Choosing Your Accounting Method Under New Tax Laws

Businesses today must take a closer look at their accounting methods. Since the passage of new tax laws, with changes to thresholds for choosing accounting methods, all companies need to take an inward look at their current accounting methods to determine if they are the most beneficial permissible method applicable. It is important to work closely with accounting professionals here — making changes as well as decisions on how accounting methods need to be updated.

What Is Changing?
The Tax Cuts and Jobs Act put into place new laws for a variety of sectors. One key area impacted that many business owners do not immediately consider is accounting. The overall method of accounting and the type of business can be key factors to consider. This tax reform set out to support small business owners and offer key ways to reduce some taxes. It also put into place provisions and accounting method reform with a focus on keeping things simple. Outdated methods of accounting minimized the amount of information shared, but they tend to overcomplicate methods. This is especially true with outdated gross receipt thresholds. Old methods required business owners to use accrual basis accounting which tends to increase overall administrative costs and compliance requirements.

Here is a look at some of the key changes businesses should recognize moving forward.

Limits on Cash Method of Accounting Improved
One key change is the limitation on which businesses can use the cash method of accounting. Previously, companies could not use the cash method of accounting — commonly considered the most natural and more affordable method — as an option if they reached a threshold in revenue. Previously, this method could not be used if the average annual gross receipts for the company were limited to companies with revenue under $10 million, except for the following companies that are that are limited to $1 Million:

  • Retailing (NAICS codes 44 and 45);
  • Wholesaling (NAICS code 42);
  • Manufacturing (NAICS codes 31 – 33);
  • Mining (NAICS codes 211, 212);
  • Publishing (NAICS code 5111); or
  • Sound recording (NAICS code 5112).

The new law changes this. First, it increases the threshold to $25 million. It also indexes this to inflation (meaning it can rise over time due to inflationary measures). Companies who are now able to use this method will note an accounting method change. It will allow the company to recognize ratable taxable income from this change over a period of four years — you do not have to adjust this all at one time. Additionally, any losses are recognized immediately.

Changes in Inventory Accounting
The law also changes Internal Revenue Code Section 263A. These UNICAP rules made for very specific restrictions for business owners. Prior to the changes, the revenue threshold was subject to the UNICAP rules. It requires businesses that maintain an inventory to apply specific costs to their inventory. When this cost is applied, it raises the company’s balance sheet. Overall, it increases the amount of taxable income the company has, therefore making it harder to overcome the threshold.

Now, companies with $25 million in revenue that qualify for the cash method of accounting will be able to note their inventories as non-incidental supplies or materials. Another option is to use their financial accounting treatment for inventories.

Long-Term Contract Changes
Another key area of the law has to do with long-term contracts. Previously, any business with $10 million or less in average annual gross receipts and maintained contracts expected to end within two years were considered small contractors. As a result of this classification, the businesses did not have to use a percentage of completion method of accounting. This helped streamline efforts for the company. The new law still applies for the most part. However, the new law increases that threshold from $10 million up to $25 million. And, it is indexed for inflation. This means more companies — those with revenue under $25 million — now achieve this same benefit.

What Does This Change Mean for You?
As a business owner, it can mean significant changes. When you meet with your accounting professionals, it will be important to look at several things:

  • Do the changes apply to your situation? Any business around the gap of $10 million ($1 Million for certain companies) to $25 million may need to consider the new methods of accounting available to them.
  • Do the changes benefit the company? Choosing the cash method of accounting over the accrual method is often beneficial, but not to all organizations.
  • Does the change require substantial changes to business operations? Though operations may stay the same, tax planning will change.

For these reasons, companies should work closely with accounting professionals to apply the changes under these laws. The law went into effect in December of 2017 – which means it applies to 2018 and beyond. For this reason, it is important to get up to date now. If you have questions or would like to schedule an appointment to discuss your accounting methods, please give us a call.

Good and Bad News About The Home Office Tax Deduction

“Home office” is a type of tax deduction that applies to the business use of a home; the space itself may not actually be an office. This category also includes using part of a home for storing inventory (e.g., for a wholesale or retail business for which the home is the only fixed location); as a day care center; as a physical meeting place for interacting with customers, patients, or clients; or the principal place of business for any trade or business.

Generally, except when used to store inventory, an office area must be used on a regular and continuing basis and exclusively restricted to the trade or business (i.e., no personal use). Two methods can be used to determine a home-office deduction: the actual-expense method and the simplified method.

Actual-Expense Method – The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office; this is generally based on square footage. These prorated expenses include mortgage interest, real property taxes, insurance, heating, electricity, maintenance, and depreciation. In the case of a rented home, rent replaces the interest, tax, and depreciation expenses. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted.

