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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.

Need a Tax Payment Plan?

Many people are suffering financial hardship because of the COVID-19 economic downturn. 

Some of those people owed more money to the IRS when they filed their 2019 income tax return, but they didn’t have the funds to pay. Interest and penalties on unpaid tax balances keep adding to your tax debt, whether you have money or not. 

So, what do you do if you owe the IRS? Here is what you need to know:

  • Extended Payment Options – The IRS offers two ways for taxpayers to extend their tax payments over time:
  1. Short-term Payment Plan – If you can pay within 120 days, this option charges no fees and makes it easy to apply online. You’ll get an immediate notification of whether your application is approved. Interest and penalties continue to accrue until the tax is paid in full.
  2. Installment Agreement – Used when you need more than 120 days to pay, this option requires a set-up fee (e.g., $31-149 online and $107-225 via phone). Installment Agreements may require more information from you, depending on the balance due. Payments can be debited from your bank account, paid online, or by check. Credit card payments cost additional fees.

More details and a link to apply are at https://www.irs.gov/payments/payment-plans-installment-agreements#costs.

  • Tax Debt Amount Matters – Payment plan applications are generally easier to get approved for lower tax liabilities due than for large balances. Applications for $10,000 or less are automatically approved as a guaranteed Installment Agreement. For applications of amounts from $10-25,000, the approval is not guaranteed, and full payment must be made within six years. Tax debt payment plan applications for $25,000 up to $50,000 require information about your income, assets, and monthly expenses. Over $50,000 means a more thorough asset review to determine if anything can be liquidated to pay the tax due.
  • Offer in Compromise – A growing number of taxpayer households are suffering from long-term job loss, eviction, and medical issues with no insurance coverage. The IRS wants to collect all tax due but does not want to create an undue burden on taxpayers’ ability to provide for their basic needs. An Offer in Compromise allows you to settle your tax debt for less than the full amount owed if paying your full tax liability would create a financial hardship based on your assets, income, and expenses. See if you qualify at https://www.irs.gov/payments/offer-in-compromise.

Taxpayers who cannot pay their taxes due to the IRS in full have options to catch up. Depending on the amount due and your ability to pay, the IRS has extended payment plans and other mechanisms to avoid placing additional undue burdens on taxpayers who have already suffered financial hardship.

Signs You’re About to be Attacked by Ransomware

Kidnappers do their homework before snatching their victims to be sure that they have enough ransom money to be worth the time and risk. Until today, I hadn’t thought about scammers doing their homework before launching a ransomware attack. An article in Sophos News by Peter Mackenzie, The Realities of Ransomware: Five Signs You’re About to be Attacked, opened my eyes that system kidnappers usually leave a trail that can be detected.

I encourage you to read Mr. Mackenzie’s article and take action to protect your systems from being held for ransom. He shares valuable tips from his own professional experience, including tools and methods. https://bit.ly/2PFuhnX 

Here is a quick list of evidence of an existing or immanent ransomware attack that could be detected by a cybersecurity professional:

  • Unusual Behavioral

A periodic scan of your network’s file history can detect repeating patterns or other indicators of malicious activity on your systems. It could be nothing to worry about, but anything that looks unusual is probably worth checking out. Even if malware has been detected and removed, scammers could still be conducting harmful operations on your network.

  • Scanner Snooping

Scammers often gain access your systems by using phishing or social engineering schemes with authorized users. They especially love to capture credentials for users with administrative rights because it gives them more access. Once in, they can install a network scanner to find files with valuable information, such as bank accounts and tax IDs. A scanner can be detected and removed if you know how to do it.

  • Neutralized Security

Scammers that manage to compromise admin rights often try to disable your security software to swing open the door to your systems even wider. Several tools are available to force the removal of your security software. These tools have legitimate purposes, but they can be used by criminals to leave your systems vulnerable.

  • Embedded Tools

In addition to installing a scanner, scammers can embed keystroke readers to capture logon credentials. Capturing keystrokes allows access to your systems, some of which could store financial and confidential identity information. Other tools can be used to extract data and lists of usernames and passwords for use or sale.

Turns out, ransomware attackers do their homework just like kidnappers looking for a rich victim to snatch. Peter Mackenzie’s recent article in Sophos News really opened my eyes that ransomware attacks can be detected before they hold systems hostage. Read his article and arm yourself with tools to fight off cybercrime. 

Six Years in Business – Already?

Just the other day, someone asked me how long ago I started my business. I was surprised to realize that it’s been six years this week! I’ve never regretted the decision to parlay my entrepreneurial spirit and experience into a full-time business. Sure, it’s been a lot of work, but with diligence and good luck, I’ve achieved my goals. 

Anniversaries are milestones worth celebrating, and a time for reflection – to assess progress, identify improvements, and set new goals. Businesses that survive to celebrate many anniversaries and other milestones invest significant time and effort in these four activities:

  • Plan with Your Objective in Mind 

A business plan is a road map to get where you want to go and help to keep your “Eye on The Prize”. Unless you know what you’re reaching for, you can’t grab it. Set your overall objectives and describe the detailed steps to achieve them. Set interim milestones along the way to help measure your progress and keep you motivated.

