Small Business Tax

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IRS Announces Increases to 2018 Retirement Plan Dollar Limits

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The IRS announced the 2018 cost-of-living adjustments to retirement plan limits.  The following plan limits are increased effective January 1, 2018:

  • Employee Contributions to 401(k) and 403(b) Plans: the contribution limit is increased from $18,000 to $18,500.
  • Defined Contribution Plans: the limit on annual additions to a participant’s defined contribution account increases from $54,000 to $55,000.
  • Defined Benefit Plans: the limitation on the annual benefit under a defined benefit plan increases from $215,000 to $220,000.
  • Annual Compensation Limit: the maximum amount of annual compensation that can be taken into account for various qualified plan purposes increases from $270,000 to $275,000.
  • Government Deferred Compensation Plans: the limit on deferrals under Section 457 (concerning deferred compensation plans of state and local governments and tax-exempt organizations) increases from $18,000 to $18,500.

Some limitations are not increased for 2018, including:

  • The limitation for catch-up contributions to an applicable employer plan other than a SIMPLE 401(k) plan or SIMPLE IRA for individuals age 50 and over remains unchanged at $6,000.
  • SIMPLE Plans: the maximum amount of compensation an employee may elect to defer remains at $12,500.
  • IRS and Roth IRA Limits: the deductible amount for an individual making a deductible IRA contribution remains at $5,500.  The Roth IRA limit of $5,500 remains unchanged as well.

If you have any questions on how these rules apply to give, please give us a call.

Current Status of Tax Reform

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The President recently reaffirmed his desire for a 15% business tax rate that applies to all business entities (C corporations, S corporations, LLCs, etc).  However, most analysts do not believe that a 15% tax rate is possible with a $20 trillion national debt.  The House Republican plan called for a 25% tax rate.

Service Businesses May Not Benefit

According to a recent piece in the Wall Street Journal, Secretary Mnuchin stated that the lower 15% tax rate would NOT apply to service businesses such as accounting (boo!!!) or law firms.  The idea is to tax these services businesses at a rate between the lower business tax rate and the tax rate that applies to wages.  That new rate would apply to pass-through service businesses but with boundaries to prevent it from being used by services businesses where the pass-through income more closely resembles wages…sounds perfectly workable!

Principles of Tax Overhaul

The President outlined four principles as guiding his tax reform efforts:

  • A fair and simple tax Code
  • A tax Code that is competitive with other nations’ tax Codes
  • Tax relief for middle-class families
  • Repatriation of overseas profits (i.e., lowering the tax on profits corporations bring back to the U.S. from foreign corporations).

What to Expect Next

Outside of general principles, details are still unknown.  Republicans plan to release details of tax overhaul on September 25.  If a tax cut is passed, it is expected to take effect retroactively to January 1, 2017.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Rules for Deducting Rental Losses

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Rental losses may not be deductible because of the passive activity loss rules. The passive loss rules apply to activities in which taxpayers do not materially participate.  Taxpayers usually satisfy the material participation standard by being involved in a business for 500 hours per year (although there are several other ways of materially participating).  Passive losses can only be deducted against passive income.  Passive losses will also be allowed when the activity is disposed of in a taxable transaction (e.g., the activity is sold).  Congress created the passive loss rules in 1986 to curb tax shelter abuses.  Unfortunately, these rules also affect many legitimate activities.

Unfortunately, rental activities will be classified as passive activities even if the taxpayer materially participates in the rental.  Therefore, rental losses will not be deductible against other income until the rental activity is disposed of in a taxable transaction (e.g., the rental property is sold).

