SBA Questioning PPP Borrowers with Loans Over $2 Million

Article Highlights: 

  • PPP Loans 
  • Affected Borrowers 
  • Loan Application Certifications 
  • SBA Compliance Questionnaires 
  • SBA Information Review 

When Congress initially authorized the Paycheck Protection Program, it was intended to provide loans that would be partially or completely forgiven if used for the intended purposes of helping businesses affected by COVID-19 stay afloat and to help those businesses maintain payroll. As part of the Small Business Administration’s (SBA’s) loan application, Form 2483 or lender’s equivalent form, borrowers had to certify under penalty of imprisonment and monetary penalties to the following: 

  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant. 
  • The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud. 

The contemplation of free money had businesses scrambling to take out PPP loans, whether the economic effects of COVID-19 impacted them or not. 

The treasury secretary had initially indicated the need for all PPP loans to be audited but later specified only those of $2 million or more would be subject to audit. 

After a long wait, and as long-anticipated, the SBA has initiated a compliance program to evaluate the good-faith certifications that borrowers made on their PPP Borrower Applications stating that economic uncertainty made the loan requests necessary. Accordingly, each borrower that, together with its affiliates, received PPP loans with an original principal amount of $2 million or greater will be required to participate in this compliance program and will soon be receiving one of the following multi-page forms from their lender: 

Sometimes referred to as a “loan necessity questionnaire,” the form and requested supporting documents must be submitted to the lender servicing the borrower’s PPP loan. The completed form is due to the lender within ten business days of receipt. Among other things, the form requests: 

  • If the borrower’s business was shut down as a result of a government order. 
  • If any of the business’s owners were compensated in excess of $250,000. 
  • The borrower’s liquidity before and after receipt of the loan funds and during the covered period.
  • The business’s gross revenue amounts for 2019 and 2020. 

The SBA says it is reviewing these loans to maximize program integrity and protect taxpayer resources. The information collected will be used to inform the SBA’s review of each borrower’s good-faith certification that economic uncertainty made their loan request necessary to support ongoing operations. Receipt of this form does not mean that SBA is challenging that certification. After this form is submitted, the SBA may request additional information, if necessary, to complete the review. The SBA’s determination will be based on the totality of the borrower’s circumstances. 

Failure to complete the form and provide the required supporting documents may result in the SBA’s determination that the borrower is ineligible for either the PPP loan or any forgiveness amount claimed. The SBA may seek repayment of the loan or pursue other available remedies. 

If you have any questions about this issue or need assistance completing the form and assembling supporting documentation, please contact us.

Preparing for 2021: Tax Planning Strategies for Small Business Owners

If you are a small business owner, every penny of your income counts. This means that you want to optimize your revenue and minimize your expenses and your tax liability. Unfortunately, far too many entrepreneurs are not well-versed in the tricks and tools available to them and end up paying far more than they need to. You don’t need an accounting degree to take advantage of tax-cutting tips. Here are a few of our favorites. 

Think About Changing to a Different Type of Tax Structure 

When you started your business, one of the first decisions you needed to make was whether you wanted to operate as a sole proprietor, partnership, LLC, S corporation, or C corporation. But as more time goes by, the initial reasons for structuring your business the way that you did may no longer be applicable or in your best interest from a tax perspective. There is no requirement that you stick with the business structure you initially chose. 

Ever since the Tax Cuts and Jobs Act of 2017 (TCJA) changed the highest corporate income tax rate from 35% to 21%, sole proprietorships, LLCs, partnerships, and S corporations can realize significant tax savings by electing to be taxed as a C corporation. This simple change can make sense if these pass-through businesses’ owner is taxed at a high tax bracket. If so, all you need to do is fill out and file Form 8832. Before doing so, make sure that the tax savings you can realize are a reasonable tradeoff for the other reasons that you may have initially selected the structure you are currently in. 

Pass-Through Businesses Can Get a 20% 

One of the most impactful changes that the TCJA made for pass-through businesses whose income is passed-through for taxation as their owners’ income is a valuable tax break known as the qualified business income (QBI) deduction. For eligible recipients, this deduction is worth a maximum 20% tax break on the income they receive from the business – but determining whether or not you qualify can be a challenge. 

