Tax “To Do” List for Closing a Business

Data from Yelp Inc., the online reviewer, shows that more than 80,000 businesses permanently closed from March 1st to July 25th of this year. About 800 small businesses filed for Chapter 11 bankruptcy from mid-February to July 31st, according to the American Bankruptcy Institute. They estimate that total bankruptcies in 2020 could be up 36% from last year.

Closing a business is a tough decision. It’s painful. It also creates a long “To Do” List, including final tax responsibilities. Figuring out everything that needs to be done can be confusing. Fortunately, the IRS recently launched a redesigned webpage to help business owners and self-employed individuals navigate federal tax steps when closing a business.

The IRS’ “Closing a Business” webpage has explanations, instructions, links, and forms for:

  • Filing a Final Return and Related Forms

You must file a final return for the year you close your business. The type of return you file and related forms you need will depend on the type of business you have (e.g., sole proprietor or partnership). 

  • Take Care of Your Employees

If you have employees, you must pay them any final wages owed, make final federal tax deposits, and report employment taxes. You must also provide an IRS Form W-2, Wage and Tax Statement, to each employee. 

  1. Pay the Tax You Owe

Whether it’s by check or online, all taxes must be paid in full. 

  • Report Payments to Contract Workers

If you have paid any unincorporated contractors at least $600 during the calendar year in which you close your business, you must report those payments.

  • Cancel Your EIN and Close Your IRS Business Account

The employer identification number (EIN) assigned to your business is the permanent federal taxpayer identification number for that business. The IRS will not close your business account until you have filed all necessary returns and paid all taxes.

  • Keep Your Records

How long you need to keep your business records, such as employment tax records, depends on the document. Generally, tax records should be kept for four years and copies of tax returns should be kept permanently.

The IRS’ “Closing a Business” webpage outlines the steps needed to close a business and help take care of any employees. No matter the business type, information on this page https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business helps business owners and self-employed individuals understand what to do after making the tough decision to shut down.

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.

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.

Want Clarity? Put Agreements in Writing!

Small businesses and nonprofits sometimes need a professional with specialized skills to help them out, like a human resources or financial consultant. Most organizations need to purchase materials or inventory items. Getting services or goods from a third party, or outsourcing, can add significant value to an organization, as long as it’s managed right. Outsourcing management starts with a clear, written agreement that both parties understand and follow.

A written agreement should address key components of both parties – the vendor’s responsibilities, as well as the organization’s. These four components should be addressed in all vendor agreements to clarify expectations and hold all parties accountable:

Objective and Scope

Clearly describe the results or accomplishments that the vendor should achieve on the organization’s behalf, as well as any requirements for the organization. Specifically describe what the organization expects to get when the vendor’s work is completed. For example, an agreement for an IT vendor to install and maintain a new system would describe, among other things, the end state after the system is installed, performance requirements and any ongoing maintenance.

Time Frame and Frequency

Specify delivery dates and how often your organization needs the goods or services provided. Clarify any unusual needs you have, such as nights or weekends, to avoid misunderstandings   that will prevent the organization from meeting its customers’ expectations. How would it look if a 24/7 café couldn’t get fresh food delivered on a Sunday? Highlight timing and frequency to make sure the vendor knows when she or he is needed.

Delivery and Acceptance

Describe the expected condition, appearance, format, or other requirements that are essential for the goods or services to achieve the organization’s objective. Do the flyers need to be blue with your logo? Does the training class need to be two-hours long and meet specific learning objectives? Should goods be delivered in a certain way? Don’t presume that the vendor will understand all specific needs. Put them in writing.

Cost and Payment

Last, but certainly not least, be clear about the vendor’s total cost and when payment will be made. Specify what is included in the total cost and how that cost is calculated. For example, is the cost for paper per box or per carton? Does the consultant cost an hourly rate plus expenses, or will she or he absorb those expenses? Hold vendors accountable by stipulating that payment will only be made after goods or services have been accepted, or when a specified objective is met.

All organizations need help with professional services or purchase from an outside source. That help can be great, but not if it doesn’t meet the organization’s needs. Having a written agreement that clarifies expectations and holds all parties accountable is the best way for organizations to successfully manage outsourced needs.

Automation Saves Money and Time

Would your organization save money by doing more in less time, with greater accuracy? Would having complete, accurate reports available at the push of a button save time and inform decision making? Could reducing errors and identifying suspicious activity minimize financial losses?

Yes, yes and yes!

Increasing productivity, reducing errors, informing decisions and minimizing losses all happen when organizations automate their processes and controls. Automation is the single best way to effectively manage and get visibility to an organization’s finances and operations. Plus, organizations with a higher percentage of automated controls have better safeguards to protect assets and lower the risk of fraud.

Sure, automating is an investment. But the cost of the technology has come way down, while the tools have gotten more powerful. Advanced automation is now accessible even to smaller organizations, and the return on investment is high. Automation, when well-planned and implemented, not only reduces errors and identifies risk. It frees your team to focus on high-value work, keeping them interested and engaged.

Automation will not replace your team. There will always be a need for skilled financial and operations professionals to assess the results of automated reports and any anomalies that are identified. Manual processes and controls greatly enhance the opportunities for fraud and abuse to occur and go undetected, draining money from the organization. Organizations that have a high percentage of automation have a more comprehensive approach that increases confidence that organizational assets are safeguarded.

Automation allows organizations to quickly analyze huge volumes of data from multiple systems, flagging potential fraud patterns as they happen. Instead of a laborious, hands-on process of performing spot checks on random samples of data, software runs continuously in the background, doing the tedious work of scanning everything from emails to purchase orders, looking for patterns and anomalies, and flagging outliers for further investigation.

Organizations that fall into the low end of the range on the percentage of automated processes and controls should take out some time to look at the available software tools that can help crunch much more data, more thoroughly, in less time. Some options are affordable for small businesses and nonprofits. Once automated controls are in place, you’ll wonder how you ever got by without them.

 

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.

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.