Archive for the "Accounting & Bookkeeping" Category

Starting a Business

Starting a business is a big decision; whether you are leaving a steady income stream or just beginning your career, venturing out on your own can seem like a daunting task.  Having an idea of what lies ahead can help.  What follows is a basic road map for the formation of a business.  Not every venture requires each step; having a trusted advisor to help along the way is invaluable.

First is the choice of entity: sole proprietorship, LLC, S corporation, and C corporation are the most common but there are others.  It is best to analyze this from both a legal perspective and a tax perspective to determine which one is the best fit.  This means meeting with an attorney and a CPA to discuss the options.  Make sure that you and your professional advisors are on the same page about the direction of the business; including the ultimate goal whether that is the sale of what you have built or a succession plan.

After the type of entity is chosen, the capital structure of the business should be developed.  This can be as simple as $100 from the owner to get things started or as complex as multiple equity offerings with different profit and loss allocations for each tier.  Deciding whether to pursue debt (loans) financing or equity (ownership) financing should be made in this step.  Your advisors will guide you through this and make recommendations along the way.

Next are some government filings.  In Minnesota you must establish the business with the Secretary of State's office.  Then you can obtain a federal employer identification number and other state identification numbers, sales tax, withholding tax, if necessary.

The next step to your business formation is to develop an accounting system.  It is best to determine and lay out some processes in the beginning of your formation.  These processes will make it easier to track income and expenses and give you an accurate and timely picture of the business' financial situation.  What you need will vary depending on the type and size of the business as well as the personal preferences of the owner(s) therefore it may be useful to contact your accounting advisor during this step.

Now it is time to solicit business… wait… that was most likely happening before and during all of these activities already.  This business is your and possibly some other partners/investors project.  Make sure that throughout the formation process the development of the business corresponds with your initial vision.  Your advisors should be able to answer any questions you have and help you to be comfortable with each step, all while remaining a valuable asset you can take with you to the next new step your venture brings.

 

Capital Equipment Sales Tax Exemption

Starting July 1, 2015 the Minnesota Department of Revenue will allow businesses an exemption from sales tax at the time of purchase for capital equipment used to manufacture, fabricate, or refine products. Currently, businesses are required to first pay the sales tax then file a request for a refund using Form ST11 so the new law will have a positive effect on cash flow and reduce tax compliance.

To qualify for this exemption, a business will need to provide the vendor with a completed Form ST3  citing the reason for exemption as "Capital Equipment."

Cash Transaction Reporting Requirement

The IRS would like to remind businesses, including sole proprietors, that they are required to report any cash transaction exceeding $10,000.  A transaction can include more than one payment if a payment is one of a series of connected transactions.  The transaction must be reported on Form 8300 within 15 business days. Cash includes: coins, currency, cashier's checks, bank drafts, traveler's checks, and money orders.

Good Recordkeeping

A new year has started and tax season is over, and maybe it was a little more difficult to gather all your information than you would have liked.  Before we get too far into the year, read these tips to make sure you are practicing good record keeping habits so that next year will be a piece of cake!

  1. Keep records in one location- One of the struggles come tax time is that records get filed in many different locations and taxpayers spend lots of unnecessary time searching all the places they could have put that one piece of paper. Instead, when you receive a receipt or record that is commonly used for your taxes, make a copy and keep it in a tax file. Doing this will ensure that all your tax records are together and you can just hand the whole file over to your preparer. Common records to keep will include, but are not limited to, medical and charitable receipts, property tax and interest statements, or any statements with the words “Tax Document” printed on the envelope.
  2. Use Excel Worksheets- When taxpayers begin to gather lots of receipts or data for the year, a good practice is to begin to record these receipts on an Excel spreadsheet.  This way you will be able to make sure that every expense has been recorded without searching through hundreds of individual receipts.  This will also enable you to compute quick totals instead of adding each expense individually with a calculator, which could take a lot of time and mistakes are easily made.  A good example of an expense to record with Excel would be business miles.
  3. Take advantage of Personal or Business Financial Software- Many different types of software such as Quicken, NeatDesk, QuickBooks, and Mint.com are available to help with personal financial needs in a range of prices from $0 to hundreds of dollars.  These kinds of software help to track and locate your finances using search features and other kinds of tracking options. Then come tax time, you can figure out exactly what you paid for deductable items such as vehicle registration fees.  They are also handy tools for budgeting and other personal finance needs.
  4. Create a System- Every person is different, some people prefer a fancy high tech computer to track everything, some love label makers and cubby holes, and some prefer a shoe box above all else.  Figure out what works for you and your lifestyle.
  5. Be Diligent- Good recordkeeping will save you money and stress in the long run.