Simplified Method – The simplified method allows for a deduction equal to $5 per square footage of the home that is used for business, up to a maximum of 300 square feet, resulting in a maximum simplified deduction of $1,500.

Even if you qualify for a home-office deduction, your deduction is limited to the business activity’s gross income—not, as many people mistakenly believe, its net income. The gross-income limitation is equal to the gross sales minus the cost of goods sold. This amount is deducted on a self-employed individual’s business schedule.

The good news is that, under the tax reform, the home-office deduction is still allowed for self-employed taxpayers. The bad news is that this deduction is no longer available for employees, at least for 2018 through 2025. The reason for this change is that, for an employee, a home office is considered an employee business expense (a type of itemized deduction); Congress suspended this deduction as part of the tax reform.

If you have concerns or questions about how the home-office deduction applies to your specific circumstances, please give us a call.

Why It Might be Time for Your Small Business to Migrate to Cloud Accounting

Cloud accounting is a big idea that brings with it a lot of lofty implications, but if you had to distill all of that down to its bare essentials it would probably look at lot like this:

Right now, if you want to manage the financial side of your small business, you probably have to be in your office to do so. You have to be sitting in front of a very specific computer, because that’s where you installed your accounting solution in the first place. If you’re at home and you need to send an invoice or if you’re out in the field and just collected a payment, you have to wait until you get back to the office to actually reconcile that information.

With cloud accounting, however, the hardware no longer matters because your accounting software was never installed on it in the first place. It exists on a centralized server that is always connected to the Internet. Because of that, you can access that information from any device with a web connection – be it your laptop while you’re in an airport lounge or your mobile phone while you’re in a client’s office or your tablet that you keep by your bedside at night or, yes, the computer in your office. The choice is yours.

But in the end, it’s exactly that – a choice, and one that should not be made lightly. If you really want to know why you should migrate to cloud accounting, or even if you should do so at all, you’ll need to keep a few key things in mind.

The Advantages and Disadvantages of Cloud Accounting

Once you’ve learned as much as you can about what cloud accounting can actually do, it’s time to move into the realm of figuring out exactly what it can do for you. The question of whether or not this is the right move for you to take is ultimately one that you and you alone can make. By examining the subject from the perspective of both positives and negatives, you’ll be in a better position to make the right decision for your own goals at exactly the right time.

For starters, the good. The cloud is often a major advantage to businesses that are just starting out in particular, as it often provides them the flexibility they need to manage accounts from anywhere, any time, in any way. All you need is a mobile device, an Internet connection, and the right piece of accounting software and you can manage the entire financial side of your business just as effectively while you’re stuck in traffic as you can behind your desk in your office.

Cloud accounting is also great for collaboration, which is particularly helpful if you don’t have one single person who has been tasked with managing business accounts. Not only can multiple users have access as needed from any location, but they can also communicate and work together so that everyone can stay on the same page in terms of financial activity. The same is true if you’re working with a dedicated accountant, as the cloud can essentially give them real-time visibility into a business for a level of insight they just wouldn’t have through other means.

Another one of the major benefits of cloud accounting is that the types of software you’ll be using can typically be easily integrated with other aspects of your infrastructure that have already made the jump. In the past, you were likely dealing with silos that hampered productivity and made routine administrative tasks take longer than they really should have. Invoicing payments, general accounting, payroll and even HR were all probably totally separate elements. Now, with everything in the cloud, data can be shared freely and information is available in an instant – perfect for breaking down those silos once and for all.

Now, none of this is to say that the cloud has NO disadvantages – far from it. To begin with, the actual process of moving from your existing system and into the cloud will hardly be as simple as flipping a light switch. If you’re staying with software from the same company, that’s one thing. If you’re not, you’ll need to prepare your data so that it can be seamlessly integrated into the new system. A new piece of software may require different naming conventions or different arrangements of columns and rows, for example. This won’t necessarily be the most challenging task you’ll ever face as an entrepreneur, but it certainly won’t happen overnight either.

You also have to think about whether or not you’re comfortable with the fact that you’re giving up a certain level of control over your data to a third party. All of your financial information will no longer be stored on a hard drive in your office – it will be on a server that could be halfway around the country (or the world). If your provider gets hacked, you get hacked. If your provider is disconnected, you’re disconnected. If your third-party vendor isn’t in compliance with any industry-specific regulations that you have to adhere to, guess what – neither are you.