There are several restrictions on taking advantage of the deduction, particularly regarding specified service trade or businesses (SSTBs) whose owners either earn too much income or rely specifically on their employees’ or owners’ reputation or skill. Though architecture and engineering firms escape this limitation, other business models – including medical practices, law firms, professional athletes and performing artists, financial advisors, investment managers, consulting firms, and accountants – fall into the category that loses out of their income is too high. In 2019 single business owners of SSTBs began phasing out at $160,700 and are excluded once their income exceeds $210,700, while those who are married filing a joint return phase out at $321,400 and are excluded at $421,400. To calculate the deduction, use Part II of Form 8995-A

Businesses that are not SSTBs are eligible to take the deduction even when they pass the upper limits of the thresholds, but only for either half of the business owners’ share of the W-2 wages paid by the business or a quarter of those wages plus 2.5% of their share of qualified property. 

These limitations and specifications for what type of business is and is not eligible are head-spinning. Though it is tempting to take the deduction simply, it’s a good idea to confirm whether you qualify and how to claim it with our office before moving forward. 

Know How You’re Going to Pay Your Taxes

It is gratifying to live the dream of owning your own small business, but the hard work required to generate revenue makes paying taxes extra painful. This is especially true because of the “pay as you go” tax system that the United States uses, asking business owners to make estimated quarterly payments. While employees pay their taxes ahead via payroll deductions withheld by their employers, no such automatic system is set up for small business owners. That leaves many with the temptation of delaying making payments to maintain liquidity. 

Unfortunately, failing to pay taxes quarterly can put you in the uncomfortable position of still having to pay at one point, with the additional burden of penalties and interest resulting from your delay. Though setting aside the money to pay taxes requires discipline, doing so will save you from the penalties charged by the IRS. These are calculated based on the amount you should have paid each quarter multiplied by your shortfall and the effective interest rate during the specific quarter (established as 3 percent over the federal short-term rate – C corporations pay a different rate). Even if you don’t calculate your quarterly estimated rates correctly, the safe harbor rule allows small businesses to pay the lower amount, which is either 90% of the tax due on your current year return or 100% of the tax shown on your last filed tax return. For those whose AGI was over $150,000 in the previous tax year, the safe harbor percentage is 110% of the previous year’s taxes. 

It is always a good idea to increase the amount you send in if you have a higher-income year. By doing a simple calculation of your safe harbor number and dividing it by four, you have a reasonable quarterly payment that you can safely send in on the due dates (April 15th, June 15th, September 15th, and January 15th of the following year). By setting aside the appropriate percentage that you will owe from each payment you receive, you can easily set aside the money you will need to pay and entirely avoid concerns about penalties or interest. Payment is most easily submitted using the online link for IRS Direct Pay, though many people opt for sending in the paper vouchers for IRS Form 1040-ES, along with a check. There is also an EFTPS system available for C Corporations’ use. 

Choose Your Accounting Method Carefully

Each small business owner calculates their income and revenue differently, with many using a method of accounting that is based on when money is received rather than when an order is placed and counts expenses when they are paid rather than the item or service ordered. This is known as the cash method of accounting. 

Whatever method of accounting you use, smart business owners can strategically adjust their approach—reporting their annual income based on cash receipts to reduce their end-of-year revenues, especially if there is reason to believe that next year’s income will be lower or they anticipate being in a lower tax bracket. 

An example of how this approach would be helpful can be seen in a business that expects to add new employees in the new year. Between that expense and other improvements planned, it makes sense to anticipate that net income will be down. The tax bracket for the business will be lower, so any work is done or orders placed towards the end of the current tax year should be accounted for when payments arrive so that the income can be taxed at a lower rate. The contrast to this is if you anticipate your business revenue to increase and be forced into a higher tax bracket in the new year. In that case, it makes sense to try to collect monies for work done in the current year early so that you can take advantage of your current, lower tax rate. This can be done for business expenses such as office supplies and equipment, which can be deferred and accelerated in the same way so that you can take advantage of tax deductions in the most advantageous way. 