 

For additional information check out this video from the IRS titled “Good Recordkeeping helps avoid headaches at tax time

Note: BHB Advisors is not affiliated with nor endorse any of the aforementioned software companies.

2014 Tax Season Resources

Welcome to another tax season!  To make this busy time a little easier, you can download all the necessary documents right here.

We ask all of our clients to fill out and return a signed Engagement Letter, and Questionnaire. We also have an Organizer that you can fill out to help gather your tax information.

Engagement Letter

Questionnaire  – This is a “fill in” PDF form, but will need to be either printed to .pdf or paper to record your answers.

Organizer

If we did your return in 2013, you will receive an Organizer with your prior year information.  If you need a new Organizer, please contact Carrie to have one sent to you.

 

If you are a new client, please download and complete the blank Organizer that pertains to your situation.

 

  • Basic – For taxpayers without Schedule C business income or rental property.
  • Business Income – For taxpayers with self-employment income. Please make sure to fill out this Organizer AND the Basic Organizer.
  • Rental Income – For taxpayers with rental properties. Please make sure to fill out this Organizer AND the Basic Organizer.
  • Complete – This is the complete version for taxpayers with multiple activities such as business, rental, or farm income.

If you have Adobe Acrobat see our instructions  for filling out your organizer in Adobe.

Reminders!

2014 4th Quarter Estimates – Due on January 15th, 2015.

2014 1099 Forms – Regarding anyone required to distribute 1099 forms for interest paid to an individual, payments to contractors totaling over $600, rents, etc. The due date for sending these forms is February 2nd, 2015.  If you need help or have any questions about the requirements please consult your tax accountant or see our article “1099 Filing Requirements.”

2014 Sales and Use Tax – If you signed up with the Minnesota Department of Revenue as an annual filer for sales and use tax, the due date for this return is February 5th, 2015.  If you signed up for sales and use tax you are required to file even if you did not incur a sales or use tax liability.  In this case, it is perfectly acceptable to file a zero return.  If you have questions please contact your tax accountant or see our article “Do you have a Use Tax liability?

2014 Trust Distributions – Fiduciaries of estates and some trusts have the option to treat certain distributions as made in the previous year.  If a distribution is made in the first 65 days of a year, an election can be made to treat that distribution as if it was made in the prior year.  The last day to make a 2014 distribution from a trust is March 6th, 2015.

2014 IRA Contributions – You have until April 15, 2015 to make your Traditional and Roth IRA contributions.

2014 HSA Contributions – April 15, 2015 is the last day you can make a contribution to your HSA for 2014.  The contribution limits are $3,300 for self-only or $6,550 for family coverage. Add an additional $1,000 if you were 55 or older at the end of 2014.

UPDATES

2015 Standard Mileage Rates

Business: 57.5 cents per mile (56 cents per mile in 2014)

Medical and Moving: 23 cents per mile (23.5 cents per mile in 2014)

Charitable: 14 cents per mile (same in 2014)

 

Expiring deductions

The extender package was passed on December 16th that extends over fifty expiring provisions through 2014.  Since this was a one year extension, Congress will have to vote on the expiring provisions again next year.

 

179 Deduction

The amount of allowable federal 179 expense was decided upon with the extender package that was passed on December 16th.  The allowable deduction is maxed out at $500,000 and decreases dollar for dollar once a business has placed in service more than $2 million dollars of qualifying assets.

 

Minnesota Refund

Because of mid-year law changes, many taxpayers received different refunds than what was originally reported on their tax return.  It is possible for taxpayers to look up and print a copy of Form 1099-G stating what they received as a refund.  The MN DOR states however that information about refunds paid in 2014 won't be available until January 31st 2015.  You can look up your refund here.

The Truth About Business Gifts

We are quickly approaching the holiday season and companies are planning their gift lists.  Here is the truth about business gifts…

Business gifts are deductible to only $25 per recipient per year with married couples being considered one recipient.  You may want to give a great customer a lovely Christmas basket that cost you $100, and of that kind gift, $75 may be subject to tax because it is not deductible.

Promotional materials or small items under $4 with a logo do not qualify as a gift and should remain classified as a promotional expense.

Gifts are a great way to thank your clients or customers and encourage their continued support, but take the time to weigh the cost benefit before filling out your Harry and David order forms.

gift

The Skinny on Deducting Meals

hamburger

One of the most common questions I get asked by clients is how much they can deduct for meals.  To answer the question I am going to break this down.

