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.

The Ultimate Cheat Sheet on Growing Your Business

Every business must have a constant eye on growth. If your company is not growing, it is losing key opportunities and longevity. Yet, growth does not always come from increased sales. In many cases, it’s important to take an inside look at how you are operating, what costs you have, and how you can better manage day-to-day operations. To stimulate growth in your business – no matter the sector – focus in on these key areas specifically. It could mean improving your company’s ability to compete at a higher level.

Using KPIs to Guide Growth and Budgeting
Key Performance Indicators (KPIs) help you know how your company is performing. They should be used as a compass and guiding point for every decision you make within the company. KPIs such as profit, cost, sales by region, customer lifetime value, and product defects are just some of the areas to focus on. To achieve clarity here, you need an efficient way of managing all of this data. Cloud computing makes it possible along with implemented automation. These metrics can provide you with key opportunities for:

  • Growth
  • Cost-cutting
  • Better employee management
  • Better customer management
  • Scaling limitations and much more

Use KPIs to help guide every one of your company’s decisions about growth from this point out. Invest the time in learning what these figures are to get started.

Real-Time Cloud Accounting and Improving the Books
A good place to focus attention is on your accounting. Here’s what to look for:

  • Are you in the cloud yet? This provides the most effective and efficient way to manage your business’s books.
  • Real-time access means you can pull up reports and profit margins to get a clear understanding of opportunities.
  • Put more attention into accuracy and bottom lines. If you are not working with a professional service to improve your accounting clarity, what every dollar means, it is time to do so.

Use Reviews and Social Proof to Convert More Clients
Social proof and reviews are insights into what your customers are thinking, expecting, and desiring. They provide an opportunity for you to get more info on what your customers want. Social proof indicates that someone “says” your product or service is good. That means other people are going to flock toward this. Learn what reviews are out there. Amplify your marketing to focus on them. Build strong customer relationships through this process.

Shoring Up Cash Flow by Reducing Costs and Boosting Efficiency
Next, take a look at your efficiency. Using your KPIs, you can provide more insight into key areas of cost. For example, spend the time examining the various costs your company has and work to reduce them. Then, find more efficient methods to improve production, employee productivity, and customer service.

Extend Market Reach by Honing in on Your Target Market or Expand Your Reach
Establish who is your target market. Instead of marketing to the masses, reach people where they are. For example, if you are targeting Millennials as your ideal client, marketing on social media and connecting digitally is essential. For seniors, television and local ads still reign as ideal.

At the same time, consider the value and potential possible if you expand into other markets. Carefully consider other markets that fit your product perhaps in a different way. For example, if you are marketing just to Millennials right now, consider how your product or service could impact the up and coming younger generation. Do you need to make modifications? Should you use different marketing to capture the early lead in this generation?

Provide More Services to Existing Customers
Expand through your existing customers. Perhaps one of the best ways for today’s company to increase sales without having to expand on services or customer acquisition costs is to focus on increasing sales to existing customers. What else can you offer? There are several solutions here:

  • Offer more products and services you already provide to existing customers. For example, introduce them to a secondary service you provide that they have yet to purchase.
  • Build relationships with complementary service providers and market those services to your existing customers.
  • Build on your existing products and services to provide more comprehensive options. Grow the company by expanding what you offer.

In these situations, the goal is clearly to get more money from existing customers. Provide them with quality, value, and opportunity to achieve these key opportunities.

Understand Which Products Are “Losers” and Should Go
Do you have “loser” products? These are products that never really capture enough sales to make them a profit point for you. It’s important to target these products with careful insight. To grow your business’s bottom line, you need to know how effective every product is. Are you putting a lot of money into marketing a product that only has a very limited customer base? Does it yield a very small profit margin? Determine if you have these products in your lineup and then work to eliminate them, improve them, make them less expensive, or pull at least some of your marketing and labor hours away from them.

Get Better Control Over Employee Costs and Reduce Turnover
How much do you spend on managing your employees? From payroll to taxes to human resources, there are many costs that go into managing your employees. Reducing those costs is always a good thing. Automation and software can help you to reduce your human resource department to create massive savings that you could put toward scaling. The key here is to ensure you are using the most up-to-date resources and tools available.

