Business Tax Help in Jefferson City and Central MO

Non-filer tool launched by IRS

The IRS recently announced the launch of web sites for non-tax filers to register to receive their economic impact payment and a new Get My Payment tool. Here is what you need to know.

Background

As a response to the coronavirus pandemic, the government is sending $1,200 to single taxpayers with income less than $75,000 ($98,000 with phaseouts). $2,400 is being sent to married taxpayers with income less than $150,000 ($198,000 with phaseouts). An additional $500 is being sent for each child under the age of 17.

The Problem

The payments are being made based on 2019 or 2018 tax returns. If you do not need to file a tax return, you run the risk of not receiving this payment. Additionally, getting payments out to everyone is technically complex. The IRS must look at both 2019 tax returns and 2018 tax returns PLUS they are directed by Congress to match these tax files against two years of Social Security payments for seniors. Not an easy task!

The Solution

The IRS worked to launch a way to register to receive your payment and to determine the status of your payment. You can find the sites here:

For non-filers: Submit information to receive Economic Impact Payment

Payment status and direct deposit registration: There is also an IRS provided Get Your Payment tool to register to receive your payment via direct deposit.

It can be found here: Get My Payment Tool

This tool will also be used to review the status of your payment.

Who should use

If you fall into one of these cases, you need to review whether it makes sense to use these tools.

Not required to file. If you have not filed a tax return in either 2018 or 2019, using this tool or other tax filings is the only way to receive the payment.

College students. If you are not a dependent on someone else’s tax return, you need to look into using the tool. If you are a dependent, It may also be worth a conversation to see if you can or should change your filing status in 2019 in order to receive this payment.

Non-filer. Even if you know you need to file a tax return, but have not yet done so, consider using the non-filer tool. You will still need to file a tax return, but in the meantime, you can receive your payment.

Seniors. Seniors that do not file tax returns in 2018 or 2019 will eventually receive the payment based upon their form 1099-SA or railroad retirement information. The non-filer site asks you not to register, but you may receive the payment sooner AND protect your identity from would be thieves by filing a tax return.

To check on status or speed things up. Want faster payment? Payment not yet received? Use the Get My Payment tool.

The Economic Impact Payments are now officially being sent out, so the sooner you let the IRS know that your payment should be included, the sooner your payment will arrive.

The following sequence of events is common to many new and expanding businesses.

The Short-Term Squeeze

You start your business with a limited amount of capital and an abundance of good ideas and ambition. The sales activity has been adequate to produce a net profit. Your inventory is about twice as large as you intended. Your accounts payable are past due to the point where some creditors want to ship C.O.D. only. To keep your creditors happy, you have been overdrawing your checking account to the dissatisfaction of your banker. You have a short-term note past due at the bank.

These are all symptoms of a very common business ailment - too much short-term debt.

This type of cash squeeze can be avoided if you confine your company's growth to that which can be handled from retained earnings. If the cash retained in the business from last year's profits is $25,000 and inventory grows by twice that amount, somebody (you, your banker, or a new partner) has to fund the expansion that cannot be funded by the retained earnings.

Long-Term Funding

If you can't provide additional capital and you don't want a partner, you need to look for long-term funding from one of the following sources:

Funds from Owner - Studies indicate that as much as 60% of all small business funding comes directly from the owner or his/her immediate family. Outside of your immediate family or friends, you may find funding from other private parties or from financial institutions.

Private Lenders - There are some problems with outside private lenders. First, they are few and far between. Second, they generally demand a higher rate of interest and/or want to own a percentage of the business.

Financial Institutions - The main problem in using financial institutions for small businesses is that banks are not in the "risk" business. Although you may be very optimistic about your company's future and have a glowing cash flow projection, the banker is not likely to rely on it for loan purposes. You may have adequate collateral in terms of inventory, real estate, etc., but if the banker feels that you will not have adequate after-tax net profits to service a loan, he/she is not likely to lend you money. Bankers do not want to liquidate your assets in satisfaction of their loan.

Small Business Administration - If financing is not otherwise available on reasonable terms, the Small Business Administration may be available to assist with its various loan programs.

Money Brokers - There are "money brokers" who advertise in various newspapers and business publications. Many of these brokers want to be paid in advance to locate possible lenders for you. Be very cautious of any broker and ask for references and credentials. Any proposal by such brokers should be reviewed by both your attorney and your accountant before you sign anything.

If you would like more information on the business funding options available in your situation, please feel free to call.

When you apply for a business loan, your request must meet certain basic requirements.

Your banker needs to have:

A written request for a specific amount of money.

A detailed explanation of the use of the funds.

A projection of how and when you will repay the loan.

A list of the collateral you are offering as security for the loan.

In addition to these essentials, the banker will want to know what will happen in the event of your disability or death; that is, do you carry disability, life, and general liability insurance?

The banker also wants to know:

The financial history of your company in the form of company balance sheets and profit and loss statements for at least the past three years.

A realistic projection of profits and a twelve-month (month-by-month) cash flow projection. This spreadsheet should show the specific month that cash will be received from various sources and the month that specific disbursements need to be made.

A narrative relating your personal business experience.

The company "game plan" telling where the company will be several years hence in terms of size, types of products or services, number of employees, locations, etc., to give the banker some insight into your long-range planning.

Personal tax returns for each major owner of the business for the past three years.

Put yourself in the banker's shoes and see what questions you would want answered if someone asked you to risk your capital. If you have not previously assembled a loan request in this manner, engage professional assistance.

Having a business plan is necessary for survival in today's competitive business environment. A written business plan is as essential for a small business as it is for large corporations. A good business plan will help you focus on current and potential problems and assist you, your advisors, and employees in improving net profit.

Many owners of small businesses fail to put their plans in writing. It takes time to get your plan reduced to writing, and since there are so many other things to be done, the business plan goes unwritten. You wouldn't consider building a building without written plans to direct those who are assisting you. Likewise, you'll find your business more profitable if employees and advisors have a clear picture of what it is you are trying to accomplish.

The fact that you have reduced your business plan to writing does not mean that it's engraved in stone. Your business plan, like your building plans, is a guideline. Circumstances arise which will require that the plan be altered; that's as it should be.

Involve your employees in the development of the business plan. Your employees have a lot to offer and their involvement will make them more enthusiastic about putting a plan to work. At least once a year you should hold a brainstorming session to review the following questions:

Should we increase or decrease the line of products we offer?

Is our marketing and advertising approach as effective as it can be?

Are there employees whose work assignments should be redefined to make the company more efficient?

What is the company's financial condition, past, present, and future? Are there policies which need to be changed to improve the financial condition?

Where do we want the company to be a year from now and five years from now?

Your business plan should be submitted along with loan applications to convince your lenders that you are serious about your business and that you have the ability to repay borrowed money.

In some industries, service has become a quaint memory, and customers are reduced to selecting the provider that costs or annoys them the least. But the golden rule has not been repealed, and pleasing your customers can create a powerful competitive advantage. A few simple changes may well increase your bottom line.

We all hate having our time wasted, and businesses are among the worst offenders. To distinguish your firm from the rest, establish the following customer service policies and procedures.

Communicate with your customers. Return calls promptly, update customers about matters in progress, and explain delays as soon as you can.

Don't make your customers jump through hoops. Offer discounts at the point of sale, rather than giving out coupons or making buyers apply for mail-in rebates. If you employ an automated phone system, provide a simple method for reaching a live person.

Don't worry about trying to save face. If you're even partly wrong, apologize and proceed to a resolution. Train your employees to do the same, and reward them for positive outcomes.

Let customers know you're there for them and that you regard them as more than mere cash cows. Listen to their concerns, and address them promptly. If someone is unhappy with a purchase (whether product or service), fix it, replace it, or refund the payment in full. At worst, the loss won't be compounded by damage to your reputation. At best, the money will come back multiplied by repeat business and referrals.

Quality service is a powerful marketing tool that's surprisingly easy to deploy. Simply imagine how you would want to be treated, and provide that treatment to your customers. As their satisfaction increases, your profits will follow.

Pay attention to your customers' needs. You'll enjoy higher profits as a result.

It's difficult for smaller companies to compete with the management capacity of large chain stores or franchise operations. However, small companies can act more quickly than big companies. So, if you know what to monitor and where to get information, your business can be as successful as any.

Consider the following ideas for saving time and money and making your business more profitable.

1. To sell right, you have to buy right. If you're going to offer your customers prices that are competitive, you must first buy competitively. Attend wholesale auctions, buy factory direct where possible, and establish a buying co-op with other small but noncompeting businesses.

2. Treat your customers right and they'll keep coming back. Customer service pays off in higher profits. Your entire staff should be aware that it is the customer who provides the money to meet payroll and pay for future salary increases.

3. Learn from other people in small businesses. Develop a circle of friends in similar businesses around the country. Discuss ideas and business problems with them on a regular basis. You'll find out what others are doing to manage problems with inventory, receivables, personnel, fixed assets, computers, etc.

4. Try new ideas. Be innovative and unconventional when necessary. The fact that something isn't currently being done in your industry or in your area shouldn't keep you from trying something different if it will give you a better product or better service for your customers.

5. Ask your employees. Companies that ask employees for suggestions get good results. Your employees are directly involved with both your customers and your product and are in a good position to suggest improvements.

6. Make costs everyone's concern. Motivate your employees to be concerned about net profit. They should be as concerned with controlling costs as with generating sales. To encourage participation, consider implementing a bonus program based on a percentage of costs saved.

You’ve loved dogs all your life so you decide to start a dog breeding and training business. Turning your hobby into a business can provide tax benefits if you do it right. But it can create a big tax headache if you do it wrong.

One of the main benefits of turning your hobby into a business is deducting all your qualified business expenses, even if it results in a loss. However, if you don’t properly transition your hobby into a business in the eyes of the IRS, you could be waving a red flag that reads, “Audit Me!” The agency uses several criteria to distinguish whether an activity is a hobby or a business.

The business-versus-hobby test

Honest assessment

If your dog breeding business (or any other activity) falls under any of the “hobby” categories on the right side of the chart, consider what you can do to meet the businesslike criteria on the left side. The more your activity resembles the left side, the less likely you are to be challenged by the IRS.

If you need help to ensure you meet the IRS’s criteria for businesslike activity, reach out to schedule an appointment.

Tax-deferred exchanges

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

A like-kind exchange simply involves swapping assets that are similar in nature. For example, you can trade an old business vehicle for a new one, or you can swap land for a strip mall. However, you can't swap your vehicle for an apartment building because the properties are not similar. Certain types of assets don't qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.

Typically, an equal swap is rare; some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.

It is not necessary for the exchange of properties to be simultaneous. However, in the case of such a "deferred" exchange, the replacement property must be specifically identified in writing within 45 days and must be acquired within 180 days (or by tax return due date, if earlier), after transfer of the exchange property.

With a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn't a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

When done properly, exchanges let you trade up in value without owing tax on a sale. There's no limit on the number of times you can exchange property. If you would like to learn more about tax-deferred exchanges, contact us.

With the proliferation of cell phones, and the corresponding accessibility of you to your employer, invariably most employees are receiving and making business calls on their cell phones. So how can you deduct your cell phone expenses on your tax return? Here are some ideas and tips:

Expense Report. If you are an employee and use your cell phone regularly for work, review your employer's policies regarding the ability to expense part of the cost.If properly documented, the reimbursed business expense for cell phone use is not income to you. Not sure? Ask your employer. It never hurts to make a reasonable request.

Employee Benefit. If you are required to be in touch with work, as in the case of a sales representative or an IT employee, ask your employer to consider providing a cell phone to you. It is much easier to reduce your billing for personal use, than to eat the expense without a valid tax deduction.

Business Expense Versus Miscellaneous Business Deduction. As an employee with unreimbursed business use of your cell phone, the old tax rules allowed you to deduct unreimbursed business expenses in excess of 2% of your Adjusted Gross Income. Beginning in 2018, this tax deduction is gone! Thankfully, business cell phone use as a sole proprietor is immediately deductable against revenue without the 2% threshold.

Keeping Records Just Got Easier. Thankfully, recent changes in the tax code make cell phone documentation requirements much easier. In the past cell phones were considered "listed property" just like automobiles. This meant you were required to keep a detailed log of business and personal use in order to deduct the expense. This is no longer required for cell phones. You still need reasonable documentation to support the business use of your cell phone, but it is no longer such a painstaking activity.