All of these are challenges that can certainly be addressed, but they also represent a fairly significant change from the way you’re probably used to doing things. Again, this is not a decision that anyone else but you can make. Most small business owners in particular will absolutely benefit from the advantages that cloud accounting brings with it… but some won’t.

Don’t look at cloud computing as a solution in search of a problem. You’ll know when it’s time to make the jump by recognizing a number of real problems that you’re facing that cloud accounting represents the perfect solution to.

Migration Best Practices

Once you have decided that the time is right to make the jump into the world of cloud accounting, there are a few key steps that you can start taking today to help make the process go as smoothly as possible.

First, shop around. Not all cloud accounting software is created equally. Make a list of all the things that you can’t do today that you want to be able to do in the cloud, or all of the things that you CAN do today but that will hopefully be BETTER in the cloud, and keep that list handy while you search for a new solution. Once you’ve picked the right option, spend some time getting used to it before implementation. Watch online videos, consult with an accounting pro, ask questions, etc. Only once you’re certain that you know how to use your new cloud software properly should you proceed.

Next, you’ll want to prepare your existing data – the process of which will vary based on the aforementioned factors. If you do happen to be transitioning over to a brand new piece of software, make a list of all the data that must make the transition so that you can keep things as organized and as focused as possible.

Note that when it comes to entering data into your new system, you may be able to automate some, or even all, of the process depending on the solutions you’re dealing with. This can definitely help speed the process along as much as possible. But a word to the wise – always be sure to back up all of your existing data in a secure, recoverable way BEFORE the process starts. If something goes wrong, if you make a mistake, or if a catastrophe happens, you want to be able to rest easy knowing that nothing has been lost.

At that point, all you have to do is continue to look for opportunities for improvement on an ongoing basis. Once you’ve put a little distance between yourself and your implementation process, ask yourself questions like:

  • What went well? What didn’t go so well? Why did these things happen?
  • Which features am I actually using versus the ones that I thought I was going to use but didn’t? Why?
  • Where am I struggling?
  • In what ways did I make real, tangible gains in terms of efficiency? How do I push these even farther?
  • What do I like and dislike overall?

The fact of the matter is that cloud computing certainly isn’t going away anytime soon—in fact, Forbes estimates that between 60 and 70% of all software, services and technology will be primarily cloud-based by as soon as 2020. There will definitely come a day in the not-too-distant future where you’re going to have to make the jump into cloud computing whether you’re ready to do so or not. It is in your own best interest to begin that process as soon as you’re comfortable, so at the very least you can do so on your own terms.

QuickBooks Tip: Get Paid Faster Using QuickBooks

Are your customers slow about paying their invoices? QuickBooks can help accelerate your receivables.

Your company’s cash flow depends largely on how quickly your customers pay the invoices you’ve sent. And if you’re like most small businesses, those checks tend to dribble in close to—and after—the due date. If you operate on a slim margin, this often means that you’re late at paying your own bills.

It’s essential, then, that you do what you can to get incoming revenue moving as quickly as possible. QuickBooks offers numerous ways to help you accomplish that critical goal.

Simplify the Payment Process
The single most effective step you can take to speed up customer remittances is to allow payment by credit card or electronic check. If you’re currently only accepting paper checks, you already know what problems that option can create, like mailing time, trips to the bank, and insufficient funds.

To establish this capability, you’ll have to sign up for a merchant account that will connect your bank to the financial institutions used by your customers. There are fees associated with this, and the initial setup will be unfamiliar to you. We can help with this.

Once you sign up for a merchant account, you’ll be able to accept payments from customers by credit card and bank transfer.

Having a merchant account will accelerate your receivables and improve your company’s cash flow, but it has other benefits, too. For example:

  • Your customers will appreciate the convenience, and may even be more likely to make a purchase.
  • In 2018, customers and prospects expect to be able to pay for items and services electronically. Not allowing this affects their perception of you as a forward-thinking, progressive business.
  • You’ll save time, which translates to money. Instead of chasing payments, you can be working on ways to meet your goals and help your company grow.

Always Know Where You Stand
If you’re conscientious about keeping your records and transactions updated, you’ll always have access to the most current data about your company’s financial status. You’ll be able to answer questions from customers and vendors quickly and accurately, and your daily accounting tasks will be much easier to accomplish.

There’s another benefit, though: reports. One of the five best things about QuickBooks is its ability to create dozens of reports using pre-formatted templates. You only have to choose the one you want to see, and the software will display it using your company’s data. You also have the option to customize these reports extensively, so they contain the exact cross section of data that you want to see.

QuickBooks contains dozens of templates for pre-formatted reports that you can customize and create very quickly.

