documentation that is specific to each country, disclosing (i) material related party transactions, (ii) the amounts involved in such transactions, and (iii) the analysis of the transfer pricing determinations made with regard to such transactions; and

(3) An annual CbC report to (i) report the number of employees, stated capital, retained earnings, and tangible assets in each jurisdiction where business is conducted, (ii) identify each entity within the group doing business in a particular jurisdiction, and (iii) provide an indication of the business activity in which each entity engaged.

The OECD recommended that the information required for the master and local files be filed by the MNEs directly with the local tax administrations. However, it recommended that the annual CbC reports be filed in the jurisdiction of the tax residence of the ultimate parent entity and shared between jurisdictions through the automatic exchange of information on a government-to-government basis under one of the following tax agreements:

(1) The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention);

(2) Bilateral tax treaties; and

(3) Tax information exchange agreements (TIEAs).

The Convention (see item 1 above), jointly developed by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010, is the most comprehensive multilateral instrument available amongst jurisdictions for all forms of tax cooperation to tackle tax evasion and avoidance (including the exchange of information on a government-to-government basis), according to the OECD. In fact, since 2009, the G20 has consistently encouraged countries to sign the Convention. More than 90 countries (including the U.S.) currently participate in the Convention. (The list of participating countries may be found here.)

According to the OECD, countries participating in the BEPS project developed a CbC reporting implementation package, which among other things, includes a model of the Agreement (see Annex IV to Chapter V of the final BEPS Action 13 report). As the OECD explained, this model Agreement was developed based on the Convention (see item 1 above) and “inspired” by the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the MCAA on AEOI) concerning the implementation of the Common Reporting Standard (CRS).

Checkmark RIA observation: It should be noted that the AEOI standard and the CRS draw extensively from the U.S. approach to implementing the Foreign Account Tax Compliance Act (FATCA). More than 100 countries have currently committed to implementing the CRS. The U.S. has not adopted the CRS, but instead relies on its intergovernmental agreements (IGAs) with other countries to facilitate the exchange of FATCA information.

For completeness, please that the OECD has also developed two other model competent authority agreements for exchanging CbC reports. They are based on bilateral treaties (see item 2 above) and TIEAs (see item 3 above), but are beyond the scope of this article.

It is the OECD's recommendation that countries implement the BEPS Action 13 minimum standard for fiscal years beginning on or after Jan. 1, 2016. The OECD has acknowledged that some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law.

31 countries signed the Agreement. The 31 countries that signed the Agreement on January 27 are:

Australia,
Austria,
Belgium,
Chile,
Costa Rica,
Czech Republic,
Denmark,
Estonia,
Finland,
France,
Germany,
Greece,
Ireland,
Italy,
Japan,
Liechtenstein,
Luxembourg,
Malaysia,
Mexico,
The Netherlands,
Nigeria,
Norway,
Poland,
Portugal,
Slovak Republic,
Slovenia,
South Africa,
Spain,
Sweden,
Switzerland, and
The United Kingdom.

The OECD has stated that the Agreement will enable the consistent and swift implementation of the BEPS Action 13 minimum standard, facilitate the automatic exchange of CbC reports, and ensure that confidential information is safeguarded.

As OECD Secretary-General Angel Gurrìa stated at the media briefing on January 27:

[t]onight marks an important step in the next stage of BEPS: implementation, implementation, implementation! Without effective implementation, we risk consigning the BEPS reports to books gathering dust on shelves. That is why your efforts to transform the BEPS agreement into reality–evidenced by your signature of the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of country-by-country reports–are so important.

Checkmark RIA observation: The precise manner under which the U.S. will facilitate the automatic exchange of CbC reports remains to be seen. However, in the preamble to the proposed CbC report regs that were issued in December 2015, Treasury and IRS stated that the U.S. competent authority is expected to enter into competent authority arrangements for the automatic exchange of CbC reports under the authority of information exchange agreements to which the U.S. is a party. The preamble further provides that the U.S. intends to closely scrutinize each jurisdiction's legal framework for maintaining confidentiality of taxpayer information and its track record of complying with that legal framework, before entering into an information exchange agreement with any such jurisdiction.

If you would like any additional information regarding the tax aspects of your going into business, or if you need assistance in satisfying any of the reporting or recordkeeping requirements, please give me a call. Looking forward to hearing from you. Click this link to view our YouTube video http://youtu.be/KfO0_kmz7qc

Amare Berhie, Senior Tax Accountant

http://www.abataxaccounting.com/smallbiz.php

(651) 300-4777, (612)424-1540, (651) 621-5777

Wednesday, January 27, 2016

Tax aspects of self-employment

There are several important rules that a sole proprietor should be aware of:

(1) For income tax purposes, you will report your income and expenses on Schedule C of your Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses will be deductible against gross income (i.e., “above the line”) and not as itemized deductions. If you have any losses, the losses will generally be deductible against your other income, subject to special rules relating to hobby losses, passive activity losses, and losses in activities in which you weren't “at risk.”