Fortunately, there are three ways rental losses may be deductible:

  • If the taxpayer actively participates in the rental activity, rental losses of up to $25,000 per year may be deductible
  • If the taxpayer meets the requirements to be classified as a real estate professional
  • If the activity is not treated as a rental by the tax law

Actively Participating in the Rental Activity

Taxpayers who actively participate in a rental activity can deduct up to $25,000 of rental losses per year.  Taxpayers actively participate in a rental activity through managerial functions such as deciding on rental terms, approving tenants, and approving capital expenditures.  Taxpayers must own at least 10% of the value of the rental activity to meet the active participation standard.  Finally, the $25,000 loss is reduced by 50% of the excess of the taxpayer’s adjusted gross income over $100,000.

Example:  Wilma owns a rental property.  She negotiates lease terms with potential tenants, approves tenants, and decides what improvements (repairs, carpeting, etc.) will be made to the property before leasing it out. Wilma’s adjusted gross income is $90,000.  Since Wilma decides on rental terms, approves tenants, and approves capital expenditures, she actively participates in the rental.  Her income is below the phaseout threshold so she can deduct up to $25,000 of rental losses.  

Real Estate Professionals

Real estate professionals may fully deduct rental losses.  A Taxpayer must meet the following three requirements to be classified as a real estate professional:

  • She must spend more than 750 hours per year in real property trades or businesses in which she materially participates (e.g., spends more than 500 hours in the activity) AND
  • She spends more than 50% of her time in real property trades or businesses in which she materially participates
  • She must materially participate in the rental activity for which she is trying to claim a loss

The term real property trade or business means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Example:  Barney is a real estate broker.  He spends 1,000 hours per year working as a broker.  He also spends 1,000 hours per year managing an apartment building that he owns.  The apartment building will suffer a $100,000 rental loss this year.  These are Barney’s only activities.  Since Barney spends 2,000 hours per year on real estate businesses and 100% of his time is spent on real estate businesses, he is a real estate professional.  Since Barney spends more than 500 hours in the apartment building activity, he materially participates in the apartment building activity.  Barney meets the requirements of the real estate professional exception and may fully deduct the $100,000 loss.

Activities Not Treated as Rentals by the Taw Law

Rental activities of a very short duration or that require substantial services along with the rental property may be classified as business activities rather than rental activities.  This is due to the increased involvement of the taxpayer in such activities.  If a rental activity is classified as a business activity, taxpayers may be able to deduct losses if they materially participate.  Normally, rental losses are not deductible even if taxpayers materially participate (unless the active participation or real estate professional exceptions apply).

The following rental activities are treated as non-rental activities:

  • The property is rented by each customer for an average of seven days or less (e.g., hotel rooms or cars)
  • Significant personal services are provided, and each customer rents the property for an average of more than seven, but no more than 30 days (e.g., a dude ranch or resort).
  • Extraordinary personal services are provided, regardless of the average period of customer rental (e.g., nursing home).
  • The rental is incidental to the taxpayer’s nonrental activity, (e.g., the rental of a parking lot for a special event). If the gross rental income in those situations is less than 2% of the lesser of the property’s unadjusted basis or its fair market value, the rental of the property is considered incidental to a nonrental activity.
  • The property is made available by the taxpayer during defined business hours for nonexclusive use by various customers (e.g., a golf course that has both daily customers and customers who purchase long-term passes).

If the taxpayer conducts one of these activities, she will be able to deduct losses as long as she materially participates in the activity.

Comments or questions about this post?  Please let us know through the comment area below!

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Leave-Based Donation Programs for Victims of Hurricane Harvey

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In response to the extreme need for charitable relief for victims of Hurricane Harvey, some employers are adopting leave-based donation programs.  Under these programs, employees can essentially donate their vacation and sick pay to charitable organizations.

The IRS recently issued a notice that cash payments an employer makes to a charitable organization in exchange for vacation, sick, or personal leave that its employees elect to forgo will NOT constitute income or wages of the employee if the payments are:

  • Made to charitable organizations for the relief of victims of Hurricane Harvey and Tropical Storm Harvey and
  • Paid to the charity before January 1, 2019

The IRS will not allow double dipping—employees won’t have to claim the donated vacation, sick, or personal leave time as income but they will also not be allowed a charitable donation for the amount donated.