Establish and Make Deposits Into a 401(k) or SEP 

One of the smartest ways to lower your taxable income is to contribute to a retirement account. Not only does doing so reduce your business’ tax liability, but it also ensures a more secure future. As a small business owner, either a 401(K) plan or a Simplified Employee Pension (SEP) plan will do the trick while benefiting both you and those who work for you in the future. 

While a 401(k) that is established before year-end will let you deduct any contributions you make (with contributions limited to the lower of $57,000 or the employee’s total compensation), business owners who fail to set up this type of plan by December 31st can still turn to the SEP as an alternative. Though SEP contributions are restricted to 25% of the business owner’s net profit, less the SEP contribution itself (technically 20%), a SEP can be established, and contributions made up until the extended due date of your return. Suppose you obtain an extension for filing your tax return. In that case, you have until the end of that extension period to deposit the contribution, regardless of when you file the return.

If You Took Out a PPP Loan, Plan on it Being Forgiven 

Many small businesses took advantage of the PPP loans that were offered by the government in the face of the COVID-19 crisis. While these loans were attractive because they are forgivable and gave businesses a chance to survive the dire circumstances, in April of 2020, the IRS issued Notice 2020-32, which indicated that even though the forgivable loans can be excluded from gross income, the expenses associated with the money received cannot be deducted. This effectively erases the tax benefit initially offered because losing the employee and expense deduction increases the business’ income and profitability. 

There is some chance that this issue will be resolved by Congress, as it contradicts the original intent of the tax benefit that accompanied the PPP funds, but that action has not yet been taken. It’s a good idea to talk to our office about this as soon as possible. Having to pay taxes on expenses incurred may be particularly challenging in the face of the difficulties the pandemic has imposed. Being financially prepared to pay more taxes than you originally intended may be a bitter pill to swallow. However, it will still be better than paying penalties and interest if you fail to pay what the government says that you owe. 

Though all of these strategies can be helpful, they may not all be appropriate for your situation. Keep them in mind as you go into the end of the year, and be prepared to ask questions to determine which apply to you when you speak with our office. Contact us to discuss tax planning for your business today.

12 Financial Metrics Small Business Owners Should Track

Operating a small business is an exhilarating and, at times, overwhelming endeavor. There are so many details and daily tasks, and it’s essential for you to stay on top of your organizations’ finances. Whether you’re assembling your financial reports or hiring a professional to do it, it’s crucial to understand which numbers are most important and what they mean in terms of the decisions you make and your health assessment of your overall business. In this article, we review a list of 12 of the most important elements of your financial report.

1. Profit and Loss 

Every quarter, you should refresh your business’s profit and loss report to understand your bank and tax reporting needs. It is the single, at-a-glance snapshot of your bottom line that you can use to drive your own decisions and that you can show to an outsider for them to gauge your strength. If you have a reconciled balance sheet, it will ensure that everything in your profits and losses has been accounted for. 

2. Average Cost of Customer Acquisition 

We all want customers, and especially high-paying customers. Though it’s tempting to assume a ‘whatever it takes’ attitude, you need to know the average cost of acquiring profitable customers and then assess whether you can cut those costs to make them even more profitable. Knowing the average cost of customer acquisition can also help you figure out what to spend on customer retention and the value of upselling. 

3. Budget Versus Actual 

Think you’re sticking to the plan based on what you see in your bank account? The truth is that if you compare what you’ve budgeted with what you’ve spent, it will give you a far better sense of whether you’re staying on track and what kind of adjustments you need to make. 

4. Cash Flow 

Most people consider cash flow the most telling metric of all, and cash certainly is the lifeblood of any company. If you’re not keeping an eye on your cash flow, you could find yourself unaware and flatfooted when making essential payments. During your regular business health check, make sure you measure your cash flow, your cash burn (the amount you go through monthly), and your runway (how much you can operate based on your cash on hand).

