Taking Steps Today for a Better 2016

I spent the week between Christmas and New Year’s doing a thorough review of the past twelve months.  Not exactly the most exciting way to spend a week that should be filled with family and friends.  My 2015 did not end as strong as planned, and I wanted to do a deep dive to understand why.  I put the following questions on the table:   did I reach my financial milestones, is my business in a better position today than it was 12 months ago, and did my business allow me to reach my professional and personal goals?

Each question and subsequent answer warrants its own article.  Here, I’m going to focus on the financial question – did I reach my financial milestones?  On the financial side, your results can be broken down into two simple categories:  money coming in the door (ie – revenue) and money going out the door (ie – expenses).  For me, I took the hardest look at my costs.  I knew the most immediate impact I could have on improving my firm’s financials is to take action on reducing the money going out the door. 

When I looked at my costs, I found that I had two charges hitting my credit card every month for services I did not use.  Shame on me for not uncovering this earlier, but this can easily happen when you’re consumed with managing the day to day operations of your practice.  These charges were hitting my card for the past nine months and totaled $600.  This hurt.  Discovering the $600 overpayment created immediate motivation for me to take action, and I cancelled both services. 

The next cost that I looked at was my internet charges.  I need internet, so I expect some cost for this service.  However, the monthly costs looked high.   I was charged $190 per month on internet service.  I have no basis for knowing if this is reasonable or not, but my gut told me it was high.  Based on my gut intuition, I called my cable company to get a better understanding of my monthly invoice and inquire about a better deal.  Within twenty minutes, I negotiated my bill from $190 per month to $115 per month.  Savings of $75 per month or $900 per year.  I felt like I transformed from a CPA to a master negotiator, but the real trick was simply making the call.  Once I made the call, I asked for specials and bluntly asked for a reduced rate.  They wanted me to sign on for another two year contract to get the special pricing.  I was willing to accept this tradeoff in exchange for savings of $900 per year. 

These two examples lead to the next part – developing a budget and creating systems to utilize the budget throughout 2016.  If I had the discipline and the right systems in place throughout 2015, I would have identified these high costs and recognized cost savings a lot sooner.  Here are the steps I am taking to ensure my past mistakes are not repeated.

I start by reviewing the presentation of my financials.  Are my financials presented in an easy to read format where I can quickly gain value from them?  I want a simple chart of accounts.  If I’m a small law firm, my chart of accounts should not include hundreds of accounts.  This invites complexity into the accounting system.  Follow the rule of less but better.   

Next, create the budget.  I begin by projecting what each month should look like.  For revenue, adjust for any anomalies in the prior year and any known changes over the upcoming year.  On the cost side, I should be able to predict what my expenses will be each month.  I start with an independent calculation as opposed to beginning with last year’s numbers as a baseline.  For most of my costs, I can predict what the monthly expense will be.  For example, I can accurately project what my payroll costs will be based on my staff’s salary and payroll taxes.  This holds true for other consistent costs like rent, internet, phone, professional liability insurance, etc.  I know what my invoices are each month, so I create the budget to reflect my actual invoices.  Then, I compare these numbers to my actual results from last year.  Where am I high or low?  Do my independent predictions match my results from last year?  If they don’t, I need a better understanding of my actual results from last year and determine if I need to adjust the budget.

The final step is developing a system and execution plan for 2016.  I’ve spent time reviewing my chart of accounts and developing a budget.  How do I take this work and make it meaningful?  I want a system and routine where I compare my actual results against my budgeted projections.  I want to work with my accounting team or accounting software to incorporate these reports in my month-end process.  It’s a matter of discipline to review each month.  Establish a threshold where any variance outside the threshold warrants investigation and action.  If I had this system and routine throughout 2015, I would have saved myself $1,500. 

It’s easy to discuss this in theory.  The challenge is to take a few hours today so your goals are reached by December 2016.  This is always about forward looking.  There’s nothing I can do about the past.  It’s time to take action today to have a successful 2016.

One of the more common questions that I’ve fielded when working with solo practitioners and other small business owners is the mileage deduction question.  Somewhere, someone has whispered into all these aspiring business owners that the best part of running your own business is the ability to deduct everything – especially your vehicle costs!  In the words of Lee Corso, “Not so fast, my friend.” 

