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AI and Automated Bookkeeping

Oct 12, 2018 01:10 PM

When someone mentions AI, minds in the dairy business immediately think about artificial insemination. However, this article will focus on a different type of AI.  Regardless of our personal views on the issue, Artificial Intelligence (“AI”) technology is here to stay and should not be ignored.  Maintaining a competitive advantage in any industry requires that we continually look for and implement changes that will increase efficiency and decrease operating expenses.  AI arguably is, and will continue to be, at the forefront of efficiency innovation. 

 

One area where AI is effecting automation and operational efficiency is bookkeeping.  In this article I will be providing a general overview of the AI technology used in bookkeeping platforms, discussing the benefits of implementing automated bookkeeping technology, and how AI should change your relationship with your accountant.  The bottomline is it is time to embrace the possibilities of AI and what it can do for your business.

       

TECHNOLOGY OVERVIEW

 

The AI currently in use in the accounting industry should be enthusiastically welcomed.  It is designed to automate the mundane and redundant tasks that occupy much of the time or resources of business owners that could be spent on higher value activities.  Just as the advent of automated milking machines and electronic monitoring devices have improved dairy operation, accounting AI promises similar results.  

 

There are currently two AI technologies of note in use in the accounting industry.  These are 1) bank feed technology, and 2) Optical Character Recognition (“OCR”). 

 

Bank feed technology is not new and is likely currently being used by your business.  This technology connects to a bank account through “Read-Only” access.  It permits downloading of transactional history, check images, and statements automatically rather than requiring a visit to the institution’s website to initiate a download.  To illustrate, QuickBooks users have the ability to connect bank accounts and have transaction information pulled directly into QuickBooks to be accepted and categorized.  Also, rules may be written so that reoccurring transactions are automatically classified. 

 

OCR scans and analyzes printed text or numbers and converts it to a form a computer can recognize and process.  This eliminates the need to retype the material in order to include it in your accounting software.  Although extremely efficient, this process is far from perfect.  At this stage of AI evolution, accountants typically verify the imported information and ensure the OCR operated correctly, fixing any mistakes they may find.  Even with this secondary human review, the cost is a fraction of employing a bookkeeper or having an accountant be the bookkeeper.  However, please remember the adage, garbage in equals garbage out.  The higher the quality of information submitted to the system, the more effective and efficient the process will be.  I.e., if a check is written without a description, or the document is in an unusual font, then a human must intervene to ensure accurate recording of the information.  While many OCR systems can handle a wide variety of fonts, it performs best when a font is one that is widely used. 

 

These technologies are merely two forms currently used by AI.  Technology firms continue to innovate in order to improve the function, accuracy, and efficiency of these technologies as well as develop additional technologies to perform more complex tax and accounting functions.  If embraced and used correctly, AI technology will be a game changer for small businesses.

 

BENEFITS OF IMPLEMENTING TECHNOLOGY

 

Replacing or supplementing the human element of bookkeeping with AI will eliminate most of the mistakes made during data entry, provide more time for higher value activities, provide reports on a timely basis, and allow advisers to provide better advice based on operations. 

 

Whether an accountant or a member of the business performs the data entry duties for a business, that task is prone to error and disproportionately costs more than other higher value added activities.  Unfortunately, inaccuracy in bookkeeping and data entry ends up costing the business much more when tax returns are prepared due to time spent correcting mistakes before the return can be begun.  AI virtually eliminates data entry errors through internal checks, subsequently reducing both bookkeeping and tax return preparation costs as well as streamlining financial statement preparation 

 

Every quarter our firm prepares financial statements for our dairy clients.  Preparation of financial statements is expensive and time consuming, however, financial institutions require these on a quarterly basis as part of loan covenants.  Bookly, www.bookly.co, a leader in automated bookkeeping platforms, has a real-time financial statement creation and viewing option.  Were our clients on this platform, or one similar to it, the cost to prepare financial statements would decrease exponentially and turnaround time would improve significantly.  Another benefit is a business may know its cash position at any point in time.  This insight will be invaluable when making financial decisions and consulting with an advisor.

 

Tax planning and tax return preparation are not the activities of choice for many accountants.  True fulfillment comes when clients seek advice regarding streamlining business operations, analyzing an expansion or a sale, or other projects that improve the business and increase profits.  Unfortunately, this is often more of the exception than the rule, especially when the client’s budget is spent on tax returns and tax planning.  With reliable and useable information available in real-time, more time should be spent with clients learning their business needs and goals and devising ways and means to accomplish them.  With AI this is all possible.  It is incredibly exciting to think of the prospect of being a true business advisor rather than primarily a tax return preparer.