5. Fixed Burn Rate 

No matter how well you are doing, there is always the chance that you’re going to encounter some unforeseen circumstance or drop in business that is going to drive the need to cut costs. It’s crucial to take a close look at your fixed burn rate and make sure that it isn’t too high. As tempting as it may be to sign on to a long-term contract to save a little money, if you commit yourself to a payment that you can’t afford at all in the future, you’re putting your business at risk. You may be better off taking some of those expenses off of a contracted status so that you can eliminate them if you have to. 

6. Employee Productivity 

Though it’s a given that your employees are your most valuable asset, that doesn’t mean that you should be operating without ensuring that you are getting enough value out of them to justify what you are spending. The best way to do that is to monitor each employee’s productivity to ensure that each staff member is pulling their weight. 

7. Operating Cash Cycle 

When a business wants to expand, it can’t move forward blindly. Business owners need to have a good handle on how long it takes for the cash to become available to the business after their capital investment to feel confident in their ability to go through with their plans. Those who fail to understand their operating cash cycle risk joining the ranks of the 82% of businesses that fail due to poor cash flow management.

8. Churn Rate 

When you think about how hard you work to acquire new customers, knowing how long you’re holding on to them is a key metric. If you’re churning through your customers too quickly, it means that your product or service isn’t valuable enough for them to stick around for more. Addressing why your customers are leaving quickly is the first step in making your business more profitable for the long term. 

9. Regulatory Requirements for Your Industry

It’s easy to forget about renewing your industry license or maintaining a minimum capital in keeping with regulatory requirements. However, failing to keep track leads to unnecessary and costly non-compliance penalties. Make sure that you include your regulatory requirements within your financial report and calendar. 

10. Projected Profit Loss Versus Actual 

A significant part of your annual financial plan should include a projection of what you believe your profit and loss will be, as well as a budget for each of your expense areas. This will allow you to compare what you projected to your actual profit and loss and then review where things went askew. Some may be explainable and worthwhile, and others may be warnings of things getting out of control. 

11. Profit Goals and Profit Per Customer 

One of the most effective ways to promote profitability is to take a granular, analytical approach to your profit goals. By determining your short-term and long-term profit goals, you can then break it down to your profit goal based on your existing customers or the number of new customers you need to acquire. All of these numbers can drive internal processes and help you get where you want to go. 

12. Financial Ratios 

Ratios are among the most useful metrics that a small business owner can use to determine their organization’s overall financial health. Among the most important are their liquidity ratio (how much cash you have on hand to pay the monies you owe); your efficiency ratio (how much it costs you to bring in a single dollar); and your profitability ratio (profit as it compares to revenue). 

These twelve elements are extremely beneficial in helping you understand where your money is at all times. If you would like to discuss how we can help you run a successful business, please contact us for more information.

Actually, a Recession is a Great Time to Launch That New Startup

Many people are worried about an impending global recession due to the economic slowdown that the COVID-19 pandemic has brought with it – and your average entrepreneur and startup founder is chief among them. It makes sense to assume that with so many people watching what they spend and with so much uncertainty in the air, it’s too risky to launch that business of your dreams anytime in the near future. 

But at the same time, that idea and reality may not line up quite as nicely as you’d think. Some argue that entrepreneurs actually should not worry about a potential recession for the simple reason that the state of the global economy doesn’t directly impact startups on a large scale. 

Some factors will determine whether or not a startup will succeed, but they have less to do with the coronavirus or an impending global recession than you might think. 

The Positives of Founding a Startup in a Recession: What You Need to Know 

One of the significant reasons why founding a startup in a recession isn’t necessarily the issue you thought it was going to be, has to do with the fact that products and services are generally cheaper during these periods of economic downturn. Smart entrepreneurs aren’t scared by this – they’re ready and waiting to take advantage of it

While larger companies are looking for any opportunity to retract and shed costs, those struggling businesses will likely sell off many of their assets at bargain-basement rates. Retailers and other organizations will usually drop their prices to move as much inventory as possible before it’s too late. Interest rates fall to their absolute lowest, meaning opening new credit lines or taking out loans has never been easier. 

