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Are Your Financial Records Good Enough?

Record keeping is probably the least interesting part of your business, but it is one of the most important. Sure, you need financial records to file your taxes, but there are so many other reasons! Without up-to-date and complete financial records, how can you know what’s going on in your business? How can you plan? 

Believe it or not, the IRS provides a lot of help with that. Their website has explanations and examples to spell out the requirements and tips to meet them. A good place to start is their summary about financial recordkeeping at https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping. IRS Publication 583, Starting a Business and Keeping Records, gives you even more information at https://www.irs.gov/pub/irs-pdf/p583.pdf.  

No time to read all the details now? Here are four recordkeeping tips to get you started: 

  1. Business income should be recorded in a ledger as you receive it. Income should be supported by invoices, bank deposit slips, online receipt records, cash register tapes or other documents that show the source of the income, the amounts and the dates received. 
  1. Maintain separate records and bank account for each business and for personal transactions to identify income that derives from your business vs. personal (e.g., investments and wages). A separate business account also makes it easier to reconcile business financial activity between the bank and your financial records. 
  1. Business expenses must be documented to prove the amount, date, business purpose, and expense type in order to deduct them. That proof, or documentary evidence, should consist of a disbursements register, canceled checks, and/or invoices. Additional evidence is required for travel, entertainment, gifts, and auto expenses. 
  1. “Mixed use” assets, such as vehicles, computers, and cell phones, must be allocated between business and personal use in order to determine the amount that is deductible for your business. Use an automated or manual log to track the use of the asset and maintain the log as support documentation. 

Recordkeeping may be boring, but good financial records help to monitor the progress of your business, prepare your financial statements, and get organized to file your income tax returns. Yes, the IRS requires financial records; make sure that those records are good enough to track the progress of your business and achieve your objectives. 

 

Tracking Business Finances

 

Every business is different, but they all have one thing in common. Achieving success can only happen by getting control over and understanding business finances. Making informed financial decisions requires planning, tracking, assessing results, and adjusting as needed.

Tracking business income, expenses, receivables, and commitments may be the most important financial management activity. Why? Because information tracking provides the historical record needed to see what is really coming in and how much it really costs to run the business. Collecting and documenting financial information is the only way to examine and understand it.

So, how do you track your business financial activity? Follow these three steps:

Maintain a Record of all Financial Activity

The IRS does not specify a particular system or format for financial records. The only requirement is that financial records are accurate, complete, and provide enough detail to identify the business purpose of each item. Using QuickBooks or another accounting application is an option, but using a spreadsheet can work, too. Expenses should be tracked by categories, such as rent and advertising, so you know where your funds are going.

 

Organize Source Documents Using a Logical Filing System

No matter what format you use to record your income and expenses, it’s important to keep support documents that capture the five information elements that are required by the IRS – when, what, who, how much, and why. In other words, capture the date, item description, payee/payer, dollar amount, and business purpose. Documenting all five of those elements will substantiate the business income and deductible expense.

 

Keep a Running Total of Your Financial Position

Seeing the financial status of your business at a glance is immensely powerful. That power comes from complete and accurate tracking of all financial activity and keeping running totals. QuickBooks or a bookkeeper can provide that information in the form of financial statements at any time. Spreadsheet users can achieve the same goal by keeping up-to-date totals for income, expenses, receivables, and commitments and examining the bottom lines.

Tracking financial information provides the historical record needed to see what is really going on with your business. Keeping up-to-date financial records and examining the bottom line is the only way to make informed financial decisions to achieve success. Taking these three steps will give you a powerful tool to make informed financial decisions and satisfy the IRS, too.

2018 Tax Planning – The New Tax Law Will Impact Your Return

It’s summer! Know what that means? Time at the beach? Sure! Road trip? Absolutely! Summer camp? Well, almost… Summer Camp for Tax Professionals, aka the IRS Tax Forum, just happened here in Washington, DC. It’s perfectly timed between the April and October tax filing deadlines, with a chance to learn about tax trends, changes, and issues from the IRS and experienced tax professionals.

 

Timing was better than ever this year because of all the sessions on the Tax Cuts and Jobs Act that was passed in December 2017. The 2018 IRS Tax Forum provided details about how the new tax law will impact nearly every household and business in the nation. Tax professionals also got insight on new security and compliance procedures implemented by the IRS, state agencies and tax software vendors to reduce identity theft and fraud.

 

2018 IRS Tax Forum sessions covered a range of updates and issues, including:

 

  • Changes to employer tax withholding tables that do not consider the taxpayer’s specific situation. This could result in an expensive surprise next tax filing season.
  • New qualifying dependent credits and higher income limits for taking dependent and child tax credits. These credits partially offset elimination of personal exemptions.
  • Itemized deduction limits for state-level taxes and mortgage interest.
  • Elimination of moving and miscellaneous itemized deductions.
  • Clarification about eligibility for the new Qualified Business Income deduction for Sub S Corporations and Partnership clients (i.e., pass-through businesses).
  • New requirements for Sub S Corporations and Partnerships to track and report stock and loan basis.
  • Changes to depreciation and expensing rules for business assets.

