Keep in Mind These Basic Tax Tips for the Sharing Economy

If taxpayers use one of the many online platforms to rent a spare bedroom, provide car rides or a number of other goods or services, they may be involved in the sharing economy. The IRS now offers a Sharing Economy Tax Center. This site helps taxpayers find the resources they need to help them meet their tax obligations.

Here are a few key points on the sharing economy:

  1. Taxes. Sharing economy activity is generally taxable. It does not matter whether it is only part time or a sideline business, if payments are in cash or if an information return like a Form 1099 or Form W2 is issued. The activity is taxable.
  2. Deductions. There are some simplified options available for deducting many business expenses for those who qualify. For example, a taxpayer who uses his or her car for business often qualifies to claim the standard mileage rate, which was 54 cents per mile for 2016.
  3. Rentals. If a taxpayer rents out his home, apartment or other dwelling but also lives in it during the year, special rules generally apply. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Taxpayers can use the Interactive Tax Assistant Tool, Is My Residential Rental Income Taxable and/or Are My Expenses Deductible? to determine if their residential rental income is taxable.
  4.  Estimated Payments. The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year to cover their tax obligation. These payments are due on April 15, June 15, Sept. 15 and Jan. 15. Use Form 1040-ES to figure these payments.
  5. Payment Options. The fastest and easiest way to make estimated tax payments is through IRS Direct Pay. Or use the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). 98005
  6. Withholding. Taxpayers involved in the sharing economy who are employees at another job can often avoid making estimated tax payments by having more tax withheld from their paychecks. File Form W-4 with the employer to request additional withholding. Use the Withholding Calculator on IRS.gov.

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return. 

IRS YouTube Videos:

  • Your Taxes in the Sharing Economy – English | ASL

Original article was published on March 30, 2017 by the Internal Revenue Service – IRS Tax Tip 2017-39

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Name Change? How It Impacts Taxes

A name change can have an impact on taxes. All the names on a taxpayer’s tax return must match Social Security Administration records. A name mismatch can delay a tax refund. Here’s what taxpayers should know if they changed their name:

  • Reporting Name Changes. Got married and now using a new spouse’s last name or hyphenate a name? Divorced and now back to using a former last name? In either case, taxpayers should notify the SSA of a name change. That way the new name on IRS records will match the SSA records.
  •  Making Dependent’s Name Change. Notify the SSA if a dependent had a name change. For example, if a taxpayer adopted a child and the child’s last name changed. If the child does not have a Social Security number, the taxpayer may use an Adoption Taxpayer Identification Number on their tax return. An ATIN is a temporary number. Apply for an ATIN by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. Visit IRS.gov to get the form.
  • Getting a New SS Card. File Form SS-5, Application for a Social Security Card. The form is on SSA.gov or by calling 800-772-1213. The taxpayer’s new card will reflect the name change.

All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
IRS YouTube Videos:  

Original article was published on February 23, 2017 by the Internal Revenue Service – IRS Special Edition Tax Tip 2017-19

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IRS Debunks Myths Surrounding Tax Refunds

As millions of people begin filing their tax returns, the Internal Revenue Service reminds taxpayers about some basic tips to keep in mind about refunds.

During the early parts of the tax season, taxpayers are anxious to get details about their refunds. In some social media, this can lead to misunderstandings and speculation about refunds. The IRS offers these tips to keep in mind.

Myth 1: All Refunds Are Delayed

While the IRS issues more than 90 percent of federal tax refunds in less than 21 days, some refunds take longer. Recent legislation requires the IRS to hold refunds for tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) until mid-February. Other returns may require additional review for a variety of reasons and take longer. For example, the IRS, along with its partners in the states and the nation’s tax industry, continue to strengthen security reviews to help protect against identity theft and refund fraud. The IRS encourages taxpayers to file as they normally would.

Myth 2: Calling the IRS or My Tax Professional Will Provide a Better Refund Date

Many people mistakenly think that talking to the IRS or calling their tax professional is the best way to find out when they will get their refund. In reality, the best way to check the status of a refund is online through the “Where’s My Refund?” tool at IRS.gov or via the IRS2Go mobile app.

