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Don't Use Your Retained Earnings Account 'Til Year-End
One item on your financial statements that can provide you with really useful information is called "retained earnings." So it pays to understand it.

As one of the equity accounts on a balance sheet, retained earnings accounts show changes in assets. Most commonly, business profits trigger increasing cash or accounts receivable - both of which are assets. Profit growth raises retained earnings; on the other hand, business losses have the reverse effect.

Changes in retained earnings only occur at the close of an accounting cycle, which is typically at year-end. Throughout the year, the retained earnings account doesn't change. Instead, the balance sheet has another equity account for current year profit or loss. Only when the year is complete does the balance in the current year account flow over into retained earnings.

Throughout the current year, retained earnings should continuously match last year's final number. If you increase retained earnings to a figure that's greater than the balance at the previous year-end, your tax accountant has no choice other than to adjust the current year's profit; you'll pay income tax on an additional amount that wasn't really income. If retained earnings decline, the tax accountant must record the change as a non-deductible distribution or dividend rather than a deductible expense.

Never record a transaction that alters retained earnings. Distributions or capital contributions are changes in cash assets that are not a consequence of business earnings. If you want to record these events correctly, use different equity accounts - not your retained earnings account!

The Decision-Making Process: Is It Algorithms vs. Humans?
Human Math
Too often, business people make poor decisions. Or so says Nobel economics laureate and psychologist Daniel Kahneman.

In a recent article in Knowledge@Wharton, Kahneman suggests: "We're fundamentally overconfident in the sense that we jump to we misunderstand situations." In other words, we're driven by our emotions.

The cure? Algorithms, which can moderate our emotional responses by introducing "disciplined thinking."

As explained by writer Kendra Cherry in, "In mathematics, an algorithm is a defined set of step-by-step procedures that provides the correct answer to a particular problem...the same type of process can be followed to ensure finding the correct answer when solving a problem or making a decision."

The use of algorithms may not be new, but algorithms have become something our society craves and needs, says Panos Parpas of Imperial College, London: "They've been used for decades - back to Alan Turing and the codebreakers, and beyond - but the current interest in them is due to the vast amounts of data now being generated and the need to process and understand it. They are now integrated into our lives."

According to Michael C. Mankins and Lori Sherer in Harvard Business Review, "The use of analytics can hugely improve the quality of your decisions and can increase decision process efficiency by as much as 25%."

Fortunately, the human factor is likely to remain key. Someone has to identify the problem and ask the right questions. Otherwise it's garbage in, garbage out. So...people 1; algorithms 1. It's a win-win.

Harness the 'Latent Power of Connection' to Succeed
As a society we face a dramatically changing - and frequently disturbing - world, and many say we lack the understanding (or the smarts, or the vision) to handle the economic and political crises that shake our world daily.

Joshua Cooper Ramo disagrees. It's the connections between these crises we're missing.

In a recent LinkedIn article, author and consultant Ramo introduces us to his newest book, The Seventh Sense. Here he examines these continuous crises and explains how they're caused by the same underlying dynamics.

Ramo sees the world through interlinkages. While invisible to most of us, these interlinks can be used to explain everything from explosive technological changes to viral videos to far-off coups d'état. Eventually, we will learn to adapt to the reality of these systemic connections, and be able to deal intelligently with them.

A network, according to Ramo, is any collection of linked nodes. The most obvious network is, of course, the Internet, but there are also expansive and powerful networks of trade, finance, DNA, knowledge, and people. The ability to recognize the connections that are at play in any given context is what enables one to disseminate a new idea, a brand, a trend, or even a revolution.

To leverage these latent connections, ask yourself: "What connections can I find that will help me grow my business, solve business problems, or confront looming challenges?" Ultimately, it will be these connections and our ability to perceive, access, and utilize connected systems that will determine how powerful and influential we are.

How to Save Taxes as an S Corporation
Toward the end of each year, unincorporated businesses begin considering tax structure advantages to implement in the following year. One of these is obtaining S corporation status. When your annual profit reaches approximately $50,000, you may want to consider this option as a way to save on taxes.

If you do decide to convert your business into an S corporation next year, you'll need to know that a great deal of planning is involved. The issue of converting to an S corporation is surrounded by multiple guidelines from the tax authorities, but no solid formula. Your accountant can help you navigate this labyrinth of guidelines and assist you in deciding whether the option is a good one for you and your business.

