Outsourcing an IT function? Ensure the dollars make sense

Many of today’s businesses have taken to outsourcing various IT functions. The goal of doing so is usually to save money. But rushing into such an arrangement could mean losing money on the project itself while diminishing employee morale and even compromising your reputation. Here are a few best practices to follow to help ensure the dollars make sense.

Ask the users

Elicit feedback from your staff and let them help you refine your approach to outsourcing. Ask for candid feedback about whether your company’s technology is really meeting their needs.

Also try to gather “lessons learned” from other businesses that have outsourced. How did outsourcing help them? What went wrong? To find such companies, ask your professional advisors or contact a relevant trade association.

Weigh benefits vs. risks

Look at your in-house capabilities and rank your ability to deliver every service your users require. If you’re coming up short on some of them, maybe an outside vendor could do a better job — and, in doing so, help your employees do their jobs better.

But consider risks as well. Generally, you should outsource innovation-based work only to accommodate peak demands or when you absolutely lack expertise. And even then, ensure knowledge transfer and retain control over vital tasks such as program management and client contact.

Be committed and disciplined

If you decide to go forward with IT outsourcing, develop a plan that includes objectives such as:

• An aggressive, integrated pilot program,
• Strategically selected offshore locations,
• Multiple supplier bids to ensure better competition and lower risks,
• Performance-measuring metrics, and
• A communications strategy to keep everyone involved informed and motivated.

Remember, it’s not enough to budget for only the monetary expense of IT outsourcing. You’ve got to plan to manage the relationship as well.

Manage it wisely

In many industries, outsourcing has become a competitive necessity. But that doesn’t mean you can’t manage it wisely from a financial perspective. Please contact us for help assessing and executing your next IT outsourcing arrangement.

Awards of RSUs can provide tax deferral opportunity

Executives and other key employees are often compensated with more than just salary, fringe benefits and bonuses: They may also be awarded stock-based compensation, such as restricted stock or stock options. Another form that’s becoming more common is restricted stock units (RSUs). If RSUs are part of your compensation package, be sure you understand the tax consequences — and a valuable tax deferral opportunity.

RSUs vs. restricted stock

RSUs are contractual rights to receive stock (or its cash value) after the award has vested. Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.

But RSUs do offer a limited ability to defer income taxes: Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.

Tax deferral

Rather than having the stock delivered immediately upon vesting, you may be able to arrange with your employer to delay delivery. This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).

However, any income deferral must satisfy the strict requirements of Internal Revenue Code Section 409A.

Complex rules

If RSUs — or other types of stock-based awards — are part of your compensation package, please contact us. The rules are complex, and careful tax planning is critical.

© 2016

Lower gas costs = lower business driving tax deductions

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business went down. The reason? Compared with last year, the cost of driving is less because gas prices are lower.

Two options

If you use a vehicle for business, you can generally deduct the actual expenses attributable to your business use. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle, based on the percentage of business use. However, depreciation write-offs are subject to “luxury car” limits.

But some taxpayers don’t want to keep track of actual vehicle-related expenses. Another option: You may be able to use the IRS’s standard mileage rate. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

This year’s rate

Beginning on January 1, 2016, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 54 cents per mile. For 2015, the rate was 57.5 cents per mile.

The cents-per-mile rate is adjusted annually by the IRS. It is based on an annual study commissioned by the IRS about the costs of operating a vehicle.

Current gas costs

On June 15, 2016, the national average price of a gallon of regular unleaded gas was $2.36 and it fell below $2 a gallon earlier this year. This is down from the average price of $2.80 per gallon a year earlier. (There are variations in fuel prices from one state to another so the per-gallon price in your state could be higher or lower.)

Going forward

Not all taxpayers can use the cents-per-mile rate. It depends on how they’ve claimed deductions for the same vehicle in the past.

If you have questions about deducting mileage expenses in your situation, contact us.