Taxpayers eager to know when their refund will be arriving should use the “Where’s My Refund?” tool rather than calling and waiting on hold or ordering a tax transcript. The IRS updates the status of refunds once a day, usually overnight, so checking more than once a day will not produce new information. “Where’s My Refund?” has the same information available to IRS telephone assistors so there is no need to call unless requested to do so by the refund tool.

Myth 3: Ordering a Tax Transcript a “Secret Way” to Get a Refund Date

Ordering a tax transcript will not help taxpayers find out when they will get their refund. The IRS notes that the information on a transcript does not necessarily reflect the amount or timing of a refund. While taxpayers can use a transcript to validate past income and tax filing status for mortgage, student and small business loan applications and to help with tax preparation, they should use “Where’s My Refund?” to check the status of their refund.

Myth 4: “Where’s My Refund?” Must be Wrong Because There’s No Deposit Date Yet

The IRS will update “Where’s My Refund?” ‎on both IRS.gov and the IRS2Go mobile app with projected deposit dates for early EITC and ACTC refund filers a few days after Feb. 15. Taxpayers claiming EITC or ACTC will not see a refund date on “Where’s My Refund?” ‎or through their software package until then. The IRS, tax preparers and tax software will not have additional information on refund dates.

The IRS cautions taxpayers that these refunds likely will not start arriving in bank accounts or on debit cards until the week of Feb. 27 – if there are no processing issues with the tax return and the taxpayer chose direct deposit. This additional period is due to several factors, including banking and financial systems needing time to process deposits. Taxpayers who have filed early in the filing season, but are claiming EITC or ACTC, should not expect their refund until the week of Feb. 27. The IRS reminds taxpayers that President’s Day weekend may impact when they get their refund since many financial institutions do not process payments on weekends or holidays.

Myth 5: Delayed Refunds, those Claiming EITC and/or ACTC, will be Delivered on Feb. 15

By law, the IRS cannot issue refunds before Feb. 15 for any tax return claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC). The IRS must hold the entire refund, not just the part related to the EITC or ACTC. The IRS will begin to release these refunds starting Feb. 15.

These refunds likely won’t arrive in bank accounts or on debit cards until the week of Feb. 27. This is true as long as there is no additional review of the tax return required and the taxpayer chose direct deposit. Banking and financial systems need time to process deposits, which can take several days.

See the What to Expect for Refunds in 2017 page and the Refunds FAQs page for more information.

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

IRS YouTube Videos:

Original article was published on February 3, 2017 by the Internal Revenue Service – IRS Special Edition Tax Tip 2017-02

Posted in Additional Child Tax Credit (ACTC), Akron Accounting Firm, Akron Certified Public Accountants, Akron Ohio Community, Earned Income Tax Credit (EITC), Internal Revenue Service, Refunds, Tax Refunds, Taxation, Uncategorized | Tagged , , , , , , , , , , , , , , , , , , | Leave a comment

Stop, Look and Think Before You Expand

The driving force in many expansion plans is to generate higher sales, with the hope that profits will rise. But before making moves to buy new equipment, expand your plant or implement a new business idea, you need to grasp the profit angle.

In some cases, an expansion plan boosts sales but not profits. You wind up working longer and harder for nothing.

You may think, “if we lose a little bit on each deal, we can make it up on volume.” That sounds good but may prove difficult in reality. To prevent problems, analyze three factors of success. Here’s a step-by-step guide.

expansion-plan-analysis

Once you calculate these factors, you’re ready to analyze the impact of expansion. Let’s say your company makes Belgian chocolates and sells them in quarter-pound boxes at $10 apiece. Your variable costs are $8, giving you a contribution margin of $2 on each box to cover fixed costs and provide a profit. Your fixed costs are $100,000, so you need to sell 50,000 boxes to break even.

