The Key Steps to Take BEFORE You Start a New Business

Very few people think that starting a new business is easy. But at the same time, there are few first-time entrepreneurs who realize just how involved things are from the moment you start trying to bring that idea that previously only existed in your head into the real world.

There’s a massive amount of commitment required, even before your business technically exists at all. This is okay, because as the old saying goes, “anything worth doing is worth doing right.”

In fact, there are a number of key steps that you need to take BEFORE you’ve even started the business of your dreams that you’ll absolutely want to pay close attention to moving forward.

Identify the “Why” of It All
First thing’s first: Before you do anything else, you need to determine why you feel so compelled to start this particular business at this particular time.

Is it just because you think you have a great, sure-fire idea that is going to generate a lot of money? If so, you may want to take a step back… you’ll likely be disappointed. But if it’s because this will allow you to genuinely do something you love, and something that you think will make an impact on the lives of a lot of people, then, by all means, push ahead.

Identify the NEED
Next, you need to verify that this idea of yours is actually a viable one in the first place; essentially, you have to confirm that there is a genuine need in the marketplace for a product or service like the one you want to create.

DO NOT allow yourself to become “a solution in search of a problem.” Make sure that people are asking for a business like yours and that need is currently going unfulfilled.

DON’T Quit Your Day Job
Building a successful business is not something that happens overnight. This often takes years of planning and hard work, not to mention many mistakes along the way.

All of this is to say that if your ability to quit your day job and focus on your new business full time depends on an instant success… don’t quit your day job just yet.

DON’T Neglect Your Family
Yes, starting a business is something that requires a huge amount of your time. Yes, you need to devote every ounce of space in your brain and every free moment to this goal. But do not, under any circumstances, let that come at the expense of your loved ones and those around you.

You’re going to need quite a bit of support to get your new business up and running. If you neglect your family now, you’re not going to have that support later.

The Art of Writing a Business Plan
At this point, you can start working on making your vision a reality. This part of the journey always begins in the same basic way: writing a realistic, actionable business plan that will guide your every move in the future.

With a business plan, you really do need to be as specific as humanly possible. You know where you’re starting, and you know where you want to end up. The job of a business plan is to connect those dots by way of a series of smaller, logical and achievable steps. It’s essentially the roadmap you’ll use to shine a light through the darkness, guaranteeing that you’re always moving in the right direction (and that this direction is forward).

The Entrepreneur’s Bet
As you write your business plan, you’ll also have to make what is often referred to as “The Entrepreneur’s Bet.” Essentially, you need to figure out how much money a business like yours needs to make in order to become profitable.

You also need to acknowledge that, once again, your business is very unlikely to be successful enough right away to have this bet pay off in the short term. A lot of new businesses are operating at a loss at first — that’s okay. But this is yet another step that confirms the path you’re on is actually viable and it’s one that you absolutely do not want to skip.

The Myth of the “One Size Fits All” Approach
At this point, it’s also important to acknowledge that there really is no one “right way” to start a business. The choices you have to make will be influenced by a wide range of different factors, many of which are unique to your industry, your business plan and even the vision that you’re starting with.

Case in point: You need to review all local, state and federal regulations pertaining to what you’re trying to accomplish. Different places have different laws, and ignorance is not an excuse for breaking them. Factors like how to become compliant, what standards a product has to meet and more will all be influenced by these regulations, and they will impact a lot of the steps on your business plan as well.

It’s Time to Start Thinking About Technology
Once this foundation is all in place, it’s time to start thinking about the tools you’ll need to bring your new business into the world. These days, that involves a lot more technology than people often realize.

This is another one of those steps that will obviously be impacted by the type of business you’re starting. A local brick-and-mortar retail store will obviously have different technological needs (point of sale systems, inventory management equipment, etc.) than an online marketing agency (graphic design software, collaboration tools, etc.).

But when built properly, your technology strategy and your business strategy are essentially one and the same. They feed into one another, and your IT helps generate the momentum you need to continue to grow and expand while remaining agile as well. It’s far too important to neglect.

