For 2013, the annual limitation on deductions under IRC Sec. 223(b)(2) for an individual with self only coverage under a High-Deductible Plan (HDHP) is $3,250. The family coverage limitation is $6,450. An HDHP is defined under IRC Sec.223(c)(2) as a health plan with an annual deductible that is not below $1,250 for self only coverage or $2,500 for family coverage, and an annual limit of out-of-pocket expenses of $6,250 for self only coverage and $12,500 for family coverage. This out-of-pocket limit includes deductibles and co-payments, but not premiums.

By: Ronna Beemer, CPA
PriceKubecka, PLLC

The new online search tool is called Exempt Organizations Select Check – EO Select Check for short.

By utilizing EO Select Check, users can confirm if an organization:

• Is qualified to receive tax-deductible charitable contributions. Previously taxpayers had to go to IRS Publication 78, but now it has been incorporated into the new tool. Taxpayers can utilize this list to verify the deductibility of contribution.
• Has filed a Form 990-N annual electronic notice. The majority of small nonprofit organizations whose annual gross receipts are usually $50,000 or less are required to electronically submit Form 990-N, except if they elected to file a completed Form 990 or Form 990-EZ.
• Has had its federal tax exemption involuntarily revoked under the law because it did not file a Form 990-series return or notice for 3 consecutive years.  The IRS refers to this list as the “Auto Revocation List”.

EO Select Check also has superior search functions. For example, users can now check for organizations that are eligible to receive deductible contributions by the Employer Identification Number. Previously the EIN was not a searchable or sortable field in the electronic version of Publication 78. Info concerning organizations that are qualified to receive deductible contributions will now be updated monthly, instead of quarterly.

Additionally, organizations that have automatically lost their tax exemptions can now be searched by the following:

• EIN
• Name
• City
• State
• Zip code
• Country
• Exemption type
• Revocation posting date

Even though, EO Select Check tool offers information on the tax-exempt status, there are also other web sites that can provide information about the reputations of charities and other nonprofit organizations. Here are the most common sites:

• GuideStar
• Charity Navigator
• Better Business Bureau

To access the EO Select Check tool, go to http://apps.irs.gov/app/eos/.

Fast Facts when considering Charitable Contributions to an Organization.

• In order for charitable contributions to be deductible you must itemize your deductions.
• In order to be deductible, charitable contributions can only be made to qualified organizations.
• Contributions to individuals are never deductible.
• If your contribution authorizes you to receive products, services or goods, including entrance to a charity ball, banquet, theatrical performance, or sporting event, you may only deduct the amount that surpasses the fair market value of the benefit received.
• In order for a contribution of cash, check, or any other monetary gift, you must keep a bank record or a written communication from the qualified organization containing the organization name, date of the contribution, and the amount

In order to obtain bonding, a contractor firm should be financially healthy, well managed and have strong internal accounting controls. Surety and Bonding companies focus mainly on the contractor’s financial statements by analyzing equity, working capital, profitability trends, backlog of work and contingencies to establish bonding capacity.

An accurate financial presentation is crucial in order for the bonding company to perform a complete analysis. Most bonding companies require financial statements to be audited or at least reviewed by a CPA prior to submission for bonding approval. It is important that the financial statements be prepared utilizing the percentage-of-completion method of accounting. If the financial statements are older than 6 months, then typically an interim statement that is no older than 90 days will need to be submitted, as well.

Additional Disclosures and Supplemental Schedules

It is important to follow generally accepted accounting principles when providing the basic financial statements to the Surety and Bonding company. Statements that are generally required include the income statement, balance sheet, cash flow statement and footnotes. Nevertheless, from a practical point of view, the Surety and Bonding company will also require additional disclosures and supplemental schedules to accomplish a proper assessment. The following additional disclosures should be included with a firm’s financial
statements.

• Accounts Receivable — an itemization of receivables and retainages from completed and incomplete projects. (A summary of accounts receivable aging also should be included.)
• Inventory — an itemization of raw materials and fabricated inventory. Specify if the inventory is being held for jobs in progress or for unspecified possible contracts.
• Over and Under-Billing — reconciliation of any over- and under-billing at year end.
• Revenue Recognition—a complete account of the method utilized for recognizing contract revenues and any recorded claims.
• Backlog of Work — reconciliation of any backlog work for the year.
• Tax Information — Divulge tax consequences of deferred contract income and any anticipated distributions of cash to pay income taxes for S Corporations.

Companies also should include the following supplemental schedules:

• Summary of Earnings from Contracts
• Completed Contracts
• Contracts in Progress
• Selling Expenses, General and Admin Expenses

Business Information

• Personal Financial Statement – For all owners, partners, stockholders or members.
• Resume – For all owners, partners, stockholders or members.
• Business Plan – if the company is newly established.
• Current Certificate of Insurance for the company.
• Corporate Tax Returns for the last 3 years.
• Personal Tax Returns for the last 3 years for all owners, partners, stockholders or members.

