Monthly Archives: May 2015

More than Money: Customer-Smart Invoicing

Invoicing Should be Easy!

invoiceIt’s simple, right? You send customers an invoice and they pay up. But the process can be so much more — it can be an opportunity to improve business relationships and gather useful data. It’s called “customer-smart invoicing,” and it’s about more than just money.

What’s the problem?
Ask contractors why they’re not getting paid and many might say, “They don’t have the money!” Just last year, postsale relationship consultants TermSync surveyed businesses about delayed payments. Some 49% of respondents blamed purchase order (PO) miscommunications as the top reason for tardy accounts receivable. Insufficient funds did come in second, but at a much lower 27% of respondents.

This is actually good news. You can’t do much about your customers’ cash flows. And, in the “paid when paid” environment of the construction industry, payments will likely always be challenging. But you can improve the invoicing discrepancies that could be causing payers to set your bills aside to call about later — much later.

How well do you communicate?
Customer-smart invoicing is broadly based on two concepts: communication and information. Let’s start with the former, for which your objective is to prevent the PO perplexity mentioned in the survey above.

Start looking at invoices as opportunities to reach out to customers and initiate positive interactions. For example, several days after sending out invoices, you might dispatch follow-up e-mails expressing gratitude for the business, requesting confirmation receipts and asking whether anything is unclear.

For high-importance customers, you could get your sales staff in on the process. Have them make phone calls — not to demand payment, of course, but just to ensure the invoice got there and to clarify any confusion as to its terms.

Are you learning anything?
The second major aspect of customer-smart invoicing is information. Or perhaps a better word might be “education.” By tracking a few key metrics, your invoices can teach you invaluable things. Such metrics include:

  1. Time to payment. The time from the date you remit an invoice until you have the check in your hands should, obviously, be as short as possible. But it’s important to track trends to make sure payment times aren’t dragging out of control.
  2. Accuracy of invoicing. Total the number of invoices you’ve sent out over a given period (say, six months or a year) and then compare it to the number of customer questions or disputes. (You’ll need to start tracking those, too.) The resulting ratio should be as far apart as possible — if you’re creeping toward 1:1, something is definitely wrong!
  3. Time to resolution. As you track customer invoice inquiries and disputes, record the date of the very first interaction and the date of resolution. If it’s taking many days or even weeks to resolve problems, you’ll know (at least partly) why your collections and cash flow are suffering.
  4. Customer satisfaction. Gathering this information can be as simple as asking customers to fill out a brief (three to five questions) “on a scale of 1 to 10” survey about their experience with your construction company. You can include this as a postage-paid card in paper invoices or as a hyperlink included in e-mailed or online invoices.

Where to begin?
Adapting to customer-smart invoicing doesn’t necessarily mean overhauling your entire system. To begin with, identify the areas that need improvement and then decide whether better customer communication or gathering more information could serve you well.

Contact Bob Smolko at 216.831.7171 or to see how the Small Business Group at Ciuni & Panichi, Inc. can assist.

You may also be interested in:

The Costly Consequences of Fraud

Are You Taking a Tax Deduction for Mileage?

© 2014

New Ruling for Real Estate Trusts

How a trust qualified for an exception to PAL rules

us tax courtIn a favorable decision for trusts that hold real estate assets, the U.S. Tax Court has held that such a trust qualified for the real estate professional exception and was therefore exempt from the limitations on passive activity losses (PALs). The court’s holding also means the trust can avoid the new 3.8% net investment income tax (NIIT) that applies to passive activity income.

Real estate professional rules
“Passive activity” is defined as any trade or business in which the taxpayer doesn’t materially participate. “Material participation” is defined as involvement in the operations of the activity that’s regular, continuous and substantial. Rental real estate activities are generally considered passive regardless of whether you materially participate.

Internal Revenue Code Section 469 grants an exception from restrictions on PALs for taxpayers who are real estate professionals. If you qualify as a real estate professional and you materially participate, your rental activities are treated as a trade or business, and you can offset any nonpassive income with your rental losses. You may also be able to avoid the NIIT as long as you’re engaged in a trade or business with respect to the rental real estate activities (that is, the rental activity isn’t incidental to a nonrental trade or business).

To qualify as a real estate professional, you must satisfy two requirements: 1) More than 50% of the “personal services” you perform in trades or businesses are performed in real property trades or businesses in which you materially participate, and 2) you perform more than 750 hours of services in real property trades or businesses in which you materially participate.

The IRS challenge
In Frank Aragona Trust v. Commissioner of Internal Revenue, the trustee had formed a trust in 1979, with his five children as beneficiaries. He died in 1981 and was succeeded as trustee by six trustees — the five kids and an independent trustee. Three of the kids worked full-time for a limited liability company (LLC), wholly owned by the trust, that managed most of the trust’s rental properties and employed about 20 other individuals, as well.