 

While AI will inevitably shift priorities of accounting firms from tax and audit work to advising, it promises to provide business owners with more discretionary time and operating capital.  Without the time and financial constraints associated with the repetitive tasks required for business operation, a business owner can shift that time and those resources to higher value activities.  Zach Olson, CEO of Bookly stated: “[o]ur focus has been to reimagine how cutting-edge technology can improve the lives of business owners – no matter their area of expertise.  It is almost impossible to quantify what extra time would be worth to a business owner.  Whether that time is spent developing a new product or service line, investing in new equipment, spending more time with family, or another activity of interest, AI has the potential to make it possible. 

 

HOW AI SHOULD CHANGE YOUR RELATIONSHIP WITIH YOUR ACCOUNTANT

 

Innovation drives growth and distinguishes the leaders from the followers.  Often, it is asked if the accounting industry fears the advent of AI.  The answer has been and should continue to be a resounding ‘NO.”  AI promotes innovation and efficiency and should change your relationship with your accountant for the better by: 1) Reducing the amount of time spent on traditional accounting functions; and 2) Increasing the time spent advising on business operations. 

 

It is not unreasonable to anticipate AI replacing the bookkeeping, accounting, and tax functions performed by an accountant.  Therefore choose an accountant that has the capability to become more of a financial advisor.  This is not to say the accountant should be completely removed from the traditional accounting processes.  They will still play a very important role in reviewing the information created by the AI to ensure compliance with tax code and optimization in accordance with client specific situations and scenarios.  However, these tasks should take a mere fraction of the time now spent.  These saved funds should then be funneled into consulting and advising services to improve your business operations. 

 

Actionable data is the catalyst for innovation.  Some may think their accountant and financial advisor are the same person, but this is not always the case.  An accountant analyzes financial information in order to build a picture of what happened to a business in the past.  A financial advisor needs to be able to read your history, extrapolate trends, and formulate a financial strategy for future operation and growth.  Actively seek to build this type of relationship with your accountant.

 

While it may be disconcerting to rely on AI to perform financial functions, the benefits far outweigh the potential downsides. When fully understood how beneficial automated bookkeeping can be for your business by freeing capital and human resources for more valuable work, making the switch to a reputable automated system should not be difficult.  Please evaluate automated bookkeeping as you would evaluate any other new technology you have implemented in your operations.      

 

Originally written for Progressive Dairyman Magazine. Learn more about the author, Mark Fetzer, JD, MBA, here.

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Welcome New Cooper Norman Partner Ethan Lee

Brooke Eppa
Oct 12, 2018 01:00 PM
Ethan Lee, CPA, ABV, CFF

Meet New Cooper Norman Partner

and  Business Valuation Expert

Ethan A. Lee, CPA, ABV, CFF

Ethan Lee has joined Cooper Norman CPAs & Business Advisors as a Partner based out of the Idaho Falls office, and serving our clients across the entire firm. He was previously a Principal at Pacific Business Valuation in Honolulu, Hawaii.

Ethan has specialized in business valuation and forensic accounting services since 2006. He helps clients and interested parties understand the valuation and financial implications in various settings, such as business transition planning, tax planning, and dispute matters.

 

 

Ethan enjoys volunteering in various professional, civic, and ecclesiastical capacities. He currently serves on the AICPA’s Forensic & Valuation Services Executive Committee. Ethan has presented at the national AICPA Forensic & Valuation Services Conference, San Francisco office of the Financial Industry Regulation Authority (FINRA), and at multiple other professional venues.  He has been a guest lecturer at Sonoma State University and BYU – Hawaii.

After being raised in Southern California, Ethan eventually migrated to Hawaii where he has lived for a total of 10 years.  His family recently found a new paradise in Eastern Idaho and relocated to his father’s hometown of Rigby. Ethan has been married to his sweetheart for 16 years. They have 4 children together.  For fun, Ethan enjoys fishing and hunting, and looks forward to snowboarding with his family this winter!