Planning Steps

Surety and Bonding professionals apply specific analytical
procedures and ratios to financial statements to evaluate a contractor’s
financial stability, acceptable working capital and net worth. They also look
for potential red flags that could turn into issues or might require more
explanation from the contractor. Additionally, contractors can take steps to alleviate
an unfavorable situation by:

• Maintaining adequate cash balances at year-end.
• Billing all contracts before year-end to decrease net under-billings and increase receivables.
• Avoiding sizeable under-billings. This is a major red flag that could suggest potential losses, overly optimistic profit estimates, weak billing practices or inadequate estimating.
• Making sure estimates on contracts in progress are accurate; profit fade is a serious red flag.
• Having an adequate unused line of credit available.
• Keeping inventory levels as low as possible at year-end.
• Avoiding loans to shareholders or affiliated entities.
• Avoiding making large cash advances to employees.
• Making sure over-billings correspond with cash in the bank or accounts receivable. Surety and Bonding professionals want to make certain cash is available to complete the contract.
• Meeting any covenants, terms or conditions of any financial agreements.
• Avoiding numerous unapproved or un-priced change orders.
• Eliminating as many prepaid expenses at year-end as possible.
• Maintaining a low debt-to-equity ratio.
• Making certain estimated costs on contracts in progress incorporate the same costs and allocations included in costs incurred to date.

By disclosing complete and accurate financial information to
the Surety and Bonding professionals at the beginning of the bonding process goes
a long way toward establishing a construction firm’s credibility and help
maximize its bonding capacity.

In today’s evolving business environment, it is even more imperative
for a contractor to work with a trusted CPA who understands the highly
specialized construction industry and can provide valuable insights on how to improve
a firm’s financial performance.

Most likely, you and your customers have very different goals. You desire to collect payment as soon as possible for the products and/or services that you have delivered to them. Conversely, your customer wants to delay payment as long as possible. It is your job to come up with solutions that are acceptable to your customers while reducing your waiting time for payment and the potential for nonpayment.

Developing an efficient A/R process is very important

The ability to quickly collect your accounts receivables directly affects your cash flow and the financial stability of your company.  The sooner you can collect your outstanding receivables, the sooner you will have the cash to spend to make payroll and other expenses, and improve company profits.

Collection issues will make it difficult to forecast cash flow and may require that the business has more cash available in order to manage slow payments and still meet its responsibilities.

It is important for a business to evaluate its risks

• Run credit checks so that you can set up payment terms accordingly. A customer with questionable credit should probably be required to pay more up front, while a dependable customer may deserve an extended payment arrangement, if needed.
• Expect and discourage late payments. Monitoring your accounts receivables faithfully will allow you to rapidly identify trends in payment performance.  Are there customers who routinely pay late? Consider whether you should negotiate
  discounts for early payment or establish a deposit plan before work commences.
• For your new customers, take time to set expectations for credit and collection terms up front.

Issue your new customers a notice of terms explaining in full detail how and when they will receive their invoices, what their payment choices are and what your expectations are as to when they will be expected to submit payments. Make sure to state the consequences of late payments for instance, late fees or interest due. Make sure to act quickly to collect when a payment is past due.

• Spread your risk. When your business is reliant on a few large clients, the timeliness of payments from them can put you at a bigger risk than if your receivables are more equally spread across many smaller customers. If one large customer suddenly develops unpredictable payment behaviors or goes out of business, your ability to forecast and effectively manage your cash flows may be drastically affected.

It is important for a business to manage its orders and decrease its receivables conversion cycle

Making a purchase should be quick and easy for the customer.
Provide payment choices and offer assistance from customer service representatives. Having someone to answer questions will increase your order completion rate, and your customer service reps. can suggest other products, resulting in increased sales. Lastly, provide timely product shipments or completion of services. The timely conversion of orders to currency can be damaged by in-house inefficiencies or a lack of understanding of production metrics. It is important to define and measure crucial targets. This will help you to prevent significant product or service shortages.

Make sure to streamline your receivable

Make every effort to invoice your customers within 24 hours of shipment. Generally the customer won’t begin the payment process until the invoice has been received.

• Keep invoices to the point. Typically invoices go directly to the accounting group, so unnecessary information is a waste and can confuse the focal point — the amount due. To speed up payment, make it easy for the customer. Below are some banking products and services that may help.
• Employ remote deposit capture. Scan your incoming checks at your location and generate a digital file that is sent to the bank over an internet connection. This fast-tracks paper check deposits into your account.
• Accept electronic payments and deposit. Decreasing paper transactions can speed payment. The time between delivery of the product or service and payment can be minimized by utilizing electronic solutions such as an automated clearinghouse, wire payments and credit cards.
• Utilize bank lockbox services. For businesses that receive a large quantity of checks or large dollar amount checks, a bank lockbox can simplify the activity and lessen the time from receipt of a check to deposit. Checks go directly to a remittance address kept by the bank in order to expedite the payment processing, reducing mail handling and check float while making funds available to your business faster.

Remember that Accounts Receivables is the lifeblood of any business and an ineffective A/R process can impede growth. A CPA can evaluate you’re A/R needs and propose cash management solutions to simplify A/R procedures to improve cash flow.