(2) You may be able to deduct office-at-home expenses. If you will be working from an office in your home, performing management or administrative tasks from an office-at-home, or storing product samples or inventory at home, you may be entitled to deduct an allocable portion of certain of the costs of maintaining your home. And if you have a office-at-home, you may be able to deduct commuting expenses of going from your home to another work location.

(3) You will be required to pay self-employment taxes. For 2015 and 2016, you will pay self-employment tax (social security and Medicare) at a 15.3% rate on your net earnings from self employment of up to $118,500, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) will be imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

(4) You will be allowed to deduct 100% of your health insurance costs as a trade or business expense. This means your deduction for medical care insurance won't be subject to the limitation on your medical expense deduction that is based on a percentage of your adjusted gross income.

(5) You will be required to make quarterly estimated tax payments. We can work with you to minimize the amount of your estimated tax payments while avoiding any underpayment penalty.

(6) You will have to keep complete records of your income and expenses. In particular, you should carefully record your expenses in order to claim the full amount of the deductions to which you are entitled. Certain types of expenses, such as automobile, travel, entertainment, meals, and office-at-home expenses, require special attention because they are subject to special recordkeeping requirements or limitations on deductibility.

(7) If you hire any employees, you will have to get a taxpayer identification number and will have to withhold and pay over various payroll taxes.

(8) You should consider establishing a qualified retirement plan. The advantage of a qualified retirement plan is that amounts contributed to the plan are deductible at the time of the contribution, and aren't taken into income until the amounts are withdrawn. Because of the complexities of ordinary qualified retirement plans, you might consider a simplified employee pension (SEP) plan, which requires less paperwork. Another type of plan available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements than a qualified plan is a “savings incentive match plan for employees,” i.e., a SIMPLE plan. If you don't establish a retirement plan, you may still be able to make a contribution to an IRA.

Amare Berhie, Senior Tax Accountant

(651) 300-4777, (612)424-1540, (651) 621-5777

Tuesday, January 26, 2016

Tax aspects of caring for an elderly individual -Tax Services

1. Dependency exemption. You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify, (a) you must provide more than 50% of the individual's support costs, (b) he must either live with you or be related, (c) he must not have gross income in excess of the exemption amount, which is $4,050 for 2016 ($4,000 for 2015) , (d) he must not himself file a joint return for the year, and (e) he must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. If the support test ((a), above) can only be met by a group (several children, for example, combining to support a parent), a “multiple support” form can be filed to grant one of the group the exemption, subject to certain conditions.

2. Medical expenses. If the individual qualifies as your dependent, you can include any medical expenses you incur for him along with your own when determining your medical deduction. If he fails to qualify as your dependent only because of the gross income or joint return test ((c) and (d), above), you can still include these medical costs with your own. The costs of qualified long-term care services required by a chronically ill individual and eligible long-term care insurance premiums are included in the definition of deductible medical expenses. There's an annual cap on the amount of premiums that can be deducted. The cap is based on age, going as high as $4,870 for 2016 ($4,750 for 2015) for an individual over 70.

3. Filing status. If you aren't married, you may qualify for “head of household” status by virtue of the individual you're caring for. If the person you're caring for (a) lives in your household, (b) you cover more than half the household costs, (c) he qualifies as your dependent, and (d) he is a relative, you can claim head of household filing status. If the person you're caring for is your parent, he need not live with you, as long as you provide more than half of his household costs and he qualifies as your dependent. A head of household has a higher standard deduction and lower tax rates than a single filer.

4. Dependent care credit. If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of himself, you may qualify for the dependent care credit for costs you incur for his care to enable you and your spouse to go to work.

5. Exclusion for payments under life insurance contracts. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards.

If your situation qualifies you for any of the above tax benefits, or you wish to discuss your situation further, please call. I look forward to hearing from you. Click this link to view our YouTube video http://youtu.be/KfO0_kmz7qc

Amare Berhie, Senior Tax Accountant

(651) 300-4777, (612)424-1540, (651) 621-5777

Monday, January 25, 2016

Tangible Property Expensing Threshold Increases

Experienced Tax Accountant – The safe harbor threshold for small businesses deducting certain capital items has increased from $500 to $2,500. The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.

The new $2,500 threshold applies to any such item substantiated by an invoice. Small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions, simplifying paperwork and recordkeeping requirements.