You can see in the image above that several of QuickBooks’ reports are focused specifically on the status of your customers’ invoices and payments. We strongly recommend that you run these reports regularly. The more you know about who is behind and by how much, the more targeted your collections efforts will be.

You’ll also notice that there’s a category of reports called Accountant and Taxes. You can certainly create these yourself, but some, like Trial Balance, will be unfamiliar to you. There are others listed under Company & Financial that are quite complex, but quite important. We’d be happy to analyze these for you on a regular basis (monthly or quarterly) and provide insight that will help you make better business decisions.

Remind Late Payers
There are all kinds of reasons why customers pay invoices late. Their bills may have been lost in the mail. They may have ordered so much that they’re confused about which invoices haven’t been paid. And they may just be low on funds.

You can’t do much about the latter reason, but QuickBooks provides a way for you to update customers about their past due payments: statements.

Sometimes, customers just need a full accounting of what they owe in the form of a statement.

It’s not difficult to follow QuickBooks’ customization options for statements, but we’re here to help if you run into difficulties. In fact, we’d be happy to sit down with you and talk about these as well as other options for improving your company’s cash flow. It’s a multi-faceted problem with many solutions; we can go over the options with you. Contact us now to work on making the rest of 2018 more profitable.

What Makes a Great CEO? Personality, Perseverance and Perspective

If you ever wanted proof that quality company leadership is critical to an organization’s success, look no further than the old saying of “people don’t quit their jobs. They quit their leaders.” To that end, being an efficient CEO involves a lot more than just “having a vision” or “barking orders.” It’s not about commanding anyone to follow your lead – it’s about showing, beyond a shadow of a doubt, that your lead is worth following in the first place. People won’t work hard, put in long hours and dedicate themselves to your dream because you told them to – they have to want it for themselves, too.

This simple idea generates a massive ripple effect that impacts an organization in nearly every area and in every way that you can imagine. In fact, recent research conducted by TINYpulse even revealed that strong management quality and transparency leads to 30% better employee retention across the board.

But at the same time, all of this demands the question – what makes a great CEO in the first place? If the chasm between a good CEO and a great CEO is truly as deep as it appears, what qualities do you need to work on to guarantee that you end up in the latter category and not the former?

The answer to that particular question requires you to keep a few key things in mind.

The Three “Ps” of a Great CEO

If you had to make a list of all the core qualities that set great CEOs apart from the rest of their contemporaries, personality, perseverance and perspective would undoubtedly be right at the top. Let’s assume for a moment that as an entrepreneur in the first place, you have a clear vision for your business – a course that you’re setting out on where success is the proverbial pot of gold at the end of the rainbow. The three “Ps” will absolutely impact your ability to get from one end of that journey to the other.

In terms of personality, this quality is essential because you need to get buy-in from your employees and other key stakeholders or your business is finished before it’s even truly had a chance to start. Essentially, you have a vision that you believe in wholeheartedly – your personality will get other people to believe in it, too.

According to the Harvard Business Review, this means being able to balance keen insight into your stakeholders’ priorities with an absolutely unrelenting focus on delivering business results day in and day out. Essentially, you need to be able to deeply understand who needs to be onboard, what those people’s needs and motivations truly are AND what you can do to get them on board by aligning those motivations around the ultimate goal of value creation.

Madeline Bell, CEO of Children’s Hospital of Philadelphia, says that when it comes time to make any big business decision she first begins by making a list of all the key people who NEED to be on board to guarantee success. She says that she identifies “the detractors and their concerns, and then I think about how I can take the energy that they might put into resistance and channel it into something positive. I make it clear to people that they’re important to the process and they’ll be part of a win.” Without the right focused personality by your side, this will be an uphill battle on the best of days.

On the subject of perseverance, one of the major factors that goes into creating a great CEO involves both the ability to embrace appropriate risks and a desire to act and capitalize on opportunities when they present themselves. To put it simply, this means that the CEO is usually less cautious and more likely to snap into action than other senior executives simply because they must be – that’s literally part of their job.

But at the same time, this doesn’t mean that a great CEO somehow manages to hit a home run each and every time they step up to the plate. Far from it. Being willing to take risks means being willing to fail, which itself means accepting responsibility and finding valuable learning opportunities inside every strike out scenario. Risk for the sake of it is not what goes into making the type of CEO that people feel compelled to follow. Instead, it’s being willing to take a big risk and still fail, yet, at the same time, finding a way to come out stronger on the other side.

