Accounting Method Changes under TCJA for E-Commerce Sellers

I just returned from the CCH User Conference in Miami which included some of the top experts on the Tax Cuts and Jobs Act (TCJA). One of the sessions that I attended covered the opportunities for major tax savings under the accounting method changes now allowed. These are major decisions and a thorough analysis should be completed.

Cash Method Allowed for Larger Businesses
Cash method permitted for sellers under 25 million average gross receipts for the past 3 years. With the way Amazon pays at year end there may be an opportunity for some savings.


Inventory Methods (deemed the wild wild west by an IRS representative)

There is a lot of controversy in this area, so we will stick to what the code entails. We have been told by the IRS to not expect much guidance as they have been instructed by the treasury to not release “their own rules”. An accounting method change (form 3115) is required for the below methods).

1. Account for inventory as non-incidental materials and supplies. If following the deminimus safe harbor election then you would be allowed to expense any inventory purchases under 2,500 (5,000 with audited financials). The underlying effect causes an increase to cogs in the year of change, no adjustment for prior inventory balances unless

2. Account for inventory on the taxpayer’s method of accounting in an applicable financial statement(AFS). If no AFS the books and records of the taxpayer prepared in accordance with the taxpayers accounting procedures. ( Think twice about getting audited financials! Who is terrible at keeping track of your inventory?)

As with all our posts, consult your CPA( or us) for how you can take advantage of these changes.

5 Tips for Preparing for the Sale of your E-commerce Business

So far this year we have had two online business sell for over a million dollars and have supported the financials and due diligence of the transactions.  We have found the below tips to be essential to ensure the top sales price.

1.  Plan in advance for the sale, don't wait until you are burnt out from the business.  Both of the businesses mentioned above had planned a year in advance for the sale and were able to get a premium price.

2.  Make sure your financial statements are in tip-top shape.  The cleaner they look, the more confidence the buyer will have on your business.  Yes, they should be on Accrual Basis.  That means inventory is "expensed" when sold not when bought.

3.  Maximize your SDE (seller's discretionary income) add-backs.  Some examples include- auto expenses, travel, shareholder wages, home office, garage rent, 401k contributions, etc.

4.  The year before the sale- negotiate with your vendors.  A 3-5% discount can equal a chunk of change on the sales price.

5.  If it's your first sale use a broker to sell your business.  A good broker knows the inside out of the sale and can guide you to get the most out of the transaction.  We have a couple that we can recommend.  

Feel free to leave comments or questions below.

 

 

 

What does the Tax Cuts and Jobs Act Mean for my Business?

The Tax Cuts at their simplest form will be beneficial to most businesses that have net income.  We will highlight the key changes which will affect e-commerce business owners. 

1.  Lower Individual Tax Rates.  The range is 2-4% in most cases.

2.  21% Flat Rate for C Corps.  Depending on your earnings levels and long term plans conversion to a C Corp may be of benefit.

3.  20% Deduction for Pass-Through Entities.  The calculation of the deduction is not straight forward and varies with each circumstance.  There are limitations and phaseouts to be considered.

4.  Changes to Depreciation rules now allow you to write off most new asset purchases.  

Things we lose: Domestic Production Activities Deduction

Consult your accountant to ensure you are taking advantage of the changes.

E-commerce Cash Flow Tips, Best Practices

Cash flow management is extremely important in the world of e-commerce, as it can mean success or failure for your business. Below are some tips and best practices to help you successfully manage and streamline your cash flow process.  

Tips

  • Review the cash flow statement at least monthly.
  • Track cash conversion cycle at least monthly.
  • Manufacturers should monitor production timelines closely.

Best Practices

  • Always negotiate with your suppliers. Small savings really add up! A 3% discount on a 1M order is 30K. Ask for terms net 30/60/90.

  • Know how fast you turn each SKU, and strategically dump any inventory that is not moving. Use liquidators to quickly get cash if no other options.

  • Carefully use debt financing for inventory.

  • Have at least 6 months of operating cash on hand in order to cover any economic downturns.

  • Minimize out of stock situations by carrying one to two months average sales on hand.

Top 5 Considerations When Choosing an Inventory Management System

Inventory management (IM) is one of the most important aspects of any manufacturing or retail business, as it influences not only the speed and accuracy of order fulfillments, but overall customer satisfaction as a whole. Especially for e-commerce businesses, where the competition in the online marketplace can seem endless, a good inventory management system can be the tool that sets you apart from the rest in your accuracy and efficiency. So what should you look for in an IM system? 

Here are our Top 5 Considerations When Choosing an Inventory Management System:

  1. Cost Effectiveness. When researching IM systems, begin to estimate the amount of time you would save if you had a program replacing the work that you or your employees have been performing. Compare it to the fixed or monthly price of the program: at the end of the day, will you save more money than you’re spending on it?
  2. Usability. The user-friendliness of an IM system can make or break its success within your company. You and your employees need to be on the same page as far as understanding and navigating this system, which is why we recommend a training course for the whole company when implementing a new system like this. But even at that, what if people forget? What happens when you are training new employees? So the question to ask yourself when considering a certain platform: does this look like something I could not only learn to use, but also teach to use?
  3. Support. #2 is why having an excellent support team offered by your I.M. system is crucial. Small business marketer Paul Nugent advises, “Unless you’re super confident in your ability to figure it all out, make sure they offer training and ongoing support, or else you may be signing up for a future emergency.”
  4. Automation. E-commerce businesses are increasingly becoming hands-off, as new programs are created that allow business owners to step back and let the virtual world take the wheel. This is why you should seek an I.M. system that performs automatic shopping and re-ordering of supplies. Not all will do this, but to maximize your efficiency and minimize issues like back-ordering, we find this feature of automation to be extremely beneficial. 
  5. Credibility. Lastly, we can’t stress enough the importance of having an I.M. system with established credibility. (We recommend Dear Systems). Whether you are an established e-commerce business, in the early stages of development, or somewhere in between, you cannot afford to have your system crash or glitch-out every week. Inventory is a huge building block of your business that you should put in the hands of an established and credible I.M. system! 

So with that, some tips before you start your search for an inventory management system…

Know your inventory challenges! Where do you most lack efficiency or accuracy within your current system? What features of an I.M. platform would best help you?

Know how many people will be using and accessing this platform. Based on the number and their location, this may affect the price of the platform. 

And lastly, take your time! This is a big decision with many factors. Gather as much information as possible, and enjoy the process of building your business to its full potential. 

A2X Integration

We have been doing a lot of A2X integrations with Xero and we have found it be the best ways to captures all of the costs that Amazon tries to hide from us.  Many of our FBA clients were amazed at how much they were truly spending on fulfillment.  

The key to using a2x is the proper set up.  The tool works great but if it is set up incorrectly can be difficult to fix.  Contact us today to find out how A2X can help accurately capture the costs of doing business with Amazon.