Yes, there are definitely rules that allow for the deduction of your vehicle costs, but you want to develop clear processes and guidelines that follow the IRS rules because this is one of their favorite areas to scrutinize when reviewing your tax return.  The information below is intended for those that do not use their vehicle entirely for business purposes.  If you use your vehicle entirely for business purposes (and yes, the IRS will make sure that it is 100% for business purposes), then you get to deduct all the costs associated with that vehicle.  For those that use your vehicle for both personal and business purposes, here’s how to calculate your vehicle deduction:

Step 1:  Determine the portion of your vehicle usage that is for business purposes. 

• You are using your vehicle for business purposes if you drive your vehicle from your office to another office or work site location to meet with a client or attend a work related event. 
• In most cases, daily transportation costs cannot be deducted.  For example, driving from your home to your office would be considered a daily transportation cost and would not be eligible for deduction.  The two exceptions to this rule are the following:  (1) you have one or more regular work locations away from your residence or (2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance.

Step 2:  Calculate your vehicle deduction using either the actual cost or standard mileage rate methodology. 

• Actual costs:  You have the ability to deduct the pro rata portion of your actual vehicle costs.  Vehicle costs that qualify for deductions include the following:  depreciation, licenses, lease payments, registration fees, gas, insurance, repairs, oil, garage rent, tires, tolls, and parking fees.  In this method, you add up all the qualifying costs and allocate those costs between business and personal use.  For those costs allocated to business usage, you get to take these as a deduction.  For example, assume you had $8,500 of qualifying costs during the prior year, and you drove your car a total of 11,000 miles.  Of the 11,000 total miles, 5,000 miles were considered for business use (as determined in Step 1).  The amount of actual costs you could deduct would be $3,863.63 [(5,000 business miles / 11,000 total miles) x $8,500 of qualifying costs].
• Standard mileage rate:  A shortcut to the actual cost methodology is to take the standard mileage rate deduction.  The IRS calculates a standard mileage rate each year based on the fixed and variable costs to operate a vehicle.  In 2014, the standard mileage rate is $.56.  This methodology simply calculates the miles driven for business purposes (as determined in Step 1) and multiplies by the standard mileage rate.  Going back to our example, you drove 5,000 miles for business purposes in the previous year, then your vehicle deduction would be $2,800 [5,000 business miles x $.56 standard mileage rate].    

Helpful Hints:

• If you want to use the standard mileage rate deduction, you must choose this methodology in the first year the car is available for use in your business.  You can only choose one methodology during the course of a year. 
• Maintaining complete, accurate, and timely records will reduce any issues with the IRS.  The IRS will typically take a detailed look at transportation costs when analyzing a business tax return, so it’s recommended to be proactive in maintaining good records for your vehicle deductions. 
• For an easy to use template for tracking and calculating your vehicle deduction, use the Standard Mileage Reimbursement spreadsheet at www.trustbooks.com/mileage. 
• For the authoritative guidance on vehicle deductions, go to IRS Publication 463. 

TrustBooks Practical Tips:

• Use the standard mileage calculation.  The actual cost methodology sounds great in theory and could yield you a larger deduction (this would need to be evaluated on a case by case basis), but the time and headache to track the actual cost methodology is not worth the potential savings.  You need to be extremely organized and have a lot of free time on your hands to justify the use of the actual cost methodology over the standard mileage rate calculation.
• Keep an organized and complete calendar with all your meetings.  If you’re like me, you will never be able to update the Standard Mileage Reimbursement spreadsheet in real time.  By having a complete calendar with some minimal information on your meetings, like meeting location and meeting attendees, you can go back and calculate your vehicle deduction at your leisure. 
• Cut yourself a physical check for your vehicle deduction on a monthly basis.  For example, complete the Standard Mileage Reimbursement spreadsheet each month and write a check for the Total Reimbursement owed.  A couple of reasons why I recommend this:  1) This will show up in your financials as an expense which will allow you to see it more visibly when reviewing your financials as opposed to a tax adjustment and 2) everybody loves to get a little cash going into their personal bank account! 

Tom Boyle is a Co-Founder of TrustBooks, cloud software created to help attorneys manage, record, and reconcile their trust accounts.  Prior to TrustBooks, Tom owned Boyle CPA, a CPA firm that provided accounting and consulting services to small businesses with a focus on law firms.  For additional resources on managing and understanding your trust account, join the TrustBooks mailing list at www.trustbooks.com.