But out of the three Ps, perhaps the most important one is also the final one: perspective. Being a great CEO and a great entrepreneur are two very, very different things and should always be treated as such. As a great entrepreneur, you have a vision and a clear path for success and you’re going to start that business you’ve always dreamed of come hell or high water. You’re going to lay every brick on the road to success yourself if you have to because you simply can’t help yourself. In a lot of ways, it’s the reason why you get up in the morning – you CAN do it all yourself because you MUST do it all yourself so you WILL do it all yourself if you have to.

The first step towards becoming a great CEO involves the realization that this is no longer the case.

This, in turn, is where perspective will come in handy – it’s the realization that you can no longer do it all yourself because your company has grown into something far larger than you could have ever hoped for. This means that you’ll need to do more than just get comfortable with the idea of delegating responsibility. It means coming to terms with the idea that you are no longer the single master of your own destiny – you’re simply one of many voices that are trying to accomplish the same thing, albeit one of the most important ones.

This means that to be a great CEO, you need the courage to not only hire the right people but also do whatever you can to help them succeed. This means going out of your way to NOT surround yourself with sycophants and “yes” men and women. It means hiring people who will challenge you. Who will argue with you. Who will tell you to your face that you’re making a huge mistake and then back that statement up with a laundry list of reasons why.

The simple fact that you’re willing to open yourself up to this type of situation means that you’ve taken one of the biggest steps forward in terms of becoming the CEO you always hoped you could be. There’s a reason why, according to research conducted by Glassdoor, CEOs who are also their company’s founder often generate better results than externally hired or internally promoted CEOs — nobody would choose to fight (and potentially lose) these battles if they had even a remotely viable alternative option. But for you, there isn’t another option at all. You just can’t help yourself. Because you don’t want to be a good CEO — you want to be a great one. Rest assured, this is a very exciting position to be in — both for you professionally and for the company that you’ve already worked so hard to build.

Business Owners Beware – New Tax Law Severely Limits Entertainment Deductions

Note: This is one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family, both in 2018 and future years. This series offers strategies that you can employ to reduce your tax liability under the new law.

If you are a business owner who is accustomed to treating clients to sporting events, golf getaways, concerts and the like, we have some bad news for you. The GOP’s tax-reform bill that President Trump signed on December 22nd of last year eliminated the business-related deduction for entertainment, amusement or recreation expenses, effective beginning in 2018.

This doesn’t mean you can’t still entertain your clients; it just means you can no longer deduct 50% of the cost of that entertainment as a business expense, making it more costly for you to entertain clients.

But all is not lost! The Act does retain a deduction for business meals that are directly related to or associated with the active conduct of your business. The term “directly related” means that actual business discussions were conducted during the meal and you anticipated a specific business benefit from the meal. The term “associated with” is more liberal and includes meals either preceding or following a bona fide business discussion. In either case, the business deduction continues to be 50% of the actual expense. Also remember that business meals must be documented, including the amount, business purpose, date, time, place and names of the guests as well as their business relationship with you.

That’s not all! In the past, employers have been accustomed to deducting 100% of the cost of food and beverages provided to employees at or near the place of business. That too has changed, and the Act now subjects food and beverages supplied to employees to the 50% limitation. But that deduction is only allowed through 2025. As of 2026, employers’ costs for food and beverages furnished to employees will not be deductible.

Meals while traveling out of town on business continue to be deductible and are also subject to the 50% limitation.

If you have questions related to entertainment and meal expenses, please give us a call.

How Small Businesses Write Off Equipment Purchases

From time to time, an owner of a small business will purchase equipment, office furnishings, vehicles, computer systems and other items for use in the business. How to deduct the cost for tax purposes is not always an easy decision because there are a number of options available, and the decision will depend upon whether a big deduction is needed for the acquisition year or more benefit can be obtained by deducting the expense over a number of years using depreciation. The following are the write-off options currently available:

  • Depreciation – Depreciation is the normal accounting way of writing off business capital purchases by spreading the deduction of the cost over several years. The IRS regulations specify the number of years for the write-off based on established asset categories, and generally for small business purchases the categories include 3-, 5- or 7-year write-offs. The 5-year category includes autos, small trucks, computers, copiers, and certain technological and research equipment, while the 7-year category includes office fixtures, furniture and equipment.
  • Material & Supply Expensing – IRS regulations allow certain materials and supplies that cost $200 or less, or that have a useful life of less than one year, to be expensed (deducted fully in one year) rather than depreciated.
  • De Minimis Safe Harbor Expensing – IRS regulations also allow small businesses to expense up to $2,500 of equipment purchases. The limit applies per item or per invoice, providing a substantial leeway in expensing purchases. The $2,500 limit is increased to $5,000 for businesses that have an applicable financial statement, generally large businesses.
  • Routine Maintenance – IRS regulations allow a deduction for expenditures used to keep a unit of property in operating condition where a business expects to perform the maintenance twice during the class life of the property. Class life is different than depreciable life.
    Depreciable Item Class Life Depreciable Life
    Office Furnishings 10 7
    Information Systems 6 5
    Computers 6 5
    Autos & Taxis 3 5
    Light Trucks 4 5
    Heavy Trucks 6 5