 

There’s more. Too much for one blog post. Now is a great time for every taxpayer to check into how the new tax law will impact her or his tax bill for 2018. In a few months, it will be too late to make a change.

 

If you’re up for re-visiting your tax projections yourself, there’s plenty of online help. Guidance to project taxable income, tax withholding, deductions and tax liabilities is at the IRS website, https://www.irs.gov/individuals/irs-withholding-calculator for employees and https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes for business owners.

 

Not sure you want to DIY your taxes? Want help figuring out how the Tax Cuts and Jobs Act will impact you? Get a referral for a qualified tax professional, preferably one who went to Summer Camp for Tax Professionals, aka the IRS Tax Forum.

Nonprofit Stewardship Requires Good Processes

Stewardship is a promise to engage in responsible planning and management of resources. The stewardship concept can be applied to nature, economics, health, property, and information. For nonprofits, stewardship usually means the responsibility to make sure that the organization spends donations cost-effectively in support of the mission.

 

Nonprofits need to have good processes and systems to fulfill their stewardship role. Nonprofit Board members and management each have roles and responsibilities to implement and manage the processes needed to fulfill the promise to spent donations wisely and sustain the organization.

 

Nonprofits need to have good processes in three important areas to manage donations and make sure they are spent effectively:

 

  1. Verification – Collecting financial information and verifying that it is complete and accurate sounds basic, sure, but it’s so important! Capture donation information from all sources, like credit cards, checks and third parties. Reconcile deposits to donation reports. Confirm that all donor restrictions are documented so that promises to use funds for a specific purpose can be fulfilled.

 

  1. Anomaly Management – Identifying and following-up on occurrences that shouldn’t happen, or anomalies, helps nonprofits correct issues. Managing anomalies early in the process helps people work more efficiently and saves time researching issues. This approach can also help to identify the root causes that cause anomalies so they can be corrected to avoid recurrences.

 

  1. Independent Oversight – An important role of nonprofit Boards is to perform independent reviews of the organization’s financial performance and to take remedial action to address any issues. The Board is also tasked with assuring that financial accounting and standards of practice for nonprofits are followed and that financial functions are performed by qualified staff or consultants.

 

Nonprofits have a stewardship responsibility to use donations effectively to support their mission. By focusing on three important areas to manage donations and make sure they are spent effectively, the Board and management can fulfill those stewardship responsibilities.

 

Meal and Entertainment Deductions Under TCJA

Having a business meeting over a meal or celebrating a big contract with a team happy hour are common events. Before the 2017 Tax Cut and Jobs Act (TCJA), meals and entertainment directly related to a business activity were considered a “reasonable and customary” business deduction, subject to strict rules. For example, meals and entertainment that were considered “lavish” or where the taxpayer or her employee was not present were not tax deductible.

 

Passing the TCJA changed all of that. Or did it? Some confusion is still out there, leading to some people thinking that meals and entertainment expenses are no longer deductible. Not true! That misunderstanding could lead to missing some business deductions, and paying higher taxes. Not good!

 

In reality, the new tax law is so vague it does not specifically define the expense commonly known as a “business meal.” TCJA language retains the requirement that “the taxpayer or his agent” be present for the business meal to be deductible. However, it does not retain the “directly related” and “associated with” standards that used to apply.

 

The change in meals and entertainment language and how it will be interpreted by taxpayers and their tax advisors has not been tested. Recommended practice under TCJA is in line with common practice pre-TCJA. So what does that mean for you?

 

Under TCJA, businesses can deduct 50% of the cost of meals and entertainment when:

 

  1. The taxpayer or his agent is present and conducting business.

 

  1. Expenses are not lavish or extravagant under the circumstances.

 

  1. Records are kept of the date, amount, business purpose and attendees.

 

These “new” requirements look a lot like what most of us have been doing since 1986, the last time tax law changed related to business meals and entertainment. So don’t worry about taking a client out to a dinner meeting. Have a team meeting at the happy hour location, and then stay for some team bonding.  Keep the expenses reasonable, maintain complete records, and take that tax deduction. It’s okay.

Is Your Price “Right?”

The Price Is Right is a fun game show, but deciding the right price for your product or service is no game. Charging enough to make a profit and stay competitive in your market is a careful balancing act. You need to pay the bills without driving customers away from your business to the competition.

 

Figuring out Your Right Price boils down to three fundamentals:

 

  1. Cost – Start by identifying all of the costs associated with making your product or delivering your service. Not as easy as it sounds. The most obvious costs are usually the direct costs, like materials and labor. Rent, utilities and supplies are also easy to identify. Less obvious are costs that don’t happen all the time, like marketing and memberships. Add up all the costs to form a budget for the month or year to get a feel what it costs to deliver your product or service.

 

  1. Competition – Know your market, industry and competition to use as a benchmark, but not your only guide. Your competitors’ prices do not tell you if they are operating at a profit or anything else about the inside of the organization. Is there a lack of competition or unmet demand in your market? Competitive pricing under the right circumstances is a great opportunity to capture market share.