Small business owners have a number of options on how to organize their business for tax purposes. Many small, single owner, businesses are not incorporated, and are deemed "sole proprietors", in the eyes of the IRS. Other business entities, like C-Corporations, are taxed as a separate entity with distributions to owners taxed a second time as dividends. Still others are deemed "flow-through" entities like S-Corporations and Limited Liability Companies (LLC).

Flow-through entities

Flow-through entities do not pay taxes at the company level. Instead, the business tax return reports the net income to the IRS, but then distributes the taxable income to their respective owners via a K-1 tax form. Each individual owner then reports their share of the K-1 net income on their individual tax return and pays the tax on this and any other personal income.

Generally, business owners like flow-through entities because:

The business income is taxed once instead of twice as in the case of C-Corporations.

The business format provides owners a level of legal protection that is not available by doing business as a sole proprietor.

What you should know

Individual tax rates. Increases in individual tax rates have an impact on the amount of tax paid by all small businesses that are organized as flow-through entities.

Can you pay the tax? Small "flow-through" businesses must pay income tax on all their business profits. However the business entity is NOT required to distribute cash from the company to help pay the tax. So "flow-through" owners could see a tax bill without money to pay the tax.

Seasonality challenge. Seasonal "flow-through" businesses with high sales volumes in the summer often have a hardship to pay their taxes. This is because cash for these businesses is typically used to build inventory at the same time taxes are due.

Minority shareholder caution. Minority Shareholders in "flow-through" entities are doubly cursed. They not only may not receive distributions to pay taxes due, but they are often precluded from selling their shares, and they do not have enough ownership to require distribution of funds through shareholder voting.

The marriage penalty. Taxes on your business income can be higher for a married couple versus a single business owner. This is due to the pre-built tax rate penalty for married couples in the current tax code.

Very popular business entity type. According to the IRS the S-Corporation formation is a popular business entity type with over 4.2 million S-Corporations on record. LLC's are quickly becoming the new entity of choice with growth from 250,000 entities to over 1 million entities today.

What records should your business keep, and how long should you keep them? There are several categories of records that are important to a business, some for internal purposes and some for tax returns and other government requirements. Let's take a look at these by category.

Tax records. First, consider the records you need to substantiate your annual income tax return. The IRS says that you must maintain adequate records, so support the items of income and expense that you claim. That means you must be able to produce receipts, invoices, cancelled checks, or banking records supporting expense items. Similarly, you should keep sales slips, invoices, or bank records to support income items.

Accounting records. Most businesses have adequate accounting systems to capture routine transactions, but not for nonroutine transactions such as the purchase of depreciable assets. When you buy a car, computer, or piece of office equipment, be sure to file all purchase documents, assign an inventory number, and immediately set up a depreciation schedule.

Travel and entertainment expenses. Good recordkeeping for travel and entertainment expenses is essential. Although the rules can be complex, in general you should capture where, when, who, how much, and the business purpose for each expense. A well-designed standard expense report form can help insure that your records contain all the required information. Also, if you have employees who drive on company business, make sure they keep an auto log showing the miles driven for each trip.

IRS audits. Generally, the IRS can audit a tax return for three years after the date it was due or the date the tax was paid, whichever is later. However, if there is a major understatement of income, they can audit for six years after the due date (or seven years after the tax year). For that reason, you should keep most income tax records for seven years. The IRS requires records relating to employment taxes to be kept for at least four years after the date of the return or the date the tax was paid, although here again a seven-year rule is safer.

Sales and Use Tax. State taxing athorities are focusing their audit activities by targeting small businesses sales and use tax. Keep invoices and reports showing your sales tax amounts and tie them to your sales and use tax filings. More importantly, keep records showing all your purchases and sales/use tax reporting. Include details behind any corporate credit card payments to defend the payment of sales and use taxes.

Corporate records. Every incorporated business needs good corporate records, including documents associated with forming the company, bylaws, business licenses, and minutes of all board meetings. Shareholder records should include stock registers and records of all share issuances and redemptions. Also keep copies of all contracts and leases. Finally, don't forget current and terminated employee files, and records of employee pension or profit sharing plans. Most corporate and employee pension plan records should be kept indefinitely.

Computer recordkeeping. The IRS has established a series of rules and recommendations concerning how electronic records must be maintained. Generally, such records should contain the same information as paper records and should be kept for the same length of time

If you use your car for business, you may deduct related expenses using one of the two methods allowed by the IRS. You can choose between using the standard mileage method and the actual expenses method.

Standard mileage. With the standard mileage method, you simply multiply your business miles driven during the year by the IRS's standard rate. You can also deduct related tolls, parking fees, and the business portion of interest expense on your car loan.

Actual expenses. With the actual expense method, you can deduct the actual cost of operating the car for business. These expenses include gas, tolls, insurance, parking, repairs, maintenance, registration and license fees, loan interest, and depreciation.

Regardless of the method you select, you need records to support the deduction. You'll need to keep track of your mileage under both methods, but the actual expense method requires more recordkeeping than the standard mileage method.

Before you opt for the simpler method, however, consider the potential impact of each method on your tax bill. The price for using the mileage rate's simplicity may be lost deductions. If you drive often or long distances for business, or if your car expenses are high, the alternative actual-cost method may be better. If it's advantageous, you can switch to this method even if you started with the standard mileage rate for the business vehicle you use now.

In making your decision, you should consider how long you'll keep the car and the estimated total tax savings under each method. The rules governing business car deductions are full of exceptions and limitations. To be certain you use the method that's right for you- and that maximizes tax savings - give us a call. We can review your situation and your options with you.

One of the things that’s going away under the new tax reform laws implemented this year is an employee’s ability to deduct unreimbursed expenses related to their job.

Farewell to miscellaneous itemized deductions

The deduction for unreimbursed employee expenses was among the qualified 2-percent miscellaneous itemized deductions that were eliminated by the Tax Cuts and Jobs Act (TCJA) passed in late 2017. This could be a blow for employees who had relied on it to deduct unreimbursed expenses for such things as work-related meals, entertainment, gifts, lodging, tools, supplies, professional dues, licensing fees, work clothes and work-related education.

A win-win solution

If you are an employee who has used this tax deduction, here are some tips to minimize its loss:

Determine the impact. Review your past tax records to help estimate how much you expect to pay in unreimbursed work expenses and what the tax deduction was worth to you.

Discuss the situation with your employer. If the loss of this deduction is a hardship, talk to your employer about how you will be affected.

The win-win. Ask your employer to consider reimbursing you for your work-related expenses directly. Your employer can probably deduct those expenses from their business return without increasing your taxable income. This will save them tax dollars when compared with the cost of raising your pay in order to indirectly compensate you for your unreimbursed expenses.

If you are an employer, consider talking to your employees about their unreimbursed expenses now that the tax laws have changed. If you wish to reimburse their qualified business expenses, make sure your reporting adheres to IRS accountable plan rules so that your reimbursements are deductible as a business expense and do not add to your employees' incomes.

Form W-2s and most 1099-MISCs are Due Jan. 31

If you own your own business or have a side business in addition to your regular job, you may need to send out several IRS forms by Jan. 31 this year.

The deadline is for forms you issue to employees and others who were paid as part of your business activities throughout the year. Forms W-2s and 1099-MISC forms that contain non-employee compensation in box 7 will have to be postmarked or sent electronically to both the IRS and the person you did business with on or before Jan. 31, otherwise you may face fines for each late form.

Most businesses understand that a W-2 is required for each of your employees. But did you know that you also may need to issue a 1099-MISC to each contractor or vendor you’ve done business with during the year?

General rule

The general rule is to issue a 1099-MISC to each individual contractor or vendor you paid at least $600 over the course of the calendar year. This form requirement doesn’t usually apply to your expenditures on hobbies or personal items, just business activities. In most cases you do not have to issue 1099-MISCs to corporations – just other individuals and partnerships.

Example. Andrea has a side business as a model on nights and weekends in addition to her career as a medical device analyst. Over the course of 2018, she paid $600 to a hair and makeup stylist at Hair Art Inc., $800 to a freelance photographer for headshots and a promotional portfolio, and $2,000 in fees to Viva Talent LLC, a local modeling agency.

Andrea doesn’t need to issue a 1099-MISC to the stylist, because she works for a corporation, but she will have to send one to the photographer, who is an independent contractor. She needs to send one to the modeling agency as well, because it operates as a limited liability company (LLC) and files its taxes as a partnership rather than as a corporation.

Hint: Andrea can make her filing activities easier by issuing Form W-9 to each vendor to get their tax information at the beginning of the year. These forms should be kept on file.

Other examples of business activities that may require you to issue a 1099-MISC include:

Rents paid to a landlord for office space.

Expenses paid to a contractor to turn a room in your house into a home office.

Any payments made to an attorney.

Fraud and fines

In the past, while most forms were filed by the end of January, you had until as late as March 31 to get the government their copies. The unified Jan. 31 deadline for these forms was changed as part of the IRS’s larger effort to crack down on refund fraud. Fraudsters have been filing bogus returns early in the year in an effort to snag a refund check before W-2s and 1099s arrive that contradict their returns.

Unfortunately, the fines on the self-employed and small business owners for missing the Jan. 31 deadline can be steep. Form W-2s and 1099s filed up to 30 days late are fined $50 each; $100 each for more than 30 days late; and $270 each for those filed after Aug. 1 or not filed at all.

These deadlines are now important, as penalties are severe. Please call if you need assistance.

40% are unaware of their tax responsibilities

40% of the workers in the Sharing Economy are unaware of their tax responsibilities.

Over 60% of the service provider companies are not training their new workers on their tax responsibilities.

Source: Written statement of Nina E. Olson, National Taxpayer Advocate given at the Hearing on “The Sharing Economy” to the Committee on Small Business, U.S. House of Representatives, May 26, 2016.

Tax compliance is a problem for Uber drivers, Airbnb and others deemed to be in the new Sharing Economy. The IRS is aware of this and has recently launched a new “Sharing Economy Tax Center” on their website to help this growing group of workers. Here are ideas to keep you out of this IRS spotlight.

The Sharing Economy

The sharing economy consists of workers that are taking part in the service economy by “sharing” their resources for part-time or full time employment. Some common examples are:

Cab services: use your car

Delivery services: use of your car

Short-term rentals: use of rooms, apartments, and homes

Home services: use of your personal tools and supplies

Note: While the IRS seems to be focusing on this new “Sharing Economy” really any freelance worker has the same tax challenges as these workers.

Key Tax Responsibilities

If you use your car as a cab or rent out your home for the big golf tournament, you will need to understand the following tax obligations.

Employee or contractor? You need to know which of these defines your employment arrangement. Your personal tax obligations are markedly different under each scenario. As an employee, the service company is responsible for paying the business portion of Social Security and Medicare. They will pay unemployment taxes. They will also withhold your portion of Social Security, Medicare, federal taxes and state taxes and send them in for you. These payments are reported to you on a W-2. This is not the case if you are a contractor.

Social Security and Medicare. All employers are required to pay Social Security and Medicare taxes. As a contractor you will need to reserve 12.4% of your net income for Social Security and 2.9% for Medicare payments.

Estimated taxes. You may need to send in quarterly estimated tax payments to avoid tax penalties when you file your tax return.

Other taxes. You may be subject to other taxes including unemployment taxes.

Depreciation. This area can be confusing. You are able to expense a portion of the cost of capital assets (like your car) if they are used for business purposes. However, if also used for personal use you will need to adjust the amount available for depreciation.

Special tax rules. Other areas of the tax code have special provisions. The most common of these is use of your home for business or rental.

The tax rules for those in the new service economy are complex and confusing. Ask for help before it gets out-of-hand or visit www.irs.gov and search “Sharing Economy Tax Center.”

Your Business articles summary 

There are new tax filing deadlines effective for 2016 tax returns and beyond. Here are the major changes worth noting.

Small Business Partnership and Limited Liability Corps

Small businesses that are organized as a partnership or limited liability companies filing Form 1065 must file their tax return on or before March 15 of the following year. This moves the required filing date up one month versus last year.

Who: Partnerships and LLC’s taxed on Form 1065

New filing deadline: March 15th (old filing Date was April 15th)

Calendar year C-Corporations

Year-end C Corporation tax filing date is a month later. The old filing date of March 15th is now moved to April 15th.