But you want to expand and fixed costs will rise to $125,000. Your contribution margin stays the same. Using the breakeven formula (fixed costs divided by contribution margin), you now have to sell 12,500 more boxes, or 62,500 total.

expansion-plan-analysis1

Once you get the figures, it’s a good idea to talk to your financial advisor about how cash flow, liquidity and profitability could change, depending on business conditions. But fundamentally, a solid grasp on these factors is critical to deciding whether you’re better off keeping the status quo or charging ahead with an expansion.

expansion-plan-analysis2

-Reposted from the Levin Swedler Kennedy Newsletter powered by Checkpoint Marketing

Levin Swedler Kennedy - CPAs

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IRS Tax Tip Number 11 – IRS, States, Industry Urge Taxpayers to Learn Signs of Identity Theft

No matter how careful you are, identity thieves may be able to steal your personal information. If this happens, thieves try to turn that data quickly into cash by filing fraudulent tax returns.

The IRS, state tax agencies and the nation’s tax industry ask for your help in their effort to combat identity theft and fraudulent returns. Working in partnership with you, we can make a difference.

That’s why we launched a public awareness campaign called “Taxes. Security. Together.” We’ve also started a new series of security awareness tips that can help protect you from cybercriminals.

Here are a few signs that you may be a victim of tax-related identity theft:

  1. Your attempt to file your tax return electronically is rejected. You get a message saying a return with a duplicate Social Security number has been filed. First, check to make sure you did not transpose any numbers. Also, make sure one of your dependents, for example, your college-age child, did not file a tax return and claim themselves. If your information is accurate, and you still can’t successfully e-file because of a duplicate SSN, you may be a victim of identity theft. You should complete Form 14039, Identity Theft Affidavit. Attach it to the top of a paper tax return and mail to the IRS.
  2. You receive a letter from the IRS asking you to verify whether you sent a tax return bearing your name and SSN. The IRS holds suspicious tax returns and sends taxpayers letters to verify them. If you did not file the tax return, follow the instructions in the IRS letter immediately.
  3. You receive income information at tax time from an employer unknown to you. Employment-related identity theft involves the use of your SSN by someone, generally an undocumented worker, for employment purposes only.
  4. You receive a tax refund that you did not request. You may receive a paper refund check by mail that the thief intended to have sent elsewhere. If you receive a tax refund you did not request, return it to the IRS. Write “VOID” in the endorsement section, and include a note on why you are returning it. If it is a direct deposit refund that you did not request, contact your bank and ask them to return it to the IRS. Search IRS.gov for “Returning an Erroneous Refund” for more information.
  5. You receive a tax transcript by mail that you did not request. Identity thieves sometimes try to test the validity of the personal data they have chosen or they attempt to use your data to steal even more information. If you receive a tax transcript in the mail and you did not request it, be alert to the possibility of identity theft.
  6. You receive a reloadable, pre-paid debit card in the mail that you did not request. Identity thieves sometimes use your name and address to create an account for a reloadable prepaid debit card that they use for various schemes, including tax-related identity theft.

More information about tax-related identity theft can be found at Identity Protection: Prevention, Detection and Victim Assistance as well as the Taxpayer Guide to Identity Theft – all on IRS.gov.

The IRS, state tax agencies and the tax industry joined together as the Security Summit to enact a series of initiatives to help protect you from tax-related identity theft.

To learn additional steps you can take to protect your personal and financial data, visit Taxes. Security. Together. Also read Publication 4524, Security Awareness for Taxpayers.

Original article was published on January 3, 2017 by the Internal Revenue Service – IRS Tax Tip Number 11.

 

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Levin Swedler Kennedy Year-End Tax Planning for 2016

With the Presidential and Congressional elections of 2016 behind us and the end of the year approaching, now is a prudent time to consider tax planning strategies to reduce your tax bill for 2016 and possibly future years. The results of the recent election give us a general idea of where federal tax policy may be headed in the coming two years, however, at this point we can only speculate on the details. As such, this letter primarily focuses on tax provisions affecting tax year 2016 (which are unlikely to change at this point). Nonetheless, there are general references throughout to a few broad changes that may be down the road and how those changes affect tax year 2016 planning. Some factors continuing to compound the 2016 tax year planning challenge include turbulence in financial markets, economic uncertainty, and whether Congress will act on a number of important tax breaks set to expire for tax years after 2016. Under current law, tax breaks that won’t be available for tax years after 2016 unless Congress acts in some form include:

  • The exclusion of income from discharge of indebtedness on a principal residence
  • The treatment of mortgage insurance premiums as deductible qualified residence interest
  • The 7.5% of adjusted gross income threshold for medical expense deductions for taxpayers age 65 or older will change to 10%
  • The above-the-line deduction for qualified tuition and related expenses
  • A host of energy provisions including the nonbusiness energy property credit, the residential energy property credit, the credit for 2-wheeled plug-in electric vehicles, the new energy efficient homes credit, and the hybrid solar lighting system property credit

The following is a listing of some key tax provisions that may apply to you in minimizing your taxes. The information is broken up into three sections: Year-End Tax Planning Moves for Businesses & Business Owners, Year-End Tax Planning Moves for Individuals, and Unique Aspects of Planning for Higher Income Individuals.

Year-End Tax Planning Moves for Businesses & Business Owners

  • Businesses should consider making expenditures that qualify for the business property expensing option (“Section 179”). For 2016, the expensing limit is $500,000 and the investment ceiling limit is $2,010,000. Expensing is available for most depreciable property (other than buildings), off-the-shelf computer software, and a limited amount of real property. The deduction is not prorated for the time the property is placed in service during the year. The make-up of the incoming Congress and administration suggests these thresholds are likely to remain as generous as 2016 if not more so for 2017 and 2018.
  • If Section 179 cannot be used, 50% first-year bonus depreciation should be considered. Like Section 179, the amount deductible as bonus depreciation is not prorated for the time of year the property is placed in service.
  • Concerning capitalization versus expense treatment for purchases of items expected to last longer than one year, businesses may be able to take advantage of the “deminimis safe harbor election.” The election permits businesses to expense each “unit of property” with a cost of $5,000 or less for those with an applicable financial statement and $2,500 or less for those without a financial statement. Elected costs may still have to be capitalized under the UNICAP rules.
  • If your business qualifies for the domestic production activities deduction (DPAD) for 2016, consider whether the 50% of W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2016 W-2 income to owner-shareholders whose compensation is allocable to domestic production gross receipts.
  • Consider disposing of a passive activity with suspended passive losses if reducing 2016 income makes sense keeping in mind that with the results of the recent election there is a likelihood that the rates that apply to you may change in 2017 or 2018.
  • If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in your partnership interest or S corporation stock so that you can deduct a loss from the entity this year.
  • There are new filing deadlines for C corporations and partnerships. Formerly, the original filing deadline for calendar year-end C corporations was March 15th and the original filing deadline for calendar year-end partnerships was April 15th. Going forward, this will be reversed. The original filing deadline for calendar year-end C corporations will be April 15th; it will be March 15th for calendar-year partnerships. The extended deadline for calendar year-end partnerships and calendar year-end C corporations will continue to be September 15th, changing to October 15th for C corporations in 2025. S corporations will continue to have March 15th as the original filing deadline and September 15th as the extended deadline.
  • The Research & Development Credit has been made permanent and has also been enhanced. Beginning in 2016, the credit is partially refundable against payroll taxes for businesses with less than $5 million in annual gross receipts who did not generate any gross receipts prior to 2012 (new businesses). The maximum benefit an eligible company is allowed to claim against payroll taxes is $250,000.
  • For tax years beginning in 2018, major changes have been made to the partnership audit process. Generally, the partnership itself will be required to pay any tax resulting from an audit adjustment or make an election to issue adjusted information statements to all partners passing the audit adjustment on to them. Also, the partnership’s designated representative has been granted much greater authority to make decisions on behalf of the partnership. Partnerships may want to review or revise their partnership operating agreement in light of these changes.
  • For Ohio Schedule C and pass-through businesses, the Ohio business income tax deduction will be 100% of business income up to $250,000 ($125,000 for married filing separately) and will no longer be subject to a percentage reduction.
  • Businesses conducting transactions in other states need to keep abreast of ever-changing rules in both the sales and income tax arena for those states in which they do business. Developments that can have a big impact depending on the circumstances are occurring rapidly in this area.
  • Businesses filing Ohio city income tax returns should consider the impact of HB5. HB5 is intended to provide a uniform tax base across all Ohio cities and generally reduce the complexity associated with each City having wide latitude in setting their own tax rules. Most provisions of the legislation went into effect January 1, 2016. One such provision is that a withholding requirement for employees working in another city begins at twenty days rather than twelve days. Changes made by HB5 concerning the application of city net operating losses go into effect January 1, 2017.

