Tax and Financial News March 2019
Winners and Losers of the Tax Bill
In 2018 when President Trump and the Republican Congress rewrote the tax code, everyone knew there would be winners and losers. Exactly how this will play out is just starting to be seen – it closes loopholes while opening others and takes away some perks while creating new ones. Let’s see who the winners and losers really are by looking at the results of the tax law now and over time.
Winners and Losers Will Change Over Time
Almost all taxpayers get some type of tax cut; for example, the Tax Policy Center estimates that only about five percent of families will face an increased tax obligation in 2019. This sounds great! Initially, measured as a percentage of their total tax bill, things start out evenly. According to the nonpartisan Joint Committee on Taxation, households earning between $200,000 to $1 million will see a nine percent decrease in their tax burden compared to only an eight percent reduction for families earning $75,000 to $100,000.
Unfortunately, not everyone gets to keep their tax cuts over time because while the average rates dropped in 2018, they will return to 2017 levels by 2026 for individuals. The changes to corporate tax code are permanent. As a result, most taxpayers will see a modest tax hike by 2027, mostly impacting middle-income families.
Big Benefits Don’t Come Easy
Many Americans will benefit from the increase in the standard deduction, but they will no longer receive personal exemptions for themselves and family members, and many will lose the ability to itemize deductions. Some higher-earning small business owners, however, will benefit from a new 20 percent tax break for pass-through income. Above certain income limits, some professions such as health care, accounting and law, among others, are not entitled to this tax break. Those who are will need to use a complicated formula to calculate their benefit. Corporations face the most complexity, especially if they operate internationally, and will face increased compliance costs.
So, the winners are individuals who always had simple returns and pass-through business owners who qualify for the 20 percent break. The losers are taxpayers with several children, those who used to itemize extensively, and people who live in states with high taxes (the maximum deduction for the total of mortgage interest, state and local taxes is $10,000).
Corporate Competitiveness Increases
The reduction in the top corporate tax rate from 35 percent to 21 percent brings the United States closer to other countries. According to the Tax Foundation, which ranks countries based on the competitiveness of their tax environments, this change moved the United States up four spots from 28th place to 24th place. For now, it appears most companies aren’t making major changes, but this could take more time to play out. Large corporations are unlikely to act until there is more certainty around how long the tax break will last. The United States will also have to hope that other countries don’t respond to even the playing field.
Who’s Footing the Bill
The tax bill was sold by many on the premise that the tax cuts would pay for themselves through economic growth generating enough revenue to offset the tax cuts. The Congressional Budget Office has a different view, estimating the tax changes will increase the federal debt by almost $2 trillion by 2027. Initial tax receipts suggest the CBO’s view is right, but it’s too early to tell.
Recognize that any time there are changes in the tax law, there will be winners and losers. These winners and losers change over time and often there are unintended consequences. For now, it’s clear who are the winners and losers in some respects, but in others it will take time.
General Business News March 2019
How to Create Cash Flow Projections and Profit & Loss Statements
When it comes to making cash flow projections, we’re all aware that it’s not an exact science. One of the main difficulties about accurately projecting cash flow has to do with timing. Examples include factoring in overhead such as payroll; lease or tax payments on the building; using credit to make purchases or for future investment to grow the business; and when payment is collected from clients.
Understanding Cash Flow Projection
One important reason that many business owners create a cash flow projection is to include it in their business plan when they approach an investor or bank for a loan. Detailing a company’s cash flow projection consists of three parts: positive, negative or break-even results going forward.
The first section details all incoming cash flow. Examples include sales revenue from products or services expected to be collected during the month noted. These often include assumptions when the majority of receivables are collected within 30 days. However, the projection may be more or less dependent on whether invoices go unpaid or collections efforts are more costly or last longer than anticipated.
The second part documents all cash outlays that will be paid during a month for business expenses. Examples include payroll and associated taxes, installment payments on loans, buying new equipment, lease or rent payments, etc. The third part of the cash flow projection for each month takes the incoming cash flow and subtracts the cash outlays from it.
Cash flow projection is a good way to determine if there will be enough collections on invoices, if expenses will be in line, and if the existing business strategy needs to be adjusted for more sales of products or services. This also can help business owners better determine strategy if they need a larger initial investment before opening or an injection of new capital post-launch.
Profit & Loss Statement
The first part consists of how much revenue the business made (from either products and/or services sold), minus any returns that must be repaid.
The second part of a Profit & Loss Statement looks at the cost of goods sold. It calculates how much it costs the company for any input or raw material expenses, labor for employees to manufacture the product or deliver the service, and whatever it took to run the factory or office. However, the costs associated with products not sold or delivered during the time frame are not included.
Along with the ability to include business overhead expenses for consideration, an important distinction with the Profit & Loss Statement is that some non-cash considerations are included – such as depreciation or how much the business can deduct for the purchase of a fixture or vehicle.
The final section specifies if a business made or lost money from selling any assets or it received interest income during the time frame.
Much like cash flow analysis is important to business operations, companies can use the Profit & Loss Statement to modify their business’ path. For example, a business owner may wish to evaluate whether or not he can increase profitability by choosing different material suppliers. Or, hedge for projected increases in raw materials to improve profit margins.
Depending on the stage of the company, these are two ways a business owner can better understand how to account for the operation in order to enhance his chances for profitable and long-term sustainability.
Tip of the Month March 2019
8 Good Things to do with Your Tax Refund
Getting a tax refund is always a great feeling. But what should you do with it? While the first thing you might be tempted to do is spend it on a splurge for yourself, here are a few other things you might want to consider.
Start an Emergency Fund. If you don’t have one, this kind of account is critical. If you already have one, add to it. Online savings accounts that are interest bearing or money market accounts are your best bets. You can’t control the future, which is why being prepared is your best defense.
Pay Off Debt. Whether it’s a credit card, student loan or car loan, paying on – or eliminating – the account with the highest interest is best. Becoming debt free not only provides emotional relief, it’s also the key to financial freedom.
Start Saving for Specific Dreams. Do you want to travel? Buy a new car? Make a home improvement? You can either put your entire refund toward one of your life goals, or break it up into different buckets. This way, you’re not only being disciplined and mindful, you’ll also avoid taking on future debt. Most importantly, you’re taking intentional steps toward making your dreams come true.
Refinance Your Mortgage. When you do this, you still have to pay closing costs and fees, but your refund can contribute to or cover this entirely. Plus, you can potentially save a lot of money each year on mortgage interest. You’ll thank your future self for this move.
Start a College Fund. With costs skyrocketing, this might be one of the best gifts you can give your kids or grandkids. Set up a 529 plan, a tax-advantaged investment vehicle designed to encourage savings for a designated beneficiary’s higher education expenses. The best thing about this is that you might be eligible to deduct it from your state income taxes. Thinking ahead pays off in the long run.
Kick Your Career Up a Notch. If it seems like your colleagues are getting promotions and raises because they know a certain skill, then use your refund to enroll in a class and catch up. One of the cool things about this is that you can take advantage of a Lifetime Learning credit and claim it on your taxes. Remember, you’re worth it.
Donate to a Charity. What are you passionate about? Giving to a cause you believe in not only helps others, you can also use it as a deduction on your taxes. Doing good for those in need always feels good.
Put it Toward Your Retirement. Though you might be years away from retirement, it will be here before you know it. Use your refund money to purchase or add to a Roth or traditional IRA. That irresistible thing you might be tempted to blow your money on today will be long forgotten by the time you retire.
Truth is, what you do with your tax refund is up to you. However, putting it toward something that has a long-term pay out or a significant goal can be a very smart thing to do.