Sure, none of this is precisely positive for those larger organizations – but it’s good news for your new startup that couldn’t have come along at a better time. Provided that you already have a plan in place, you can save on costs and still bring your vision of the perfect company into reality at the same time. 

Top Talent Will Always Be Looking for Opportunities 

Along the same lines, your startup will need high-quality employees, though depending on the financial side of your business, getting to that point may often be easier said than done. 

If a global recession occurs, this is another primary reason this could be good news for your efforts. As soon as the worldwide recession sets in, those larger companies will begin shedding workers – and fast. As unemployment rates rise across the country, it means that there will be a far larger number of qualified, passionate, and talented people available to fill whatever positions you have available. 

By putting in the effort to build a secure hiring plan, you’ll know what type of candidates to go after as soon as they become available. Not only that, but you’ll likely be able to secure these people at lower rates than you would have if the job market were more vital in your industry. 

Many people agree that this is an excellent opportunity to bring in a co-founder to complement your skillset. Never forget that a big part of your success will ultimately be determined less by what you do and more by whom you are surrounding yourself. If you’re able to attract qualified individuals who A, believe in what you’re trying to accomplish, and B, who possess the desired skills, you’ll be in a far better position, significantly earlier on in your company’s lifecycle.

Entrepreneurs Solve Problems. That Will Always Be True (and Necessary) 

In the end, the same factors that will impact whether a startup can succeed are as real today as they were before any of us had ever heard about the coronavirus. They are and will always involve your founding team and their ability to solve a problem for a paying customer. You cannot overstate the importance of starting your business with a qualified, well-balanced, and experienced team.

People will always have problems, and they will always look to new and innovative companies to help them. Yes, the issues may change given what is going on around the world – but the fact that people are looking for real, efficient solutions will not. 

In other words, it’s still all about the product-market fit. If your startup was founded on a genuinely innovative idea that speaks directly to the heart of a universal problem that many people are experiencing, it will be successful. It may take a bit longer in a global recession, sure – but the odds are very much in your favor. 

Many times, achieving this product-market fit has little to do with broader macroeconomic trends, which is precisely why a recession is probably a far better time to launch your startup than you thought. Once you remember that all recessions eventually come to an end – and the startups founded on a stable foundation during this time are in the best position to rebound – you’re looking at a stimulating position for any entrepreneur.

Please contact us if you are considering launching a business and would like assistance, or if you have any questions. 

Your Small Business Survival Guide for If (and When) the Economy Slows Down

According to one recent study conducted by the Small Business Administration, there are approximately 28.8 million small businesses in the United States that are collectively responsible for about 99.7 percent of all economic activity in this country. In many ways, they represent the “canary in the coal mine” for a nation. When small businesses are doing well, this is a sign that the economy is strong and that the future is a bright one.

Unfortunately, the reverse is also true as NSBA revealed that the greatest challenge to both small business growth and survival is economic uncertainty. That idea in and of itself may be nothing new, but a number of recent studies and surveys have revealed that a slowdown in the economy is an issue that may be significantly more timely than many realize.

A Recession and Your Business: A Primer

According to the latest CNBC/SurveyMonkey survey, 53 percent of respondents say that they expect an economic recession sooner rather than later. In fact, many of them think that it could arrive as soon as 2020. This comes despite the fact that 52 percent of respondents described business conditions as “good” for the first quarter of 2019; 57 percent expect increased revenue; and 28 percent actually plan to increase their own full-time staff in the short term.

One of the major factors that contributed to the devastation wreaked by the last recession was that it was so sudden. Things got very bad very quickly, and a lot of small business owners suffered as a result.

But, if most people are in an agreement that another recession is on the way (and indeed, a lot of people seem to think we’re overdue), that knowledge itself becomes your most powerful asset. If you truly want to make sure that your small business is capable of surviving when the economy slows down, there are a few key things you’ll want to keep in mind.

Always Be Prepared

Experts agree that one of the best ways to make sure that your small business comes out of the next economic slowdown in one piece has to do with being as proactive and as prepared as possible.

Your business might not need a working capital injection today, for example, but it may once the next recession begins. At that point, it might be difficult to gain access to that capital thanks to poor or uncertain economic conditions.