Year-End Tax Planning Moves for Individuals

  • Postpone income until 2017 and/or accelerate deductions into 2016 while keeping in mind the various phase-outs for many deductions and credits at certain levels of income. Note that depending on varying individual circumstances there may be times when the opposite strategy is appropriate, such as when you expect to be in a higher tax bracket the following year. However, given the results of the recent election, for most people with relatively stable income year to year the benefits of a general deferral strategy are likely to be enhanced.
  • Remember that charitable gifts of $250 or more may only be deducted if you have a statement from the charitable organization that shows 1) the amount of money contributed or a description of the property donated and 2) whether the organization did or did not give you any goods or services in return for your contribution.
  • Consider a traditional to Roth IRA conversion if you expect to be in a higher tax bracket when eventually taking distributions from the Roth, you do not expect to take distributions from the account for a substantial period of time, and/or your income was much lower in 2016 than is typical. A Roth IRA conversion will increase your adjusted gross income (AGI) in the year converted absent a unique tax attribute such as a net operating loss (NOL).
  • Consider using a credit card to pay deductible expenses before the end of the year. The credit card charges are considered to be a 2016 deduction even when the charges are paid in a future year.
  • Your exposure to alternative minimum tax (AMT) must be kept in mind for 2016 as many tax breaks allowed for regular income taxes are disallowed for AMT purposes. These include the deduction for property taxes on your residence, state and local income taxes, miscellaneous itemized deductions, and personal and dependency exemptions.
  • If you expect to owe state and local income taxes consider increasing your withholding of these taxes (or make or increase state estimated income tax payments) before the end of the year to pull this deduction into 2016. However, keep in mind AMT as the state and local income tax deduction is added back for AMT purposes.
  • If you are just under a threshold for the allowance of a deduction such as miscellaneous itemized deductions or medical expenses consider “bunching” these expenses into one year to get over the threshold.
  • Remember to take into account the required minimum distributions (RMDs) from your IRA or 401(k)/403(b) account(s) if you are over age 70 ½ at the end of 2016. The penalty for failure to take a distribution during the year is 50% of the RMD amount.
  • Consider ways to maximize income taxed at lower capital gain and qualified dividend rates. Consult your investment advisor to develop a strategy to match capital gains and losses and to make investments that pay income as qualified dividends.
  • Shelter gifts by using the annual gift tax exclusion before the end of the year to reduce possible gift and estate taxes. The annual exclusion applies to gifts of up to $14,000 made in 2016 to each of an unlimited number of individuals.
  • Consider filing status as a way to save taxes. Ohio taxpayers can often save by filing separate tax returns and head of household status can save taxes in certain situations. However, retired persons over 65 should also account for the negative impact that married filing separate can have on the cost of Medicare Part B.
  • There are a number of home improvements you can make that qualify for tax credits, mostly related to improving the energy efficiency of your home. Examples of such improvements include installation of material specifically designed to reduce heat loss, exterior windows, skylights, exterior doors, some special types of roofing, electric heat pump water heaters, some forms of central air conditioning, an advanced main air circulating fan, and natural gas, propane or oil hot water boilers. Each of these must meet detailed energy efficiency requirements. Keep in mind the lifetime limits and other limitations associated with these credits – for example, the nonbusiness energy credit has a lifetime limit of $500 with no more than $200 from windows and skylights.

