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Flash reports: Real-time financial reporting

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Timely financial reporting is key to making informed business decisions. Managers need to know what’s in the pipeline to respond promptly and decisively. Unfortunately, it typically takes several weeks to prepare financial statements under U.S. Generally Accepted Accounting Principles (GAAP). And many companies only produce GAAP financials at the end of the quarter or year. In the meantime, managers may turn their attention to simple “flash” reports.

Made to order

There are no standards to follow when preparing flash reports. But they typically take less than an hour to prepare and rarely exceed one sheet of paper. The goal is to provide management with a snapshot of key financial figures, such as cash balances, accounts receivable aging, collections and payroll, on a weekly basis. Some metrics might even be tracked daily — including sales, shipments and deposits. This is especially critical during seasonal peaks or when a company has recently restructured.

Customization is key. Each company’s flash reports contain different information. For instance, billable hours might be more relevant to a law firm, and machine utilization rates more relevant to a manufacturer.

Flash reports home in on what items matter most and how to draw management’s attention to them. Consider a restaurant, for example. Weekly revenues might be broken down by day of the week or between alcohol and food sales. Restaurateurs also keep close tabs on labor, food and liquor costs, as well as gross margins.

Use with caution

Comparative flash reports identify trends and exceptions that may need corrective action. For example, you might compare the current numbers to the previous week, the same week in the previous year or budgeted amounts.

When a company is starting up, aggressively expanding or struggling, lenders and investors may request copies of flash reports — especially if management has previously failed to meet projections for growth and profitability. But sharing this information can be perilous if stakeholders don’t understand that flash reports are designed for internal purposes only.

Flash reports provide a rough measure of performance and are seldom 100% accurate. Adjustments are often made when preparing GAAP financials. In addition, it’s normal for cash to ebb and flow throughout the month, depending on billing cycles.

Be proactive, not reactive

Managers who rely on stale financial information may be blindsided by unexpected threats and miss out on time-sensitive opportunities. Flash reports, if you understand their limitations, can help bridge the timing gap between daily operations and receipt of GAAP financial statements. Contact us to help you design a flash reporting format that meets your business’s current needs.

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The tax score of winning

Studies have found that more people are engaging in online gambling and sports betting since the pandemic began. And there are still more traditional ways to gamble and play the lottery. If you’re lucky enough to win, be aware that tax consequences go along with your good fortune.

Review the tax rules

Whether you win online, at a casino, a bingo hall, a fantasy sports event or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the racetrack turns into a $110 win, you’ve won $80, not $110.

You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. Therefore, you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.

Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.

Hitting a lottery jackpot

The odds of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.

Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. You may also be subject to state income tax.

You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.

If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.

Since the federal tax rate can currently be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.

Talk with us

If you’re fortunate enough to win a sizable amount of money, there are other issues to consider, including estate planning. This article only covers the basic tax rules. Different rules apply to people who qualify as professional gamblers. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements.

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M&A transactions: Be careful when reporting to the IRS

Low interest rates and other factors have caused global merger and acquisition (M&A) activity to reach new highs in 2021, according to Refinitiv, a provider of financial data. It reports that 2021 is set to be the biggest in M&A history, with the United States accounting for $2.14 trillion worth of transactions already this year. If you’re considering buying or selling a business — or you’re in the process of an M&A transaction — it’s important that both parties report it to the IRS and state agencies in the same way. Otherwise, you may increase your chances of being audited.

If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction. 

Here’s what must be reported

If you buy business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:

  • Equipment,
  • Buildings and improvements,
  • Software,
  • Furniture, fixtures and
  • Intangibles (including customer lists, licenses, patents, copyrights and goodwill). 

In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.

What the IRS might examine

The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the tax agency finds that different allocations are used, auditors may dig deeper and the examination could expand beyond the transaction. So, it’s best to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.

The tax implications of buying or selling a business are complex. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way to avoid unwanted attention. To lock in the best results after an acquisition, consult with us before finalizing any transaction.

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Double-check the rules on spousal consent for 401(k) distributions

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Some 401(k) plans require spousal consent whenever a participant takes a distribution. Others don’t require spousal consent for distributions or loans. Rather, it’s required only if a participant wants to designate a primary beneficiary other than his or her spouse.

Such variations in plan design may leave an employer’s HR staff uncertain about when they should require a participant to obtain spousal consent for a distribution. The answer, of course, lies within the wording of your plan document. Nonetheless, here’s a summary of the basic rules and the way many 401(k) plans avoid spousal consents.

QJSAs and QPSAs

Generally, qualified retirement plans such as 401(k)s are required to provide distributions to participants in the form of a qualified joint and survivor annuity (QJSA), and a minimum pre-retirement death benefit known as a qualified pre-retirement survivor annuity (QPSA).

These assure surviving spouses a minimum benefit that can be waived only with the spouse’s consent. A 401(k) plan, however, can avoid QJSAs and QPSAs so long as:

  • The plan requires that vested benefits be paid in full to the participant’s surviving spouse after the participant dies, unless the spouse has consented to a different beneficiary or there is no surviving spouse,
  • Participants don’t elect payment in any form of life annuity, and
  • Participants’ benefits exclude amounts transferred from a plan that was subject to the survivor annuity requirements.

Thus, if a plan doesn’t offer participants any life annuity distribution option and isn’t the recipient of funds from a plan that was subject to the survivor annuity requirements, it doesn’t have to obtain spousal consent before making distributions to participants.