  • Unlimited Expensing – The Tax Cuts and Jobs Act passed in December 2017 includes a provision allowing 100% unlimited expensing of tangible business assets (except structures) acquired after September 27, 2017 and through 2022. Applies when a taxpayer first uses the asset (can be new or used property).
  • Bonus Depreciation – The tax code provides for a first-year bonus depreciation that allows a business to deduct 50% of the cost of most new tangible property if it is placed in service during 2017. The remaining cost is deducted over the asset’s depreciable life. The 50% rate applies for new property placed in service prior to September 28, 2017 and, by election, to new or used property acquired and first put into use by the taxpayer after September 27, 2017 and before December 31, 2017.
  • Sec 179 Expensing – Another option provided by the tax code is an expensing provision for small businesses that allows a certain amount of the cost of tangible equipment purchases to be expensed in the year the property is first placed into business service. This tax provision is commonly referred to as Sec. 179 expensing, named after the tax code section that sanctions it. The expensing is limited to an annual inflation adjusted amount, which is $510,000 for 2017 and $1 million for 2018. To ensure that this provision is limited to small businesses, whenever a business has purchases of property eligible for Sec 179 treatment that exceed the year’s investment limit ($2,030,000 for 2017 and $2.5 million for 2018), the annual expensing allowance is reduced by one dollar for each dollar the investment limit is exceeded.
    An undesirable consequence of using Sec. 179 expensing occurs when the item is disposed of before the end of its normal depreciable life. In that case, the difference between normal depreciation and the Sec. 179 deduction is recaptured and added to income in the year of disposition.
  • Mixing Methods – A mixture of Sec. 179 expensing, bonus depreciation and regular depreciation can be used on a specific item, allowing just about any amount of write-off for the year for that asset.

For some individual taxpayers the alternative minimum tax (AMT) may be a concern. Bonus depreciation and Sec. 179 expensing are not preference items, and therefore their use will not trigger an AMT add-on tax. However, the difference between 200% MACRS depreciation, if claimed, and 150% MACRS depreciation is a preference item for AMT and could cause or add to the AMT tax.

If you have any questions related to this article, please give us a call.

Nine Best Ways to Start a Business Budget to Spur and Guide Growth

Building a business is a process that requires careful attention to many individual points, all with the goal of increasing customers, improving products, and building profit. There are many elements that contribute to the ability of a company to grow. One key area to focus on is the budget. From the foundation of the business, a well-planned budget can create a financially sound business with clear directions. To achieve that, consider these nine key ways to create an effective budget that spurs and guides the growth of your company.

#1: Know what you are spending first
It is impossible to create a budget without knowing where your money is going. To that end, business owners need to pay careful attention to every expense the company has. This should include expenses related to running the business such as marketing, employee costs, and property costs. Create a system where every dollar spent for the company is carefully tracked. While this type of oversight may seem intense, it gives you a foundation from which to build.

#2: Analyze each expense carefully
Now that you know where your money is going, the next step is to know if you are overpaying in any area. For example, you may be able to reduce your overhead on employee labor by improving your scheduling methods. You may be able to reduce your inventory purchases to be more in line with what you need right now to improve your working capital. Look at each item to determine if it is worthwhile or if there is a less-expensive solution.

#3: Build an expense-based budget
With this information in hand, it becomes possible to then build a budget. A variety of software programs, as well as the help of an accountant, can help you to do this. The goal here is to ensure that the amount you allocate to each expense matches what you are currently paying or your revised amount. In short, it is accurate. When changes occur over the month, you can spot them easily and take action to rectify your budget.

#4: Hire a tax professional for timely reports
You cannot know how well your business is doing or how it can grow without having access to in-depth information. Clear, accurate reports delivered to you can show your current profit and loss. They can help you understand sales patterns. They can also break down information based on the specific types of profit margins various items bring in and which do not pay for themselves. A tax professional is more than just a pro to file your end-of-the-year taxes.

