Archive for the "Business Consulting" Category

Repair Expense Safe Harbor Increased

Companies that do not submit financials to the SEC or have their financial statements audited each year could only deduct repair expenses up to $500 under the IRS's de minimis safe harbor.  This safe harbor applies to a large number of small businesses.  The IRS has increased the de minimis safe harbor amount to $2,500 for tax years beginning after 2015.  They also stated that they will not challenge this for earlier years if other conditions are met.  You must have a policy in place at the beginning of the year to take advantage of this safe harbor.  Consider adopting this policy soon to prepare for the 2016 tax year.  Do not hesitate to contact your tax advisor to ask about this new policy change.

Sample Capitalization Policy

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Understanding Taxable Fringe Benefits

Have you ever wondered if your company is handling fringe benefits correctly?  Click on the link below for an introduction on understanding taxable fringe benefits as published in the Minnesota Society of CPA's November issue of the Footnote.

Understanding Taxable Fringe Benefits

Common QuickBooks Mistakes

Throughout my years working with QuickBooks and doing bookkeeping I have observed that problems with year end and interim financial statements can be boiled down to simple input error. Many business owners do not have the ability to hire a bookkeeper with extensive knowledge of the software and find themselves (as usual…) doing everything.  So here are a few common mistakes to avoid while doing your books…

  1. Make end-of-the-year journal entries.  Most CPA's after reviewing the books for official consolidated financial statements and tax returns will come up with a few adjustments to the books and give the adjustments to the owner for entry. A common pitfall is to fail to make these adjustments.  Failure to make these adjustments will mean that your year end will not match what is filed for taxes and the next year your CPA will have to spend additional time to reconcile the balance sheet. This can get expensive.

 

  1. Do not change entries from a prior year.  Similarly to the first common mistake that owners will make is to change an entry in a prior year.  This will again throw off the balance sheet, which will need to be reconciled before new data can be interpreted.  If you feel a change from a prior year is necessary, talk to your accountant first! They will be able to tell you if the corresponding change will effect what was reported to the IRS or if you may do a simple journal entry as of January 1st of the current year.  It can be easy to make a mistake at the beginning of a new year when entering a date. Luckily, QuickBooks has user preferences that can be used to prevent these mistakes. First you can set a closing date that will prompt you to enter a password before you can make any changes to a prior year. Or you can set a range warning that will prompt you if the date you entered is a certain number of days in the past or future of the current date.  Both of these options can be found under the EDIT > PREFERENCES tab.

 

  1. Pay attention to dates. Do we see a theme starting? Timing is a very important aspect of accounting/bookkeeping. It is important to record transactions when they occur.  If you wait to enter data into QuickBooks at the end of every month or every other month, that is fine but make sure not to use the current date for every transaction.  Using the current date will make it very difficult to reconcile your bank account. For example, if you have two transactions with the same amount you may not actually know which has cleared. Using the current date for all transactions will also prevent you from having good data to analyze business performance.  For example you will not be able to tell which months perform well vs. poor, which expenses have risen, and the cause and effect of external factors on your financials.

 

  1. Be consistent. Bookkeeping is about processes. Therefore if you use the QuickBooks accounts payable function make sure you always enter the invoice before paying the bill.  Writing a check against the accounts payable account without entering a bill will give you negative accounts payable.  If you use the accounts receivable function, make sure to enter an invoice before receiving payment or you will throw off undeposited funds.  If you use the class function, make sure to always enter a class before saving a transaction or you may not have accurate reports by class.  QuickBooks has many defaults that create warnings when you start doing things out of order or forget something; don't turn these off, they will help you.

 

  1. Don't be afraid to ask for help. Your accountant/CPA is there for you, if you have a weird scenario or just a question, call them.  They see weird transactions everyday and a quick call could save you a lot of money in the long run.

Hopefully spelling out a few of the common mistakes will help you save time and money. For any general questions, questions about outsourcing your bookkeeping, or questions about getting some QuickBooks training give us a call. We have many years of experience with QuickBooks and would be happy to help.

Foreign Business Travel

For those of you who need to travel to another country for business, please see our client letter on the deductibility of foreign business travel.

Foreign Travel Letter

Passport

When Business Trips and Vacation Collide

There is a lot of confusion about how business trips and vacations coincide.  Is everything deductible? Is anything? Here's the truth in typical tax-speak…. It depends.

For self-employed business owners, travel expenses are deductible on either a Schedule C or a business tax return.  Meals as part of travel expenses are only 50% deductible per tax law.

For employees, travel expenses for business purposes and paid personally can be reimbursed tax-free by their employer and are not subject to FICA or income tax withholding.

Part of a vacation may be deductible if it piggybacks on a business trip. Rule 1 is that the trip must be taken primarily for business.  How do you determine if the trip is primarily for business? Unfortunately, or fortunately (depending on how you look at it) there is no concrete rule on determining if a trip is primarily for business.  We must review the facts and circumstances around the trip to make that determination.  However one important indicator is the split of time between business and personal pursuits.

Example: If Gus, a pharmaceutical sales person, flies from San Francisco to New York for a five day conference and spends an additional two days in New York to go to a play and see the sights, the portion of his trip spent at the conference may be reimbursed from his employer tax-free and the expenses are deductible by his employer.

If Gus used a company card to pay for this entire trip, then the expenses he incurred for the personal portion of the trip must be treated as compensation income.

If Gus is a sole proprietor then his travel expenses while at the conference would be deductible on his Schedule C or other business tax return.

A simple way to determine what is deductible is to determine what the trip would have cost if it had only been taken for business.  In our example, 100% of Gus's airfare as well as the lodging, transportation, and meals while at the conference would be deductible as business expenses.  Only the cost of lodging, transportation, and meals during the two personal days would be nondeductible.  The tax savings here is that because Gus was required to fly round trip for the conference, part of his vacation was tax free.