Alongside this is the goal to reduce employee turnover. Don’t create a bad experience for your employees. Provide them with support. Be sure they have constant guidance and the ability to achieve your company’s goals. Retaining employees is essential. It costs much more to have to find, hire, train, and manage new employees than it does to keep well-performing, talented, or employees with potential on staff. Find that balance within your HR department for the best results.

Improve Customer Retention to Reduce Costs
It’s hard (and expensive) work to get new customers. Every dollar you spend on marketing and bringing in new customers and clients needs to be money well spent. While you cannot stop marketing, you should do what you can to improve customer retention. To do this, consider:

  • Speak to customers one-on-one to ensure they are satisfied.
  • Ask for feedback and respond to it routinely.
  • Meet with customers to gather more insight. Conduct market research routinely.

Most importantly, listen to the negative. These are areas where you’ll be able to improve and grow specifically. Fixing a customer’s problem is also a surefire way to keep them as a lifelong customer. Are you doing what you can to improve customer retention?

Get a Clear Picture of Profit Margins of All Products and Services
How much does each product cost to make, buy, produce, market, and sell? Every service needs a clear understanding of the costs to acquire and provide that service to your customer base. These costs will change over time, especially as many companies see significant changes in production and logistics costs. You’ll need a method for monitoring these costs on an ongoing basis. That’s not always easy. With proper software and accounting tools, you should be able to gain insight into costs in real time or at least over the course of several months. This gives you the ability to know where to move prices, where to place your marketing dollars, and where to focus your efforts to scale your business.

What Steps Can You Take Now?
Business growth is always necessary, but there are many ways for your company to expand. Don’t always focus on just increasing sales and growing locations. Also look at ways to monitor the financials within your company. This will give you more leverage and power to achieve more of what you want long term.

If you have questions, please call us.

A Beginner’s Guide to Bookkeeping

If you’re a new business owner, you might not remember the last night you slept more than four or five hours. Your days may be filled with developing marketing strategies, screening potential employees and trying to figure out how to set up a bookkeeping system. If working with numbers isn’t your favorite pastime, the latter activity may be posing quite a challenge. If you can relate to this common scenario that new entrepreneurs face, the following beginner’s guide to bookkeeping might calm your frayed nerves and set you on the right course.

Cash Versus Accrual Basis of Accounting
A pivotal first step when setting up a bookkeeping system is deciding whether to use the cash or accrual basis of accounting. Cash accounting requires you to record transactions at the time cash changes hands. Both actual money and electronic funds transfers constitute cash. If you’re a sole proprietor working from home or at a one-person office, opting for cash accounting can make sense. However, if you’re going to extend credit to your customers or request credit from your suppliers, you must utilize accrual accounting. Accrual accounting dictates that you record sales or purchases immediately, even if you receive cash from a customer or pay cash to a creditor at a later date.

Single- Versus Double-Entry Accounting System
Single-entry bookkeeping is similar to maintaining a check register. You record transactions when you make deposits into your business account or pay bills. This method only works if you own a small company with a low volume of transactions. If you own a mid-size or large business that is complex, a double-entry bookkeeping system is needed. With this type of system, at least two entries are made for every transaction. One account is debited, while another one is credited. A simultaneous debit and credit system is the key to a double-entry bookkeeping system.

Balance Sheet Basics
Before you can successfully develop a bookkeeping system, you must understand the basic balance sheets accounts: assets, liabilities and equity. If you don’t carefully track these items and ensure the transactions that deal with them are recorded in the right place, your books won’t balance. The accounting equation is a simple formula you can use to ensure your books always balance. This handy equation is: assets = liabilities + equity.

Assets are things your business owns, such as accounts receivables and inventory. On the balance sheet, assets are typically listed in order of their liquidity. For instance, the assets section of a balance sheet might begin with cash followed by marketable securities, inventory and accounts receivables. These accounts are referred to as current assets. Fixed assets, or tangible assets, round out the first portion of the balance sheet. They include things you can touch such as land, buildings and equipment.