During the February comment period, the IRS received more than 150 letters from businesses and their representatives suggesting an increase in the threshold. Commenters noted that the existing $500 threshold was too low to effectively reduce the administrative burden on small business. Moreover, the cost of many commonly expensed items such as tablet-style personal computers, smartphones, and machinery and equipment parts typically surpass the $500 threshold.

As before, businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.

Please call if you have any questions or would like additional details about this change.

Need help with tax filing in 2016? Help is just a phone call away! I look forward to hearing from you. Click this link to view our YouTube video http://youtu.be/KfO0_kmz7qc

Amare Berhie, Senior Tax Accountant

(651) 300-4777, (612)424-1540, (651) 621-5777

Saturday, January 23, 2016

What's New for 2015 tax filing?

- MyRA accounts. These tax-favored accounts are a form of ROTH IRA account which can be funded by a payroll deduction. Taxpayers can also have their federal tax refund deposited into a MyRA account.

- Achieving a Better Life Experience (ABLE) account. This is a new type of savings account for individuals with disabilities and their families. For 2015, taxpayers can contribute up to $14,000. Distributions are tax-free if used to pay the beneficiary’s qualified disability expenses. Do not deduct contributions on the taxpayer's return. For details, see Pub. 907

- Information reporting about employer offer of coverage. If the taxpayer or someone in the taxpayer's family was an employee in 2015, the employer may have sent the taxpayer a Form 1095-C. Part II of Form 1095-C will show whether the employer offered the taxpayer health insurance coverage and information about the offer. If the taxpayer purchased health insurance coverage for 2015 through the Health Insurance Marketplace and wishes to claim the premium tax credit, this information will help you see if the taxpayer is eligible for the credit. Do not attach Form 1095-C to the return. You may also be able to use the information on Form 1095-C to determine if the employer’s offer of coverage is considered affordable for the purpose of determining if the taxpayer is exempt from the Individual Shared Responsibility Payment.

Nonrefundable credits that may offset AMT and regular tax:

- Child and Dependent Care Credit

- Credit for the elderly or permanently and totally disabled

- Child Tax Credit

- Mortgage Credit

- American Opportunity Tax Credit and Lifetime Learning Credit

- Saver's Credit for Retirement Savings Contributions

- Energy Credits

- District of Columbia First-Time Homebuyer Credit

DEPENDENT EXEMPTIONS: Dependents cannot claim exemptions for dependents. If a taxpayer can be claimed as a dependent on someone else's return, that taxpayer cannot claim any exemptions for other dependents.

EARNED INCOME CREDIT (EIC): A taxpayer may be able to take the EIC if any of the following apply:

- Three or more children lived with the taxpayer, and the taxpayer earned less than $47,747 ($53,267 if MFJ)

- Two children lived with the taxpayer, and the taxpayer earned less than $44,454 ($49,997 if MFJ)

- One child lived with the taxpayer, and the taxpayer earned less than $39,131 ($44,651 if MFJ)

- A child did NOT live with the taxpayer, and the taxpayer earned less than $14,820 ($20,330 if MFJ)

NOTE: The maximum investment income is $3,400.

STANDARD MILEAGE RATES: The 2015 mileage rate is 57.5 cents per mile.

STANDARD DEDUCTION: The standard deduction for most people is as follows:

Filing Status Standard Deduction

------------- ------------------

Single or MFS $6,300

MFJ or Qualifying Widow(er) $12,600

Head of Household $9,250

(See Form 1040 instructions for over 65 or blind.)

ITEMIZED DEDUCTION LIMITATION: Itemized deductions are limited by AGI for tax years after 2012.

For taxpayers under age 65, the deduction threshold for medical expenses was raised to 10% from 7.5% of AGI.

EXEMPTION AMOUNT: The personal exemption amount is $4,000 and is limited by AGI for tax years after 2012.

SELF-EMPLOYMENT INCOME: The maximum amount of self-employment (SE) income subject to Social Security tax is $118,500.

ADOPTION CREDIT: The maximum amount of credit has increased, as has the modified AGI phaseout range.

- Maximum credit $13,400

- Modified AGI phaseout range $201,010 - $241,010

STUDENT LOAN INTEREST: The modified phaseout range for the student loan interest deduction has increased.

- Maximum Interest Deduction $2,500

- Modified AGI Phaseout Ranges:

* Married Filing Jointly (MFJ) $130,000 - $160,000

* Single/Head of Household (HOH) $ 65,000 - $ 80,000

MEDICAL SAVINGS ACCOUNTS (MSA): The range and maximum out-of-pocket expenses have increased.

