You’re Invited: Rob Slee presenting on Creating Value in Your Company

Call or e-mail Stephanie Johnson at (719) 579-9090 or sjohnson@biggskofford.com for more information or to reserve your seat!

IRS Expands Use of Correspondence Examinations

The IRS has expanded the use of correspondence examinations of individual income tax returns. The IRS initiates a correspondence examination by mailing either Letter 566 (CG), often termed an initial contact letter, advising the taxpayer that a return has been selected and listing the items to be verified, or a CP 2000 notice, which contains proposed adjustments based on information documents issued by third parties, such as Forms W-2, Wage and Tax Statement; 1099-MISC, Miscellaneous Income; and 1098, Mortgage Interest Statement. The examinations are handled at an IRS Service Center or campus.

Please notify us if you receive correspondence from the IRS. Do not assume the change(s) proposed in any IRS correspondence is correct. Often, it is not! Let us review the correspondence and respond on your behalf.

When the IRS receives returns, it compares them against norms for similar types of returns. The IRS develops the norms from audits of statistical random samples of returns that are selected as part of the National Research Program, which the IRS conducts to update return selection information.
The IRS typically selects returns for correspondence examinations based on data indicating that the taxpayer has not reported income, claimed improper deductions, or claimed erroneous tax credits. Some typical items for which the IRS requests verification include alimony, moving expenses, various itemized deductions, casualty losses, employee expenses, Schedule C receipts and expenses, foreign tax credits, earned income credits and education credits.

Unlike a field examination, a correspondence audit is not assigned to a specific examiner. When the IRS receives correspondence, the file is assigned to an auditor. If there is no response from the taxpayer, the process moves through an automated system. After a certain period of time, the IRS issues a second notice, and if there is no reply, it will issue a statutory notice of deficiency or a 90-day letter.

The IRS has been having workload problems in timely responding to taxpayer or practitioner letters that provide the requested information or express disagreement with proposed adjustments. Often correspondence is not assigned to the auditor who reviewed earlier documents. Correspondence tends to not be reviewed for several months, resulting in the IRS sending letters advising the taxpayer that it needs additional time to review the correspondence. When the IRS finally issues reports, in some cases the proposed adjustments are not correct because proper consideration and evaluation have not been given to the documents and substantiation furnished by the taxpayer or his or her representatives.

If you have any questions, please call your contact at BiggsKofford at (719) 579-9090.

2010 Tax Relief Act

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010″ is a sweeping tax package that includes an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment and a host of retroactively resuscitated and extended tax breaks for individuals and businesses.

Here’s a look at the key elements of the package:

• The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
• Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
• A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.
• Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.
• Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
• Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit.
• After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010’s or 2011’s rules.
• Omitted from the new law: Repeal of a controversial expansion of Form 1099 reporting requirements.
• Also not included: Extension of the Build America Bonds program, which permits state and localities to issue federally-subsidized municipal bonds.

If you have questions about this tax law, please contact Greg Gandy or Mike McDevitt.

Payroll Updates

As the end of the year approaches, it is important to update your payroll systems for new payroll requirements.

Beginning 2011:

• EFTPS Mandate

Virtually all businesses will have to switch to the Electronic Federal Tax Payment System (EFTPS) for all federal tax payments starting in 2011. The familiar paper voucher deposit system is going away for any company with quarterly employment tax liability of $2,500 or more. The IRS penalties for non-compliance are 10 percent for taxes paid by check.

Beginning 2012:

• Expanded 1099 Reporting

Under a mandate of the Health Care Reform and Small Jobs Act, businesses will be required to report all payments made in 2012 in excess of $600 for services or merchandise to the IRS on Form 1099. Under current law, businesses send Form 1099 for payments in excess of $600 for rent, interest, dividends and non-employee services when these payments are made to entities other than corporations. The reporting expansion now includes corporations and payments for services, including services performed on rental properties owned by an individual. The expanded reporting requirements begin with payments made in 2012.

In order to file the required Form 1099, a business would have a vendor complete Form W-9. Business owners may chose to gather need information and update accounting systems now in preparation of these changes.

• W-2 Reporting of Health Care Coverage Costs

The health care reform legislation requires employers to include the aggregate cost of employer sponsored health care coverage on employees’ W-2s for tax years starting on or after January 1, 2012. The original deadline was pushed back a year from 2011 to allow employers to make changes to their payroll systems and procedures to comply with this rule. A penalty will be imposed for non compliance beginning with 2012 W-2s. The amount reported is informational only and will not be includable in employee earnings.

If you have any questions about how your business needs to prepare for this, please feel free to e-mail Deborah Helton, CPA, or call her at (719) 579-9090.

President Signs Small Jobs Act of 2010

On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010.

