Leverage Depreciation Methods to Gain the Most Benefits in 2013

What is Depreciation?

Depreciation is the term used to describe reduction in asset value or assigning asset expenses to time periods of their usage.

When an asset's value decreases, it is termed as fair value depreciation, while assigning costs to the period of use of an asset is termed as depreciation with matching principle. Fair value depreciation influences a balance sheet, whereas depreciation with matching principle can affect the net income that is reported by the business.

For small businesses that operate on fixed budgets, leveraging the advantages of depreciation can be extremely beneficial. A business can assign expenses to assets, and if an asset is expected to prove useful in the future these expenses may be deferred. The depreciation is then noted in current period cost allocation, based upon the asset cost, its expected value, and its shelf-life.

Managing depreciation

Depreciation of capital assets needs to be accurate, like any other accounting function in an organization. One of the ways in which depreciation could be streamlined is to manage each asset separately or individually in a fixed asset management system.

How do you determine the amount to be depreciated? The difference between the cost of a fixed asset and its residual value is the total amount that needs to be depreciated over the life span of the asset. The time period across which the fixed asset is to be depreciated is termed as the 'useful economic life' of the asset.

Accurate depreciation matters because it is applied against the total profits earned by the organization in a single accounting period. There are several methods by which to arrive at this.

Straight line depreciation method

This depreciation method operates on the principle that every accounting period in the life of the asset should reflect equal depreciation. The formula for this is as follows:

Cost of Asset – Residual Value of Asset/ Number of years of Useful Economic Life of the Asset

Points to remember in this method

> This method is effective if the benefits received from a fixed asset are expected to remain unchanging for the most part, over its useful economic life.

> This is a popular method, and one widely adopted by many companies in calculating depreciation.

Reducing balance method

This method allocates a high depreciation charge in the initial years of the asset life, but it lessens the charges as asset age increases. The formula for this method is as follows:

Depreciation = Percentage of the reducing balance

Points to remember in this method

> The depreciation percentage is applied to the written-down value of the fixed asset.

> In some fixed assets, the benefits do decline over its period of useful life. Thus, this method is beneficial where the allocation of expenses matches with the pattern of benefits derived from the asset.

Financial and Accounting benefit

> Regardless of the method chosen, the total depreciation charged will remain the same because depreciation is not a method of valuation; instead, it allocates expenses.

> One of the two methods should be adopted and retained to gain the maximum benefit from depreciation over the asset's lifetime.

> Methods may be changed if the new one displays a clear advantage in financial position.

Depreciation of Capital Assets

Some organizations may not calculate depreciation using fixed asset systems. For these organizations, generating depreciation expenses every month could probably help maintain the pattern and also help in streamlining the process, resulting in higher accuracy.

Automated accounting solutions that can better define and improve the scope of the overall method used for depreciation, and they can also help in cases where fixed asset system is not used.

Any automated system needs to be customized to the specific needs of the organization. However, most of them would:

> Identify the capital assets involved

> Calculate and generated depreciation expense per capital asset on a monthly basis

> Provide a report on the depreciation of capital assets.

Whichever method you select, make sure that depreciation practices are fully leveraged to help you improve the profitability of your business.

Analytix Solutions
The Company that CPAs Recommend
Analytix Solutions is a professional full-service business support solutions provider. The company offers comprehensive and scalable bookkeeping and accounting services while leveraging its expertise, experience, and state-of-the-art infrastructure. It offers multiple services in diverse packages for companies that are seeking a trustworthy and professional partner to give their business a head start.

New Year Financial Resolutions for Small Businesses to Increase Profitability

New Year resolutions can fall by the wayside soon after they are made. However, those which involve adhering to financial best practices during the subsequent year should be followed with sincerity. For small businesses that often face inflexible budgets and the prospects of further cuts, this is even more important.

One trick to keeping your resolutions on target is to tackle them one step at a time. This rings true for maintaining financial resolutions, as well.

Resolve to abide by the books

In other words, maintain accurate books. Keep all expenses recorded and updated.

Resolve to record every transaction as it occurs or immediately afterwards. Write it on a piece of paper if required and then transcribe to your expense log. As a business owner, you need to ensure that all financial transactions are not verbal but are supported by written documentation.

One practical solution for ensuring diligent record-keeping for most small companies could be automation or turning to professional bookkeeping.

Improve financial reporting

Resolve for better and if possible, more detailed financial reporting. There are several software options available today that not just carry out detailed bookkeeping and data management, but also present users with accounting analysis and comparisons of other industry players by means of mathematical ratios. Tailoring the information you receive from your financial reports can be accomplished by customizing the setting parameters which you'd like compared and analyzed.

Keep an eye on short-term financial issues

Levers that impact business profitability can be short-term financial functions, not just long term improvements. Current and short-term goals such as close monitoring of cash flow, revenue and expenses, combined with meeting or surpassing customer expectations from your services/products/deliverables can help you increase profitability.