- Individual coverage $2,200 to $3,300

- Family coverage $4,350 to $6,650

- Maximum out-of-pocket expenses:

* Individual coverage $4,450

* Family coverage $8,150

FOREIGN EARNED INCOME: The maximum has increased to $100,800.

Need help with tax filing in 2016? Help is just a phone call away! I look forward to hearing from you. Click this link to view our YouTube video http://youtu.be/KfO0_kmz7qc

Amare Berhie, Senior Tax Accountant

(651) 300-4777, (612)424-1540, (651) 621-5777

Friday, January 22, 2016

Tax Tips - Tax Brackets, Deductions, and Exemptions for 2016

Experienced Tax Accountant – More than 50 tax provisions, including the tax rate schedules, and other tax changes are adjusted for inflation in 2016. Let's take a look at the ones most likely to affect taxpayers like you.

The tax rate of 39.6 percent affects singles whose income exceeds $415,050 ($466,950 for married taxpayers filing a joint return), up from $413,200 and $464,850, respectively. The other marginal rates--10, 15, 25, 28, 33 and 35 percent--and related income tax thresholds--are found at IRS.gov.

The standard deduction remains at $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly. The standard deduction for heads of household rises to $9,300, up from $9,250.

The limitation for itemized deductions to be claimed on tax year 2016 returns of individuals begins with incomes of $259,400 or more ($311,300 for married couples filing jointly).

The personal exemption for tax year 2016 rises to $4,050, up from the 2015 exemption of $4,000. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $259,400 ($311,300 for married couples filing jointly). It phases out completely at $381,900 ($433,800 for married couples filing jointly.)

The Alternative Minimum Tax exemption amount for tax year 2016 is $53,900 and begins to phase out at $119,700 ($83,800, for married couples filing jointly for whom the exemption begins to phase out at $159,700). The 2015 exemption amount was $53,600 ($83,400 for married couples filing jointly). For tax year 2016, the 28 percent tax rate applies to taxpayers with taxable incomes above $186,300 ($93,150 for married individuals filing separately).

For 2016, the maximum Earned Income Credit amount is $6,269 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,242 for tax year 2015. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.

Estates of decedents who die during 2016 have a basic exclusion amount of $5,450,000, up from a total of $5,430,000 for estates of decedents who died in 2015.

For 2016, the exclusion from tax on a gift to a spouse who is not a U.S. citizen is $148,000, up from $147,000 for 2015.

For 2016, the foreign earned income exclusion rises to $101,300, up from $100,800 in 2015.

The annual exclusion for gifts remains at $14,000 for 2016.

The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains at $2,550.

Under the small business health care tax credit, the maximum credit is phased out based on the employer's number of full-time equivalent employees in excess of 10 and the employer's average annual wages in excess of $25,900 for tax year 2016, up from $25,800 for 2015.

Need help with tax planning in 2016? Help is just a phone call away! I look forward to hearing from you. Click this link to view our YouTube video http://youtu.be/KfO0_kmz7qc

Amare Berhie, Senior Tax Accountant

(651) 300-4777, (612)424-1540, (651) 621-5777

Ensuring Financial Success for Your Business

Experienced Tax Accountant – Can you point your company in the direction of financial success, step on the gas, and then sit back and wait to arrive at your destination?

Not quite. You can't let your business run on autopilot and expect good results. Any business owner knows you need to make numerous adjustments along the way - decisions about pricing, hiring, investments, and so on.

So, how do you handle the array of questions facing you?

One way is through cost accounting.

Cost Accounting Helps You Make Informed Decisions

Cost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions - raw materials, labor, inventory, and overhead, among others.

Note: Cost accounting differs from financial accounting because it's only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.

Cost accounting allows you to understand the following:

Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?

Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.

Budgeting. You can't create an effective budget if you don't know the real costs of the line items.

Is It Hard?

To monitor your company's costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.

Fixed costs don't fluctuate with changes in production or sales. They include:

rent
insurance
dues and subscriptions
equipment leases
payments on loans
management salaries
advertising

Variable costs DO change with variations in production and sales. Variable costs include:

raw materials
hourly wages and commissions
utilities
inventory
office supplies
packaging, mailing, and shipping costs

Tip: Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company's functioning.

If you'd like to understand the ins and outs of your business better and create sound guidance for internal decision making, consider setting up a cost accounting system.

Need Help?

Please call if you need assistance setting up cost accounting and inventory systems, preparing budgets, cash flow management or any other matter related to ensuring the financial success of your business. I look forward to hearing from you. Click this link to view our YouTube video http://youtu.be/KfO0_kmz7qc

Amare Berhie, Senior Tax Accountant