 
Cooper Norman News
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The Pass-through Deduction: Things every business owner needs to know

Sep 21, 2018 12:16 PM

By Dan Packard, CPA, CFE, CVA

Tim Anderson, CPA

Scott Nielson, CPA

 

Recent tax changes have dramatically impacted the opportunities available to small business owners.  One of the largest opportunities now available is the pass-through deduction (Section 199A deduction), by which a taxpayer can deduct up to 20 percent of income from partnerships, s corporations, or sole proprietorships.  The availability of the deduction is influenced by your industry, the nature of your income, the structure under which you operate your business, and whether you’ve adequately prepared before year end.  Simply put, the deduction isn’t simple.  However, your ability to understand the deduction and properly plan can result in substantial tax savings.

The Basics

Effective for tax years beginning after December 31, 2017 and before January 1, 2026, a taxpayer is entitled to a deduction equal to 20% of the taxpayer’s “qualified business income” earned in a “qualified trade or business.” The deduction is limited, however, to the greater of:

  • 50% of the W-2 wages with respect to the qualified trade or business, or
  • The sum of 25% of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

The resulting deduction is then subject to a second limitation equal to 20% of the excess of:

  • The taxable income for the year, over
  • The sum of net capital gains

The purpose of this overall limitation is to ensure that the 20% deduction is not taken against income that is taxed at preferential rates.

“Qualified Business Income” is the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business that are effectively connected with the conduct of a business in the United States. However, some types of income, including certain investment-related income, reasonable compensation paid to the taxpayer for services to the trade or business, and guaranteed payments, are excluded from qualified business income.

“Qualified trades and businesses” include all trades and businesses EXCEPT the trade or business of performing services as an employee and "specified service" trades or businesses: those involving the performance of services in law, accounting, financial services, and several other enumerated fields, or where the business's principal asset is the reputation or skill of one or more owners or employees.

The W-2 wage limitation does not apply to taxpayers with taxable income of less than $157,500 for the year ($315,000 for married filing jointly) and is phased in for taxpayers with taxable income above those thresholds. Income from specified service businesses is not excluded from qualified business income for taxpayers with taxable income under the same threshold amounts.  Consequently, taxpayers, regardless of the industry wherein they operate, can achieve the pass-through deduction if taxable income is $315,000 or less.

 2018 Passthrough Deduction Flow Chart

 

Maximizing the Pass-through Deduction

Given that the pass-through deduction is primarily designed to benefit qualified trades or businesses and those with taxable income less than $315,000 (MFJ), taxpayers should engage early in tax planning to ensure they maximize the benefit.  Below are several ideas you should consider and discuss with your CPA during tax planning:  

  • Retirement Plan Contributions: Increasing retirement plan contributions, especially for the business owner, is a great idea irrespective of the pass-through deduction.  Safe harbor 401(k) profit-sharing plans can provide significant benefits to a business owner and their spouses, and also allow staff to contribute to the 401(k) plan at a relatively low cost to the business.  Furthermore, the business owner can adopt a defined benefit or cash balance plan that can provide for extreme contributions for the owner, subject to some limitations.  Implementation of a pre-tax retirement plan will reduce your taxable income and help you achieve the income thresholds that yield the largest pass-through deduction. 
  • Employment of Your Children in your Business: Paying your children the highest reasonable amount for the services they render will further reduce taxable income.  Thanks to the increased standard deduction, each child can now earn up to $12,000 annually that is free of federal income tax. 
  • Be Cautious with Capital Gains and Investment Income: Interest, dividends, and capital gains all serve to increase taxable income.  Consequently, it is wise to review investment portfolios to ensure capital gains are not needlessly being recognized as assets are moved.  Furthermore, when selling real property, 1031 exchanges should be considered whenever possible to defer gains and reduce taxable income.  As a reminder, Section 1031 allows a taxpayer who owns real property held for investment or used in a business to exchange property and defer paying taxes if the taxpayer acquires a like-kind replacement property to be held for investment or used in a business.  This allows taxpayers to potentially use all of the proceeds from the sale of the relinquished property to leverage into more valuable property, increase cash flow, diversify into other properties, expand business operations, reduce management or consolidate into one larger replacement property.  When considering replacement properties, be sure to consider Opportunities Zones and the tax benefits associated with investment in these types of properties. 
  • Charitable Contributions: Charitable contributions present a highly effective way to reduce taxable income.  Charitable contributions can take many different forms: cash contributions to qualified 501(c)3 organizations, non-cash contributions of household items, and contribution of highly appreciated property, such as stock, art, or real property.  Taxpayers can specifically take a charitable deduction for qualified conservation contributions, which are contributions of a qualified real property interest to a qualified organization exclusively for conservation purposes. A qualified real property interest for this purpose can be the taxpayer’s entire interest in the property, a remainder interest or an easement that restricts the use of the property in perpetuity. Conservation purposes include (1) preserving land for outdoor recreational use by, or education of, the general public; (2) protecting relatively natural habitats of fish, wildlife or plants; (3) preserving open space (including farmland or forest space) for scenic enjoyment of the general public or under a governmental conservation policy yielding significant public benefit; and (4) preserving a historically important land area or a certified historic structure.  This type of donation can be facilitated in many different ways. 
  • A Dilemma: Real Estate and Business Management Entities: Administrative and management companies provide billing, collection, human resource, and other ancillary services.  Intrinsically, administrative and management companies are qualified trades or businesses.  Business owners that do not generate qualified business income have been incentivized to establish these types of entities to create intercompany service agreements and generate qualified business income.  These separate management companies are commonly owned by the business order, the business owner’s spouse, or the business owner’s children.  If your business is utilizing an administrative or management company, the services provided should equate to the fees that are paid.  Minutes should be prepared annually to document the services that were performed.  Before adding an administrative or management company to your business structure, be aware of the published guidance from the Treasury Department.  The Treasury regulations include an anti-abuse rule designed to prevent taxpayers from separating out parts of what otherwise would be integrated with the non-qualified trade or business, such as administrative functions, in an attempt to qualify those separated parts for the pass-through deduction. 