Another consideration of going on vacation in conjunction with a business trip is that the vacation part of the trip is not required to occur at the business destination but may occur en route or on the way home.  To compute the deductible part of the trip you calculate the cost of the trip without the personal portion.  For example, Juliet drives from San Francisco to Santa Barbara for a business meeting and stops at Disneyland on the way home.  The total cost of the trip was $700.  If she had not stopped at Disneyland, the trip would have cost $500 therefore the deductible portion of the trip is $500.  If Juliet brings her boyfriend Shawn on the trip with her she may still deduct the cost of the hotel (business portion only), and rental car because she would have incurred those expenses even if she had been traveling alone. Only her meals during the business portion would be deductible.

Are personal days deductible under any circumstances?

There are certain instances where personal days are considered deductible.  If a weekend is sandwiched between business meetings, such as when you are required to attend meetings on a Friday and again on a Monday, then the expenses you incur on the days off such as meals and lodging will still be considered deductible even though you could be spending Saturday and Sunday on the beach.  Another time a personal day could still be deductible is when a business purpose ends on a Friday morning but it's cheaper to fly out on a Saturday.  If the expenses incurred to stay an extra day are less than the savings on the flight then the extra day's expenses can still be deductible.  In both of these circumstances you must use a good measure of common sense to take the deduction.

 

It's a good idea to consult your tax advisor if you have any questions when considering taking a vacation in conjunction with your business trip.  It is also very important to keep good records and to save your receipts to corroborate your deduction.

Note: this guidance is for domestic travel & excludes specialized rules for those in the transportation industry.

travel

Self – Employment & Taxes

A question on a lot of minds is "What does it mean to be self-employed for tax purposes?"

There are several factors that you must be aware of when you decide to open that business or strike out on your own.

  1. For income tax purposes, you will report your income and expenses on Schedule C of your Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses will be deductible against gross income (i.e., "above the line," and not as itemized deductions subject to the 2%-of-adjusted-gross-income floor). If you have any losses, the losses will generally be deductible against your other income, subject to special rules relating to hobby losses, passive activity losses and losses in activities in which you weren't "at risk."

 

  1. If you will be working from an office in your home, performing management or administrative tasks from a home office, or storing product samples or inventory at home, you may be entitled to deduct an allocable portion of certain of the costs of maintaining your home. And if you have a home office, you may be able to convert nondeductible commuting expenses (of going from your residence to another work location) into deductible transportation expenses. See an additional blog on deductible miles.

 

  1. You will also be required to pay self-employment taxes: a social security tax at a 12.4% rate on your net earnings from self-employment of up to $118,500 (reduced by any wages that you earn from employment), and a Medicare tax at a 2.9% rate on the excess. A portion of your self-employment taxes will be deductible as a trade or business expense (that is, as a deduction against gross income, not subject to the limits that apply to itemized deductions). Note: no SE taxes will be assessed on self-employment income under $400.

 

  1. You may be allowed to deduct your health insurance costs as a trade or business expense. This means your deduction for medical care insurance won't be limited by the normal 10%-of-AGI floor on itemized medical expenses. Your health care insurance can include your spouse and your children and still qualify for a deduction.

 

  1. Your income won't be subject to withholding tax. However, you will be required to pay estimated taxes quarterly. You should work with your tax advisors to minimize the amount of your estimated tax payments while avoiding any underpayment penalty.

 

  1. You will have to maintain complete records of your income and expenses. In particular, you should pay attention to recording your expenses in order to be able to take the full amount of the deductions to which you are entitled. Certain types of expenses, such as automobile, travel, entertainment, meals, and home office expenses, are subject to special recordkeeping requirements or limitations on their deductibility and require special attention. See our blog on record keeping for more information.

 

  1. If you hire any employees, you will have to get a taxpayer identification number and will have to withhold and pay various payroll taxes. Hiring employees and other independent contractors can lead to additional accounting obligations. The first of which is to decide whether the person should be hired as an employee or an independent contractor.  To determine if a person should be an employee or contractor please see the following client letter:  Employee – contractor letter.  If you hire someone as an independent contractor and pay them $600 or more, you may be required to send them and the IRS Form 1099 in the following year reporting the amount you paid them.  When you consider hiring, it is important to contact your tax advisor to discuss the matter in detail.

 

  1. You should consider establishing a qualified retirement plan. The advantage of a qualified retirement plan is that amounts contributed to the plan are deductible at the time of the contribution, and aren't taken into income until the amounts are withdrawn. Because of the complexities of ordinary qualified retirement plans, you might consider a simplified employee pension (SEP) plan, which requires less paperwork. Another type of plan available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements than a qualified plan is a "savings incentive match plan for employees," i.e., a SIMPLE plan. If you don't establish a retirement plan, you may still be able to make a contribution to an IRA.

 

This list is simplified and far from exhaustive, if you have additional questions or you are considering starting your own business.  Please consult your advisors and see our blog “Starting a biz”

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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.

Deductible Miles

In 2015 the mileage rate for business miles is 57.5 cents per mile.

Taking a mileage deduction is a great opportunity to offset business income. However it is important to keep good records of your miles for substantiation.  It's also important to know which miles are deductible and which are not.

This is a basic chart for employees and business owners whose main office is not the person's home:

deductible miles

As shown, commuting from home to work is never deductible, but travel from your main office or home to a temporary work location is deductible.  Make sure you substantiate your deductible miles by keeping a log of the miles traveled using either the total miles or the beginning and ending odometer readings before and after making the trip.  You should also state the date, location, and reason you made the trip on your log.  Without a substantiating log, your mileage deduction may be disallowed by the IRS upon audit.  Click for an example mileage log.