Who: Year-end C Corporations

New filing deadline: April 15th (old filing date was March 15th)

Note: If your C Corporation is a non-calendar year filer, your deadlines may change over the next few years so please be alert to this.

Foreign bank accounts

Foreign bank account reporting dates are changing. Annual reporting of foreign bank accounts moves from June 30 to April 15th. This is FBAR Form 114

Who: Anyone with foreign financial accounts.

New filing deadline: April 15th (old filing date was June 30th)

Financial Statements

Most successful business managers use financial statements and other special reports to generate higher profits. If you haven't been using all the financial tools available to you, here are some ideas to get you started.

There is no need to feel intimidated by financial statements. If your company's record system is properly designed, you should be getting regular financial reports that are easy to understand. In addition to the traditional balance sheet and income statement, you should get special reports and ratios specific to your industry. You will be able to use this past performance information to help you create higher profits for your company.

Accurate financial reports compared with industry standards and with your company's past performance will also serve as an early warning system of problems or opportunities which need your attention.

How do you get the best financial information at the least cost? To begin with, there are three basic levels of financial statements: compiled statements, reviewed statements, and audited statements. The type of report you need may be specified by your banker or by an absentee owner. An owner who lives out of the area may require a higher level of report than one who works closely with the business.

Compiled statements Compiled statements are management's information put in the form of financial statements. The accountant is making no assurances as to the accuracy of the information in those statements. Because of the limited involvement by the accountant, this is the least expensive level of statements.

Reviewed statements Reviewed statements require more involvement by the accountant than is required for compilations, but less than is required for audited financial statements. The accountant needs to obtain a general understanding of the business's organization. There will be little or no verification of specific figures on the financial statements. Reviewed statements are often required by lenders and owners who do not require a full audit.

Audited statements Audited statements are the highest level of financial statements. Accountants must spend whatever time is necessary to allow them to express an opinion as to the accuracy of the numbers on those statements. Because of the time involved, audited statements are the most expensive financial statements. Unless an audit is required by outsiders, reviewed or compiled statements should do nicely for your company.

Do not hesitate to ask for assistance to leverage your financial information to enhance the profitability of your business.

Bank Loans

When you apply for a business loan, your request must meet certain basic requirements.

Your banker needs to have:

A written request for a specific amount of money.

A detailed explanation of the use of the funds.

A projection of how and when you will repay the loan.

A list of the collateral you are offering as security for the loan.

In addition to these essentials, the banker will want to know what will happen in the event of your disability or death; that is, do you carry disability, life, and general liability insurance?

The banker also wants to know:

The financial history of your company in the form of company balance sheets and profit and loss statements for at least the past three years.

A realistic projection of profits and a twelve-month (month-by-month) cash flow projection. This spreadsheet should show the specific month that cash will be received from various sources and the month that specific disbursements need to be made.

A narrative relating your personal business experience.

The company "game plan" telling where the company will be several years hence in terms of size, types of products or services, number of employees, locations, etc., to give the banker some insight into your long-range planning.

Personal tax returns for each major owner of the business for the past three years.

Put yourself in the banker's shoes and see what questions you would want answered if someone asked you to risk your capital. If you have not previously assembled a loan request in this manner, engage professional assistance.

Cash versus Accrual

When you start a business, you have many decisions to make. One of those is the method of accounting your business will use for reporting income and expenses on your tax return. It is an extremely important decision. With few exceptions, the method you choose can only be changed in the future with the IRS's permission.

The two methods generally used are the cash method and the accrual method. The cash method is probably the easiest for most people to understand and the easiest for small business owners to use. This method recognizes income when you receive a payment from a customer, and a deduction is taken when you pay cash or write out a check for a bill you have to pay.

The accrual method recognizes income when the services are rendered or the product is sold, despite the fact that you may not get paid for several months. You have "accounts receivable" in the form of money customers owe you. Expenses are handled the same way. If you buy something today, but don't pay for it until later, maybe even next year, you would deduct the cost now. What you owe for purchases you've made constitutes your "accounts payable."

The cash method is easier to understand and more closely reflects how money is coming in and out of the business. However, it doesn't tell you how much people owe you or how much debt the business owes. The accrual method better reflects how the business is actually doing, but it is more complex and, for most business owners, more difficult to understand.

All new business owners should sit down with their accountants to discuss the pros and cons of each method and to decide what works best for their business. Many businesses are required by tax law to use the accrual method for tax reporting.

Retirement plan choices

Small businesses and self-employed individuals often tune out when conversations or articles about pension plans come up. That's just for big business, they think, not for little guys like us. But small firms can tap into the tax breaks of pension plans more easily than they might imagine.

Pension plans provide tax deductions for the business and tax-deferred earnings for the employee. The establishment of this important fringe benefit can also reduce employee turnover by increasing employee job satisfaction.

There's never been a better time to offer a retirement plan to your employees. Many plans are easy to implement, require little paperwork, and reduce your tax bill.

Selecting the right plan for your business begins with understanding your choices. Each plan has advantages and drawbacks. To help you decide which might be appropriate for you, here are highlights of some common plans:

Simplified Employee Pension (SEP) Plan. Also known as a SEP-IRA, this retirement plan lets you establish individual retirement accounts for yourself and your eligible employees. You can also have a SEP if you are self-employed. Setting up a SEP can be as simple as completing a short, written agreement. Other than annual disclosure statements to employees, there are no filing requirements.

SEPs can be funded only by employer contributions, but they offer flexibility because you decide each year how much you want to contribute. Annual contributions for each employee are based on a percentage of compensation, with a maximum dollar limit. Unlike other plans, SEPs can be established up until the extended due date of your tax return.

The 401(k) Plan. The 401(k) plan is a type of employer-sponsored retirement plan that allows participants to contribute a certain percent of their salary each year. Employers can match employee contributions. An employee is not taxed on either his contribution or the employer's contribution until withdrawal from the plan. The earnings on the account also accumulate tax-deferred.

There are requirements that prevent highly compensated employees from contributing large amounts while the rank and file contribute little. A 401(k) is more complicated to maintain than a SEP, and it has annual IRS reporting requirements.

Individual 401(k). An individual 401(k) plan can be set up by a business - incorporated or unincorporated - where the owner is the only employee. Such plans are designed to be somewhat less complicated than traditional 401(k) plans. Their major advantage is that they allow higher contributions than other plans.

Savings Incentive Match Plan for Employees (SIMPLE). Like a SEP, a SIMPLE plan consists of individual retirement accounts (IRAs) for yourself and eligible employees. Alternatively, a SIMPLE plan can also be established as a 401(k) plan. Either type can easily be set up with a bank or insurance company using a "model," or standard plan document. In a SIMPLE plan, employees can make voluntary contributions through payroll deductions, and employer-matching contributions are required.

There are two requirements for setting up a SIMPLE plan: you must have 100 or fewer employees, and you cannot offer another retirement plan. Also, a SIMPLE plan must generally be established before October 1 of any calendar year.

Qualified Plans. Qualified Plans also known as Keogh (or H.R. 10) plan is a retirement plan for self-employed people and their employees. If you have earnings from self-employment, whether full-time or part-time, you are probably eligible to establish a Keogh plan.

Qualified p\Plans have lost much of their popularity because other plan options provide much of the same benefits, but require much less administrative paperwork.

There are two major types of Qualified Plans:

Defined contribution plans require contributions based on a percentage of wages (for employees) and profits (for owners). The benefits that the participants will receive at retirement depend upon how much these contributions and the earnings on them have accumulated to at retirement time.

Defined contribution plans in several forms including money purchase plans, target benefit plans, and profit sharing plans. The advantage to a profit sharing plan is that the amount of annual contributions can vary from the maximum to no contribution at all depending on the profitability of the business. Annual contributions are required for money purchase plans.

Defined benefit plans require contributions based on the amount of the retirement benefit the plan is to pay out. An actuary must be used to determine the required annual contribution. Benefits that a participant may receive upon retirement are limited by law.

All Qualified Plans have more complicated reporting requirements than a SEP or SIMPLE-IRA plan. Business owners cannot cover just themselves in these plans; they must make contributions for employees as well.

Qualified Plans must be established by December 31 of the tax year in which you want to take a deduction for a contribution. Contributions can be made up to the due date of the company's tax return, including extensions.

Key business numbers

What numbers monitor the vital signs of your business? You may be surprised to find you must look beyond the numbers on your financial statements.

Most successful business owners have a set of key numbers they use to monitor how well their business is doing. Usually these numbers are a combination of financial and nonfinancial measurements.

You can improve the profitability of your business by monitoring and analyzing the numbers that are vital to your business. Since each business is unique, the first task is to determine what measurements will reveal the most about your operations.

Look beyond the financials

Many business owners rely heavily on their financial statements in making business decisions. Indeed, financial numbers are only the beginning; they can be one of the more useful tools used in the decision-making process.

But remember, the importance of financial statements lies not just in the measurement of current income and expenses, but in providing you information that may warrant further review. Other very useful indicators are found in payroll reports, production reports, telephone logs, customer complaint reports, or production quality control reports.

What numbers are important?

What key numbers best monitor the vital signs of your business, and how often should you compile these numbers?

Key numbers often vary by business. Some are obvious; sales trends, cost of product, inventory turns, accounts receivable and accounts payable. But some are not so obvious. To determine yours, a vital sign must have a direct and immediate impact on your business. Otherwise, the information, though useful, won't provide the timely indicator required.

Numbers at a point in time are meaningless. They must be taken in context and compared with something else. This comparison could be against a plan or against prior month or prior year. So in deciding how often to get the information, remember you're focusing on trends. Distortions caused by too short a measurement period are just as bad as undetected trends caused by too long a period.

Your goal should be to get information soon enough to act on it instead of having to react to a situation that has escaped detection for a critical period. With common sense and experimentation, you should be able to identify the significant numbers for your business and the right measurement periods.

Consider size and complexity

The size of your business and the complexity of your product line or services will help determine what indicators you need.

If you are running a drive-in hamburger stand, perhaps one of the best indicators of how your business is doing is the number of hamburger buns used per day. The number of hamburgers sold is probably a reliable indication of other aspects of the business. The number may relate to the total dollar volume of drinks sold, the total poundage of hamburger taken from inventory, or the total number of employees needed for the day.

If refunds to customers have always been a strong indication of good customer service, a reduction in refunds may be an indicator that the field representatives or customer service people are not being sensitive to customers' concerns.

On the manufacturing line, the amount of rejected products may be your measurement of quality control. A change in the quantity of rejected items at the end of a given shift should certainly send a signal that something needs to be checked.

Every business owner is concerned with the annual sales volume it takes to at least break even and, therefore, has reduced his breakeven to a daily sales figure. Although interesting, a drop below the breakeven point for a day or two doesn't spell disaster.

A more interesting figure might be a monthly, quarterly, or annual computation of sales per employee. Suppose that over the last three or four years you have averaged $150,000 of gross sales per employee. If your gross sales have now dropped to $125,000 per employee, perhaps you are overstaffed, perhaps not. At the very least, you have an indicator that deserves investigation.

Timely analysis is critical

You prepare monthly financial statements to avoid having to wait a whole year to find out whether or not there is a profit or loss from operations. Likewise, don't wait for your monthly financial statements to get an indication of problem areas which can be revealed to you by these other indicators.

Don't be hamstrung by your computers in your efforts to obtain these vital numbers. There's a lot to be said for a manual report pulled from various time records, production reports, daily sales, etc.

The survival of most businesses depends on their growth and adaptation to changing operating conditions. Consequently, you should keep a critical eye on your business indicators. As your business develops, some indicators may lose their usefulness and need to be replaced with others. Similarly, expanding into a new product line may require fashioning a set of indicators specific to that product's needs.

Get expert help

Often asking for help in reviewing your financials is the best place to start. This review can help you focus on the correct information and provide suggestions for improving your reporting to identify the important drivers of your business.

Contractors: control costs

Controlling overhead costs is critical for all construction managers. Increased competition and slim profit margins have forced contractors to take a hard look at overhead cost management.

Budgeting and variance analysis

Technological changes have made budgeting systems, planning, and control techniques available to all contractors. Budgeting allows contractors to evaluate current operations, assess future costs, and provide a proactive approach to controlling overhead costs.

Overhead costs are either variable or fixed. Managers can use these cost relationships along with historical trends to forecast overhead expenses. A flexible budget can then be used to evaluate significant variances between actual costs incurred and projected amounts. This analysis also highlights problems and weaknesses in a contractor's organizational structure.