If a business owner owns business real estate in a separate entity, he or she may be inclined to increase the rent paid from a non-qualifying business activity to the rental entity to create qualified business income.  Unfortunately, if the real estate entity leases only one property (the business real estate), there is authority that the real estate entity isn’t a qualified trade or business.  Additionally, paying too high a rent risks having it recharacterized if rent exceeds the fair market value of facilities in the geographic area.  In an effort to combat this, the real estate entity may consider hiring maintenance and janitorial staff and require the operating entity to reimburse for those costs.  

The new tax bill has created many questions that have yet to be answered.  Consequently, it is difficult to know which strategies will provide the most meaningful benefit moving forward.  Strategizing with CPAs at Cooper Norman can help you find the best route forward.  We encourage you to start tax planning as soon as possible. 

 

Tax
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Tommy Gwinn Quoted on Bitcoin filings

Brooke Eppa
Mar 22, 2018 06:01 PM

Tommy Gwinn of our Pocatello office quoted in the Idaho Business Review.

Make sure you file your Bitcoin and other cryptocurrency gains and losses correctly on your taxes!
 
 
Learn more about Tommy Gwinn here.
 
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Dan Packard Featured in the East Idaho News

Brooke Eppa
Jan 23, 2018 05:44 PM
Dan Packard, CPA, CFE, CVA was recently featured in the East Idaho News giving tips on how to avoid fraud like the case he helped to uncover of a local woman guilty of embezzling over $2 Million. 
4 of the specific tips Dan gives are:
  1. Be aware, fraud can happen to anyone.
  2. Investing resources in fraud prevention is cheaper than detecting fraud after the fact.
  3. Separate business functions:
    • Custody of assets.
      Authorization.
      Record keeping.
      Auditing the books.
  4. Get quarterly check-ups.
If you'd like to read the rest of the article, you can find it here.
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2018 Ag Seminars

Brooke Eppa
Dec 19, 2017 10:50 AM
2018 AgKnowledge Ag Seminar
 
 

Seminars hosted by Cooper Norman

Pocatello – Friday, January 19th  

Twin Falls – Tuesday, January 23rd

Idaho Falls – Thursday, January 25th  

  

Get your operation future-ready with this half-day seminar:

  • 2018 Tax Update
  • Industry Panel with discussion on current industry issues and Q&A audience participation portion
  • And more
   
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Tax Reform Summary

Dec 7, 2017 02:14 PM

If you are feeling confused by the recent tax reform proposals, you are not alone. With the Senate narrowly passing their version of tax reform early Saturday morning, both the House of Representatives and the Senate have now each passed their own versions of a tax legislation bill, but the two versions include many technical differences.

We have been closely monitoring the progress of these bills. Although the final details of the bill are yet to be determined, it is clear that it will have a dramatic impact on your 2018 tax return (filed in 2019).

House and Senate Republicans are set to reconcile differences between the two tax bills.  Here are a few highlights of things that may affect you.