  • Execute Your Plan

Actively work through the detailed steps in your plan. It’s exhilarating to achieve goals and move forward. Executing your plans also gives you opportunities to get more information. Use new information to adapt your plans and make course corrections. Also listen to how your network receives your message and adjust the wording to get your message across better.

  • Outsource Needs You Can’t Meet

Be realistic about aspects of your business where you do not have the necessary expertise or can’t take the time away from your core business to do it yourself. Legal, accounting, and social media are some areas where engaging an expert can accomplish specialized tasks, free up your time, and prevent you from making costly mistakes.

  • Give to Your Network

Answering general questions in your area of expertise and presenting at workshops gives are ways that you can share knowledge with your network and establish your credibility. Sharing tips and perspective helps to establish your brand and draw people to you and your business. Being generous is often its own reward, over the long run.

The last six years of being in business full-time have been hard work, fun, and rewarding – all at the same time. It takes a lot more than investing in these four activities to be successful. But businesses that invest in planning, executing, outsourcing, and giving back increase the probability that they will enjoy many future anniversaries and milestones.

Retirement Distributions and the CARES Act

Tax rules prevent you from stashing away your pre-tax retirement money indefinitely to avoid paying taxes. Some of the rules about pre-tax retirement accounts have changed multiple times, making it a real challenge to keep up. Age and distribution rule changes for annual Required Minimum Distributions (RMDs) from traditional Individual Retirement Account (IRA) and other pre-tax retirement plan distributions are particularly head-spinning.

An RMD is just what it sounds like – a required distribution that is calculated and paid annually based on the taxpayer’s age and pre-tax retirement plan balances. The RMD amount is included in taxable income. The good news – there are online tables to help to calculate the RMD amount that must be taken every year. The bad news – a 50% penalty is assessed by the IRS if the minimum RMD is not taken by the deadline (e.g., April 1, 2020, for tax year 2019). Quite a strong incentive to follow the RMD rules.

Back in December 2019, the Setting Every Community Up for Retirement Enhancement Act (aka “SECURE Act”) was signed into law. The SECURE Act changed several important aspects of distributions from traditional (pre-tax) IRAs, 401(k) plans, 403(b) plans, and other pre-tax retirement plans. For example, the age when RMDs must start increased from 70½ to 72. See my December 11, 2019, blog post http://www.searlebzllc.com/2019/12/ for details about SECURE Act changes.

Well, because of COVID-19, portions of the December 2019, the law related to RMDs didn’t stand for long. On June 23, 2020, the IRS announced that, per the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act, the RMD is waived for 2020. Taxpayers over 72 who had already taken her or his RMD for 2020 from a pre-tax retirement account has until August 31, 2020, to roll the funds back into the account. Ordinarily, RMD rollbacks need to be done within 60 days of the distribution.

The IRS is also giving taxpayers a couple of other breaks by not counting the RMD repayment toward the rule that prohibits more than one rollover per 12-month period and the restriction on rollovers for inherited IRAs. Nice breaks but more to track. 

Some of the rules about pre-tax retirement accounts have changed multiple times, like RMDs from pre-tax retirement plans that changed twice in less than a year! Keeping up can be hard. Sure, you can hire a tax professional to help you out, but you don’t have to. The best place for all the latest tax information is free and always available – www.irs.gov!

Federal (and Some State) Taxes Due July 15

Remember way back on March 21st when the IRS has delayed the 2019 tax deadline to July 15th? Around that time, many states also delayed their 2019 filing deadlines to align with the feds. Well, March 21st might seem like just yesterday, but time flies and the filing and payment deadline is now looming. At this writing, the Treasury Secretary is floating another filing deadline delay. Tax industry experts are opposed, concerned that another delay would make this confusing and exhausting tax filing season even worse.

So, what if you still aren’t ready to file your federal tax return by July 15th? No problem! You can apply for a tax filing extension from the IRS (and your state, too). No need to provide a reason but it does take a little time and effort to get it done correctly, to avoid potential underpayment interest and penalties.

Two important tips about getting a tax filing extension:

  • You Have to Apply

Individual taxpayers use IRS Form 4868 to request an extension to file their federal income tax return until October 15th. A federal extension can be filed directly on the IRS website, e-filed using approved tax software, or in paper form by midnight on July 15th. If you are getting a refund or submit the amount due with your extension (see #2 for more details), the extension request is automatically approved. If you are expecting a refund, you must wait until after your return is filed to get your money back. State extension requirements vary. Check your state tax department website for details.

  • You Must Pay What You Owe

Use the IRS Form 4868 instructions to estimate your income tax liability based on the information you have https://www.irs.gov/pub/irs-pdf/f4868.pdf. Compare your estimated tax liability with your tax withholding or quarterly estimated payments and enter the numbers on the extension request form. If you are estimated to owe more federal income tax than you’ve paid in, the balance due must be paid with your extension request. Failure to pay will result in an underpayment penalty and interest on the unpaid amount, accrued daily until it’s paid. That really adds up.

Rushing at the last minute is stressful and causes mistakes. Better to give yourself more time to file your 2019 income tax returns by requesting an extension until October 15th. Need more details about estimating your 2019 tax liability and getting a tax filing extension? Go to the IRS website at https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return