Choosing the Right Business Entity
This is another important step you don’t want to skip because it dictates things like taxes, paperwork, liability and other legal elements of your business.

One of the most common types of business entities is the limited liability structure, or LLC. This is because it provides you with the level of flexibility you need right now, coupled with the protection you’ll need from a personal liability standpoint.

But that isn’t a guarantee that this is right for you. Other structures like sole proprietorships, partnerships, S corporations and C corporations all have their fair share of advantages and disadvantages. You need to pick the right one today or you’ll open yourself up to a world of problems tomorrow.

Finding the Help You Need (and You WILL Need It)
Finally, as your journey toward true entrepreneurship is about to begin in earnest, you need to understand two of the core pillars of successful business ownership:

  1. You do not know everything, even if you think you do.
  2. You cannot do it all alone, even if you think you can.

The difference between failed and successful business owners often comes down to the acknowledgment of these two points.

Rather than do a poor job at a business task for which you don’t have the skills, don’t be afraid to hire someone who does have those skills. Rather than guess at answers to questions, find the right advisors and mentors to guide you. Reach out and find the people who are willing to assist you and don’t be afraid to share your vision with them.

You WILL need help and there are people who are absolutely willing to stand by your side. You just have to want to look for them.

In the End
It’s fair to say that starting a new business is harder than you probably thought it was going to be, especially when you consider the sheer amount of time you’ll need to devote to the steps outlined above. But provided that you have a realistic vision and a passion that cannot be extinguished, success is no longer a question of “if” but “when.”

The stakes are high and the risk is higher, but the rewards are even greater if you persevere. Never let anyone tell you otherwise.

Are You Prepared for a Disaster?

This year’s wildfires, record rains, flooding, tornadoes, hurricanes and potential for earthquakes should all act as reminders that you should be prepared for a disaster. Sure, it will take some effort on your part and you may never be affected by a disaster, but if you are, you will sure wish you had been prepared. It can become a nightmare, whether it impacts you personally or your business.

Business Owners – If you are a business owner, unexpected events can have a devastating effect on your business. You need to be protected from any number of natural and unnatural events, such as fire, computer failure and illness or the loss of key staff, all of which can make it difficult or even impossible to continue day-to-day operations.

Good planning can help you take steps to minimize the impact of a disaster and protect your business. The following recommendations can help your business cope with an unforeseen calamity.

By identifying possible disasters that may affect you and your business, you may be able to minimize the risks and losses that might occur. A well-thought-out business continuity plan will identify an action plan, safety concerns, applicable computer back-ups and alternative operational headquarters. It will also provide a road map back to normal activities by highlighting the points of contact for insurance and emergency relief way ahead of time.

How will you escape? Where will you meet up? How will you communicate? Map out and practice escape routes from your building. Familiarize yourself with the local authorities and emergency radio signals announced at the time of a disaster. What happens if you survive the disaster but your biggest supplier does not? Develop backup vendors and relationships ahead of time. Don’t forget that many employees will have families to care for and that their homes may be damaged or destroyed by the disaster. Have you stockpiled water, batteries, first aid kits and food in case emergency services are delayed?

As many realize after the fact, they are not insured for many natural disasters under their existing business policy. You may need to add or increase coverage, if it is available. Check with your carrier for details on your coverage.

Different types of businesses have different computer system needs, and those systems need to be backed up in case an event damages or causes the loss of the business’s computer capabilities. Backups are easy with the current online technology. Many businesses now have outside vendors that host and back up their computer systems for them. Inquire about whether they have redundant backup systems and request information on their emergency plans. In fact, in many cases, businesses now have their entire computer systems and data online, and these backups function from anywhere, from any computer.

If the disaster is only temporary and shuts down the electrical grid to your business, a generator may be a sound investment. The generator can power your computer system, equipment, refrigerators and other crucial items.