 Individual tax rates

  • The House bill collapses the current seven brackets into four and keeps the top tax rate of 39.6%, although it raises the income level at which that applies. The changes would take effect in 2018.
  • The Senate bill has seven brackets, but reduces the top rate to 38.5% (currently 39.6%) for income over $500,000 for single filers and $1 million for couples filing jointly. The Senate bill also reduces income levels on other brackets compared with the current levels.

 Obamacare individual mandate

  • While the House bill makes no changes to the Affordable Care Act, the Senate bill would repeal the individual mandate that requires Americans to purchase health insurance or face a tax penalty.

 Mortgage interest deduction

  • The House bill would reduce the mortgage interest deduction for future home purchases.  Homeowners would be limited to deducting interest on up to $500,000 in mortgage debt. Deductions for second homes would no longer be allowed. Existing mortgages would not be affected.
  • The Senate bill does not change any of those provisions.

 Estate tax

  • The House and Senate bills would double the exemption next year for assets subject to the estate tax, a levy of as much as 40% that hits heirs of large estates.
  • The current exemption levels are $5.49 million for an individual and about $11 million for a couple.

 Alternative minimum tax

  • The House bill eliminates the alternative minimum taxes for individuals and corporations.
  • The Senate bill also repeals the tax, but AMT would return in 2026 as part of the expiration of the changes to that part of the tax code.

 Corporate rate reduction

  • The House and Senate bills permanently cut the corporate tax rate to 20% from 35%. The House cut would take effect next year, but the Senate bill delays it until 2019.

 Tax rate on pass-through businesses

  • The House and Senate bills also reduce taxes on pass-through businesses — sole proprietorships, partnerships, limited liability companies, and S corporations.
  • The changes are complicated and the bills take different approaches to those taxes.
  • The House bill would cap the top tax rate for pass-throughs at 25%, down from 39.6% individual rate.
  • The Senate plan would continue taxing pass-through businesses at the individual rate that would apply to the owner, with a top proposed rate of 38.5%. But the Senate bill would allow most pass-throughs to deduct about 23% of their business income from their taxes. 
  • This would likely exclude many service-based companies.

 State income tax

  • If you itemize your deductions, you can deduct state and local income taxes or sales taxes. Both proposals would eliminate the state and local income tax or sales tax deduction for individual taxpayers.
 
 
Dan Packard, CPA, Cooper Norman
You can read more about the author Dan Packard, MAcc, CPA, CFE, CVA here. 
 
Tax
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Forensic Work by Cooper Norman cited by Jonathan Shipley at AmeriBen

Brooke Eppa
Nov 10, 2017 12:55 PM
Jon Shipley, an HR Consultant with AmeriBen, recently wrote an article on fraud and self deception. The article appeared in the AmeriBen newsletter "The Explorer". Shipley cites the case of Charlotte Pottorff. The forensic audit that uncovered this fraud was performed by Dan Packard and Misty Martinell in our Idaho Falls office of Cooper Norman. We're proud that the work they did has had an impact. 
 
"In September of 2017, a woman by the name of Charlotte Pottorff pled guilty to embezzling $2.3 million over 10 years from Dura-Bilt Transmissions in Idaho Falls, ID. She had been an employee of the company – a trusted bookkeeper – since 1999. While extreme, her case is not unique; there are over 500 major embezzlement cases every year within the United Sates, and the vast majority of those are committed by long-time employees who generally fly under the radar because of their perceived character. And they are able to steal largely unsuspected: the average length of time for an embezzlement scheme lasts 4.6 years before they are caught."
-Jon Shipley, PHD, HR Consultant
Publication: "The Explorer Edition 570" 
 
 
To read the full article, please follow this link.
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Rexburg Office Open House October 25th

Brooke Eppa
Oct 5, 2017 12:03 PM
Cooper Norman Rexburg Office Open House
 
 
Come and go as you like. Refreshments will be available.
 
 
 
Cooper Norman News
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2017 Idaho AgFest

Brooke Eppa
Sep 26, 2017 12:23 PM
Idaho AgFest will be taking place at the Pinecrest Event Center at 1515 Northgate Mile in Idaho Falls, Idaho on October 21st this year. Festivities will run from 12pm to 5pm. In an effort to support our vibrant local agricultural community, we'd like to encourage everyone to attend and connect!
 
Idaho AgFest flyer, October 21st 2017
You can download a PDF version of the flyer in both English and Spanish here.
 
 
 
Community Involvement
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