How it saves

Figuring out how converting to an S corporation can reduce a tax burden begins with understanding how proprietorship operations in the United States are taxed. Profit is subjected to two distinct taxes - regular income tax and self-employment tax. The latter is reported and paid on your annual income tax return, but it's calculated separately from ordinary income tax.

Self-employment tax is a flat rate assessment on profit; it comprises contributions to the owner's Social Security and Medicare accounts. Corporations - as distinct entities from their owners - do not pay self-employment tax.

How do you get paid?

Unfortunately, incorporated small businesses are confronted with the confusing problem of having to forward corporate profits to their owner(s). This is confusing because receiving a salary from a corporation you own doesn't reduce your tax burden. Why? Because this salary incurs the Social Security and Medicare taxes you're trying to avoid.

Compensation via dividends is even worse. Dividends do not represent an income tax deduction for a corporation. As a result, corporate income remitted to an owner as dividends is considered taxable income for both the corporation and the individual.

Special S corporation status eliminates this double taxation. Profit simply passes through to an owner for calculation on his or her individual income tax. No self-employment tax is assessed because the owner is receiving taxable profits as a shareholder.

Officer compensation

More complexities arise when the shareholder is the working operator of the enterprise in addition to owning the business. Tax rules do not allow this person to receive all of the compensation as a shareholder's taxable profits. Enjoying the tax savings from operating an S corporation - in which you're both the shareholder and officer - is only allowed when you receive reasonable compensation for your operational services. That means receiving some compensation as wages, which then incurs Social Security and Medicare taxes. But the remaining corporate profit after the cost of your compensation does escape these employment taxes.

Identifying compensation that satisfies the requirement for reasonableness presents a challenge to anyone serving in the dual role of S corporation shareholder and officer. But it's not insurmountable. As mentioned previously, discuss this in your annual pretax meeting with your accountant, and he or she will ensure you're in compliance.
Michele Ball
Perfect Additions
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Worth Reading
The Impoverishment of Attention
By Shane Parrish
Farnam Street blog
In his book Focus: The Hidden Driver of Excellence, Daniel Goleman laments the fact that many people exist in a constant state of fractional attention because the onslaught of incoming data diminishes their focus. In his discussion of Goleman's theory, Parrish highlights the need for accurate focus and reflective thinking, something that also concerned ancient philosophers.

Giving Feedback to an Overly Sensitive Worker
By Staff

Business Management Daily

It can be difficult to give constructive feedback to overly sensitive employees. No one likes to correct a worker who gets angry. It helps to act promptly; be direct, clear, and specific about your expectations; focus on behavior, not personality; and listen. And remember, most overly sensitive workers have other more positive qualities.

Is This the Most Perfect Method for Staying Organized?
By Anna Hensel

Inc. com

Hensel is a believer. It seems Ryder Carroll, who has suffered from ADD, designed the Bullet Journal while in college as a way to take notes more mindfully and systematically. His method employs various symbols (dots, circles, lines, etc.), and Carroll calls his note-taking system a work in progress. Some of us will be happy just to have a system.

This Month: How to Be a Great Listener
"Don't speak. Nod frequently. Maintain eye contact. Throw in an "uh-huh" or "mmm..." every so often. Is that it? If we do these things, are we good listeners? These may play a part, but great listening requires more. Find out how to be a great listener below.

New research shows great listeners are trampolines, not sponges. Get your bounce on here:
What Great Listeners Actually Do

Great listeners possess special traits, such as:
9 Things Good Listeners Do Differently

Better listening means better business. Understanding your colleagues can make the difference that leads to success. Find out how:
Tips for Being a Highly Effective Listener

Researchers found we remember only half of what we hear. Increase this at:
Be A Better Listener Immediately

Effective leaders are great listeners. Take this road to intentional listening and become a leader:
Are You An Intentional Listener?
This newsletter and any information contained herein are intended for general informational purposes only and should not be construed as legal, financial or medical advice. The publisher takes great efforts to ensure the accuracy of information contained in this newsletter. However, we will not be responsible at any time for any errors or omissions or any damages, howsoever caused, that result from its use. Seek competent professional advice and/or legal counsel with respect to any matter discussed or published in this newsletter.
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