Family and Home – Just like a business, your family needs to have an emergency plan. They may be in different locations, such as school, work and home, when a disaster strikes. You need to have plans in place for where to meet if separated and a pre-planned evacuation route or action plan for unexpected disasters. The pre-planned evacuation route should avoid areas that can flood or are dangerous. It is good practice to never let the fuel level in your car(s) get below half-full, or let your electric car be less than half-charged, because the area may lose power, and gas stations may also be damaged by the disaster or run out of fuel.

While many people these days use credit or debit cards or other electronic payment methods in lieu of cash for their purchases, it’s a good idea to have some cash on hand for times when a disaster causes the electricity to be out for an extended period of time. Without power, vendors won’t be able to process non-cash payments.

Is your insurance coverage appropriate? Do you have supplies of batteries, flashlights, water, food, medications and first aid supplies in case of an emergency? And don’t forget to consider the needs of your pets during and after an emergency.

Records – We now live in a digital world, and if you are computer savvy, an easy way to keep your records out of harm’s way is to store digital copies of the documents on a remote server (i.e., in the cloud). It may cost a few bucks a month, but the digital files will be there when you need them, regardless of what happens to your home or business location. If you aren’t a fan of cloud storage, you should maintain an up-to-date backup of your computer files on an external hard drive or thumb drive(s), preferably with a copy stored in a secure location away from your home or office that is not likely to be affected by the same disaster.

Most financial institutions these days provide all of their documents digitally, and you can store those documents on your remote server or even retrieve them from the financial institutions’ websites. However, before relying on the financial institutions, make sure they retain your records for long enough to meet your needs.

For example, you generally need to keep individual tax records for at least 3 years after the tax return’s due date for that tax year or the date when you filed the return, if it was filed after the due date. For example, your 2017 return was due April 17, 2018. If you filed it on or before April 17, the statute of limitations for the 2017 return would not run out until April 15, 2021. So, you would have to keep the records for the 2017 tax return until then. (The statute of limitations runs for 4 years for some states, and some records need to be kept longer for both federal and state purposes.) If some of your files are not already available digitally, you can always scan the originals to create digital copies.

Another very important thing to everyone is family photos. Modern-day pictures are digital, so you can save them on a remote server, or many photo services will save them online for you. For the older important ones, you can scan them or take digital pictures of them with your camera.

Another important document to have is a list of your home’s and business facility’s contents for insurance purposes. The quick and easy way is to take a video or pictures throughout the house or business showing the furnishings and equipment. A better method is to take the pictures or video and back them up with a detailed list of the items in each room.

Disaster Scams – Whenever there is a disaster, lowlifes show up and try to scam generous individuals out of money intended to go to victims of the disaster. Don’t you be another victim of the disaster – watch out for scammers claiming to represent charitable organizations, who will pocket the donations for themselves instead. Besides fraudsters soliciting on behalf of bogus charities, some so-called charities aren’t entirely honest about how they use contributions.

You may receive phone calls, emails, snail mail or appeals on social networking sites for donations to help the victims of the most recent disaster. Some of these appeals may come from fraudsters and not legitimate charities. Unfortunately, this happens often after natural disasters such as earthquakes and floods.

So before writing a check or giving your credit card number to a charity that you aren’t familiar with, check them out so you can be assured that your donation will end up in the right hands. Follow these tips to make sure that your charitable contributions will actually go to the cause you are supporting:

  • Donate to charities that you know and trust. Be alert for charities that seem to have sprung up overnight in connection with current events.
  • Ask if a caller is a paid fundraiser, who he/she works for, and what percentages of your donation will go to the charity and to the fundraiser. If you don’t get clear answers – or if you don’t like the answers you get – then consider donating to a different organization.
  • Don’t give out personal or financial information – such as your credit card or bank account number – unless you know for sure that the charity is reputable.
  • Never send cash. You can’t be sure that the organization will receive your donation, and you won’t have a record for tax purposes.
  • Never wire money to someone who claims to be from a charity. Scammers often request donations to be wired because wiring money is like sending cash: once you send it, you can’t get it back.
  • If a donation request comes from a charity that claims to be helping a local community group (for example, police or firefighters), ask members of that group if they have heard of the charity and if it is actually providing financial support.
  • Check out the charity’s reputation online using Charity Navigator, Charity Watch or other online watchdogs.