Budgets can be used as a quantitative action plan to change employee behavior and decision-making processes. By prompting managers to emphasize cost control and extend planning horizons, employees adopt the supervisor's values, and often a cost-conscious attitude begins to permeate the company.

Partnering

Advances in technology and the availability of Internet access have allowed contractors to join with owners, architects, financiers, and subcontractors to work through all aspects of a project, from the initial conceptualization to its final completion. This cooperation eliminates many of the problems that arose previously because the parties involved weren't communicating.

For instance, if an architect working on plans for a client shows those plans to the contractor who will be doing the building, they may discover that the plans will be too expensive or impractical to execute.

Thanks to technology, this can happen even when the architect and the contractor aren't in the same city. Video conferencing can allow people hundreds or thousands of miles apart to work on the same documents simultaneously.

Job planning and management

Computer programs are now available that will help builders plan and manage jobs more efficiently. For instance, with the help of a computer, contractors can now more accurately plan crew sizes and production schedules and manage the flow of materials and the scheduling of subcontractors. These programs let contractors make better decisions that help ensure that jobs are completed with fewer problems and according to budget.

It is important to be able to track job information under a number of different subject headings, which is an additional feature found in updated contracting software. Materials, labor, subcontractors, overhead, and equipment are all subject categories that information can be referenced by. It is even possible to use the system to anticipate changes in job orders. When changes are actually made, it is beneficial to have a system that can incorporate these changes and appropriately adjust cost estimates. The flexibility of these new database functions allows a tighter grip on expenses.

In the area of employment, it is equally important to be able to access and evaluate different types of information. Due to the varying requirements of different unions and insurance plans, payroll systems now need to be adaptable to various situations. Some computer systems will enable managers to set up an automated pay rate formula, eliminating the potential for overpayment. Tax rates, deductions, fringe benefits, and garnishments can all be calculated in one database. Different time schedules of payment can also be incorporated into the system. These preset methods are a reliable way to keep closer track of payroll and to keep your processing time down.

Technology saves time and money

With so many customized contracting options available, now is a good time to pursue an updated office system. Although it may seem like a short-term financial setback, the initial investment in more sophisticated office technology can lead to the elimination of many unnecessary expenditures. Organizing records and working from customized programs can make management of jobs and related finances substantially easier.

In addition to the traditional financial statements, you will want industry specific reports to allow you to compare your company's performance to that of others. You will also want to learn the key ratios and the value of those ratios in month-to-month and year-to-year comparisons of your company's performance.

Here are several key ratios and trend indicators. Keep in mind that a change in one of these indicators from one accounting period to another, or a significant difference between your company and the industry average, is what makes the measurement useful. Check these ratios and reports to see which are the best for monitoring your company's performance.

Net profit margin In its simplest form, this is net income divided by sales. Every manager wants to know if his or her business can do better and how the business compares with similar businesses in the industry and in the community. When comparing your company to its past performance, an upward trend in this ratio is certainly desirable.

Inventory turnover ratio This is the cost of goods sold for the accounting period divided by the average of inventory at the beginning and end of the accounting period. This ratio is an excellent indicator of trends in sales volume. Assuming the same price markup on your products, the higher the inventory turnover ratio, the better.

Accounts receivable turnover ratio This is computed by dividing the credit sales for the accounting period by the average of the outstanding accounts receivable at the beginning and the end of the accounting period. These numbers are most useful when compared to industry standards and your own company's past performance. You should also prepare an accounts receivable aging list. This tracks the balances in the 30-day-old, the 60-day, and the 90-day-or-older categories. In general, the older the account receivable, the less likely you are to collect it. This is one set of numbers your banker will want to see when you ask for additional operating funds.

Current ratio This is the total current assets divided by total current debts. This ratio measures your business's ability to pay off all its current obligations (due in one year or less) with your current assets (cash and assets which can be turned into cash in a short time). Current ratios of 2 to 1 are desirable. A ratio of less than one means that your company could be hard pressed to meet obligations such as payroll and current accounts payable.

Quick ratio This is also known as the acid test ratio. This is cash, collectible receivables, and marketable securities divided by current liabilities. This means you would not need to sell inventory to meet current debts. A quick ratio of one or greater should keep your company operating smoothly.

Debt-to-equity ratio The debt-to-equity ratio is of special interest to your creditors. The ratio is computed by dividing the total debt of the company by the total equity (net worth). For example, if the net worth was $100,000 and the debts were $150,000, your debt-to-equity ratio would be 1.5. A healthy ratio would normally be something less than 2.0, and even better at 1.0. You should compare your company to others in your industry.

Breakeven point The breakeven point is probably one of the most watched numbers in any business. This is the point at which the revenue exactly matches costs, the point at which there is no profit and no loss. It can be expressed in dollars or units of product. You may find yourself monitoring the breakeven daily, monthly and yearly. Once you pass the breakeven point, the gross profit on additional sales should all become part of the net profit.

Navigating COVID-19 pandemic requires an accurate financial picture

With the COVID-19 pandemic dominating the news and creating havoc in many sectors of the economy, companies are going to need to be on their "A" game to survive and thrive. Here are five essential tasks to help you do this.

1. Bring financial statements up to date

A clear understanding of your company’s current cash flows, revenues, expenses, assets, and liabilities is critical. For example, in an effort to cut expenses, you might prematurely lay off or furlough workers who are, in fact, essential to the continued success of your business.

2. Create a forecast

After getting a solid grip on current finances, project those numbers by month for the next twelve months. What will revenues and expenses look like in two months? By year end? Of course, the future—especially in light of the current crisis—can seem especially hazy. But as the old saying goes, “Those who fail to plan, plan to fail.”

3. Build a three-scenario sensitivity analysis

Because of the future uncertainty, once you’ve established a baseline forecast, create three different scenarios - a best-case, worst-case and most-likely case scenarios. Then come up with action plans to adjust costs for each scenario.

4. Communicate

Don’t leave customers, suppliers, creditors, and employees in the dark. Communicate with your community frequently. If workers, managers, suppliers and others don’t know what you’re thinking, they may develop erroneous conclusions about the direction of your business. In time, such misunderstandings can lead to unanticipated staff turnover, irritated customers, costly disputes with vendors, and other problems that may take years to correct. Even if the news is uniformly bad, talk to them.

5. Stay in touch with advisors

Attorneys, accountants, insurance brokers, lenders—all these experts can provide independent help to you and your business. Advisors with a fresh set of eyes can analyze your company and offer insights into what their other clients are doing to survive the pandemic. Even better, they are often best positioned to share perspectives about recently-enacted tax law provisions targeting small businesses.

There is no question, that some businesses are going to come out of the pandemic stronger and more vibrant than ever. With proper planning and clear-headed choices—now and in the months ahead—your business can be one of them.

Business Meetings

Are your organizational meetings dull, uninspiring, and inefficient? Do they drain morale, waste time, and focus on the past? Would you like them to be vibrant, engaging, productive, and future-focused? If so, here are some suggestions to supercharge your business meetings.

Assess your current situation. Be honest. Determine what is and isn't working and commit to improvement.

Raise your expectations. Demand more from your sessions. Agendas should be circulated in advance. Attendees should be on time, prepared, and ready to actively participate.

Set ground rules. No Web surfing or crossword puzzles. Keep your sessions disciplined and business-like. But don't forget the benefits of humor to lighten things up and reduce stress.

Have an agenda, but be prepared to leave it. If a stimulating and productive discussion develops, exploit it. Harvest those creative ideas. You can always revisit less important matters.

Challenge your meeting time and formats. If your meetings get in a rut, try something different. Don't underestimate the power of mixing things up.

Know when to quit. If you hit a big breakthrough, consider stopping. End on a high note.

Avoid the trivial. Handle routine updates via memos or e-mail.

Stretch and challenge the team. Your meetings are valuable personal and organizational development opportunities. Treat them that way.

Recognize excellence. Praise and reward performance.

Focus on the positives and keep future-focused. Maintain a positive tone. Discuss your yesterdays only to improve your tomorrows.

Recap and take action. Resolve issues, determine a course of action, and assign action steps. It's important to make recognizable progress.

End on a unifying note. Reinforce the common bond and move forward together.

You can make your business meetings more productive. Commitment and discipline will make it happen.

Hiring decisions

Hiring and training new employees is one of the toughest jobs you face as a manager or business owner. Even when there are plenty of applicants, finding the right one is still time-consuming. Here are some tips for each stage of the process - from identifying your requirements to interviewing candidates.

Identify the job requirements by meeting with the manager or those who will be co-workers of the new hire, and talk through exactly what skills are important to do the job well. For some positions such as line production positions, the job requirements are clear. You may need specific technical skills or certain work experience. In other cases, the important skills required for the job may be less obvious. This is especially true in small companies where employees may have to perform several functions.

Set up a standard application form to capture prior work history and other information. This will make it easier to compare candidates.

When you conduct interviews, let the candidate do much of the talking. Ask free-form questions which make the candidates choose and prioritize exactly what they are going to tell you. Questions such as, "What did you like most about your last job?" can produce revealing answers. Follow with, "Now tell me what you liked least about your last job." Letting candidates do most of the talking will tell you a great deal about their attitudes and priorities.

Structure the interview so the candidates talk about themselves first, and you talk about the job and the company later. Otherwise they're likely to tailor their answers to fit the job you have just described.

Set up a meeting between finalists and their future coworkers. Describe it as a "get to know you" meeting. You'll be surprised what people will discuss in a less formal setting. You might also be surprised at what your other employees will notice about their future co-worker. This is still part of the hiring process, so make sure your employees attending the meeting are aware of questions they can and cannot ask.

Follow up on references, and check police or driving records if appropriate.

Taking the time to find the right employee for a job opening will pay off in the long run. You'll avoid the frustration and expense of excessive employee turnover.

Profit Tips

Consider the following ideas for saving time and money and making your business more profitable.

1. Develop tight controls over billing and collections. To speed up cash flow, reduce the time between shipping your product and sending an invoice. Consider semimonthly instead of monthly billing, and send second notices more quickly.

2. Collect past-due receivables. Almost every business has past-due receivables. Phone the people who owe you the most money, and try to resolve the problem on the spot. If you can't collect the total immediately, try to negotiate a payment schedule, or schedule a follow-up call.

3. Watch your payables. Don't be one of the many businesses that overpay vendors due to sloppy accounts payable procedures. Go over these rules with your accounts payable clerk:

Don't pay vendors twice (or more) for the same invoice.

Don't pay for goods that you return to the vendor; check the invoice to be sure an adjustment has been made.

Keep track of credit memo allowances you receive and subtract them from the next invoice.

Be sure to take discounts for early payments when they apply.

Don't pay for charges that are incorrectly included on the invoice, such as shipping charges the vendor agreed to pay.

4. Keep payroll costs under control. Payroll costs are a major item in most businesses. Perhaps a more efficient plant layout or work schedule would result in reduced labor needs. Consider the use of temporary employees and subcontractors if your business is subject to seasonal variations.

Review employee classifications for workers' compensation insurance. Improperly classified workers can be costing you significant premiums. Review group insurance programs. Solicit bids for the programs every three years. Consider higher deductibles as a means to lower premiums.

5. Watch those numbers. Use your financial statements to give you important management information. Compare inventory turnover (cost of sales divided by average inventory) year by year. If turnover drops, consider it a warning sign and investigate further.

Compare your gross profit margin (sales less cost of products sold) from year to year. A decreasing profit margin may be a danger sign; it should be checked as soon as it is spotted.

If you sell a number of different products, determine their individual gross profit margins and their mix. Give particular attention to low-margin products to see if it's still worthwhile to carry them.

6. Use prior financial statements as a guide to prepare budgets and long-range projections. Actual results should be compared to these projections to highlight areas needing attention before major problems develop.

7. Use your advisors wisely. Keep your accountant, banker, insurance agent, and lawyer informed about your business. These professionals consult regularly with many other businesses and can help you avoid pitfalls in making business decisions.

There are other business management strategies in addition to those mentioned here. If you would like assistance please ask for help.

Internal controls

Internal accounting controls are vital to every business. The coffee shop owner needs to be sure that all sales are rung up and that all cash is deposited in the bank. The plumber needs controls to make sure that all time and material costs are captured and assigned to the right job.