To combat this, consider taking out a new line of credit to help make sure those funds are available if and when the time comes. Getting a credit line for $20,000 doesn’t mean that you have to borrow that money today or even in full. But the peace of mind that comes with knowing you do have access to these funds will go a long way toward making sure that you can stay afloat during those slow periods.

It All Comes Back to Cash Flow

Likewise, if you know with some certainty that an economic slowdown is inevitable, there are steps that you can take in the short term to avoid traps and other pitfalls that would cause additional damage during a recession.

When the economy does slow down, you’ll need to make sure that your cash flow is in order. If that is currently a problem for you, it’s only going to get worse as time goes on. Make an effort today to collect on accounts receivable at a faster pace. Improve and optimize your own processes and workflows to make sure that you’re getting the money for services rendered as quickly as possible. If you take meaningful steps to improve your cash flow situation now, it will be one less thing you have to worry about if the economy does slow down dramatically next year.

The Art of Inventory Management

Finally, one of the best steps you can take to protect your business during slow economic periods has to do with performing an overhaul of your inventory management practices.

Inventory costs are always a major pain point for most small businesses, but this is especially true during a recession. Again, take a look at some of the problems you may have today that could cause major damage down the road.

Do you currently order far too many of one specific item? Is there an item that you have that can be sourced somewhere else for a better price? Are you capitalizing on every opportunity to reduce shipping and warehousing costs?

These are the types of questions you need to ask yourself prior to the next economic slow period. If you wait until things start to get tough before taking a look at your inventory management practices, you’ll have waited far too long. You may be able to make progress at that time, but the lion’s share of the serious damage will have already been done.

However, by following tips like these to strengthen the foundation of your business right now, it will still be as solid as you need it to be moving forward – regardless of what happens with the economy during that time. If nothing else, these steps will all help to make sure that your business comes out of the next recession stronger than ever, which is definitely the position you want to be in.

If you have any questions, please contact us for assistance.

Ten Ways to Improve Profits in the Coming Year

In the U.S., the economy is thriving and expected to grow over the next few months. Businesses are expanding. The Federal Reserve has inched up interest rates, creating investment opportunities, and lenders are offering small business loans. All of this points to a promising outlook for the coming months. As a small business owner, this is the time to take a closer look at your profit and loss sheets to determine how you can make the most out of this current economy.

How Can You Increase Revenue and Profits in the Coming Year?
For most companies, increasing revenue and profit margins is a goal. Yet, there’s strong competition in most sectors. Here’s a look at ways you can boost your profit margins without having to invest heavily.

#1: Increase Pricing Marginally
Inflation is a key component of the current market. As the U.S. consumer increases confidence in spending, it becomes possible to increase prices. Re-evaluate your current price points. Are you getting enough from each sale to build profits?

#2: Don’t Overlook the Impact of Tariffs
The ongoing trade war with China has many business owners worried about cost. Plan now. Tariffs are impacting nearly all industries including construction, retail, restaurants, and manufacturing to name just a few. Work with your team to understand the impact on your business’s bottom line, such as the higher cost of goods, and build those costs into your prices.

#3: Get Rid of Tasks Not Adding Value to the Customer
Take a closer look at what you are spending on within your profit and loss. Is each one of these expenses directly contributing to your customers’ needs? Eliminate costs that do not contribute to customer value.

#4: Review Competitor Prices
Along with increasing your prices, take a closer look at what your competition is charging for services. There are two things to focus on here. If their prices are higher, why? Are they offering something better for their product or service that encourages a higher price point? Second, are your prices competitively aligned with theirs? If not, what can you do to offer something extra to your customer?

#5: Reduce Overstock
Carrying a significant amount of stock does not improve business operations and increases costs. It can drive up waste when product is lost or forgotten. It also hampers your company’s ability to keep inventory costs in line with your goals. Pair down stock.

#6: Find a Way to Increase the Value of Every Sale
Provide some last-minute addition your customer could buy to enhance their product or service. Ensure your sales team is speaking to each customer about this offer, right as they close the deal. If you sell cars, offer an add-on feature for a certain additional amount. If you sell professional services, determine if your customers could benefit from a monthly check-in or other add-on services.