Unique Aspects of Planning for Higher Income Individuals

  • Higher-income individuals must take into account the 3.8% net investment income tax on certain unearned income. The tax applies to individuals with income over $250,000 who use the filing status of married filing jointly or qualifying widow, $125,000 for the married filing separately status, and $200,000 for any other filing status. Strategies to minimize the tax include having investments that generate tax-exempt income (such as municipal bonds) and maximizing investments in qualified retirement plans where income taxes are deferred. Income from activities in which you materially participate is not subject to the tax and your business activities should be carefully analyzed in classifying the income as net investment income versus income from an active trade or business. Going forward into 2017, there is a chance the net investment income tax may be eliminated.
  • Like the 3.8% net investment income tax, the 0.9% Medicare tax applies to individuals for whom the sum of their wages and self-employment income is in excess of $250,000 for joint filers (or the qualifying widow filing status), $125,000 for those with the filing status married filing separate, and $200,000 for any other filing status. Self-employed individuals must take this into account in figuring quarterly estimated taxes due. Also, individuals and married couples who have two or more employers may have a disparity in their withholding if one or more W-2’s are under $200,000 (the amount where employers must withhold the tax) but combined with the other earned income the total earned income exceeds the threshold. Alternatively, tax may also be over-withheld where, for instance, a couple files married filing jointly but one spouse has wages over $200,000 and is required to withhold but the combined income does not exceed $250,000. Again like the net investment income tax, there is a chance this tax will be eliminated going forward.
  • Plan for estate taxes based on current law, but allow for the possibility of dramatic changes from new legislation in this area. As of now, the current effective estate tax exemption due to the unified credit is $5.45 million and a married couple can pass an estate valued at $10.9 million on to their heirs without paying federal estate tax because of a provision allowing for the unlimited portability of a deceased spouse’s unused exclusion amount between spouses.

If you would like to discuss any of the above or any other ideas and/or strategies you may have in achieving your tax objectives, please contact us so that we can help. Remember, most smart tax moves concerning tax year 2016 will need to be done before the end of the year. After the year ends, it’s often too late.

Very truly yours,

Levin Swedler Kennedy

Certified Public Accountants – Akron, Ohio

Akron, Ohio Certified Public Accountants

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Managing the Ups and Downs of Seasonal Businesses

What do pumpkin patches, ski resorts, ice cream shops and accounting firms have in common? They’re all seasonal businesses that experience a surge in revenues during their busy seasons that tapers off in the slow season. Seasonal peaks and troughs present challenges that require creative planning and fiscal prudence.

Understand the Cash Flow Cycle

Every business has some degree of ups and downs during the year. But cash flow fluctuations are much more intense for seasonal businesses. So, it’s important to picture-with-pumpkins-for-11-9-16-blog-managing-the-ups-and-downs-of-seasonal-businessesunderstand a seasonal business’s operating cycle to anticipate and minimize shortfalls.

To illustrate, consider a manufacturer and distributor of lawn-and-garden products like topsoil, potting soil and ground cover. Its customers are lawn-and-garden retailers, hardware stores and mass merchants.

The company’s operating cycle starts when customers place orders in the fall — nine months ahead of its peak selling season. The company begins amassing product in the fall but curtails operations in the winter. In late February, when the thaw begins for most of the country, product accumulation continues, with most shipments going out in April.

At this point, a lot of cash has flowed out of the company to pay operating expenses, such as utilities, salaries, raw materials costs and shipping expenses. But cash doesn’t start flowing into the company’s checking account until customers pay their bills around June. Then, the company counts inventory, pays all remaining expenses and starts preparing for the next year. Its strategic selling window — which will determine whether the business succeeds or fails — lasts a mere eight weeks.

Maximize the Selling Window

Seasonal businesses put substantial pressure on their marketing and sales teams. They have a limited amount of time to attract customers and little opportunity to take corrective actions. Successful seasonal businesses use targeted, tailored marketing programs that address these questions:

  • Who’s the company’s typical customer?
  • What’s the best way to reach that customer base?
  • When are customers making their buying decisions?

In the example of the lawn-and-garden distributor, customers place orders in the fall. So, an end-of-summer “early bird” discount program, communicated via an email campaign in September and paper inserts with customer invoices in May, might entice customers to place orders early — and choose that company over its competitors.

Seasonal businesses that market to consumers increasingly turn to social media to generate sales. Customers who follow a business on Facebook or LinkedIn provide a narrow target audience, and social media posts can be cheap and relatively simple to generate. For example, a summer camp sent personalized “Happy Birthday” messages to last year’s campers throughout the year. These posts were viewed by all of the campers’ Facebook friends, many of whom could be potential new campers next summer.