The employer will take a business (and not a charitable deduction) for the amount of vacation, sick, or personal leave time donated.

People also need to be aware of scam artists that have created fraudulent charities.  The IRS cautions people wishing to make disaster-related charitable donations to avoid scam artists by following these tips:

  • Be sure to donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. The IRS website at IRS.gov has a search feature, Exempt Organizations Select Check, through which people may find qualified charities; donations to these charities may be tax-deductible.
  • Don’t give out personal financial information — such as Social Security numbers or credit card and bank account numbers and passwords — to anyone who solicits a contribution. Scam artists may use this information to steal a donor’s identity and money.
  • Never give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.
  • Consult IRS Publication 526, Charitable Contributions, available on IRS.gov. This free booklet describes the tax rules that apply to making legitimate tax-deductible donations. Among other things, it also provides complete details on what records to keep.

Comments or questions about this post?  Please let us know through the comment area below!

If you found this article informative, subscribe to our Tax Newsletter.

Contact us for a Free Initial Consultation

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Restaurant Owners–What Are Your Numbers Really Telling You?

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Successful restaurant owners are focused on providing high quality food at reasonable prices and with very good service.  This is obviously a very important focus for restaurant owners.  Successful restaurant owners also know that there is a numbers side to the business—how profitable is the restaurant?

It is helpful for restaurant owners to know how their financial numbers look compared to their competition.  When restaurant owners compare their numbers to industry norms, interesting questions tend to arise.  They begin to take closer looks at certain aspects of their restaurants to make sure they are operating the restaurants as profitably as possible.

Our firm has access to real-time databases and we were able to gather information on privately held restaurants in Michigan with sales of $1 million and under.

We found the following information (percentages of sales):

Average Cost of Food    42.57%

Average Gross Profit      57.43%

Payroll                              22.22%

Rent                                  5.92%

Advertising                       4.16%

Example: JoJo’s Restaurant has the following Profit & Loss Statement:

Sales                      $1,000,000

Cost of Food               600,000  (60%)

Payroll                        280,000  (28%)

Rent                           100,000  (10%)

Advertising                   50,000  (5%)

There are some things to note:

JoJo’s cost of food is slightly higher than the average.

This can be caused by:

  • Underpricing the competition
  • Paying higher food costs than the competition
  • Buying higher qualify food than the competition
  • Inventory walking out the back door
  • High inventory waste or spoilage
  • Over-portioning
  • Inventory being eaten by the owners/employees and it’s still being counted as food cost expense

JoJo’s cost of labor is higher than the competition

This can be caused by:

  • Scheduling too many employees during shifts
  • Paying employees a higher wage/salary
  • Employees are moving slowly
  • Having too few employees and paying some employees overtime
  • Employees clock in early and clock out late

Going through the numbers on a regular basis may not be the most interesting thing to do, but it will reveal things about your restaurant that could surprise you.

Learn More About Restaurant Accounting and Tax Services We Provide

Schedule a Free Tax Analysis

Qualified Small Employer HRA Avoids $100 per Day Penalty

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Background

Over the past few years, there has been a $100 per day per employee penalty for employers who provided certain Health Reimbursement Accounts (HRAs) and/or Employer Payment Plans.

Under an HRA, an employer reimburses employees for the medical expenses up to a certain limit.  The reimbursement is deductible by the employer and tax-free to the employee.

Under an Employer Payment Plan, the employer either reimburses employees for the cost of health insurance premiums or directly pays the insurance company for the employees’ health insurance coverage.  Again, the payment is deductible by the employer and tax-free to the employee.

Under the market reform provisions of Obamacare, these plans became disfavored and subjected the employer to a $100 per day per employee (i.e., $36,500 per employee per year) penalty.  The primary reason for the penalty is because the market reform provisions eliminated any annual or lifetime cap on benefits.  HRAs are generally subject to an annual cap and Employer Payment Plans are deemed to be capped at the cost of the employee’s premium that is being paid.