Self-Help Publications:

Recovering and Government Assistance
The following government agencies may provide assistance:

  • Small Business Administration (SBA) – The SBA provides low-interest loans to businesses, homeowners and renters who are victims of a disaster. It even provides loans to replace or repair damaged or destroyed clothing, appliances, furnishings and automobiles. For more information, visit its website at: www.sba.gov.
  • Federal Emergency Management Agency (FEMA) – Disaster assistance is provided in the form of money or direct assistance to individuals, families and businesses in an area whose property has been damaged or destroyed and whose losses are not covered by insurance. It is meant to help with critical expenses that cannot be covered in other ways. For more information, visit its website at: www.fema.gov.

Since many disasters strike without warning, being prepared can help your business and family to recover more quickly from a catastrophic emergency. Take the necessary steps to ensure that both you and your business are well protected.

Please give us a call if you have questions or if we can provide any other assistance.

After Tax Reform, Which Is Right for You: S Corp or C Corp?

The Tax Cuts and Jobs Act has left many of today’s businesses with big questions. Incorporation remains a hot topic, but this law is shaking things up. It’s quick to assume your company should be one or the other, but without careful consideration of the facts, your organization may end up facing financial loss, hefty tax penalties or missed tax savings.

The goal of this type of incorporation is to minimize tax burdens, but the wrong decision can be costly. In a C Corp, the company pays corporate taxes to the Internal Revenue Service. But, in an S Corp, there’s no entity tax. Rather, taxes are paid through an individual return.

The New Law Changes
The new law, which went into effect for the 2018 tax year, brought changes to both S Corp and C Corp businesses. In fact, both types of corporations benefited here. For C Corps, the tax rate was dropped from 35 percent down to just 21 percent. For an S Corp the new law provides a deduction equal to 20% of the pass-through income from the corp subject to limitations for higher-income taxpayers. At best, this reduces the effective tax rate to 29.6 percent from 37 percent. In both cases, there are specific restrictions here to know.

One thing to remember about these tax changes is that there are many components to determining which method is right for your business. Don’t make a quick judgment here. Rather, invest in some one-on-one time with your tax professional to determine the best possible scenario for your individual company. To help, consider these key areas.

S Corp and C Corp Ownership
A key component in deciding how to incorporate your business relates to ownership. In the S Corp, there is a limit of 100 shareholders within the company. These must be domestic organizations operated in the United States where all of the company’s shareholders are also living in the United States. Additionally, this structure allows for a single stock classification. As a business, you cannot offer common stocks as well as preferred shares, for example.

Comparatively, C Corps allow for fewer restrictions. There is no limit on ownership at all. There is no limit on the number of shareholders the company can have. Any small- to a medium-sized company planning an IPO or simply obtain investors outside of the traditional domestic structure will find C Corps offer far more flexibility.

Another key factor about C Corps relates to the differences within your shareholders. These corporations can issue several types of stock. As a result, it is not uncommon for some shareholder votes to be more important than others. This, too, can influence the decision you make in choosing one or the other model.

Corporation Taxation – Choosing the Best Taxation Structure
Most companies will focus most of their decision on S Corp or C Corp options based on ownership as a starting point. However, every company also wants to keep costs low. Taxation is one of the most expensive hurdles any organization must manage. And, each type of structure offers a different look.

For example, consider how a C Corp is taxed. It is commonly referred to as a “double taxation structure.” This is because the company (the entity itself) will pay a corporate tax. Then, the stockholders pay taxes on their income from the business. While this has long been a concern for any business owner using the C Corp structure (paying taxes twice on income is very costly), the new tax law changes this a bit. As noted previously, the tax rate for C Corp has changed from 35 percent to just 21 percent. However, the dividends will still be faced with double taxation.