In part, the Act:

• Doubles the Section 179 expensing limit for fixed assets placed in service to $500,000, phasing out at $2 million for tax years beginning in 2010 and 2011, and allows the expensing up to $250,000 of leasehold, retail and restaurant improvements
• Reinstates 50 percent bonus depreciation for qualifying property acquired and placed in service in 2010, and authorizes an increased first-year depreciation limit by $8,000 for passenger autos that are “qualified property”
• Doubles the allowable tax deduction for start-up expenditures to $10,000
• Removes cell phones from the definition of listed property
• Allows self-employed individuals to deduct health insurance costs in paying their 2010 self-employment tax
• Allows small businesses to carry back general business tax credits to offset their taxes from the previous five years and count those credits against their Alternative Minimum Tax (AMT) liability
• Requires information reporting for rental property expense payments

For a more detailed explanation of these new provisions, please call Gregory L. Gandy, CPA, or Michael E. McDevitt, CPA, at (719) 579-9090. Also, for a detailed review of this and many other tax law changes, e-mail Stephanie Johnson to R.S.V.P. for our November Entrepreneurial Corner on November 18, 2010.

The Mayor Project Event

Recently, BiggsKofford hosted an event highlighting the various topics that are essential to The Mayor Project, which is slated to be on November’s ballot. In case you missed this event, a copy of the presentation handouts can be found here:

The Mayor Project: A Perspective on City Governance 

Funding is imperative for this initiative to be successful, and we believe that this is an issue our city must pass. We are requesting that you join us in contributing to this extremely important cause. We would be happy to discuss with you why we believe so strongly about this issue. Feel free to call Kurt, Chris or Jerry if you need more information before you decide to donate.

Jerry Biggs – (719) 661-1202
Kurt Kofford – (719) 661-9091
Chris Blees – (719) 649-8749

To make a donation to The Mayor Project, please make your checks out to The Mayor Project and mail to BiggsKofford, P.C., 630 Southpointe Court, Suite 200, Colorado Springs, CO 80906. You may also make online donations here.

Need help with your business loan?

Recently the Colorado Springs Business Journal published an article entitled “Delinquent loans hurting local banks”, giving a good perspective of what businesses and banks are facing alike when it comes to financing in this economy.

If your business is facing any of these issues:

• You can’t renew your line of credit.
• Your loan has a balloon payment, but the bank won’t extend.
• You have an opportunity to expand your business, but you can’t get the financing.
• What are you to do to keep your business afloat?

BiggsKofford has developed solutions:

• We can help you develop, plan and present your financial story for lenders and capital sources.
• We have successfully placed clients with new lenders, when others have turned them down.
• We have identified alternative capital sources – when traditional lenders won’t do the deal.

For more information on how BiggsKofford can help, contact Chris Blees or Austin Buckett. You can also find more information on capital sources here.

Four Ways to Grow Your Business

It wasn’t long ago when it seemed that the answer to every business challenge was to “get out and sell more”. Now, business owners are scrutinizing their operations for ways to squeeze out every last drop of profitability. This is a healthy exercise for any economy to undergo and the surviving businesses tend to emerge from difficult times as leaner, more disciplined enterprises poised to take advantage of every opportunity as the general market conditions improve. Let’s look at four ways to increase your profitability and grow your business.

Increase Average Price

The classic example of increasing prices was when Starbucks turned the 25 cent cup of coffee into a $3.50 specialty drink. Part of their success was with branding and perception, which can both be powerful tools for increasing your prices as well. Do your customers treat you as a low-cost provider in your industry? How can you change that mindset? One of the best ways to overcome the customers’ arguments to paying a higher price is with value-added services. While “value-add” is tossed around an awful lot these days as a buzzword for consultants and marketing spinsters, savvy entrepreneurs develop ancillary services around their core products to differentiate themselves from their competition and justify higher average prices. Whether your barista takes an extra few seconds to smile and ask about your day or your key supplier includes your marketing on their website, these services set their businesses apart and keep you happy paying a higher average price because you actually receive more value. Do the same for your customers to increase your profitability.

Increase Average Transaction Quantity

Assuming your products and services generate more revenue than they cost to produce, increasing the quantity each customer purchases also increases the average sale and is another way to improve profitability. Offering discounts at certain volumes is a great way to convince your customers to buy in bulk. A small discount at 5,000 units and a larger discount at 10,000 trains them to think in bigger numbers and to find ways to use more of your products. Choosing your discount carefully will ensure you improve your profitability at the higher volumes.

Increase Number of Transactions

Once your average transaction value is where you want it to be, increasing the number of transactions is your next challenge. Marketing is the key here, both to your existing customers and to potential new customers. Highlight your value-added services, find your target market and get in front of them consistently, sell, sell, sell. Customer loyalty cards are often a great tool to increase the number of times your existing customers purchase. If they only need three more purchases to “get one free”, the motivation is strong to keep buying.

Reduce Costs

Cost reduction tends to be the default for business owners when pressed to increase profitability and most businesses are ripe with opportunities to streamline operations. Costs generally fall into three categories:

Reduce Average Cost of Goods Sold

Cost of Goods Sold consists of those expenses that vary directly with the volume of revenue generated. Gross Profit equals Sales minus Cost of Goods Sold and is the revenue left over to cover selling and administrative functions and to pay yourself. Reduce variable expenses with improved engineering, outsourced manufacturing, less expensive materials and streamlined delivery.