Qualified HRAs No Longer Subject to $100 per Day per Employee Penalty

Beginning in 2017, qualified HRAs will be exempt from the $100 penalty.  Employer Payment Plans remain subject to the penalty.

For 2017 and later, eligible employers that do not offer group health insurance coverage to any employees can offer a Qualified Small Employer HRA (QSEHRA).  Eligible employers are employers that are not applicable large employers under Obamacare (applicable large employers have 50 or more employees).

The employer must offer a QSEHRA to each eligible employee.  An eligible employee is defined broadly as any employee; however, the employer can elect to exclude the following:

  • Employees who have not completed 90 days of service
  • Employees under age 25
  • Part-time or seasonal employees
  • Employees covered by a collective bargaining agreement covering accident and health benefits
  • Nonresident alien employees with no U.S. source income

A QSEHRA must be provided on the same terms to all eligible employees and funded entirely by the employer.  Payments and reimbursements are limited to $4,950 per year ($10,000 for family coverage) and are prorated if the employee is not covered for the whole year.  For example, if a single person starts employment on July 1, then the limit is reduced by 50%–$2,475 ($4,950 times 50%).  These amounts will be adjusted for inflation.

Payments/Reimbursements are Taxable If Employee Does Not Have Minimum Essential Coverage

Unlike a regular HRA, premiums for individual health insurance policies, as well as other medical expenses such as deductibles and copays, can be paid or reimbursed by a QSEHRA.  However, any payments or reimbursements from a QSEHRA for medical care (including insurance premiums) that are provided when an individual does not have minimum essential coverage are included in the employee’s income.  Generally, an individual health insurance policy qualifies as minimum essential coverage, but the employer must verify that the employee has minimum essential coverage.  Payments under a QSEHRA will affect the employee’s amount and qualification for the premium tax credit.

Employer Must Provide Notice to Employees

An employer funding a QSEHRA must provide written notice to each eligible employee no later than 90 days before the beginning of the year (or the date the employee first becomes eligible to participate).  The notice must state the amount that will be available for reimbursement or payment for the year.  Additionally, the notice must remind the employee that any benefits available under a QSEHRA must be disclosed to the health insurance marketplace if the employee applies for coverage through the marketplace and requests advance payment of the premium tax credit.  The notice must also include a statement that if the employee does not have minimum essential coverage for any month, he may be subject to a penalty for the month and that payments and reimbursements under the QSEHRA may be included in income.

Employers that do not provide proper notice to employees are subject to a penalty of $50 per employee.  The total penalty that can be assessed for one year cannot exceed $2,500.

Finally, amounts paid under a QSEHRA must be reported on the employee’s W2 (even though the payments are generally tax-free).

Comments or questions about this post?  Please let us know through the comment area below!

If you found this article informative, subscribe to our Tax Newsletter.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Hired Your First Employee? Your Tax Obligations

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It’s a major milestone for you, but it comes with a lot of paperwork that must be done correctly.

Bringing a new employee into your business is a reason to celebrate. You’ve done well enough as a sole proprietor that you can’t handle the workload by yourself anymore.

Onboarding your first worker, though, comes with a great deal of extra effort for you at first. You have to show him or her the ropes so you can offload some of the extra weight you’ve been carrying.

But first things first. Before your employee even shows up for the first day of work, you should have assembled all the paperwork required to keep you compliant with the IRS and other federal and state agencies.

A New Number

As a one-person company, you’ve been using your Social Security number as your tax ID. You’re an employer now, so you’ll need an Employer Identification Number (EIN). You can apply for one here.

The IRS’s EIN Assistant walks you through the process of applying for an Employer Identification Number (EIN).

Once you’ve completed the steps in the IRS’s EIN Assistant, you’ll receive your EIN right away, and can start using it to open a business bank account, apply for a business license, etc.