The slashing to 21 percent means every company is paying the same rate, neither the size of the company nor the type of organization matters. That’s an important consideration when choosing which type of structure is right for your company.

With the help of a tax professional, it is also important to consider other tax strategies available. For example, an S Corp shareholder pays taxes every year on the money the company earns during that year. This is a simpler, straightforward scenario. But, in a C Corp, the taxes are only paid when the company decides to distribute dividends. It can also occur if a shareholder realizes capital gains (such as when selling ownership). This provides the C Corp with an ability to minimize taxes just by timing dividends properly.

Making the Right Decision for Your Needs
This is only the very top edge of considerations for which is best for your company. However, there are a few things that can influence your decision.

Stable Small Businesses
If you own a smaller company, you’ll benefit from an S Corporation for various reasons. First, the income passes through and is taxable to the stockholders on their 1040s, thereby eliminating double taxation. Plus the lower tax rate and the 20% pass-through deduction are very beneficial to an S-Corporation structure.

Growing Small Businesses
If your company is growing – or you plan to go public and take on new ownership, the C Corporation offers the opportunity to do so. It allows for a larger number of investors, and international investments are possible. Additionally, as a smaller business, you may not be likely to issue dividends any time soon. As a result, this can reduce the amount of income reported to the IRS on an annual basis.

Larger Companies
For larger organizations, the C Corp tends to offer the best structure overall. Other options limit investor access and may create scenarios where the company cannot grow. The effective tax rate is significantly lower – competitive to any company no matter the size. The new tax reform provides the most advantages to this buyer in particular.

Making the Decision for Your Needs
Many organizations today have jumped on the new tax reform as an opportunity to incorporate more tax savings. However, a clear picture is important and we recommend slowing down before making any type of drastic decisions like this. They have far-reaching implications and can create a financial burden or limitations on an organization if the wrong decision occurs. With the assistance of a tax professional or attorney, it is possible to make better decisions based specifically on the type of business structure you have, the business’s short-term and long-term goals, as well as new laws and taxation rates. Before you make a change as an entrepreneur, know what you are really getting. Please contact us with any questions.

10 Mistakes Most Small Business Owners Miss When Starting Out

The process of starting a small business can be an arduous one; there are numerous steps that need to be taken — and often in a precise order — to legally establish a business. As a result, the process can be overwhelming. Unfortunately, it’s also easy to overlook some important details and steps along the way. By being aware of a few of the most common legal and compliance mistakes made by small business owners when starting out, you can be better prepared for future success.

1. Misclassifying Employees as Independent Contractors
Regulators are coming down hard on misclassifications. The IRS estimates that this problem includes millions of workers. It is best to talk this through with an expert, but you can get some background on the guidelines at the United States Department of Labor website.

2. Choosing the Wrong Business Structure
One of the first major decisions you’ll need to make in regards to your small business is the type of business structure you will select. This can range anywhere from a basic sole proprietorship (which doesn’t require any special forms or paperwork) to a more complex structure, such as a corporation or LLC. Keep in mind that different types of business structures offer different tax benefits and other protections, so it’s important to thoroughly explore your options and select the structure that’s best for your unique needs. You’ll also need to go through the legal process of establishing your business under your desired structure, which may require help from a legal or other type of professional.

3. Failing to Apply for an Employer Identification Number
Unless you plan on operating your business strictly as a sole proprietorship (in which case, you will use your personal Social Security number when filing taxes), you’ll also need to apply for a unique Employer Identification Number (EIN). This number will be specifically associated with your business, and it can be helpful to think of it as a business Social Security number of sorts; it’s used to file your business taxes, open up dedicated business bank accounts, and the like.