#5: Create a cash flow projection
Now that you have a professional on hand, you can use this team to help you build a realistic, accurate cash flow projection for the next month. You can extend that to include cash flow goals for the next six months and then for the year. By having this present, you can see where your growth is occurring as well as any limitations within the process.

#6: Create a savings plan
It sounds like a personal money management step, but one of the most costly components of growing a business is expanding assets, building space, marketing, or other large investments. Your business has working capital, but do you have a growth account? This is an account that you are saving in to allow your business to make large purchases down the road. It can also help a company to manage costs in financial emergencies or situations where they need a significant amount of cash on hand. By having these funds, you do not have to tap into costly credit and loans to grow.

#7: Tackle debt with a lot of effort
Debt is one of the most taxing of components in managing a business. Debt is expensive. Every dollar you spend on interest payments is money not going toward helping your business to grow. Work with your tax professional to understand your company’s current debt, cash flow needs, and allowances that could be used to pay down debt faster. Create an aggressive plan to reduce your company’s debt so that you can free up more capital for short-term and long-term investments.

#8: Begin moving profits toward growth goals
Companies that have their financials in line are likely to begin to see profit more readily. With that comes the ability to grow. Some companies may wish to be aggressive here. Instead of borrowing for another location or launching a new product based on costly debt, begin to move a percentage of all profits toward the business’s growth plan and investments. It’s important for companies to recognize growth as a cost of doing business. For example, if a company has a 25 percent margin for profit on every sale, recognize that to just 20%. Tuck the remaining 5% into an investment for future growth. In other words, see investing in future growth as an expense for your company now. This way, you begin to readily put money aside.

#9: Develop a growth plan
What is your goal? How does your company foresee growing revenue, providing more services, or otherwise scaling? Work with an accounting firm to create a solid plan of action. This should include outlining all goals for the company (for a year, five years, and so on). Then, create financial expectations for the next six months and year. Your growth plan should also include all costs of growth – as well as any expected investments necessary to build that long-term picture.

By focusing on each one of these areas, with the help of accounting professionals, it is possible to build a solid growth plan that addresses every need the company has. You cannot simply say you want to increase customers by 100%. You need a plan based on your financials to get you there.

If you have any questions related to this article, please give us a call.

Five Steps You Need to Take After Jumping Into Entrepreneurship

Congratulations! You’ve decided to dive into the exciting world of entrepreneurship and bring that great business idea to life. Whether you’re opening a local brick-and-mortar business that your community needs, looking to grow rapidly in the next few years and get an investor, or just keep things small and solo, certain steps come next that aren’t as exciting as preparing for launch, but need to be done.

Here are the five important steps to take after you’ve decided it’s time to go from idea to delivery.

1. Choose the Right Business Entity.
How you organize your business plays a major role in taxes, bookkeeping, current and potential ownership, and overall administrative burden. While all of these considerations would need to be made regardless of the current state of the tax code, it’s especially important to think about in the face of massive tax overhaul. The GOP tax reform bill has become law and many changes go into effect starting January 1, 2018.

Some owners of pass-through businesses can expect to get a bonus deduction of up to 20 percent of profits up to $157,500 for most filing statuses and $319,000 for married filing jointly. Ninety-five percent of U.S. businesses are pass-through entities, which is a sole proprietorship, partnership, S corporation, or limited liability company (LLC) using the same tax structure as one of these entities, with the maximum income tax being 29.6 percent for pass-through income. For C corporations, the maximum corporate income tax rate is dropping from 35 percent to 21 percent.

Taxes aside, each state also treats business entities differently and may present bonuses and disadvantages you weren’t aware of. For example, many small business owners reap numerous benefits from S corporations but if you’re a New York City resident, you still have to pay city income tax. New York State recognizes S status but New York City doesn’t. Sales tax nexus, risk management, and legal aspects are other considerations to make when choosing an entity.

Depending on your entrepreneurial goals as well as personal needs, you need to decide which entity makes the most sense for your operations. If you plan to change entities in the near future due to taking on a partner or investor, you should also factor in how the tax bill will affect you.

2. Register your business with the appropriate state, local, and federal agencies.
When you organize your business, you may automatically be registered into your state or local agency’s database after filing articles of incorporation or similar documents. Check with your local Division of Corporations or other authority to make sure that you’ve taken all necessary steps to register your business once you’ve decided which entity to go with.

If you’re forming an LLC, you may need to file additional paperwork such as a publication affidavit which is when the state requires you to announce your commencement in a newspaper. This can be inexpensive or present a major cost barrier. For any “DBA” claims where you’re not doing business under your actual name or business entity name, you also need to check with your county clerk regarding forms and filing fees.