#7: Expand Product or Services Lines With Care
Look for complimentary services and products that do not require a lot of investment to offer them to your customers. What additional products or revenue streams could enhance what you already provide? This may not require additional equipment or a large amount of inventory.

#8: Build Your Team’s Skillset
Beyond a doubt, in a sales-oriented business, your company cannot build revenue if your sales team misses their market. Invest in sales training for the modern audience. Focus on moving away from traditional methods toward more efficient and brand-building methods for sales.

#9: Get Your Numbers in Line Now
Hiring a team to help you explore your current profit margins is critical. However, bringing on a professional organization to help with managing your books is only effective if you apply the information and insights they provide to you. In other words, find a team you can sit down with and discuss opportunities you can apply right now.

#10: Build Your Customer Base
Use a variety of tools to help build your customer base. Complete a market analyses to better understand who your target customer is. Then, work to modernize your marketing efforts to attract that specific audience. When you do, you turn heads and capitalize on a new set of customers.

Building revenue and profits starts with knowing where you are specifically. Review your prices, financial accounts, and books with care. Then, look for small ways to reduce costs that don’t contribute to your profits and build up services, products, and prices for those that help your company to grow. Always have a focus on the bottom-line benefit of any investment you make.

If you have any questions about improving profitability in the coming year, please contact us for assistance.

Rejoice — Business Meals Are Still Deductible

f you are a business owner who is accustomed to treating clients to sporting events, golf getaways, concerts and the like, you were no doubt saddened by part of the tax reform that passed last December. A part of the tax reform did away with the business-related deductions for entertainment, amusement or recreation expenses, beginning in 2018. You can still entertain your clients; you just can’t deduct the costs of doing so as a business expense.

While the ban on deducting business entertainment was quite clear in the revised law, a lingering question among tax experts has been whether the tax reform’s definition of entertainment also applied to business meals, such as when you take a customer or business contact to lunch. Some were saying yes, and others no. Either way, both sides recommended keeping the required receipts and documentation until the issue was clarified.

The IRS recently issued some very business-friendly guidance, pending the release of more detailed regulations. In a notice, the IRS has announced that taxpayers generally may continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business, including business meals, provided:

  1. The expense is an ordinary and necessary expense paid or incurred during the taxable year in carrying out any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
  4. The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact; and
  5. Food and beverages provided during or at an entertainment activity are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices or receipts.

The IRS notice also included the following interesting examples related to #5: The taxpayer invites a business contact to a baseball game. The tickets to the game are entertainment and not deductible. However, the taxpayer also purchased hot dogs and a beverage for himself and the business contact. Because the food and drinks were purchased separately, they are not disallowed as entertainment and are deductible if they otherwise qualify as an ordinary and necessary business expense. Had the ticket price included the hot dogs and beverages, they would be treated as non-deductible entertainment. If the ticket price separately stated the ticket price and the food and beverage price, then the food and beverage portion would not be disallowed as entertainment.

Of course, the substantiation requirements still apply. You must be able to establish the amount spent, the time and place, the business purpose and the business relationship and names of the individuals involved. You should keep a diary, an account book, digital files or similar records with this information and record the details within a short time of incurring the expenses. If the meal expense is $75 or more, documentary proof (receipts, etc.) is also required.

If you are an employee, starting in tax year 2018, you will not be able to deduct your unreimbursed employee business expenses, including the cost of client meals. These expenses have been deductible as miscellaneous itemized deductions when you itemized deductions and when your total deductions in that category exceeded 2% of your adjusted gross income. Under the tax reform, this category of deductions is not deductible for years 2018 through 2025. So, unfortunately, the IRS’s expansive definition of meal expenses will not benefit you.

If you have questions related to business meals, substantiation, or the ban on entertainment expenses, please give us a call.

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.

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.

Driving For Uber Or Others? Your Tax Situation Is Unique

With tax time approaching, if you drive for Uber, Lyft or a competitor, here is some tax information related to reporting your income. You are considered self-employed and will report your income and deductible expenses on IRS Schedule C to arrive at your taxable income for income tax and self-employment tax.