4. Overlooking Important Permits and Licenses
Depending on the specific industry in which your business will be operating and your location, you may also be required to obtain specialized licenses and/or permits in order to legally operate. Otherwise, you’ll run the risk of being shut down or finding yourself in serious legal trouble down the road. Take some time to research the specific types of permits or licenses that you may need to obtain, as well as the steps you’ll need to take in order to acquire them. Sometimes, this process can be time-consuming and even costly, so it’s not something you’ll want to put off until the last minute.

5. Not Knowing When to Speak to a Professional
When starting up a small business, it’s not uncommon to run a one-man (or woman) operation. After all, you may not have the cash flow or even the need to hire outside help in the early stages. Still, when it comes to making sure your business is squared away from a legal/compliance standpoint, it can certainly be worth the money to consult with tax and accounting professionals early in the game. You don’t necessarily need to onboard these experts full-time, but being able to turn to them for advice and guidance when you need it will help you avoid serious legal issues later on.

6. Putting Off Domain Name Registration
As soon as you have your business name picked out and registered, it’s also in your best interest to go ahead and register your website domain as soon as possible. Even if you don’t plan on setting up and launching your website any time soon, domain names are cheap, and having yours registered now will help you avoid a situation where the domain name you want is taken by somebody else later on.

7. Lack of a Comprehensive Business Plan
One of the biggest mistakes small business owners make when first starting out is that of not having a well thought-out and articulated business plan. A business plan is an important document that outlines in detail what your goals for your business are and how you will achieve them. This document is important not just for you and other members of your immediate team, but for potential investors as well. Should you seek financing for your company at any point, an investor is going to want to see and scrutinize your business plan — and it will likely have a major impact on the final decision.

8. Not Having Finances Squared Away
Another common mistake new business owners make is that of poor financial planning, which can lead to a lack of funding to get you through your first months successfully. Ideally, you’ll want to make sure your business plan accounts for all the company-related expenses you’ll incur during the first year of operation, as well as any personal expenses as well. Unfortunately, this is something that many small business owners overlook or miscalculate with disastrous results. The easiest way to avoid this mistake is to consult with a small business accountant during the early stages of drafting your business plan.

9. Failing to File Patents on Products or Ideas
It’s (hopefully) no surprise that you’ll want to be proactive about filing for patents for any unique products, prototypes or designs you may have. However, what many small business owners first starting out don’t realize is that they’ll also want to file patents on ideas, such as intellectual property, that could otherwise be stolen or copied and used by other entrepreneurs. After all, intellectual property can be just as valuable as a product prototype — so you’ll want to plan and protect these kinds of ideas accordingly.

Be careful to also avoid the mistake of waiting too long to file for relevant patents; the process can often be long and drawn out, so getting started as early as possible will be in your best interest.

10. Being Blind to Important Compliance Requirements
Last, but not least, make sure you’re aware of any and all compliance requirements that may apply to your business based on its structure, location, industry or other factors. For example, even if you’re keeping things “simple” by operating as a sole proprietorship, you’re going to be required to file and pay quarterly estimated taxes under that structure. Failing to meet compliance and other requirements can result in serious legal trouble, including fines and penalties, down the road.

When it comes to compliance requirements, such as annual reporting and tax filing, it’s always a good idea to keep a calendar of important dates, so you don’t forget anything. After all, you’ll have enough deadlines to worry about and remember on your own — especially during that first year of business operation. This is yet another situation where having a compliance expert, such as a tax or accounting professional, can really come in handy. He or she can assist you with annual compliance reviews, reminders on impending deadlines and the like.

From selecting a name and business structure to making sure your small business remains in compliance at all times, there are, unfortunately, a lot of opportunities to make mistakes as a new business owner. By keeping this information in mind and by working alongside the right types of professionals as you prepare to launch your new business, hopefully, you’ll be able to avoid these issues. From there, you can maximize your chances for success in the first year of operation and beyond.

How Some High-Income Taxpayers Can Maximize the New 20% Pass-through Business Deduction

Taxpayers with higher 1040 taxable incomes who are self-employed but are not “specified service businesses” may find it beneficial to structure new businesses, or restructure an existing business, as an S corporation to avoid taxable income limitations that apply to the new 20% Sec. 199A pass-through deduction.