Proper internal controls should be part of everyday procedures in a business. They should work in a way that helps prevent fraud and theft or detects them early. Having an audit or review of your financial statements once a year will not necessarily detect fraud.

Every business should be sure it has set up an adequate system to safeguard all its assets- cash, inventory, equipment, etc.- with periodic reviews to be sure the controls are working.

Use the following checklist to review your internal control procedures. The list is not all-inclusive and is no substitute for a thorough internal control analysis.

Cash

Are cash handling and cash recordkeeping duties segregated?

Are all expenditures authorized and documented?

Do you conduct unannounced checks of petty cash and other cash accounts?

Do you prohibit any single employee from handling a transaction from start to finish?

Do you deposit all receipts intact to the bank daily?

Do you prepare bank reconciliations?

Sales

Do you have proper segregation of duties to preclude an employee from pocketing cash from a sale but never reporting the sale?

If you have too few employees for adequate segregation of responsibilities, do you play an active role in monitoring sales activities?

Accounts Receivable

Do you have different employees responsible for the various duties associated with accounts receivable? (For example: taking the order, shipping the product, customer billing, collecting receivables, depositing collections in the bank.)

Do you account for and physically control returned merchandise?

Do you bill customers promptly?

Is an account receivable aging schedule prepared regularly?

Do customers receive monthly statements?

Inventory

Are inventories physically counted at least annually?

Is central control over inventories maintained?

Are perpetual inventory records maintained?

Is inventory adequately insured?

Do you maintain safeguards against theft and pilferage?

Fixed Assets

Are fixed assets acquired only with proper authorization?

Do you take regular inventory of fixed assets?

Are discrepancies between physical counts and accounting records resolved?

Are fixed assets adequately insured?

Are small tools and supplies properly safeguarded?

Debts

Is there proper authorization for the creation of any debt?

Are liabilities promptly recorded?

Are accounts payable checked for accuracy?

Are bills paid only when the merchandise has actually been received?

Do you take advantage of vendor discounts?

Stock

Are designated officers the only ones allowed to sign stock certificates?

Are stock certificates prenumbered and carefully accounted for?

Corporate minutes

To preserve the legal benefits of incorporation, corporations must hold regular directors' meetings. By keeping clear and appropriate records of these meetings in the form of corporate minutes, firms can save taxes and avoid business problems.

Properly documented transactions are more assured of getting favorable tax treatment. For example, compensation to an employee-stockholder is tax-deductible only if it's necessary and reasonable for business operations. When setting corporate officer compensation, consider recording comparable industry salaries, the officer's scope of responsibility, job qualifications and experience, and current economic conditions. Documenting all these factors will show that the compensation was reasonable and, therefore, tax-deductible.

Other business matters with potential tax consequences should also be carefully recorded in the minutes. These include loans, leases, or other transactions between officers/shareholders and the company; dividends; bonuses; and deferred compensation arrangements. Your goal should be to clearly document the business intent behind each decision.

But you may not want to record everything. Generally, firms should record only final decisions, not the detailed discussions that led to those decisions. If a particular corporate decision is challenged later, you don't want a record of the differing opinions before consensus was reached. This can give fuel to those who want to question how the firm acted.

Keeping complete and accurate minutes of your corporate meetings may seem like a bothersome task, but the time spent now can save your corporation a great deal of money later on. So get with your attorney and bring your corporate minutes up to date.

Disaster planning

Every business is vulnerable to natural disasters such as fires, floods, tornadoes, hurricanes, and earthquakes. However, advance preparation can minimize your exposure in several ways. For example:

Physical assets. Buildings, equipment, furniture, inventories, and supplies should all be protected by adequate property and casualty insurance. Be sure to review each policy for "named perils," which are the disasters covered (such as floods or earthquakes). If your location is prone to one of the "perils" not listed, consider expanding your coverage or buying an additional policy to include it.

Income. Business interruption insurance will reimburse you for lost profits, which will be computed from your financial records. Your policy should allow a realistic time period for recovery, even if it costs a little more.

Records. Missing records can cause a host of problems, including making it hard to quantify your disaster losses. Duplicates of financial statements, customer lists, asset inventories, and other important data should be maintained in a secure off-site location and updated regularly. Important on-site documents should be stored in a fire-proof safe or vault.

Computers. Critical computer data should be duplicated regularly on portable hard drives or other storage media. Updated copies should be stored off-site.

Recovery. Consider buying "extra expense" insurance to cover relocation costs for a quick post-disaster recovery. Also, you should identify alternative sources of operating assets (such as furniture and equipment lessors), and investigate other possible business locations. Look into government disaster relief programs available to businesses in general and your industry in particular.

Motivating employees

Motivate employees to excel

A motivated staff is a productive staff, and without incentives, your best people could leave for more satisfying endeavors. Pay and benefits are important, but they're only the beginning.

To retain your best people, do the following:

Establish reasonable, objective work standards, and base rewards and promotions on those standards.

Communicate your standards clearly, and provide whatever training is needed. Then give your employees the leeway to do their jobs. Focus on results, and let your staff determine the process.

Avoid showing favoritism, particularly if your employees include family or friends.

Encourage your people to offer input about work issues. If their suggestions result in significant improvements, reward them with bonuses or other incentives.

Improve employee evaluation

The annual employee performance review - usually it's dreaded by both supervisor and employee. The employee knows he'll have to hear about those mistakes from months ago, and the supervisor will finally have to discuss those issues he's been avoiding all year. Too often, the result is discomfort and embarrassment all around. Usually both parties fudge a little and are glad that it's over for another year. Too bad, because another chance for open communication and feedback has been lost.

To improve the process, consider holding performance appraisals more frequently, perhaps even quarterly. This can help make the appraisal less of a "special event" and more of a routine exchange of information. It also means your feedback is more directly related to your employee's recent performance, rather than coming months later.

Of course, even quarterly appraisals don't substitute for immediate feedback. If an employee does something wrong, or something good, tell him or her immediately. Point out the problem, make sure the employee acknowledges it, and make clear what you expect in the future. And if it's something good, the employee will appreciate receiving a pat on the back. With immediate feedback, there should never be any surprises at an appraisal.

At the end of every appraisal, summarize the discussion and put the highlights in writing. Make sure your employee gets a copy. Before the next appraisal, ask your employee to review the copy and prepare his thoughts on his most recent performance. Ask him to present his opinions to start the discussion. If there are areas needing improvement, agree on an action plan and put that in writing too. And that might be a two-way street. It could involve your providing training or taking actions to support the employee, so make sure you're living up to the agreement.

Don't limit the appraisal to a scorecard on the employee's achievements. If appropriate, use it to discuss career planning, cross-training, or job enrichment. Solicit ideas from the employee. It can all help turn a judgmental meeting into a constructive exchange of ideas.

Cost-Cutting Ideas

Too often businesses emphasize increasing sales as the only way to boost profits. Cost-cutting, when done selectively and intelligently, can be a faster way to higher profits. "Trimming the fat" should continually be on every business owner's or manager's mind, and a serious cost-cutting review should be conducted every year or two.

Here are nine ways you may be able to cut costs in your business.

1. Look at gross profit margins. If the margin has been deteriorating, find out why. Determine if increases in direct costs can be passed along to the customer. Analyze the product to see if it can be reformulated or redesigned for cost savings.

If you sell a number of different products, determine their individual gross profit margins and their mix. Give particular attention to low-margin products to see if it's still worthwhile to carry them.

2. Payroll costs are a major item in most businesses. Perhaps a more efficient plant layout or automation would result in reduced labor needs. The initial investment may be costly, but more than offset by future payroll savings. Consider the use of temporary employees and subcontractors if your business is subject to seasonal variations.

Payroll-related costs are fertile areas for cost reduction. Fringe benefits can easily amount to 25-50% of direct payroll. Review employee classifications for workers' compensation insurance. Improperly classified workers can be costing you significant premiums. Review group insurance programs. Solicit bids for the programs every three years. Consider higher deductibles as a means to lower premiums.

3. Review telephone and postage costs. Are all telephone calls necessary? Is the telephone being used effectively? Can money be saved by alternate shipping and receiving carriers?

4. Review credit policies. The longer it takes to get paid, the greater the risk of loss. The 80/20 rule states that 80% of your revenues are generated by 20% of your customers. If this is the case, it may be wise to review the other 80% of your customers to see if you can continue to serve them cost-effectively. Otherwise, your time will be better spent soliciting new customers.

5. Analyze inventory levels. Determine if any obsolete inventory can be reworked or sold for salvage.

6. Review fixed assets. Consider disposing of excess machinery and equipment. Determine whether it would be better to buy or lease major assets, especially those subject to rapid technological change and those assets used infrequently.

7. Review purchasing policies and costs of supplies, products, or raw materials. Compare prices of other suppliers. Switch suppliers where appropriate, or renegotiate for better prices with your current suppliers.

8. Enlist the aid of employees by soliciting suggestions on cost reduction. Many companies have generated significant savings using this approach. To encourage participation, consider implementing a bonus program based on a percentage of costs saved. Be wary of "quick fixes" that will have no impact, or worse, prove costly in the long run.

9. Review your expenses on a regular basis; don't wait until a financial crisis develops. Avoid the temptation to make across-the-board cuts, because rarely do all areas of the company contribute equally to its success.

There may be other cost-cutting strategies that would improve the profitability of your business. If you would like to discuss cost-cutting or other business concerns you have, please call.

Starting a business

If you start your own business, improve your chances for success by avoiding these common pitfalls.

Lack of money. You'll probably need capital to start your business, plus a cash reserve until your business becomes self-sufficient. Plan your cash needs carefully and realistically, and provide a generous cushion for setbacks and unexpected expenses.

Consider leasing equipment instead of buying. If you must buy, look into used equipment.

If your business is going to need a start-up bank loan or other financing, obtain the money before you make any major commitments.

People problems. Make sure that you'll be able to hire and pay for the employees you need, especially if your business requires specialized skills.

Evaluate your own business skills honestly and objectively. Do you have both the financial and marketing skills that your business will need, or do you plan to hire someone who does?

If you plan to take partners into your business, take a very close look at your potential partners. Partners don't have to be best friends, but they should like one another. Even more important, they should have mutual trust and respect for the contribution each will make to the business.

It is always a good idea to draw up a partnership agreement so that each partner can examine in advance the pros and cons of the partnership arrangement. Have your tax advisor and your legal advisor review the agreement before the document is signed.

Be sure to line up qualified accounting and legal advisors, as well as any other experts you may need. Good advisors can mean the difference between success and failure, especially in the early days of your business.

Insufficient planning. Research your industry and your competition in depth, and prepare a written business plan covering several years. Write a short mission statement for your company, identify your target market, and state your business plans as specifically as possible.

Nonprofits: internal controls

Each year, employees steal about $40 billion from American businesses. Unfortunately, nonprofit organizations are among these businesses. To avoid internal theft, put these basic control and accounting procedures into effect.

1. Financial monitoring system. Prepare a detailed annual budget to establish expense guidelines. Record and allocate expenses to general ledger accounts in the same manner in which they were budgeted.

2. Segregation of duties. Different people should be given responsibility for authorizing and recording transactions and for maintaining custody of assets. This reduces any one person's opportunity to both perpetrate and conceal errors or irregularities.

3. Conflict of interest policies and ethics statements. Many nonprofits have a conflict of interest policy or ethics statement in place. These policies call for employees and officers to disclose any interests they have in companies doing business with the organization. Any contracts entered into with the related parties should be reviewed and approved by board members and officers not involved in the transactions.

4. Controls over cash receipts. Consider using a bank lock box service to process receipts. In addition, assign someone unrelated to the accounting process to open the mail, restrictively endorse all incoming checks, and prepare a list of the checks received. This list should be compared to deposits made.

When a nonprofit receives numerous cash receipts (such as registration fees at an event or Sunday collections at a church), two or more people should handle and count the cash receipts and certify the total together.

5. Bank statement review and reconciliation. Reviewing and reconciling bank statements will reveal any unusual cash disbursements or evidence of check fraud. Unopened bank statements and correspondence should be sent to someone outside the accounting function to allow an extra set of eyes to review these critical documents.

Establishing adequate internal control procedures is the best deterrent to internal fraud and embezzlement. Please contact us if you would like assistance establishing or reviewing your procedures.