Are meals ever deductible?

Yes! The caveat with deducting your meals is whether they are directly related to or associated with your business activity.  Additionally, you must be able to prove that the purpose of the meal was business and that there is more than a general idea that you will be engaged in business with them in the future.  Some examples of non deductible meals:

  1. Deciding not to bring your lunch from home and grabbing a sandwich does not constitute a business activity and is not deductible.  If you were traveling to and from clients and needed to stop for lunch because you could not reasonably go home or bring your lunch, you may have grounds for a deduction.
  2. Generally meals with business associates and coworkers are not deductible unless you can establish a clear business purpose.
  3. Having a meal with someone with the hope that they may be a client or customer someday does not make the meal deductible.

Additionally, you will need to keep records of your expense and business purpose should your deduction be challenged.  Using a spreadsheet or writing the information right on the receipt doesn’t take very long and could save you hours in the future.

Most meals are only 50% deductible

Even when your meals are legitimate and deductible most are only deductible up to 50%.  This means that it is important for companies to discuss and decide the appropriateness of using this deduction.  Spending $5,000 on meals throughout the year could result in an additional $2,500 of taxable income and depending on your tax rate, the numbers can add up.

Exceptions to the 50% limit

There are circumstances where meals are fully deductible:

  1. As a fringe benefit.  You can deduct the cost of meals served on the premises for the convenience of the employer.  An applicable scenario would be a lunch meeting where the employer provides lunch so that they can continue working.
  2. As compensation. You can deduct the full cost of meals if they are added as taxable income to the employee’s wages.
  3. As a promotional activity.  Meals provided to the general public as part of a promotional event can be fully deductible.  A promotional event would include the snacks at a retailer’s open house event.
  4. At special occasions. If you provide meals for your employees at a social or recreational event such as a holiday party or summer picnic, the cost of the meals is fully deductible.

The deduction for meals is a nice way for business owners to conduct their activities in a more enjoyable and stress free atmosphere as well as providing a nice benefit to employees.  Because it is an attractive deduction it has the propensity to be misused and abused.  The IRS can easily disallow your deduction if you cannot provide appropriate support for your deduction upon audit.  My advice is to add this deduction to your business toolkit: use it when it is appropriate for good business practice but remember its limitations.

It's all about attitude

I can still hear my mother's voice in my head telling my 14 year old self to watch my attitude.  And though she was threatening recriminations for my continued crabby tone, her advice goes way beyond my adolescent angst.  Don't we, as a general rule, tell ourselves to think positively, out of some subconscious superstitious fear of our negative thought suddenly materializing into absolute reality?  And while that one chipper neighbor may drive us a little crazy, there is great value to watching your attitude.

Most business owners work hard to maintain a positive attitude with their clients, but what about their employees? While perusing one of the accounting publications I follow, I found the following article…

Art of Accounting: My Boss Hated the Client By Edward Mendlowitz

Early on my boss took me to a client that I was to work on. He started to explain what needed to be done and what the client did, but then he said, “I hate this client—everything is always messed up and nothing ever makes sense.”

He also told me my work area was in the factory. I would probably have to move a chair next to a carton that would serve as a desk, and he warned me the lighting wasn’t too good.

His remarks were like a kiss of death. For the next five or six months, I dreaded going to the client, always thinking how messed up they were and nothing ever made sense. Then it dawned on me that I was the person doing the work, and things were in order. The carton I worked on was a few feet from where the client packed his shipments. When he did, he always chatted with me about his business, customers, employees and pricing strategies.

He also told me things he liked to do, such as going to the opera (which I did too) and vacations he took or would like to take. The client also would buy me a sandwich to have lunch with him. I got very friendly with him. And then I asked myself why I dreaded going there. I loved working there! It became my favorite client that I eagerly looked forward to visiting.

My boss's idle remark prejudiced me against the client, and it took me months to get over it.

The takeaway for me was that when I became a boss, I only said great things about a client, influencing the staff to like the client and eagerly look forward to working with them. Negative remarks about a client never left my lips! Actually, negative remarks were never applicable—my clients are all great!

And while I feel like I have the opportunity to work with great people, this article was a good gut check for me to take stock on my attitude.  And while the occasional bad day can always be forgiven, it's important not to let your bad attitude ruin your day or anyone else's.

“A bad attitude is like a flat tire. If you don't change it, you'll never go anywhere.” – Unknown