To make up for the tax reform’s reduction of the C corporation tax rate to 21%, from which other forms of business activities do not benefit, Congress created a new deduction and code section: 199A. The 199A deduction is for taxpayers with other business activities – such as sole proprietorships, rentals, partnerships and S corporations – since, unlike C corporations, which are directly taxed on their profits, the income from the other business activities flows through to the owner’s tax return and is taxed at the individual level, i.e., at the individual’s tax rate, which can be as high as 37%.

This new Sec. 199A deduction is 20% of the pass-through income from these business activities. But not every owner of these flow-through businesses will benefit from this deduction because, as in all things tax, there are limitations.

Whether or not a taxpayer will benefit from the deduction will depend in great part upon the taxpayer’s 1040 taxable income figured without the Sec. 199A deduction. Married taxpayers with a taxable income below $315,000 (or below $157,500, for others) will benefit from the full 20% deduction.

However, limitations begin to apply when a taxpayer’s 1040 taxable income exceeds those amounts. The most restrictive limitation is the one placed on “specified service businesses.” Once married taxpayers filing jointly have a 1040 taxable income exceeding $415,000 (or above $207,500, for others), they receive no Sec 199A deduction benefit from any pass-through income derived from a specified service business. Specified service businesses include trades or businesses involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services or any trade or business in which the principal asset of the trade or business is the reputation or skill of one or more of its employees or owners. Note that an engineering or architecture business is not a specified service business for this deduction.

On the other hand, a taxpayer can still benefit from pass-through income from other business activities, even when the taxpayer’s 1040 taxable income exceeds the $415,000/$207,500 limits, provided the business activity pays wages and/or has qualified business property, the combination of which make up what is referred to as the wage limitation. Without getting too complicated, the Sec. 199A deduction is the lesser of 20% of one’s pass-through income or the wage limitation. If the wage limit is zero, then the Sec. 199A deduction would also be zero for these high-income taxpayers. The wage limitation itself is the greater of 50% of the wages paid by the business activity or 25% of the wages paid plus 2.5% of the cost of qualified business property. Perhaps this is best explained by example.

Example #1: Peter and his wife have a 1040 taxable income of $475,000. Peter has a self-employed business (not a specified service business), from which he has a net profit of $300,000, and his tentative 199A deduction is $60,000 (20% of $300,000). However, because his taxable income exceeds $415,000, his Sec. 199A deduction is the lesser of $60,000 or the wage limit. Peter has no employees or qualified business property, so his wage limitation is zero; thus, his Sec. 199A deduction is also zero.

Example #2: Same as example #1, except Peter’s business is organized as an S corporation. Of his net profit of $300,000, it is determined that a reasonable compensation (wage) for the services Peter provides to the S corporation is $150,000, which the S Corporation pays as a salary to Peter. The other $150,000 is pass-through income. Now, Peter’s Sec. 199A deduction is the lesser of 20% of the pass-through income – $30,000 (20% of $150,000) – or the wage limitation, which is 50% of the wages paid by the S Corporation or $75,000 (50% of $150,000).

This demonstrates how a business activity can benefit from being organized as an S corporation, since S corporations are required to pay working shareholders a reasonable wage for their services provided in operating the business. They are able to divide the pass-through income between reasonable wages and pass-through income to enable a 199A deduction for a higher-income taxpayer. Other business entities do not provide this option, which is the reason why high-taxable-income taxpayers might explore the benefits of organizing new businesses as, or reorganizing their existing businesses into, an S corporation.

Of course, there are other issues involved as well, and some sole proprietors may not find it worth the expense or effort to switch to a different type of business entity. However, the higher the taxpayer’s income, the more beneficial it becomes. The same issues also apply to partnerships. To see if organizing or reorganizing your business activity into an S corporation can reduce your tax liability, call us for an appointment.