Liabilities are things a company owes to third parties such as suppliers and banks. The liabilities section of the balance sheet comprises both current and long-term accounts. Current liabilities, those expected to be paid within a year, typically include accounts payable and accruals. Accounts payable contains amounts owed to suppliers. This account may also encompass credit card and bank debt. Accruals consist of taxes owed, including:

  • Sales taxes
  • Social security taxes
  • Medicare taxes

Long-term liabilities, such as bonds and mortgages, aren’t expected to be paid off during the next year.

Equity represents the ownership a business owner and other investors have in a company. If you’re the only person who has put money into your business, the equity section of the balance sheet will only have one account in it.

Income Statement Basics
In addition to being familiar with balance sheet accounts, understanding income statement basics is critical to setting up a superb bookkeeping system. The income statement consists of revenue and expense accounts.

Revenue represents all the income received when selling goods or services. On the income statement, revenues are classified as either “operating” or “non-operating.” Operating revenues stem from your business’s main operations. Sales is an example of this type of revenue. Non-operating revenues are earned from some other activity such as rent or interest revenue.

Expenses are the costs incurred to run your business. On the income statement, expenses are classified as either cost of goods sold, operating or non-operating. Cost of goods sold represents the cash a company spends to manufacture or buy the products or services it sells to customers. Operating expenses are the costs a company incurs as part of its regular business activities excluding cost of goods sold.

Examples of operating expenses include:

  • Supplies expense
  • Wages expense
  • Rent expense
  • Utilities expense

Non-operating expenses are incurred for reasons outside the scope of normal business activities such as interest expense.

Benefits of Working With a Bookkeeping Professional
Besides familiarizing yourself with the aforementioned beginner’s guide to bookkeeping, working with a professional accounting expert is a smart idea. Numerous details go into managing your enterprise’s bookkeeping. Even a trivial mistake such as putting a decimal point in the wrong place can wreak havoc on your books. In addition to assisting you in setting up and managing a bookkeeping system, our professionals can help you raise financing, develop a pricing structure for your goods or services, and discover ways to save money on operations, which may decrease your stress levels and increase your odds of long-term business success.

Enhance Your Cash Flow, Enhance Your Business: The Top Tips You Need to Know

We’ve discussed at length in the past about how cash flow is ultimately one of the most important factors of a business that far too many people just aren’t paying enough attention to. Cash flow maintenance is about more than just knowing how much money is coming in versus how much money is going out. Even if your business is very close to true profitability, this ultimately won’t mean a thing if you’re dealing with clients who are slow to pay. This can seriously impact your momentum, and worse — your chances at long-term success.

To put it simply, enhancing your cash flow isn’t just about enhancing your accounting — it’s also about enhancing the very organization you’ve already worked so hard to build. With that in mind, there are a few key tips you’ll absolutely need to know about moving forward.

Technology Is Your Friend. It’s Time to Start Acting Like It
Perhaps the most important tip that you should start using to enhance your cash flow (and thus, your entire business) is to start leveraging the power of modern technology to your advantage. There are a wide range of different financial solutions that allow you to not only submit invoices to clients electronically, but that then allow those clients to pay you in exactly the same way.

Not only will this make it far, far easier for you to track money that is still “in play” so to speak, but it will also significantly help shorten the time it takes to get you paid for your products and services in the first place. This means that money will be coming in at a much faster rate, helping to make sure that you have the cash on hand necessary to take advantage of certain opportunities as they develop.

Use Your Credit Cards in the Right Ways
Another key tip that you can use to enhance your cash flow actually involves using your company credit card for purchases that you may otherwise pay for by check. Using your company credit card gives you an extra grace period to pay off the card in full each month. This essentially allows you to “push” that cash payment down the road, giving you a bit more breathing room than you’d have rather than the net 15 or net 30 that you’d be dealing with for check-based payments.

Get Organized and Stay That Way
Perhaps the most important step that entrepreneurs can take to enhance their cash flow involves not just getting organized, but doing anything that they have to in order to stay that way as long as possible. Consider creating different types of tier groups in your records, clearly separating people based on when they absolutely need to be paid.

Order everyone by who must be paid first — meaning that you’re definitely going to want to prioritize the government, payroll and certain vendors that may shut off your access to resources before anyone else. Certain others, on the other hand, can easily be paid later without too much undo fuss. Sure, you’d love to be able to pay everyone at the same time — but in the event that you can’t, this information will be invaluable to have when making strategic decisions regarding where your available funds should go.