Transfers and loans

Plans that have received transfers from plans that were subject to the survivor annuity requirements can prevent those requirements from applying to other benefits under the plan by separately accounting for the transferred assets and their income.

For purposes of the survivor annuity rules, plan loans are treated like distributions to the participant. So, if a plan doesn’t need to obtain spousal consent for other distributions to a participant, consent is unnecessary for plan loans.

Deferred annuity contracts

Certain deferred annuity contracts that include lifetime income options can be used as investments in a plan without triggering the spousal consent requirements. However, they must allow participants to move funds freely in and out of the contract until the annuity’s deferred starting date.

If the contract is accounted for separately, the spousal consent rules won’t apply to the contract until the deferred starting date of an annuity distribution. This allows earlier distributions and loans to occur without spousal consent.

Read the fine print

As you can see, many details go into whether a spouse must consent to a distribution or loan from an employer-sponsored 401(k) plan. Read the fine print of your plan document and ensure your staff or third-party administrator is aware of the rules. Our firm can answer any questions you might have about the tax or financial impact of employee benefits.

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Is it time to upgrade your accounting system?

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Timely financial data is key to making informed business decisions. Unfortunately, it’s common for managers to struggle with their companies’ accounting systems to get the information they need, when they need it. Often, it takes multiple, confusing steps to enter and extract data specific to customers and/or projects.

Businesses and accounting software solutions evolve over time. So, what worked for your company years ago may not be the optimal solution today. For example, you might prefer a different solution that’s more user-friendly, more sophisticated or customized for your industry niche. Here are four factors — beyond just cost — to consider when evaluating your current accounting system.

1. Remote access

These days, remote access — from the field or from home to facilitate social distancing — remains a priority. Accessing your accounting system remotely allows team members to see real-time project data from anywhere. It also allows direct, daily reporting of key financial information, such as sales figures, labor hours, equipment usage and cash on hand. Managers can then compare this information against budgeted amounts to catch potential problems and adjust as needed.

2. Integration

Modern accounting software can facilitate seamless information sharing with other platforms and existing applications. For instance, your accounting solution should support timecard entry and project management software. It also should be compatible with customer and supplier networks. Likewise, if you outsource payroll to a third party, you should be able to integrate with the provider’s system so it can automatically import pertinent information in a timely manner with minimal manual input.

3. Vendor support

A quality accounting system comes with top-notch customer support, including training and a help desk to solve problems. To assess your current level of support, ask your vendor representative whether you’re maximizing the functionality of your accounting software. The rep should be able to tell you what’s working and what’s not. If the vendor doesn’t respond or provides minimal feedback, it may be time to switch providers.

4. Team buy-in 

Changes in technology affect people throughout your organization, so the entire team (or at least key members thereof) should have input on the decision. Gather feedback from the team on which features are “must haves” and which ones are “just wants.” Then work with IT and financial specialists to narrow down the list of prospective vendors to three to five solutions to research in-depth and test drive.

Once you’ve selected a system, it’s important to overcome any fear or confusion about the prospective software. This involves promptly announcing the plans to upgrade the accounting system, giving a rundown of the company’s objectives for doing so and keeping staff updated on the effort’s progress. Once the new system is in place, training is the final piece to the puzzle. More complex systems generally have a learning curve that can be reduced with formal instruction by the vendor.

We can help

If you’re dissatisfied with your current accounting system, contact us. We can do a complete assessment on the effectiveness of your system and how you’re using it. Then we can help you identify other cost-effective solutions that may better fit your operational needs.

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Is a Health Savings Account right for you?

Given the escalating cost of health care, there may be a more cost-effective way to pay for it. For eligible individuals, a Health Savings Account (HSA) offers a tax-favorable way to set aside funds (or have an employer do so) to meet future medical needs. Here are the main tax benefits:

  • Contributions made to an HSA are deductible, within limits,
  • Earnings on the funds in the HSA aren’t taxed,
  • Contributions your employer makes aren’t taxed to you, and
  • Distributions from the HSA to cover qualified medical expenses aren’t taxed.

Who’s eligible? 

To be eligible for an HSA, you must be covered by a “high deductible health plan.” For 2021, a high deductible health plan is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. For self-only coverage, the 2021 limit on deductible contributions is $3,600. For family coverage, the 2021 limit on deductible contributions is $7,200. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits can’t exceed $7,000 for self-only coverage or $14,000 for family coverage.

An individual (and the individual’s covered spouse) who has reached age 55 before the close of the year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2021 of up to $1,000.

HSAs may be established by, or on behalf of, any eligible individual.

Deduction limits 

You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2021, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $3,600. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,200. Thus, deductible contributions aren’t limited by the amount of the annual deductible under the high deductible health plan.

Also, taxpayers who are eligible individuals during the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.

However, if an individual is enrolled in Medicare, he or she is no longer eligible under the HSA rules and contributions to an HSA can no longer be made.

On a once-only basis, taxpayers can withdraw funds from an IRA, and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the transfer time. The amount transferred is excluded from gross income and isn’t subject to the 10% early withdrawal penalty.

Distributions

HSA Distributions to cover an eligible individual’s qualified medical expenses, or those of his spouse or dependents, aren’t taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65 or in the event of death or disability.

As you can see, HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat complex. Contact us if you have questions.

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