You can also implement accounting methods such as cost-volume-profit analysis and other cost calculations that will help you evaluate various parameters such as sales on costs, profits, etc.

Getting a clear handle on these factors will provide you with insight into helping you decide where your efforts are best leveraged and whether you should consider outsourcing certain functions to free up key resources for other profit-making efforts.

Continuously improve existing financial information systems

Look for information systems that help to standardize information and disseminate it in a timely and easy-to-use manner. Your financial applications should be easy to understand and use. Information systems should also be customized to provide the right kind of information that is detailed and aligned with your company's objectives.

Ensuring that information is updated assists decision makers to focus on areas of profitability, as they can confidently make financial adjustments knowing that the data is reliable. Proper categorizing and reporting of financial information empowers the entire decision-making process by providing a clear snapshot of the company’s health.

Make it a goal for your company this year to establish some financial New Year's resolutions…..and stick to them.

Analytix Solutions
The Company that CPAs Recommend
Analytix Solutions is a professional full-service business support solutions provider. The company offers comprehensive and scalable bookkeeping and accounting services while leveraging its expertise, experience, and state-of-the-art infrastructure. It offers multiple services in diverse packages for companies that are seeking a trustworthy and professional partner to give their business a head start.

Fiscal Cliff Implications on Small-Mid Sized Businesses

By now, most of us are well aware of the 2012, eleventh-hour, year-end deal and decisions enacted by Congress to avert the Fiscal Cliff crisis. Whether or not those decisions successfully will accomplish that objective remain unknown. The legislation minimizes tax increases for the individual taxpayer, but it is still unknown what consequences those changes will have on long term economic development. However, one thing which is certain is that several of those measures have a direct impact on small to mid-sized businesses, resulting in both positive and negative implications. Several of what could be the most impactful measures on small to mid-sized companies are summarized below.

Permanent Tax Rate on Salary- The tax rate for single income earners with taxable income over $400K or married earners with taxable income over $450K will be capped at 39.6%. Households with income lower than that will remain at the lower tax rate. The majority of small business owners have taxable income that falls under the $400K/$450K threshold, so permanent continuance of that lower tax rate is good news. For business owners with taxable income above the $400K/$450K threshold, the increased tax rate of 36% to 39.6% is not good news; however, it does allow for better tax planning, eliminating uncertainty about the rate.

Section 179 Depreciation Bonus- This incentive has been extended through 2013 providing a 50% tax credit to companies to purchase or lease new equipment. This measure promotes reinvestment in business and is beneficial to small to mid-sized companies, as long as they are willing to buy and in a financial position to make these purchases.

R&D Tax Credit- Like the depreciation bonus, this tax credit has also been extended and was made retroactive to 2011. This provides a 6% - 14% tax break for R&D expenses. Although this is a substantial credit and encourages investment in business growth, it applies only to small to mid-sized businesses that invest in research and development.

Payroll Tax Increase- The Payroll Tax Holiday was not extended as part of the Fiscal Cliff deal. As a result, employers' share of the Social Security tax rate will revert back to 6.2% from the 4.2% rate that has been effective for the past few years. Although a seemingly small percentage, this increase could have a substantial ramifications on payroll budget for small to mid-sized companies and discourage hiring. The small to mid-sized business sector accounts for a large percentage of job creation, so this may have a negative impact overall on economic expansion.

Work Opportunity Tax Credit (WOTC)- This measure has been extended through 2013, and encourages small businesses to hire underemployed and unemployed groups such as veterans and young people. This should assist in offsetting the payroll tax increase and incent small to mid-sized businesses to continue hiring, thereby promoting business growth.

Estate Planning Exemption Level- One of the most prevalent concerns among small business owners was the estate tax exemption threshold level. The new legislation has that level remaining fixed at $5.12 million, which is great news for small business owners. It was predicted to drop to just over $1 million. This would have been detrimental to many small, family owned businesses that have been family run for generations. In the event of an untimely death, many may have been forced to sell off part of the business or critical assets (such as machinery) to fund estate taxes, especially those companies which were heavily invested in assets but had low liquidity.

Assessing the true impact of these changes will take some time. Hopefully, the pros outweigh the cons for small to mid-sized businesses, and these measures will, in fact, stimulate growth. In the interim, it is more important than ever to have a clear understanding of your company's financials so that you are informed on which measures you can readily leverage to your company's advantage. We are currently offering a free 1 hour analysis of your business processes, including budgeting. If you would like to learn more on how Analytix Solutions can help move your business forward, please call me directly at 781.503.9004 or email me at sales@aixsol.com

Satish Patel, CPA
President, Analytix Solutions
Satish Patel, Founder-CEO of Analytix Solutions, has more than two decades of experience as a CPA. He has also advised small and mid-sized businesses on diverse matters such as valuation, accounting, and finance. His experience extends to raising capital and arranging for finance from angel investors.