This itself can also help identify certain trends and patterns that make the next six, 12 and 24 months of essential decisions far easier to predict.

Never Be Afraid to Consult a Professional
At the end of the day, the most important tip that you need to not just understand but truly believe in with regards to cash flow is that you should never be afraid to enlist the help of a trained professional. You’re a business leader and you’re good at what you do. You wouldn’t have gotten this far if you weren’t.

However, that doesn’t make you a financial expert and it certainly doesn’t mean that you’ll have the time necessary in a day to devote to something as mission-critical as proper bookkeeping and other financial tasks. In certain cases you might, sure — but if you start to feel like this is getting overwhelming, it is in your own best interest to pick up the phone and find someone who can lend you a much-needed helping hand. Find an accounting expert who doesn’t just have experience in terms of cash flow, but who understands your niche and knows exactly how a business just like yours needs to perform.

Not only will this help put you in a better position to make positive cash flow gains moving forward, but it’ll also give you the essential peace of mind that only comes with knowing your financial needs are being properly (and actively) taken care of.

How to Identify When the Time Is Right to Bring an Accounting Pro Into the Fold

Running your own business is a complicated affair with a wide range of different “moving parts” to concern yourself with, but many people don’t realize how many of them ultimately lead back to your finances until it’s far too late.

A large part of your ability to be successful in the long-term will ultimately come down to the rate at which you expand. Grow your business too quickly and you might spread yourself too thin. Grow too slowly and you’ll be passing up opportunities that are rightfully yours, leaving a lot of money on the table at the same time. Your control over your finances will dictate whether you’re able to strike that perfect balance the way you need to.

Marketing, paying vendors, paying employees, managing client relationships – all of it depends on the quality of your bookkeeping (or lack thereof). To that end, a large part of your success will ultimately come down to your ability to identify when the time is right to stop doing things yourself and bring a professional accounting provider into the fold. To do this, you’ll need to keep a few key things in mind.

The Warning Signs You Need to Know
As it does every year, Intuit recently released a survey outlining the state of small business accounting in the United States. The results are very telling in terms of when people should bring a financial professional into the fold – and what the consequences are of inaction.

Asset tracking, for example, is something that you may not immediately think impacts your bookkeeping, but it does in a fairly significant way. Ghost assets are fixed assets that have either been rendered unusable or are physically missing. However, “out of sight, out of mind” does not apply in this case – they still count toward a business’s tax and insurance liability, thus making it difficult to properly reconcile their books every year.

Of the people who responded to Intuit’s survey, 74% indicated that they didn’t understand this, and 49% said that they didn’t even know what ghost assets were in the first place. If you are among those numbers, congratulations on arriving at one of the biggest indicators that you need to bring a financial professional into your business (and also that you’ll likely want to conduct inventory on a regular schedule moving forward).

Other signs that the time is right to bring a accounting professional into the fold ultimately come down to the most pressing financial issues that most businesses face. 51% of people who responded to Intuit’s survey said that accounts receivable and collections were their most significant business challenge. 44% said that cash flow was always something they were concerned about, and getting a better handle on “money in vs. money out” was always a top priority.

Cash flow troubles, it is important to note, is the number one reason why most small businesses fail within the first four years of existence.

Other pressing issues included properly managing paperwork on a regular basis, accurately closing the books each month, and managing payroll. The major thing to understand is that a financial professional will be able to help with ALL of these things, taking the stress off your plate so that you can focus simply on running your business like you should be. If ANY of these things are ones that keep you awake every night, or you feel these issues are significantly affecting your ability to grow and evolve, guess what? It’s time to contact a professional to do as much of the heavy lifting as possible.

Never Underestimate the Power of Trust
Consider it from another perspective. Recently, small business owners responded to a survey outlining all of their most pressing accounting issues. The survey, conducted by Wasp Barcode Technologies, spoke to 393 small business leaders of nearly every organization size and industry that you can think of.