You’ll also need an EIN before you start paying your employee. It’s required on the Form W-4. If you’ve ever worked for a business yourself, you’ve probably filled out this form. As an employer now, you should provide one to your new hire on the first day. When it’s completed, it will help you determine how much federal income tax to withhold every payday. If you’re not bringing in a full-time employee but, rather, an independent contractor, you won’t be responsible for withholding and paying income taxes for that individual. You’ll need to supply him or her with a Form W-9.

Note: Payroll processing is probably the most complex element of small business accounting. If you don’t have any experience with it, you’ll probably want to use an online payroll application. After you’re set up on one of these websites, you enter the hours worked every pay period. The site calculates tax withholding and payroll taxes due, then prints or direct deposits paychecks. Let us know if you want some guidance on this.

Don’t forget about state taxes if your state requires them, and any local obligations. The IRS maintains a page with links to each state’s website. You can get information about doing business in your geographical area, which includes taxation requirements.

More Forms

You also have to be in contact with your state to report a new hire (same goes if you ever re-hire someone). The Small Business Administration (SBA) can be helpful here, as it is in many other aspects of managing a small business. The organization maintains a list of links to state entities here.

All employees are required to fill out a Form I-9 on the first day of a new job. New employees must also prove that they’re legally eligible to work in the United States. To do this, they complete a Form I-9 from the Department of Homeland Security. As their employer, you’re charged with verifying that the information provided is accurate by looking at one or a combination of documents (U.S. Passport, driver’s license and birth certificate, etc.). By signing this form, you’re stating that you’ve done that.

You can also use the U.S. government’s E-Verify online tool to confirm eligibility.

A Helping Hand

The Department of Labor has a great website for new employers. The FirstStep Employment Law Advisor helps employers understand what DOL federal employment laws apply to them and what recordkeeping they they’re required to do. Please consider us a resource, too, as you take on a new employee. Preparing for a complex new set of tax obligations will be a challenge. We’d like to see you get everything right from the start.

How to Deduct 100% of Meal Expenses

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Taxpayers are normally allowed to deduct 50% of their meal and entertainment expenses.  The reason is because the IRS believes that taxpayers inflate the amount of meal and entertainment expenses they claim as deductions, and therefore the IRS automatically throws out 50% of these expenses.  The IRS has some trust issues.

Fortunately, there are exceptions to the 50% rule.  If any of these exceptions are met, taxpayers may deduct 100% of their meal expenses.

The exceptions are:

De Minimis Meals

These are usually small, occasional meals that an employer provides to employees (e.g., coffee and occasional bagels).  The IRS requires that accounting for these food items is unreasonable or administratively impracticable.

Recreational or Social Meals

These include expenses related to recreational, social, or similar activities incurred primarily for the benefit of employees (e.g., company picnics, holiday parties).  If these events are only held for highly compensated employees, they will not qualify under this exception.  This exception only applies to employees; it does not apply to independent contractors.

Meals for the General Public

Examples of this exception include free hotdogs and popcorn at a grocery store.  The exception also applies to food provided to potential customers as part of a sales presentation (e.g., a free meal provided by a real estate broker to potential real estate investors).  This exception does not apply if the meals are provided on an invitation-basis only and not otherwise available to the general public.

Department of Transportation Meals

Individuals whose work is subject to the hours of service limitations of the Department of Transportation (e.g., interstate truckers, certain railroad employees) can deduct 80% of their food expenses.

Meals Treated as Compensation to Employees

Meals that are included in an employee’s W2 as wages are not subject to the 50% limitation by the employer.  The employer will claim a 100% deduction for the meal expenses as a payroll expense.  However, if the employee tries to deduct the meal expenses, she will be subject to the 50% limitation.

Meals Reimbursed under an Accountable Plan

When an employee or independent contract is reimbursed for meal expenses by a business owner under an accountable plan, the employee or independent contractor will not include any of the meal reimbursement as income (i.e., 100% of the meal reimbursement is excluded from income).  However, the employer will be limited to a 50% deduction for the meal expenses that it reimbursed.