Navigating COVID-19 pandemic requires an accurate financial picture

With the COVID-19 pandemic dominating the news and creating havoc in many sectors of the economy, companies are going to need to be on their "A" game to survive and thrive. Here are five essential tasks to help you do this.

1. Bring financial statements up to date

A clear understanding of your company’s current cash flows, revenues, expenses, assets, and liabilities is critical. For example, in an effort to cut expenses, you might prematurely lay off or furlough workers who are, in fact, essential to the continued success of your business.

2. Create a forecast

After getting a solid grip on current finances, project those numbers by month for the next twelve months. What will revenues and expenses look like in two months? By year end? Of course, the future—especially in light of the current crisis—can seem especially hazy. But as the old saying goes, “Those who fail to plan, plan to fail.”

3. Build a three-scenario sensitivity analysis

Because of the future uncertainty, once you’ve established a baseline forecast, create three different scenarios - a best-case, worst-case and most-likely case scenarios. Then come up with action plans to adjust costs for each scenario.

4. Communicate

Don’t leave customers, suppliers, creditors, and employees in the dark. Communicate with your community frequently. If workers, managers, suppliers and others don’t know what you’re thinking, they may develop erroneous conclusions about the direction of your business. In time, such misunderstandings can lead to unanticipated staff turnover, irritated customers, costly disputes with vendors, and other problems that may take years to correct. Even if the news is uniformly bad, talk to them.

5. Stay in touch with advisors

Attorneys, accountants, insurance brokers, lenders—all these experts can provide independent help to you and your business. Advisors with a fresh set of eyes can analyze your company and offer insights into what their other clients are doing to survive the pandemic. Even better, they are often best positioned to share perspectives about recently-enacted tax law provisions targeting small businesses.

There is no question, that some businesses are going to come out of the pandemic stronger and more vibrant than ever. With proper planning and clear-headed choices—now and in the months ahead—your business can be one of them.

To keep your business solvent through the COVID-19 pandemic, stay focused on the 3 rules of cash:

1) Now versus later. Cash now is better than cash later.

Decreasing cash flow for many of your customers means you’ll likely have trouble collecting 100% of your accounts receivable in the short term. But don’t overlook clients whose cash flow or revenue has yet to be dramatically affected by the pandemic or who have a big enough emergency fund to pay most of their bills for several months.

What to do now: Be compassionate, but don’t stop your A/R collection efforts. You need as much cash as possible now, not later. You likely have some customers who can still pay your invoices. So actively communicate with key customers and consider offering slightly better terms to receive payments earlier than normal. Also look to suppliers to extend payment terms with them. By working together, you can find unlikely partners to help you both through this hardship.

2) More versus less. More cash is better than less cash.

It is important to build your cash reserves now more than ever. While difficult after the pandemic hits your business, it is not impossible. Review every asset on your balance sheet – accounts receivable, prepaid expenses, fixed assets, and inventory. Determine what it would take to convert each of them to cash.

What to do now: Consider leveraging these assets with your bank as a line of credit. Also talk to your lenders about the possibility to postpone several months of loan payments. Perhaps your bank will take interest only payments. Ask suppliers who will give you discounts for paying on time during the pandemic. Get involved in your bill paying process and pay bills on time, never early. And think long-term, any ideas to build up your cash now will only help later.

3) NEVER zero. Don’t run out of cash.

According to a 2019 survey by The Service Corps of Retired Executives, 82% of small businesses that eventually fail do so because they run out of money. So it is critical to constantly forecast your business’s worst-case scenario and figure out how much cash you need to keep your doors open. Then take steps to protect your business before you run out of cash.

What to do now: Start by prioritizing your business’s expenses. Know who you have to pay and who can be delayed. Identify expenses you can cut and in what order they should be cut. Use your forecast as an early warning system to determine when to start these cuts, if you haven't already done so.

These simple cash principals are timeless, but the pandemic reminds all businesses that you need to have a sharp focus on your cash position. By keeping these ideas top of mind, you may be able to meet your goal: Have enough cash to keep your doors open and stay solvent.

Employee Theft

Employee theft happens frequently enough for it to be a concern of every business. It makes no difference whether your business is a one-employee medical office or a forty-employee retail outlet. Absentee business owners should be even more alert to the problem of employee theft.

Busy managers find it easy to turn the recordkeeping over to a qualified employee. Don't do so without proper controls and constant review.

Some examples of employee theft

Consider these examples of the methods by which employees have been known to steal from their employers:

Opening a checking account in a nearby community under the same name as the employer company.

Overpaying the payroll taxes or large suppliers and asking for refunds which are then deposited in the employee's new company account.

Convincing the employer that the independent accountant is an expensive luxury which the company can do without now that the employee is available to do financial statements.

Soliciting the help of a supplier's employee, then overpaying the supplier and sharing the overpayment.

Opening a checking account with the same name as the employer's major suppliers and then paying invoices twice. The first payment is sent to the supplier, and the second is deposited in the employee's "extra supplier account."

Some small businesses have paid a high price to learn about employee theft. Don't be lulled into thinking it could never happen in your business.

Learn to spot employee theft

Whether your business deals in products or services and whether you have one employee or many, you should be aware of the signs of employee fraud or embezzlement.

Fraud most often develops over a period of time and will sometimes involve employees with outstanding track records. What would cause a long-term, trusted employee to go bad? Watch for employees who are under new pressures such as:

Unusually large medical bills

Living beyond their financial means

Excessive use of alcohol or drugs

Large investment losses

Excessive gambling

Also, watch for a growing disregard for the company in favor of personal gain.

Identify problem areas

What circumstances in your company make fraud or embezzlement easy? Small companies find it especially hard to segregate duties of employees. That can increase the chance of losses to the company. Consider these problem areas:

Inadequate accounting records.

Too many related transactions handled by the same person.

Too close a relationship between your staff and specific staff members of your suppliers.

An employee who takes very brief vacations or no vacations at all.

It is not necessary that you become paranoid about employee theft. It is wise, however, to have a system set up that makes fraud less likely.

Take steps to prevent employee theft

Many businesses have too few employees to provide for proper segregation of the duties. If one employee is allowed to handle too many functions, such as paying bills, collecting receivables, preparing payroll reports, handling petty cash, and making bank deposits, the company is wide open to fraud.

If you're a small business owner, you should stay close enough to the business transactions to be able to spot unusual problems with the receivables, payables, refunds, etc. Ask questions about accounts receivable balances from time to time. Insist on being the first one to open the bank statement. This gives you the opportunity to spot unusual checks, odd vendor names, etc.

Open all incoming mail from customers and vendors. This allows you to see customer complaints and adjustments to account balances. It also allows you to view anything out of the ordinary.

Finally, be curious. Conducting random spot checks in different areas of the business will let employees know you are involved. If done correctly, employees will see this activity as caring and valuing what they do and not that you do not trust them.

Many small businesses have their Payroll Protection Program Loan (PPP Loans) applications already approved by their bank and the Small Business Association (SBA). However, there are just as many small businesses that are confused, frustrated, and stuck! Here are some ideas to help:

Background

As part of the coronavirus stimulus package, the federal government is offering loans up to 2.5 times your monthly payroll and related expenses in a fast track loan. If you retain your employees, much of the loan can be forgiven. Unfortunately, the high demand and rushed process to set up the program is creating havoc.

Some ideas to unplug your process

Remove the application plug. If you don’t have the required information, make collecting it a priority and get it done! Here are common things you need:

2019 quarterly payroll 941 reports or the equivalent

2019 financials proving payroll, and other core expenses

2019 1099 filings and related form 1096

Bank provided excel or similar file that calculates the loan limit and # of full time employees (FTE)

Remember this could be FREE money! Make getting information a priority …TODAY!!

Unplug the bank bottleneck. Is your bank the hold up? Here are the common problems.

Your bank is not an approved SBA lender

Your bank is focusing on large customers first

You don’t have a business banker that knows you

You don’t have an account at the bank

Your bank is unsure about what they will require

Your bank is too small

Your action:

1st: Understand your bank’s status. What problem is holding up your request?

2nd: Determine if the problem can be immediately solved. If so, stay on it and keep communicating with your lender until they confirm your application has been submitted to the SBA.

3rd: If not solved OR you get the run around, MOVE! Look for a bank or former bank that is using this situation to build their new customer base. The U.S. Treasury has also approved non-banks to participate in the lending program, such as Cross River, Divvy, Quickbooks Capital and Ready Capital. If you can't find a bank to take your application, consider these non-bank options.

4th: Don’t confuse the SBA by having multiple loan requests. It could knock you out, so keep your efforts coordinated.

I don’t think my business will benefit. Too many small businesses don’t think the PPP loan will work for them because they don’t think they will have enough future payroll to translate the loan into repayment forgiveness. This is a big mistake. Here is what to do now:

Apply anyway. You are not committed to the loan until you are approved and sign loan papers. So the no go loan decision should be made AFTER you apply, not before.

Do the math. Remember there are no costs to apply for this loan. Your cost will be the deferred interest until payments are required. Remember, you can repay what you don’t use without penalty. So, if your interest cost is lower than the amount of loan forgiveness, it might still provide your business with free funds. Plus if you re-hire employees by the end of June you can still benefit.

It’s not too late attitude. The worst bottleneck of all is thinking it is too late to apply. Yes, it is possible that the funds will be used up if you come late to the party. But don’t give up until the funds are gone. And even then, get your application approved by a bank. Who knows, if you miss this round, you will be at the head of the line if additional funds are made available.

IRS has broad authority to seize bank accounts

If someone manipulates cash transactions to avoid required bank reporting to the Treasury Department, they are using the technique of structuring their transactions. Knowing what is reported and the power given to the IRS to seize related assets can be important.

Background

In an effort to identify questionable illegal transactions, financial institutions are required to report any monetary amounts over $10,000 to the Treasury Department. If someone knowingly structures their transactions to avoid this reporting, the Bank Secrecy Act allows the IRS to legally seize these assets. The old rules provide fairly broad discretion in this area and many innocent taxpayers not only had assets frozen, but found it virtually impossible to get their funds returned to them.

Example

Vocatura’s Bakery in Norwich, CT did most of their bakery trade in cash. To help their local banker not have to fill out required federal forms when they deposited $10,000 or more, they tried to make lower deposits. One day the IRS showed up at their business and seized over $65,000 of their deposits suspecting illegal activity through use of this structuring activity. Using civil forfeiture rules, the IRS permanently seized this small business’ assets. Three years and lots of legal fighting later, the business finally got their money back. Here is a link to their story; IRS Returns Bakery’s Money After 3 Years.

What you should know

Be aware of the rule. As more small businesses try to avoid the high charges associated with credit cards, they must also be aware of the Bank Secrecy Act rules. Establish a good relationship with your banker and have them understand your business to help create a potential ally if needed. Do not knowingly try to avoid the $10,000 reporting rule.

Consistent numbers. Create a regular routine of sales deposits. Do not save up deposits and then deposit similar amounts. This could raise red flags.

The rules are changing. In a recent change, the IRS will still pursue structuring violations, but will try to more closely align action taken with knowledge of criminal activity. The government must show that the taxpayer knows of the rules and knowingly structures their transactions to avoid the reporting.

There are bad guys. Money laundering is a big problem. Whether it be drug money, terrorist fundraising, bootlegging, or other illegal activity, excess cash deposits will raise suspicions. So while the IRS uses their tools to catch these crooks, they are making an active attempt to keep innocent taxpayers out of their net.

Partnership Decisions

Planning to start a business partnership with a friend? Prudence demands looking at the pitfalls - as well as the potential strengths - of such relationships. Here are a few questions to consider.

What will my friend contribute to the business? Does he or she have strengths that will clearly enhance the business - abilities, knowledge, or resources that you don't possess or aren't willing to acquire by other means? Say, for example, you're a crackerjack salesman, but not too good with numbers. If your friend loves details and is clever with records, the partnership may make sense. If, on the other hand, your pal really can't offer something that would round out the business or make it more profitable, you might want to consider partnering with someone else.

Are you willing to lose the friendship? This is a tough question, but one that's critical to consider. After all, you and your friend will be working together, day in and day out, to make the business succeed. Such relationships can bring out the best - and worst - in people. If maintaining your friendship is one of your highest priorities, partnering with someone else may be a better choice.

What's expected from each partner? Developing a profitable business is hard and often unrewarding work. You and any potential business partner should honestly discuss expected work hours, contributions, and responsibilities. Resentment can creep into any business relationship when partners feel that workloads and rewards aren't fairly distributed.