For federal agencies, most of the registration has to do with hiring employees, but even if you don’t plan on hiring any in the near future or ever, you still need to get an Employer Identification Number from the IRS. If you need to obtain licenses or approvals before operations commence, you also need to prioritize contacting these agencies and getting your paperwork taken care of before working with your first client.

3. Find business advisers, mentors, and peers.
You want to work with business advisers who can teach you about not just business in general, but also about the specific type of business that you’re operating and your industry. A good business adviser is one that will tell you both what you’re excelling at and what really needs improvement and how to achieve your business goals.

You want to find an adviser who’s on the same wavelength as you, but who can also give you the benefit of their knowledge and experience for your particular industry. In seeking out mentors and professional peers, you’ll want to find spaces for your profession or business type online and in person to exchange ideas and learn from each other. They’re excellent ways to grow your business while learning the ropes and you’ll learn the dos and don’ts of pre-launch.

4. Pick the right accounting software.
Even if you plan on outsourcing your accounting and tax responsibilities to a competent professional, you still need to have an accounting solution in place for them to work with. Jotting your expenses down on an Excel sheet can be a placeholder when you don’t have that many transactions yet and haven’t formally set up an entity in the very beginning, but it’s not going to be a viable long-term solution.

Accounting software isn’t as cost-prohibitive as it once was and there are many different products on the market meant for small business owners, solopreneurs, people who travel frequently, and even programs and apps that work in the cloud designed specially for certain industries and types of businesses. Cloud accounting programs are perfect for busy people who use multiple devices, so your accounting professional can see transactions in real time and correctly adjust them as you go.

If your business has more robust accounting needs such as inventory tracking and payroll, you need to test out the program and see if it works well for you. For most people without accounting knowledge, figuring out how to get accounting software set up can be daunting, so you also want to see if your tax professional can help you with this or if there are training videos and courses for your software.

5. Get ready to launch!
Once you’ve taken care of these crucial items pre-launch, it’s time to get going! You can now focus your time and energy on building a great product, finding the best staff, and cultivating a following for your brand. It’s just part of the game when you own a business.

While your business entity and accounting needs might not be as exciting as putting together your website and initial marketing blasts, it’s extremely important to have them sorted out beforehand so you aren’t scrambling to get tax paperwork in order right when things are really taking off for you. By establishing your entity, business registration, publication affidavits, and other business-related paperwork beforehand with the help of a business adviser, you’ll also have peace of mind that these things were done right the first time and you won’t need to stop what you’re doing to keep mailing in forms.

The journey to a successful business is definitely not an easy one. But if you’ve got a pre-launch roadmap and the right professionals on your side, you’ll minimize your chances of dealing with irksome bureaucratic obstacles so you can focus on growing your business. If you have any questions about jumping into entrepreneurship, and the important steps to take afterward, please contact us.

Employee vs. Independent Contractor — Tips for Business Owners

If you are a small business owner, whether you hire people as independent contractors or employees will impact the amount of taxes you withhold from their paychecks as well as how much and what types of taxes you pay. Furthermore, it will affect how much additional cost your business must bear, what documents and information must be provided to you, and what tax documents must be given to the individuals you are hiring.

Worker misclassification is a perennial issue for the Internal Revenue Service and state taxing authorities due to the perception that many employers are not properly classifying their workers.

The obvious advantage for a business to treat an individual as an independent contractor is to avoid paying minimum wages, overtime, payroll taxes, worker’s compensation insurance, unemployment tax, Social Security contributions, health benefits, paid leave, 401(k) benefits, and unpaid leave under the Federal Family and Medical Leave Act. Workers also have some tax-related benefits to being considered independent contractors, such as the ability to deduct certain business expenses that are not available to employees, the eligibility to set up their own retirement plans, and the fact that they are not subject to withholding. Of course, many workers want to be considered employees so they can get the benefits due to employees, such as vacation pay, overtime pay, and health insurance.

Here are some things every business owner should know about hiring people as independent contractors versus hiring them as employees.

Three characteristics are used by the IRS to determine the relationship between businesses and workers:

  1. Behavioral Control – Behavioral control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.
  2. Financial Control – Financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
  3. Type of Relationship – This type of relationship factor relates to how the workers and the business owner perceive their relationship.

If you have the right to not only control or direct what is to be done but also how it is to be done, then your workers are most likely employees.

If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and not filing the required tax forms. Employers can request the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. A worker may also file Form SS-8 requesting an IRS determination. The IRS does not issue determinations for proposed or hypothetical situations.

If you need more information about the critical determination of a worker’s status as an independent contractor or employee, please give us a call.