Ramp Up for Busy Season

Ideally, a seasonal business should stockpile cash received at the end of its operating cycle, and then use those cash reserves to finance the next operating cycle. But cash reserves may not be enough, especially for a high-growth company.

Many seasonal businesses apply for a line of credit to avert potential shortfalls. However, banks tend to be leery of such enterprises, particularly those with limited history. To increase the chances that a loan application will be approved, business owners should compile a comprehensive loan package, including historic financial statements and tax returns, as well as marketing materials and supplier affidavits (if available).

More important, the company’s owner should draft a formal business plan that includes financial projections for the next year. Some companies even project financial results for three to five years into the future. Seasonal business owners can’t rely on gut instinct. They need to develop budgets, systems, processes and procedures ahead of the peak season.

Without a line of credit, a business that has severe fluctuations might not have enough working capital to make it through the operating cycle. If there’s insufficient money to pay suppliers, they could stop delivering materials. If the employees aren’t paid, they’re unlikely to report for work. If the weather doesn’t cooperate, revenues might fall short of the business plan. The line of credit is a solid backup plan. If one lender turns down an application for a line of credit, a smart business owner will find out why, remedy any shortcomings and try again.

Plan for the Off-Season

Some companies, such as a local ice cream or golf pro shop, may decide to close during the off-season. Others, such as a hotel or accounting firm, are open year-round, offer promotional discounts or cut operating hours to weather the slow times.

Creative seasonal businesses try to find ways to operate two (or more) seasonal businesses with opposite busy cycles using the same resources. Examples include a midwestern landscaping company that plows snow in the winter, a ski resort that offers hiking and rafting packages in the summer, and costume stores that sell outdoor furniture in the spring.

Another off-season survival strategy is hiring part-time seasonal workers. Salaries and employee benefits quickly drain savings. Using part-timers converts a fixed expense (full-time salaries) into a variable expense that ebbs and flows with the operating cycle. But recruiting reliable, skilled part-timers — who are available to work on demand — is often harder than it seems.

So it’s a good strategy for an employer to build a pool of part-time workers that it can draw on year after year, such as an ice cream shop or a day camp that hires teachers to work during the summer. Also, part-timers should be treated with the same respect as full-timers. A positive work environment will lower turnover, improve morale and increase the likelihood that people will come back to work for the business again. Employers may want to consider offering financial incentives to employees who refer friends and family members for part-time positions.

Remember, most of the same labor laws regarding such issues as harassment, discrimination, child labor, minimum wages, and workplace health and safety apply to all workers, both seasonal and full-time. It’s still necessary to withhold taxes just as for regular employees and pay overtime for nonexempt employees.

Seasonal workers also may affect a company’s headcount under the Affordable Care Act. And, if a seasonal worker exceeds an average of 30 hours per week, large businesses may be required to provide health insurance coverage for them and their children during the months they’re employed. Typically, full-time employment is measured month-to-month. But some large companies avoid providing health insurance benefits for part-timers by electing a measurement period longer than one month or adopting a 90-day waiting period for eligibility.

Consider a Fiscal Year End

Most businesses operate on a calendar year basis that begins on January 1 and ends on December 31. It’s straightforward, matches the owner’s personal record keeping, and may be required by the IRS under certain circumstances.

But seasonal businesses may have good reasons to elect to use a fiscal year. (A fiscal year is 12 consecutive months ending on the last day of any month except December.) For example, reporting income by calendar year could split up the peak season between two years and give a distorted view of income and expenses. This also happens when a seasonal business reports most of its expenses in one calendar year and income in another.

A company that wants to adopt a fiscal year for a seasonal business will need to consistently maintain its books and records and report income and expenses using the time period adopted. But first and foremost, it’s important to consult a tax advisor to determine if the business is allowed to switch its year end under the tax rules and whether doing so is worth the extra effort.

Need Help?

Many seasonal businesses struggle during the operating cycle, and some owners can’t resist the urge to spend their windfall, rather than saving it for the next operating cycle. Financial advisors can help manage seasonal fluctuations and the unique challenges they present.

Levin Swedler Kennedy – Certified Public Accountants – Akron, Ohio

Levin Swedler Kennedy - CPAs

 

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