When asked to rank the professionals that they worked with on a regular basis in the order of importance, these business leaders overwhelmingly agreed that accounting experts were one of the single most valuable assets they had. They outranked attorneys, insurance agents, technology firms and even staffing services.

This is how important tax professionals are: Business leaders know that much of what they’re trying to do each day, along with what they hope to be able to accomplish in the future, would be impossible without the stable foundation that only an accounting professional can provide.

When It Comes to Accounting, Knowledge Is Power
At the end of the day, it’s important to remember what may be the single most important piece of advice for small business owners when it comes to accounting: It is far, far cheaper to hire an accounting professional today before things get out of hand tomorrow.

Think about it this way: A large part of the reason why you got where you are today is because you took the initiative and started to do things for yourself. You have a “can do” attitude that just won’t quit, and you’ve built something incredibly successful from the ground up as a result. But there are certain situations where you cannot let pride get in the way of making the right decision, and accounting is absolutely one of them.

You already have a full-time job: running your business. You don’t have the time to take on another one, let alone the expertise to guarantee that you’re making the best decisions at all times. Yet this is exactly what business accounting is – a heavily specialized, full-time job that requires a careful hand and attention to detail that is second to none.

Bringing in a professional sooner rather than later will not only help make sure that you have cleaner books and other records, it will also significantly reduce the chance that you’ll get hit with penalties for things like late taxes and allow you to be much, much more successful in the long term. These types of benefits, to say nothing of the peace of mind that only comes with knowing your accounting is taken care of, are things that you literally cannot put a price on.

Startups: Research Credit Can Offset Payroll Taxes

A little-known tax benefit for new, qualified small businesses is the ability to apply a portion of their research credit – no more than $250,000 – to pay the employer’s share of their employees’ FICA withholding requirement (the 6.2% payroll tax). This can be quite a benefit, as in their early years, start-up companies generally do not have any taxable profits for the research credit to offset; quite often, it is in these early years when companies make expenditures that qualify for the research credit. This can substantially help these young companies’ cash flow.

Research Credit – The research credit is equal to 20% of qualified research expenditures in excess of the established base amount. If using the simplified method, the research credit is equal to 14% of qualified research expenditures in excess of 50% of the company’s average research expenditures in the prior three years.

Qualified Research – Research expenditures that qualify for the credit generally include spending on research that is undertaken for the purpose of discovering technological information. This information is intended to be useful in the development of a new or improved business component for the taxpayer relating to new or improved functionality, performance, reliability or quality.

Qualified Small Business (QSB) – To apply the research credit to payroll taxes, a company must be a QSB and must not be a tax-exempt organization. A QSB is a corporation or partnership with these criteria:

  1. The entity does not have gross receipts in any year before the fourth preceding year. Thus, the payroll credit can only be taken in the first 5 years of the entity’s existence. However, this rule does not require a business to have been in existence for at least 5 years.
  2. The entity’s gross receipts for the year when the credit is elected must be less than $5 million.

Any person (other than a corporation or partnership) is a QSB if that person meets the two requirements above after taking into account the person’s aggregate gross receipts received for all the person’s trades or businesses.

Example – The taxpayer is a calendar-year individual with one business that operates as a sole proprietorship. The taxpayer had gross receipts of $4 million in 2016. For the years 2012, 2013, 2014 and 2015, the taxpayer had gross receipts of $1 million, $7 million, $4 million, and $3 million, respectively; the taxpayer did not have gross receipts for any taxable year prior to 2012. The taxpayer is a qualified small business for 2016 because he had less than $5 million in gross receipts for 2016 and did not have gross receipts before 2012 (the beginning of the 5-taxable-year period that ends in 2016). The taxpayer’s gross receipts in the years 2012-2015 are not relevant in determining whether he is a qualified small business in taxable year 2016. Because the taxpayer had gross receipts in 2012, the taxpayer will not be a qualified small business for 2017, regardless of his gross receipts in that year.

The research credit must first be accrued back to the preceding year, where it must be used to offset any tax liability for that year. Then, the excess (up to $250,000 maximum) can be used to offset the 6.2% employer payroll tax. Any amount not used is carried forward to the next year.If you have questions related to the research credit or if your business could benefit from using the credit to offset payroll taxes, please give us a call.