During 2005 and 2006, the trust reported nonpassive losses from its rental properties, which it carried back as net operating losses to 2003 and 2004. The IRS determined that the trust’s real estate activities were passive activities, and the challenge landed in the Tax Court.

A trust as a real estate professional
The IRS contended that a trust couldn’t qualify for the real estate professional exception because a trust can’t perform “personal services,” which regulations define as “any work performed by an individual in connection with a trade or business.” The Tax Court rejected this argument. It found that, if a trust’s trustees are individuals who work on a trade or business as part of their trustee duties, their work can be considered personal services that can satisfy the exception’s requirements.

Evaluating material participation
The IRS alternatively argued that, even if some trusts can qualify for the exception, the Aragona trust didn’t, because it didn’t materially participate in real property trades or businesses. The agency asserted that only the activities of the trustees can be considered, not those of the trust’s employees. And the IRS claimed the activities of the three trustees who worked for the LLC should be deemed activities of employees and not trustees.

The Tax Court didn’t decide whether the nontrustee employees’ activities should be disregarded in determining if the trust materially participated in its real estate operations. But it held that the activities of the trustee employees should be considered. It also noted that trustees aren’t relieved of their duties of loyalty to beneficiaries just because they conduct activities through a corporation wholly owned by the trust.

Be prepared
For technical reasons, the trust in this case wasn’t required to prove that it satisfied the two-prong real estate professional test. Other trusts wishing to take advantage of the exception should be prepared to do so.  Contact our Construction and Real Estate Services Group (CARES) at 216.831.7171 or Tony Constantine at for more information and assistance.

You may also be interested in:

Internal Controls

The Costly Consequences of Fraud


© 2014

Short Term Rental of Your Home

Does renting your home make sense for you?

TJCWe are all aware that Cleveland has become a popular destination of late.  Major motion pictures are being filmed here, we recently had the Rock n’ Roll Hall of Fame Induction Ceremony, and next year brings the RNC convention into town.  This activity is increasing demand for short-term housing in and around downtown.

A major concern for many people considering renting out their homes is how it will affect their tax return.  When considering the tax implications, it is important to look first to how long the property is rented.

Rented Less than 15 Days 

If the property is rented for less than 15 days during the calendar year, then the income is not subject to tax.  You are still able to deduct your mortgage interest and real estate taxes to the extent allowed as an itemized deduction on Schedule A.  No other expenses or depreciation are deductible.

Rented More than 14 Days

If the property is rented for more than 14 days, the rental income is taxable.  A portion of the mortgage interest, real estate taxes, insurance, maintenance, and utilities are allowed as a deduction to directly offset the rental income on Schedule E of your 1040.  The balance of the mortgage interest and real estate taxes that do not relate to the rental activity would continue to be deductible on Schedule A as an itemized deduction.  The balance of the other expenses are not deductible.

Personal versus Rental Use

If the home is used personally by you, a related party, rented below market, or given to a charity for more than 14 days or 10% of the rental days, then the home is considered a personal asset. You are able to deduct expenses to the extent of income but not in excess of income.  Depreciation expense is also not allowed.

If, however, the personal use is less than 15 days then the property is treated as a rental property.  In this case, the property can be depreciated and expenses are allowed in excess of income (subject to certain limitations under IRC Sec 469).

Proration of Expenses

Empty days are days that the home is not being used for personal use or rented out.  They are treated as personal if the home is deemed personal due to usage.  Empty days are considered rental if the home is deemed a rental property (personal use less than 15 days or 10% of the rental days).  This is an important distinction that can affect the proration of expenses as the calculation would be rental days divided by 365 days.  The numerator of rental days would be higher if it included the empty days.

Tips and Conisderations

Renting your home to take advantage of the increased demand for short-term housing can be very beneficial.  Here are some tips:

  1.  Keep a journal of the use of the property and whether it was personal, rental, etc. and who the property was used by,
  2. keep careful track of your receipts to substantiate expenses,
  3. consult with an attorney to obtain proper documents such as a lease agreement,
  4. review your condominium or homeowners’ association agreement to make sure you are allowed to lease your home,
  5. review your homeowner’s insurance policy to make sure you have appropriate coverage,
  6. consult with your tax advisor to make sure that you are able to make the most of this opportunity in the most tax efficient manner.

Renting out your home to strangers can be a very scary proposition.  There are benefits and obviously some potential risks.  If you are diligent with your recordkeeping and careful about structuring the transaction, you may be able to take advantage of this unique opportunity.

Be sure to contact your tax advisor to review the specifics of your situation and how to properly apply these rules to maximize your cash flow.

Tony Constantine is a Senior Manager in the Tax Department at Ciuni & Panichi, Inc.  Tony is a Practice Leader in the firm’s Real Estate and Construction Services Group. He can be reached by calling 216-831-7171 or email him at