When Small Businesses Need a CFO

Recording financial transactions and reconciling bank accounts are important tasks for running your day-to-day business and getting your taxes done. Turning that financial data into useful information for making business decisions takes a specialized skill set. It takes analytical and management skills to plan for growth and adopt a long term view.

A Chief Financial Officer, or CFO, has the experience and expertise to provide the analysis and financial direction that businesses need to make informed financial decisions and detect impending issues before they morph into expensive crises. Most small businesses can’t afford a fulltime CFO, but they often can afford to engage a CPA firm or financial consultant to perform the CFO role for a few hours a month. 

So, when is it time to engage a part time CFO? Small businesses need a CFO when:

  • Cash Flow Isn’t Flowing

Knowing how much cash is available to run and invest in your business is crucial to keeping your doors open. Dire and expensive surprises happen to businesses that can’t clearly project their bank balances, revenues coming in, and payments going out. If your monthly cash flow isn’t flowing in and out like you think it should, a CFO can establish cash flow projections that provide reliable information.

  • Your Budget is Last Year Plus 5%

A budget spells out the financial resources needed to deliver your services or product, maintain your infrastructure, and invest in growth or improvements. If it’s just based on last year, it probably doesn’t address all your financial objectives or changes in your business. A CFO can help you build a budget that effectively addresses all the essential elements for costs, revenues, and short- and long-term investments in your business.

  • Price Doesn’t Cover Costs

Charging the same price as the competition might work for the other guy, but if it doesn’t cover your costs you won’t be in business for long. Pricing your service or product requires knowing your costs and understanding the value that distinguishes your business from that “other guy”. A CFO can examine your costs, identify the fixed, variable, direct and indirect cost components, and advise you on pricing and profit margins. 

A part time CFO is a business investment in sustaining and growing your business. Her or his skill set and experience focus on the analysis to make higher-level financial decisions needed to plan for growth and sustainability. Investing in a part time CFO will pay you back over and over again, as your business thrives and grows.

Payroll Tax Deferral and Federal Employees

In response to lack of Congressional action to assist Americans impacted by the pandemic-related economic downturn, the Trump Administration issued an Executive Order to defer payroll taxes through the end of calendar 2020. Most people probably don’t even know what that means. If you are not employed, it means nothing. If you are an employer, it means figuring out the news rules and how to follow them.

Payroll taxes are paid on wages and other earned income to support the Social Security and Medicare benefit systems. In general, employers and employees each pay half of the total 15.3% tax. Employers withhold the employee portion and remit the total amount to the IRS as wages are paid. The Executive Order allows employers the option to defer payroll tax payment for income earned from September 1 to December 31, 2020. Deferred taxes would be due by April 30, 2021, after which past-due interest will accrue.

Many private employers are hesitating to take the deferral option. Tracking the deferral is a headache. Withholding extra tax in early 2021 is another headache. All these changes are a burden on payroll processors and create additional expenses. Not to mention that if your business does not have the cash for payroll taxes now, chances are you will not be able to absorb the “double” expense a few months from now.

Federal agencies and employees don’t have an option. Guidance from the IRS is still not entirely clear, but federal representatives have stated that the government will begin deferring the withholding of payroll taxes for federal workers in September. The quasi-good news is that the payroll tax deferral will apply only to employees making less than $104,000 in annual gross wages, calculated on a pre-tax basis. Still, this is going to impact tens of thousands of workers.

The Secretary of the Treasury expressed a desire to explore forgiving the repayment of these taxes. However, a “desire to explore” is not a rule, so the IRS is advising federal and other impacted workers to hold on to those extra funds to have them available to pay back. The IRS guidance says that employers should withhold the deferred taxes from wages and compensation paid between January 1, 2021 and April 30, 2021. That might be okay when impacted workers are still employed by the same employer, but what if a worker leaves before the deferred taxes are repaid? Well, the IRS guidance advices employers to take collection action against former employees. Sounds unpleasant, not to mention more work for employers.

Regardless of your politics, this Executive Order certainly seems like extra cost and effort, plus some added risk, in exchange for questionable gain. Unfortunately, federal workers earning less than $104,000 annually will have to be aware of why their paychecks are a little higher in late 2020. They also need to know to save that extra money for early 2021, when their paychecks are going to be surprisingly low.

Taxes and Your Subchapter S Corporation

Whenever I get a “run” of client calls about a specific topic, I assume that the Tax Universe is telling me to blog about it. Lately, that topic has been the tax rules for business owners who have elected to operate as a Subchapter S Corporation (Sub S). Business owners often form an LLC to protect their personal assets. An LLC can be operated for tax purposes in one of several ways, including the election to operate for tax purposes as a Sub S. That election has some advantages, but it adds more complexity as well.

If your business operates for tax purposes as a Sub S, or you are thinking about forming one, here are a few things to know:

  • Qualification – To qualify for Sub S status, the business must be a corporation that has between one and 100 shareholders who are domestic individuals, certain trusts, or estates. A Sub S can only have one class of stock. The corporation must have legal formation documents, an operating agreement, a separate tax ID, and documented shareholder meetings. 
  • Avoid Double Taxation – Sub S Corporations pass corporate income, losses, deductions, and credits through to their shareholders for tax purposes. However, there are a few exceptions when a Sub S is responsible for tax, such as built-in gains and passive income. Shareholders of a Sub S report their pro rata share of income and losses on their personal tax returns, subject to tax at the shareholder’s individual income tax rates. 
  • Shareholder Compensation – Sub S Corporations must pay reasonable compensation in the form of wages to a shareholder-employee if that the employee provides services to the corporation. Wages are reported on a W-2 and are subject to employment taxes. Net profits or losses from operations are reported on a Form K-1 and treated as non-wage distributions, which are not subject to employment taxes. 
  • Limited Losses – The fact that a shareholder receives a K-1 reflecting a loss does not mean that the shareholder is automatically entitled to deduct the loss. She or he must first have adequate stock and/or debt basis to claim that deduction. Each shareholder is responsible for tracking her/his own basis. Loss deduction amounts also depend on at-risk and passive activity loss limitations. 

These are just a few of the things to know when operating your business as a Sub S for tax purposes. There are a lot of rules on this topic, so visit https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations and the “Related Topics” links on the right to get more details, instructions, forms, and all the other stuff you’ll need. Like I said, electing to operate as a Subchapter S Corporation has some complexities, so make sure you do your homework before getting started. Or think about consulting a qualified tax professional.