Meals for Nonemployees who Receive a Form 1099

When a business provides a meal to a nonemployee and issues the nonemployee a Form 1099 for the value of the meal, the business can obtain a 100% deduction for the meal cost.  An example would include a business that holds a raffle and the winner receives a free dinner for himself and his family valued at $500.  If the business issues a Form 1099 reporting the $500 as income to the winner, the business can obtain a $500 deduction.

Meals during a Move that are Reimbursed by the Employer

An employer may obtain a 100% deduction for meal expenses she reimburses an employee during a move required for employment or business reasons.

Meals Sold by a Business

This exception is a technical exception to prevent businesses such as restaurants and daycare centers that sell food from being disallowed a valid deduction for cost of goods sold.

Meal expenses may be substantial.  If a business incurs any of the above expenses, they should be accounted for separately from meals that will be subject to the 50% disallowance rule.

 If you need help with small business taxes,

sign up for a FREE tax consultation.

 

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Pros and Cons of a Paperless Business

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Has your bank, broker, credit card company, or maybe even your phone or utility company sent you information about getting your statements online instead of through the mail? Going paperless has its advantages — not the least of which may be seeing your countertop for the first time in months. But it also has its drawbacks. Before you completely eliminate paper statements, look at both the pros and cons.

The Benefits

When customers manage their accounts online, companies can save substantial amounts of money in printing and mailing costs. That’s why many companies offer incentives, such as reducing interest rates or fees or making donations to environmental groups, to encourage customers to go paperless. And fewer mailings mean there’s less risk that someone could steal personal documents from your mailbox and use the information fraudulently.

The Drawbacks

While companies claim financial information sent electronically is more secure, not everyone agrees. When they happen, security breaches can put your personal information at risk. And it may be easier to miss the e-mail or forget about reviewing statements or paying bills when you don’t have them right in front of you.

Another potential drawback: Retrieving statements that are more than a few months old may be difficult, although many companies say they’re working on archiving several years’ worth of documents.

Going paperless may be to your advantage, but weigh everything carefully before you sign up.

Take charge of your financial future. Give us a call, today, to find out how we can assist you and your business.

What Are Your Financial Ratios Telling You?

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hulksterHow’s business? Most business owners can answer that question without consulting a financial statement. But what if someone asks about “return on assets” or “average collection period”? To answer those questions, you need the help of financial ratios.

Inside the Numbers

A financial ratio is the numerical relationship between certain figures on your income statement and balance sheet. “Profit margin” is probably the most familiar financial ratio. Expressed as a percentage, profit margin is calculated by dividing net income by sales.

There are many useful ratios. They can provide information about liquidity, turnover, and debt, as well as profit. Digging “inside” the numbers can reveal such things as how quickly receivables are collected, how frequently inventory is turning over, and whether you’re in a good position to repay your financial obligations on time.

Putting Ratios to Work

While the numbers themselves are interesting, the real value comes from analyzing financial ratios. You can use ratios to spot trends, both good and bad, by comparing your company’s current situation with the past. And ratio analysis can help you with forecasting and goal setting.

Ratios can also be used to compare your company’s financial performance with that of other companies and with the industry as a whole. Another important use: Bankers frequently review a company’s financial ratios as part of the loan application process.

Some Common Ratios

The following key financial ratios are essential business management tools.

Current Ratio Current assets ÷

current liabilities

Does the company have sufficient resources to meet current liabilities when they come due?
Debt-to-Equity Total liabilities ÷

stockholders’ equity

How heavily is the company leveraged?
Gross Profit Margin Gross profit ÷ sales How much profit is available to cover operating expenses?
Net Profit Margin Net income ÷ sales How much profit is earned on each sales dollar after all expenses are accounted for?

For more tips on how to keep business best practices front and center for your company, give us a call today.

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