Can you communicate effectively? Like a good marriage, a long-term business partnership takes honest communication to succeed. Ask yourself, for example, whether you can handle constructive criticism from your friend/business partner. Even the closest business partners don't always see eye to eye, so it's important to take an honest look at how you both handle disagreements. Will you work through difficulties for the firm's sake, or bury your head in the sand and hope for the best? Answering this question is crucial to the success of your partnership.

Friends can be great business partners, but it's wise to proceed with caution.

Buying a Business

If you are considering buying an existing business, take time to investigate the business thoroughly.

Don't be too eager. Many people feel they should get into the business and then worry about the problems as they develop. An investigation of all the problem areas may indicate that you shouldn't buy that particular business in the first place.

Make sure that the price is not too high. Many small businesses are not profitable enough to give an acceptable return on both the buyer's time and money. If the buyer wants $90,000 per year for working 60 to 70 hours per week and wants a 12 percent return on his $100,000 investment, the business must net $102,000. Analyze the past performance of the business you're thinking of buying to be sure it can satisfy your requirements.

If you are willing to take a reduced return on your time and money for the sake of self-employment, do so with your eyes open - know the facts.

Ask questions. Most buyers don't ask enough questions or require enough financial history to make an informed decision. Any business worth buying should have kept adequate records. The inability or the unwillingness to provide the proper financial information is an indication that the business may be overpriced.

The need for professional assistance when buying a business cannot be overemphasized.

Home Office

Your home. Your office. Are they one and the same? If so, you may be able to take a home-office deduction that can save income and self-employment taxes.

The deduction gives you the opportunity to claim expenses related to the business use of your home, such as utilities, repairs, and insurance. Meet the requirements, and you're eligible whether you rent or own your home.

Taxpayers who qualify may use a simplified deduction calculated at $5 a square foot for up to 300 square feet of an area in a home that is used regularly and exclusively for business. The deduction is capped at $1,500 a year.

Here are two questions that can help you decide if you qualify for a home-office deduction.

Do you pass the regular and exclusive business use test? The rules say you have to use your home office on a continuing basis, and that it has to be dedicated to your business.

While you're not required to have a separate room, personal or family use of your work area means no deduction.

What business activities do you conduct in your office? Meeting customers or clients in your home office qualifies as business use.

Taking care of management and administrative tasks such as writing reports and billing clients also qualifies, as long as you don't have another office that you use primarily for the same activities.

If your office is separate from your home and you meet the regular and exclusive business use test, you can deduct related business expenses - even if you don't meet clients or perform management activities there.

Special rules apply to work-at-home employees and daycare facilities. In addition, exceptions apply when you use your home for storing inventory or product samples. Please call us if you would like more information.

Hobby or Business?

If you're like some taxpayers, you have a pastime that brings in cash but produces a loss after you deduct your expenses. Example: an amateur artist who spends money for paint and canvas but who only occasionally sells a painting. If you could deduct "hobby" losses on your tax return, you could reduce taxes owed on your salary or other income.

Actually, you can deduct your losses, but only if you establish that you are carrying on your pastime with the motive of making a profit.

If you can't prove you have a profit motive, the IRS views your activity as a hobby, not as a business. Expenses of a hobby can be deducted only up to the amount of income from the hobby. You can't deduct hobby losses from your salary or other income.

You can help establish your profit motive in one of two ways. If you show a profit in three out of five years (two out of seven years for horse activities), the IRS will presume you've got a business and not a hobby. However, you can't simply manipulate deductions and income to create profit years.

The other way to demonstrate that you're operating with a profit motive is to conduct your activity in a business-like manner. Get advice from an accountant to assist with keeping accurate books and records. Maintain a separate checking account, advertise your services or products, and get a business phone listing. If you have losses, try to turn your business around by taking classes, consulting with experts, and changing your methods of operation. Be sure you spend enough time at your activity to demonstrate that you're serious about profits. Remember, you don't have to earn a profit, but you must try to do so. If you don't have profits in three out of five years, the burden of proof will be on you to show the IRS that this activity is a business and not a hobby.

If you want to turn your hobby into a business, contact us! We can assist you with the IRS requirements.

One of the more unpleasant surprises that can hit a taxpayer occurs when you sell personal property, rental property or assets from your small business. This tax surprise is often associated with depreciation recapture rules.

Defined

Depreciation recapture refers to reducing the cost of an asset sold by prior period’s depreciation expense to determine whether taxes are owed on the sale of an asset and to determine the type of tax that must be paid on the sale of the asset.

When you have business property with a useful life of over one year, you often have the ability to deduct part of the cost of that property over the estimated useful life (recovery period) of that property. The most common users of these depreciation rules are small businesses and rental property owners.

When the asset is later sold the IRS wants you to determine if any tax is due as either ordinary income or as a capital gain.

A simplified example: Assume you run a small business out of your home. You purchase a new computer used 100% by your small business. The cost of the computer is $3,500. IRS rules determine you may recover the cost of this type of asset over five years. So each year you can deduct $700 as depreciation (1/5 of the cost of the computer assuming straight-line depreciation is used) on your business tax return.

Next assume the computer was sold at the end of year three for $2,000. This will result in a taxable event that includes depreciation recapture.

This example is simplified for clarity. Actual depreciation methods used will vary from this example. The ordinary income must be claimed on your tax return and is caused because of the depreciation taken in prior years. This illustrates the recapture of prior period depreciation.

When does it occur?

Look for the possibility of depreciation recapture when:

You sell rental property

You sell your home that you have used as a home office

You sell any property used within a small business

Warning: Understand the allowed or allowable trap

One of the land mines surrounding depreciation recapture rules is the concept of “allowed or allowable.” When calculating whether you owe deprecation recapture related taxes, the tax code requires that you adjust for depreciation whether or not you actually took the depreciation expense in prior years. So if you have assets that should be depreciated on your tax return, but are not, please call for a review of your situation.

What you should know

First and foremost, many unsuspecting landlords forget that years of depreciation on their property can impact their tax obligation when the property is sold. This can occur even if the sales price is less than what they paid for the property.

Secondly, the tax code applies different tax rates on ordinary income versus depreciation recapture versus long-term capital gains. The maximum tax rates on each are noted here:

Personal income tax: 37%

Depreciation recapture: 25.0%

Long-term capital gains: 20.0%

(excludes the impact of possible Affordable Care Act surtax)

Unfortunately, the tax laws in this area are fairly complex. The amount due can be impacted by;

Different depreciation methods

Use of Section 179 and bonus depreciation rules

Improvements made to property

Like-kind exchange rules

Asset class designations

Thankfully, you do not need to understand the complexities surrounding depreciation recapture rules. You simply need to know they exist and ask for assistance.

Business succession plans

How many family businesses can you name that have been around for many generations? Have you ever wondered what they have in common? Most businesses that continue to prosper as they pass from generation to generation have a common denominator - a business succession plan.

Regardless of what you may have heard, recent estate tax law changes haven't made business succession planning obsolete.

A succession plan allows your business to continue if you leave the business for any reason: your retirement, disability, death, or just your decision to move on.

Here are some basic steps you should take to help ensure the survival of your business.

Determine who will succeed you. Will it be family members, your business partners, your employees, or an outside buyer? Each choice requires a different plan. For example, if you are not the sole business owner, a buy-sell agreement may allow a smooth transition when a co-owner leaves.

Prepare a timeline. Barring death or disability, when and how do you plan to exit the business? Well in advance of your planned departure, equip your successors with the skills and experience necessary to take over.

Maintain complete and accurate financial records. Your company's financial history is essential to preparing a fair business valuation. An accurate valuation is important for several reasons. First, you deserve a fair price for your business. Second, a buyer and his creditors will want evidence that the purchase price is fair. Finally, your company's valuation may have to withstand IRS scrutiny.

Create a financing plan. Your plan might include life and disability insurance, an employee stock ownership plan, or a stock redemption plan. Whatever your plan, it should take your future financial needs into account and provide a method for your successors to meet those needs.

Surround yourself with a team of advisors. Your accountant, your attorney, your banker, and your insurance agent can each have an important role to play in completing your plan.

Business succession is a process, not an event. Failure to plan for an orderly transition can result in financial losses or even the loss of your business. A well-designed plan, on the other hand, can protect your family, your employees, your co-owners, and your customers.

Business Valuations

Do you know what your business is worth? If you're like many business owners, the answer to this question is probably "no." That's because business valuations can be both time-consuming and costly. Even so, there are many instances when it's important to determine the value of your company.

Selling. Anyone considering selling a business should first have it valued. By doing so, you'll help ensure that you don't sell your company for less than it's worth. Plus, knowing its value helps prevent you from setting the price, and your expectations, too high.

The same holds true if you're selling a division, territory, or product line. It's not uncommon to have a valuation prepared for just a segment of your business.

Partners. Looking to bring new partners into your business? Having your business valued by a third party is a fair way to set the buy-in price.

If you already have partners in your business, you should have a "buy-sell" agreement in place, detailing what happens if one of the owners dies, becomes disabled, retires, or wants to be bought out. Generally, buy-sell agreements dictate when and how your business needs to be valued.

Estate planning. Business valuations are also a key ingredient in your succession planning. Without knowing the fair value of your business, how can you ensure that there will be enough liquidity to allow for a smooth transition to your successors? Plus, if you're gifting shares of your company to your family members, charities, or other people or organizations, being able to substantiate the value of the shares given is a must.

Family business

Tax and business planning is important for the success of any organization, but especially for the family-owned enterprise. Here are some important questions that owners of family businesses need to address.

1. Do you have a plan? Without a plan, your business has no direction and possibly no future. You can be sure your strong competitors have written plans. Write a business plan that includes both short and long-range goals. Include specific goals such as profit, growth, and market-share targets. Plans for conflict resolution and transition should also be included.

2. Who's running the store - family, outsiders, or employees? When several family members participate in the company, an organization chart should be drawn to clearly show lines of authority. Promotions should be based on a clear, fully understood set of guidelines.

3. Should the legal form of the organization be changed? Whether your business is a sole proprietorship, a partnership, a regular corporation, an Scorporation, or a limited liability company, you should review your business form periodically to see if it's still the best choice for your business. The legal form under which you operate can make a difference in the taxes you pay, the costs of doing business, and the amount of paperwork and red tape you'll have.

4. Have you reviewed your retirement and fringe benefit plans? The types of plans available depend on your business form. Besides being an excellent tax planning tool, such plans can be effective in motivating and retaining employees.

5. Are formalities observed? Family members occasionally overlook the fact that business assets are not personal assets. Company loans to family members need to be documented. Shareholder or employee use of corporate assets, such as automobiles, may have income tax consequences. Get advice so you structure transactions properly.

6. Who's next in line? Many family businesses are lucky enough to have a very strong member at the helm. But that person won't live forever.

The survival of any family business depends on how wisely one generation passes ownership to the next. The more family members, the more complex the situation is likely to become.

Facts show that only 30 percent of family-owned businesses survive to the second generation, and only 13 percent survive to a third generation. Careful planning while you're still at the helm may prevent the demise of your business.

Business incorporation

If you're a sole proprietor, you have probably wondered at some point whether you'd be better off if you incorporated your business. Here are some facts for you to consider.

The single biggest benefit of incorporating a business is limiting an owner's liability. In theory, a stockholder in a corporation risks only his or her investment in the corporation stock. A lawsuit against the company generally cannot be satisfied by attaching the stockholder's personal assets. In practice, most small corporation stockholders must personally guarantee bank loans for their corporations. Thus, if the corporation fails, the stockholder's personal assets are at risk. In addition, where personal services are involved, the individual performing the services may be personally liable for his or her actions even though the business is incorporated.

The second advantage of operating as a corporation is that it may be easier to raise capital because the business can do so by issuing stock and selling bonds.

A third advantage is that ownership interest in a corporation is easier to transfer than in a sole proprietorship.

A corporation files its own tax return and pays its own income tax. Therein lies the major drawback to the corporate form: business profits may be taxed twice - once at the corporate level and again at the shareholder level when paid out as dividends or liquidating distributions. Double taxation can generally be avoided by electing S corporation or LLC status.

The corporate form does allow for more fringe benefits that are deductible by the corporation and tax-free to employees, including an owner-employee.

No business owner should incorporate without carefully considering the pros and cons of doing so.