The Most Common Accounting Mistakes Small Business Owners Make and How to Avoid Them

Most small business owners are an expert in their field, but not necessarily in the accounting aspects of building a business. And, with this comes a few common mistakes. Yet, even simple small business accounting mistakes can prove to be financially limiting and costly down the road. With the help of an accounting professional, it is possible to overcome at least some of these mistakes. Take a look at some of the most common mistakes and how to avoid them.

#1: Choosing the Right Accounting Software for My Business
You’ve purchased small business accounting software. You assume it will be ideally matched to your business and easy enough to jump into. It’s not. The problem is, each business requires a carefully selected and even customized accounting method. There are always risks related to regulatory compliance when the wrong accounting software is used or information is overlooked.

To resolve this, work with a professional that listens to your needs, learns about your business, and modifies your bookkeeping methods to meet your goals.

#2: Your Business Has Poor Organization and Recordkeeping
It’s quite common for small business owners to lack the time and skills to effectively manage small business recordkeeping and bookkeeping. There’s much to do and it takes time away from your business. And, there are dozens of apps and cloud accounting options present. Which do you use?

The good news is all of those options are a good thing. It means there are no longer excuses for not getting your business organized. With a bit of help, it is possible to set up a system that streamlines your business operations.

#3: Cash Flow Versus Profit-Loss Statement
Many small businesses are making money on paper, but they end up going under if their float to getting paid is too long. This is financially limiting and stunts your growth as well.

It’s important to understand how this impacts your business. Cash flow is a critical component of any business operation — it determines how much you end up borrowing and paying for, too. Learn the best methods for managing cash flow.

#4: Not Understanding Standard Accounting Procedures and Terminology
Many small business owners don’t understand key business accounting terms and procedures. What does setting up controls mean? What about bank reconciliation? What are your balance sheets and when are they updated? Profit and loss statements are filled with very specific terminology you need to get right.

It’s possible to learn these terms and methods on your own. There’s plenty of information available. However, it takes time to learn it all. More importantly, you may find applying specific procedures and tax laws to your business challenging. To overcome this, work with a tax professional you can depend on.

#5: The Small Business Budget
A budget provides financial insight. It offers guidance to you about where your business is right now and what your goals are. That’s because a budget — which many small business owners lack — creates key goals for your company to manage. Flying blind, on the other hand, is a common small business mistake.

Creating a budget takes some time and a good amount of dedication. Once it is in place, it can be modified each month to meet current needs. Software is available to help with this, but an accounting professional is also an option.

#6: Too Much DIY
To be frank, one of the biggest mistakes small business owners make is simply trying to save money by doing it themselves. Yes, it is true this will cut your accounting costs, but it also creates a scenario in which you have absolutely no control over “what you don’t know.” In other words, just because you can enter it doesn’t mean you should.

Working with a bookkeeping and accounting service capable of handling these tasks for you is the best option. In nearly every situation, these services will work to save you money, far overlapping any DIY savings you are creating.

#7: Lack of Tax Planning
Taxes are not something you should do just one time a year. Year-long tax planning for small businesses is necessary. It’s not just important to pay your taxes, but also to plan for them and plan for savings options.

If you lack a tax planning strategy, work to improve this by simply working with a tax professional. Create a plan for ways you can invest and cut your tax burden.

#8: Lack of Modernization
Are you still balancing your books using pen and paper? It is no longer considered ideal to do so. Yet, many small business owners see the investment in modernization and cloud accounting to be too costly. In fact, moving to a digital accounting system is likely to save you time and money. It doesn’t have to be challenging to implement this system either.

#9: Not Realizing True Profit and Loss
You may have a profit and loss sheet, but you may not have a lot of insight into what each line means. More so, you may not know enough about methods for reducing costs or viewing profit potential.

The investment in an accounting service can alleviate this. We are happy to talk to you about methods to save you money or boost your profit margins with simple changes to your methods.

Most small business accounting mistakes come from a lack of insight into the industry. The good news is solutions are available to help you overcome nearly all of them. Please call us if you have any questions.

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.