© 2016

Throw a company picnic for employees this summer and enjoy larger deductions

Many businesses host a picnic for employees in the summer. It’s a fun activity for your staff and you may be able to take a larger deduction for the cost than you would on other meal and entertainment expenses.

Deduction limits

Generally, businesses are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:

• For recreational or social activities for employees, such as summer picnics and holiday parties,
• For food and beverages furnished at the workplace primarily for employees, and
• That are excludable from employees’ income as de minimis fringe benefits.

There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.

Recordkeeping requirements

Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses.

If your company has substantial meal and entertainment expenses, you can reduce your tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.

For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction, please contact us. Visit our website, call us at (631) 368-3110 or send an email to alan@sz-cpas.com.



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Could your income trigger the AMT this year?

The top alternative minimum tax (AMT) rate is 28%, compared to the top regular ordinary-income tax rate of 39.6%. But the AMT rate typically applies to a higher taxable income base and will result in a larger tax bill if you’re subject to it.

Midyear is a good time to check on whether any events in your financial life during the first six months of the year make it likely you’ll owe the AMT when you file your 2016 return.

AMT triggers

You’ll be subject to the AMT if your AMT liability is greater than your regular tax liability. Some income items that might trigger the AMT include:

• Long-term capital gains and dividend income, even though they’re taxed at the same rate for both regular tax and AMT purposes,
• Accelerated depreciation adjustments and related gain or loss differences when assets are sold,
• Tax-exempt interest on certain private-activity municipal bonds, and
• The exercise of incentive stock options.

Income isn’t the only thing that can trigger the AMT. So can deductions, because many popular deductions aren’t allowed under the AMT, such as state and local income and property tax deductions.

Avoiding or reducing AMT

If it looks like you could be subject to the AMT in 2016, consider accelerating income into this year. This may allow you to benefit from the lower maximum AMT rate. And deferring expenses you can’t deduct for AMT purposes may allow you to preserve those deductions. If you also defer expenses you can deduct for AMT purposes, the deductions may become more valuable because of the higher maximum regular tax rate.

For help assessing whether you could be subject to the AMT this year — or for more ideas on minimizing any negative consequences from the AMT — please contact us. Visit our website, call us at (631) 368-3110 or send an email to alan@sz-cpas.com.

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3 Keys to strong business financials

Businesses fail for many reasons — dysfunctional management, insufficient working capital, insurmountable competition. Why they succeed, on the other hand, is often easily explained. Regardless of size and sector, most healthy companies share the following three characteristics when it comes to their financials:

1. Ample revenue

You’ve no doubt heard it before, but this cliché is true: Cash is king. Without a robust revenue stream coming in, profitability will be precarious. To determine how much revenue your company needs to be profitable, perform a profitability breakeven analysis. Then review your sales and determine where you can make changes. For example, you may need to invest more in R&D or focus more on prospective customers.

2. Well-managed labor and production costs

For most companies, labor is their biggest production cost — particularly when benefits and taxes are factored into the equation. Determine whether your labor force increases the value of products or services enough to offset its high cost. If not, consider solutions such as:

• Providing more training or better incentives,
• Improving production processes, or
• Investing in more modern facilities.

When production overhead costs are too high relative to a product’s sales price, take action. You might increase the price of the product, find better production methods or even discontinue the product.

3. Lean operations

Operating expenses — costs you incur to run your business that aren’t directly attributable to production — must be minimized. For example, compensation takes a big bite out of your operations budget, so monitor staffing needs relative to sales and adjust them if necessary. And while you can’t eliminate marketing expenditures, you can review your sales levels relative to them and ensure you’re getting bang for your buck.

Establish a foundation

If you’re trying to build the foundation for a healthy, long-lived business, focus on these three keys. For help applying them to your company’s specific size and situation, please call us. Visit our website, call us at (631) 368-3110 or send an email to alan@sz-cpas.com.

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