 

  1. Value – Identify and market the value proposition that differentiates your product or service, and use it to command a higher-than-average price in your market. Does your team have credentials, experience or knowledge that the competition doesn’t have? Do you offer a higher quality, longer lasting product? All of that can be reflected in a higher price.

 

Making sure that Your Price is Right is no game. Should you charge less to gain market share, or charge more to highlight your quality? Will you be able to cover your costs and make a profit? Feel confident that Your Price Is Right by considering the three fundamentals — cost, competition, and value.

Tax Basics for New Business

 

Today, I spoke with my absolute favorite kind of new client – a new business owner who wants to make sure she is covering all her bases when it comes to business taxes. Entrepreneurs who plan and ask for qualified professional advice have a better-than-average chance of meeting their goals.

 

All business owners need to know about taxes. All kinds of taxes: income, employment, sales and use, and property. Plus, if the business has sales or other business activities in more than one state, it has to follow the tax rules for each state. Needless to say, that involves more details than I can fit into this blog.

 

Here are the four basic tax areas that small businesses need to know:

 

  1. Income Tax

Net business income is subject to federal and state income taxes. For sole proprietors, net income is figured on Schedule C, which is part of the IRS Form 1040 for individual tax return. Net income is total business income minus the “reasonable and customary” expenses necessary to operate and sustain the business.

 

  1. Employment Tax

Payroll taxes of 15.3% must be paid on business wages or on net business income from self-employment using Schedule SE on the owner’s return. Non-owner employees must have taxes withheld and remitted to the IRS, state and Social Security Administration. Contractors to whom $600 or more is paid during the year are required to receive IRS Form 1099 to report their earnings.

 

  1. Sales Tax

State taxes are assessed on sales of products and some services, depending on the jurisdiction. Internet and mail order sales are subject to tax depending on the location of the seller and purchaser, and applicable laws. Businesses that operate in more than one jurisdiction, like my new client, must collect, report, and remit taxes in all applicable states.

 

  1. Business Property Tax

Tangible personal property used in a business is subject to property tax, usually collected at the local, or county, level. Taxed property includes furniture, machinery, tools, and all computer and peripheral equipment hardware and all operational software.

 

One business “tax” often overlooked by new businesses is a getting the appropriate business license for each jurisdiction in which it operates. Every business needs to be registered and licensed at the state and local level.

 

I am looking forward to meeting again with my new client next week. Entrepreneurs who plan and get professional advice not only meet their goals – they are fun to help.

 

TIME FOR YOUR MID-YEAR TAX CHECK-UP

Does it seem like you just took down the Christmas tree? Well, believe it or not, 2018 is half over! That means the tax year is half over, too. Only six months to avoid getting an expensive surprise when filing your taxes next year.

 

Doing a mid-year tax withholding checkup is even more important this year than it was before. Changes in the Tax Cuts and Jobs Act passed in December 2017 could impact your 2018 tax bill dramatically, depending on your family size and make-up, income level and location.

 

So what are the tax law changes that taxpayers should be aware of? Three areas are likely to make your 2018 tax bill look a lot different from 2017:

 

  1. Itemized Deductions – Deductions for state and local income, sales, and property taxes are limited to a total of $10,000. Home mortgage interest is limited on new mortgages to balances of $750,000. Deductions are eliminated for home equity interest unless used to purchase or improve a home. Non-disaster personal casualty losses, tax preparation and investment fees are eliminated. One bit of good news for high income taxpayers — the itemized deduction phase-out is eliminated.

 

  1. Personal Exemptions and Standard Deduction – The $4,050 per person personal exemption is eliminated. That will hit some families pretty hard. Losing personal exemptions hasn’t come up much in the news, but taxpayers will definitely notice when filing in 2019. Doubling the standard deduction has been a huge news headline. For example, married couples filing jointly will get a $24,000 standard deduction for 2018, instead of $12,700 for 2017. Millions of taxpayers will find that the standard deduction is more beneficial than itemizing.

 

  1. Tax Bracket – Six of seven individual tax brackets are reduced. Most taxpayers will benefit from the new rates, which range from 10% to 37%. Even after calculating the impact of losing some itemized deductions and all personal exemptions, lowering the rate results in a lower overall tax for many taxpayers. However, some taxpayers who were in the 33% marginal tax bracket will find themselves in the 35% marginal bracket in 2018. This unfavorable change will mainly affect singles and heads of households with taxable income between $200,000 and $400,000.

 

All of these changes means that it’s even more important to check on your tax withholding and plan ahead for next tax season. Tax projection calculators are available to help determine what your new income tax bill will look like. Of course, www.irs.gov is a great resource. The Tax Policy Center also posted a tool that appears easy to use – http://tpc-election-calculator.urban.org/.

 

Whichever tax calculator tool that you choose, don’t wait to do your mid-year tax withholding checkup. It will be time to put up the Christmas tree again sooner than you think!