Identify and Reduce Direct Costs

Direct Costs are those overheads that can be easily traced to a revenue generating activity but not always to a specific unit of product. Examples are advertising, sales salaries, and location-specific overhead in a business with multiple locations. The important thing to remember when reducing direct costs is that these costs generate revenue. Cutting advertising to save a dollar today can come back to haunt your business in the form of reduced sales tomorrow.

Reduce Overhead

Overhead is that administrative function that is necessary for running a business but not tied to revenue in any way. These are expenses such as rent on corporate headquarters, administrative salaries, insurance, attorney fees, etc. Reducing your overhead is only limited by your imagination, frugality, ability to maintain compliant and risk tolerance. Perhaps you don’t really need a full-time CFO and can outsource that function to your CPA; you find your IT administration can be handled more efficiently by a third-party; or your insurance agent can restructure your policy to provide coverage targeted to your specific risks at a lower cost. Savings in overhead generally roll directly to your bottom line to improve profitability.

There are many other ways to grow your business during tough times, so keep working on your business and thinking forward. When the economy booms again, your business will be well structured to maximize all of the opportunities to grow and profit.

PTAC Comes to Colorado Springs

Original article published January 22, 2010 at Colorado Springs Business Journal

In case you haven’t heard, Colorado was recently awarded a Procurement Technical Assistance Center (“Center”) in September 2009.  The Center’s office is located right in Colorado Springs, at 6 South Tejon.  Getting a Center in Colorado was a long, difficult two year process led by several key members of the local business community.  I have the honor of serving as the Chairman of the Board of the Colorado Center, and I wanted to tell the community more about who we are and what we do.

What is a PTAC?

You’re thinking, ‘Okay, great.  Colorado now has a Center, but what is it and what does it do?’  Procurement Technical Assistance Centers (PTACs) are offices (over 300 nationwide offices) that form a nationwide network of procurement professionals working to support small businesses seeking federal contracts from the Department of Defense and other government agencies.

During the 1980s, Congress became concerned that small businesses were not able to compete effectively against larger businesses for federal contracts.  The Procurement Technical Assistance Program (PTAP) was authorized by Congress in 1985 in an effort to expand the number of businesses capable of participating in the Government Marketplace.

PTACs are the bridge between buyer and supplier, bringing to bear their knowledge of both government contracting and the capabilities of contractors to maximize fast, reliable service to our government with better quality and at lower costs.  PTAC counselors have backgrounds in government acquisitions, and virtually all receive ongoing training to keep pace with continually evolving acquisitions procedures and policies.

Colorado PTAC

Our Colorado PTAC is a non-profit entity, and operates under an agreement between the federal agency that administers them nationwide, the DLA, and Colorado’s Office of Economic Development & International Trade (OEDIT).  Both the DLA and the OEDIT allocated funds for the operation of the Colorado PTAC.  Additionally, several El Paso County local businesses funded the remaining required amounts to operate the PTAC for its initial year.

The Colorado PTAC’s mission is to provide Colorado small businesses with training, support, and counseling, on government contracting, with the ultimate goal of assisting these small businesses in being awarded federal contracts.  In addition, the Colorado PTAC will also help small businesses do the same for Colorado state government contracts and local government contracts.  The Colorado PTAC is organized to provide this support to small businesses throughout the state.

Why is the Colorado PTAC important and how will it impact the local community?

The small business community here in Colorado that sought to do business with the federal government have been at a distinct disadvantage for many years.  Small businesses in other parts of the country that have PTACs have been receiving support from their local PTAC and were better prepared to win federal contracts.  Our Colorado small businesses were left without this critical support, trying to compete with small businesses outside our state that had PTAC support.

One of the reasons the Colorado PTAC was located here in Colorado Springs was the understanding of how important government contracts are to the local community.  The business community in El Paso County relies heavily on federal contracts.  The critical assistance provided to local small businesses by the Colorado PTAC will help increase the number of federal contracts awarded to them, by making them better able to compete with small businesses outside the state and win these contracts.

The Colorado PTAC also helps large government contracting businesses.  These businesses often need to partner with small businesses as part of the contract requirements they are awarded by the federal government.  So, they need small business partners who understand government contracts, have experience with government contracts and can help them meet their contract requirements.  The Colorado PTAC helps these large businesses by training and supporting their small business partners.

The director and counselors at the Colorado PTAC are experienced government contracting experts.  They are providing invaluable government contracting support to our local small businesses.  They have been in operation for only a few months, but their results so far have far exceeded targeted expectations.  We fully expect their results to continue to exceed targets, meaning local small businesses will be better at getting government contracts.

If you think the Colorado PTAC can help your business, call (719) 434-3470 or stop by their office.  They are ready and waiting to help you meet your government contracting goals.