Your driving income will be reported on IRS information Form 1099-K, which reflects the entire amount for your fares charged on credit cards through the Uber reporting system. So if the 1099-K includes the total charges, then it also includes the Uber fee and credit card fees, both of which are deductible by you on your Schedule C. To determine the amount of those fees, you must first add up all the direct deposits made by Uber to your bank account. Then subtract the total deposits from the amount on the 1099-K; the result will be the total of the Uber fees and credit card processing fees. If you drive for multiple services, you will have multiple 1099-Ks and deposits from multiple services. It is highly recommended that you keep copies of your bank statements for the year so you can verify deposits in case of an IRS audit.

You will also need to include in your income any cash tips you received that were not charged through Uber. You should keep a notebook in your vehicle where you can record your cash tips. Having a contemporaneously maintained tip logbook is important in case of an audit.

Your largest deduction on your Schedule C will be your vehicle expenses. The first step in determining the deduction for the business use of a vehicle is to determine the total miles the vehicle was driven, and then, of the total miles, the number of deductible business miles and non-deductible personal miles. Recording the vehicle’s odometer reading at the beginning of the year and again at year-end will give you the information needed to figure total miles driven during the year. Although the Uber reporting system provides you with the total fare miles, it does not include miles between fares, which are also deductible. Thus it is important that you maintain a daily log of the miles driven from the beginning of your driving shift to the end of the shift. The total of the shift miles driven will be your business miles for the year. If you know the business miles driven and total miles driven, you can determine the percentage of vehicle use for business, which is used to determine what portion of the vehicle expenses are deductible.

You may use the actual expense method or an optional mileage method to determine your deduction for the use of the vehicle. If you choose the actual expense method in the first year you use the vehicle for business, you cannot switch to the optional mileage method in a later year. On the other hand, if you choose the optional mileage rate in the first year, you are allowed to switch between methods in future years, but your write-off for vehicle depreciation is limited to the straight line method rather than an accelerated method. For 2017, the optional mileage rate is 53.5 cents per mile. The IRS generally only adjusts the rate annually. If using the optional mileage rate, you need not track the actual vehicle expenses (but you still need to track the mileage).

The actual expense method includes deducting the business cost of gas, oil, lubrication, maintenance and repairs, vehicle registration fees, insurance, interest on the loan used to purchase the vehicle, state and local property taxes, and depreciation (or lease payments if the vehicle is leased). The business cost is the total of all these items multiplied by the business use percentage. Since the vehicle is being used to transport persons for hire, it is not subject to rules that generally limit depreciation of business autos, allowing for substantial vehicle write-off in the first year where appropriate. However, if you converted a vehicle that was previously used only personally, the depreciation will be based upon the lower of cost or current fair market value, and no bonus depreciation will allowed unless the conversion year was the same year as the purchase year.

Other deductions would include cell phone service, liability insurance and perks for your fares, such as bottled water and snacks. Depending on your circumstances, you may qualify for a business use of the home (home office) deduction. However, to qualify, the home office must be used exclusively in a taxpayer’s trade or business on a regular, continuing basis. A taxpayer must be able to provide sufficient evidence to show that the use is regular. Exclusive use means there can be no personal use (other than de minimis) at any time during the tax year. The office must also be the driver’s principal place of business.

Uber provides its drivers with detailed accounting information, and the only significant additional record keeping required is the miles traveled between fares, which is accomplished while in the vehicle. So justifying a home office is problematic. Even a portion of the garage where the vehicle is parked could qualify, but the use must be exclusive, which means the vehicle must be used 100% for business.

As a self-employed individual, you also have the ability to contribute to a deductible self-employed retirement plan or an IRA. Also, being self-employed gives you the option to deduct your health insurance without itemizing your deductions. However, these tax benefits may be limited or not allowed if you are also employed and participate in your employer’s retirement plan or if your employer pays for 50% or more of your health insurance coverage.

If you have additional questions about reporting your income and expenses, or the vehicle deduction options, please give us a call.