Small business; going green

We see, hear, and read every day that the world is becoming more environmentally conscious and taking steps to "go green." While many of these may be out of reach for smaller businesses, there are several things that even small businesses can do to head toward going green.

Recycling. Most communities these days provide recycling centers. Therefore, businesses should find it fairly easy to provide internal receptacles and to transport or purchase recycling pick-up services for such recyclables as paper (including shredded), newspapers and magazines, aluminum cans, and plastic bottles.

Installing energy-efficient light bulbs. Compact fluorescent light bulbs are more energy-efficient than incandescent bulbs, offering a greener alternative. Also, watch for the next generation of commercial-use energy-efficient LED (light-emitting diode) bulbs. While LED pricing currently is rather high, LED bulbs typically use one-tenth the power of traditional light bulbs and last up to 20 times longer. Also, as volumes increase, prices should fall.

Going smoke-free (or tobacco-free). One way for businesses to create a cleaner, healthier environment is to go smoke-free. This might involve eliminating smoking indoors, while providing limited smoking areas outside; or a business might go totally smoke-free, prohibiting smoking anywhere on the premises - indoors or outdoors. Further, a business might offer its employees complimentary or discounted programs to assist them in their efforts to quit smoking.

Providing favored parking spaces. Businesses might consider offering special parking spaces for hybrid vehicles and transportation forms that use lesser amounts of fuel (e.g., motorcycles, scooters). The provision of easily accessible bicycle racks also is important.

Going "paperless." While most would agree that going totally paperless probably is unachievable, many companies already have begun to make progress in decreasing the amount of paper they use. To reduce paper, consider offering electronic portals to clients or utilizing other electronic means of sharing and working with data.

Offering "green" shopping bags. As you shop these days, you will see that many stores are selling reusable shopping bags. Consider distributing to your customers, clients, and prospects a green shopping bag with your business logo. You take a step toward environmental consciousness, while garnering some publicity at the same time.

These are just a few of the steps a small business can take toward "going green." The benefit to your business includes energy cost savings and maybe a bit of positive publicity, plus making a contribution to a healthier environment.

Franchises

Of the thousands of new businesses created every day in the United States, many are franchise outlets. If you've ever thought about buying a franchise, here are some facts worth considering.

A franchise gives the buyer the right to use a trademarked name in selling a product or service. The purchase of a franchise includes training, location assistance, inventory to get started, and advertising support. In addition, most franchises have a proven business model and a record of success.

There are costs connected with buying a franchise beyond the usual business expenses of payroll, rent, etc.

First, you must pay an initial franchise fee which can range from thousands to hundreds of thousands of dollars.

Second, you must also pay an ongoing royalty to the franchiser, which is typically a certain percent of sales.

Third, there are often separate payments and fees required to may pay for advertising campaigns and administrative projects.

To research a franchise opportunity, start by looking over its Uniform Franchise Offering Circular. Details to review in addition to fees are territory size, training offered, competition, franchisee turnover, and termination rights. Next, interview as many current franchise operators as possible. Are they profitable? How long did it take to become profitable? Are they satisfied with the support they receive from the franchiser?

Finally, ask yourself some crucial questions. Are you really interested in the franchised product or service? Will you be able to devote the necessary time to the business? Do you have the financial resources to get the business up and running? Are the franchise name, training, and support worth the fees? If your answers are positive, you may have found the right route for starting your own business.

Contractors: reduce theft

According to the Associated General Contractors of America, theft losses among its members have reached almost a billion dollars annually.

Try the following to stem losses on your sites:

Install secure fencing around the entire work area. Consider adding a chain link fence in the more sensitive areas. If authorities allow, add barbed wire to the top to discourage people from climbing.

Put employee parking outside the job site. This will reduce the theft of tools and equipment that fit into the trunk of a car.

Make sure the site is well-lit. Bright lighting deters theft and vandalism and allows neighbors and police to observe any unusual activity on the premises.

Install alarm systems. An alarm that detects motion and activates additional lighting may be all that's required.

Mark equipment with ID numbers. Mark equipment in two places, one that's apparent and one that's hidden. Record the numbers on an inventory control list.

Require signatures for all deliveries. One person should be in charge of the log for all arrivals to the job site. Critical or expensive materials should not be stored any longer than necessary.

Inform authorities before starting a project. Give police and fire departments details of your project, including the estimated completion date and work hours. Provide a list of key personnel and their phone numbers for emergencies.

Succession planning

Succession planning can be one of the most difficult issues faced by a family-owned business. As a business owner nearing retirement, how do you transfer leadership (and perhaps ownership) and keep the business running smoothly? Unfortunately, many businesses don't survive the transition to the next generation.

As with most business problems, good planning is the key. You'll need to consider four sets of issues:

Choice of a successor. Often the first preference is for a family member to take over. But the obvious family members may lack the skills, temperament, or interest to run the business. Sometimes several family members are interested in the position, and family squabbles or rivalries can interfere. That's why an outsider is often chosen as an independent manager.

Transfer of ownership. Whether or not a family member takes over the top position, you'll still eventually need to transfer ownership to the next generation. That involves questions of estate planning, taxation, and form of business. This is an area where you'll need sound legal and accounting advice.

Liquidity. Often a transfer of ownership involves issues of liquidity and funding, especially if it happens upon the death or disability of the founder. You'll need to consider key man life insurance and disability insurance, as well as tax and estate planning issues.

Personal issues. In a family-owned business, it is often very difficult for the founder to retire and hand over his or her "baby" to someone else. And if a family member is the successor, the potential for interpersonal conflict increases. It's essential to confront and discuss this issue beforehand. It can be useful to have one of your professional advisors mediate these discussions.

One factor is common to all business successions. It's never too soon to start the planning. Don't delay until retirement is imminent. This is a mistake for two reasons. First, your initial succession attempt may not work out. Second, a sudden accident or illness may force you to change leadership earlier than expected.

If you're facing this situation, please plan now to do something about it.

Solo 401(k) plans

Many business owners have considered 401(k) plans to be retirement plans for large companies. Though there is no requirement to have a certain number of employees in order to establish a 401(k) plan, the high costs of setting up and administering a 401(k) have made these plans unappealing to small businesses. Now, one-person businesses are discovering that 401(k) plans are worth another look.

How does a 401(k) plan for a one-person business differ from a 401(k) plan for a large company? Unlike a traditional 401(k), these plans are designed specifically for one-owner businesses where the owner is also the only employee. They are referred to by various names: uni-401(k), one-man 401(k), mini-401(k), and solo 401(k) plans. Administratively, these plans are less complex, less burdensome, and less costly to manage than traditional 401(k)s.

What makes solo 401(k) plans simpler? Because a solo 401(k) covers only one person - the business owner who is also the only employee - the complex 401(k) rules on coverage and nondiscrimination do not come into play.

Are lower costs and simpler administration the main benefits of a solo 401(k) plan? No. Depending on your earnings, you may be able to contribute more to a 401(k) than to another plan. Larger contributions may be possible because both the owner-employee and the company can make contributions for the benefit of the business owner. Since they allow higher contributions than other plans, such as SIMPLEs and SEPs, 401(k)s give you more opportunity to cut your taxes while building a bigger retirement nest egg.

How much can an individual put into a solo 401(k) plan? You can elect to contribute up to 100 percent of your earnings to the plan, subject to a specified annual limit. If you're 50 or older, you're allowed to make additional "catch-up" contributions.

Are these contributions tax-deductible?These contributions are actually called "elective deferrals," and they are excluded from your taxable income rather than being deducted from it. Your contributions are subject to social security tax, but they will not be subject to income tax until you withdraw money from the account.

What can the business contribute to the plan? Your business can make tax-deductible contributions to your account ? up to 25 percent of your wages, or 20 percent of net self-employment earnings. There is an overall dollar limit for the combined contributions you and the business can make each year.

Does the business have to be a corporation in order to have a 401(k) plan? No. Both incorporated and unincorporated businesses can set up a solo 401(k) plan. Even if you're self-employed, you're still considered an employee of the business.

Can you borrow from a solo 401(k)? Yes. That's another benefit to an individual 401(k); you have access to the money you've invested. While borrowing against SEPs or SIMPLEs is never allowed, 401(k) plans allow you to borrow as much as 50% of the balance in your account, up to $50,000.

If you have retirement money in other plans, can it be rolled over into your solo 401(k) plan? Yes, you have the option of rolling over money from other eligible retirement accounts into your 401(k) account. Doing so may make it easier for you to track investment returns.

Are there any disadvantages to a solo 401(k) plan? Yes. Perhaps the main problem is that if your business grows and you hire employees, your 401(k) plan must also cover them. Your plan then is subject to all the complex rules and costly administration of a regular 401(k) plan. Because nondiscrimination rules would no longer allow you to make large contributions just for yourself, the main benefit of having a solo 401(k) would be lost. In certain situations, a solo 401(k) plan is an excellent way to cut current income taxes while putting away large amounts for a business owner's retirement. Before making any decisions, investigate not only a solo 401(k) but also other retirement plan options available to you.

A U.S. Supreme Court ruling involving the state of South Dakota vs Wayfair (an online furniture retailer) opens the door for states to impose sales taxes on online retailers located outside their borders.

This will have wide-reaching effects on small businesses and consumers. Here’s what you need to know:

Who benefits?

State governments. States will be able to collect hundreds of millions of additional tax revenue from purchases made at Amazon, Overstock and other online retailers.

Brick-and-mortar stores. Physical stores that are collecting sales taxes will no longer be at a price disadvantage with online competition that hadn't been.

Who loses?

Online businesses. Not only will online sellers likely have to raise their effective prices to pay the state taxes, they now may have to contend with a complex patchwork of state and local tax jurisdictions.

Consumers. Consumers that had been enjoying lower taxes on online purchases are likely to have to pay more after this ruling.

Small businesses. Trying to keep track of 50 different sets of sales tax rules and complying with this ever-changing rate environment will be difficult.

Some background

The federal standard in place since the 1990s is that states can only impose tax collection on businesses that have a physical presence within their borders. Many states try to get around this by imposing “use taxes” on consumers who make purchases from out-of-state retailers. But use taxes collection is hard to enforce and are widely ignored by taxpayers.

In the recent Supreme Court ruling, South Dakota successfully challenged the physical presence standard in favor of “economic presence,” allowing states to require businesses to collect these taxes even if they are located elsewhere.

The small business dilemma

This ruling may be concerning to small business owners who have customers outside their home state. The risk is that small businesses may now have to register and comply with complex tax filings in all 50 states, and maybe even thousands of local jurisdictions as well. But keep in mind that:

The ruling is based on South Dakota’s simplified tax structure, which collects only at the state level, avoiding the complexity of local tax compliance.

South Dakota has a compliance threshold that exempts small businesses with less than either $100,000 in sales or 200 transactions of products or services delivered into the state.

Further events may follow:

State governments will have to put their collection systems in place, which will take time. Some will first need to pass new laws authorizing the taxation of online transactions using the economic versus physical presence standard.

Congress may feel compelled to act with legislation simplifying the tax jurisdiction of state and local governments.

There’s no doubt the Supreme Court ruling has caused the ground to shift for any businesses selling outside their state, and the total effect of the changes is still unknown. Call if you have any questions about this or other tax matters.

The Federal Reserve announced a Main Street New Loan Facility among several actions aimed at pumping in another $2.3 trillion of financing into U.S. businesses.

Here are the highlights of two lending programs aimed at small businesses:

1. Main Street New Loan Facility (MSNLF)

Eligibility

Businesses with up to 10,000 employees or $2.5 billion in 2019 annual revenues

The business must be created or organized in the United States with a majority of its employees based in the United States

Eligible borrowers that participate in the program may not also participate in the Main Street Expanded Loan Facility lending option (see below)

Lending limit

The minimum loan size is $1 million. The maximum loan size is the lesser of $25 million or a more complicated calculation using several of the business’s financial indicators

Loan payments can be deferred for one year

The loan must be repaid within 4 years

2. Main Street Expanded Loan Facility (MSELF)

The MSELF is essentially the same loan program as the MSNLF except for the maximum amount a business can borrow. Businesses in the MSELF program can borrow up to the lesser of $150 million or a more complicated calculation using several of the business’s financial indicators.

The application process is under development

The Federal Reserve is finalizing details of the program, which will be administered through banks and other lending institutions. Stay in touch with your banker to find out how to apply once the Fed makes the application form available.