Searle Business Solutions

It’s time for that annual ritual of resolving self-improvement in the New Year — exercise more, eat better, lose weight. What about your business? Should you make a New Year’s resolution to improve your business in 2016? Probably a good idea, but “improve business” is too broad. How do you measure that improvement? It helps if you start with the end in mind.

To start, pick one specific area of your business you’d like to improve. Make a statement about the different results you want in 2016. Then, use that statement to create a New Year’s Resolution for your business and a plan for achieving it.

Are higher profits a 2016 business goal? Here are three specific New Year’s Resolutions that can help achieve those higher profits:

1. Invoice Customers On Time

Be sure to invoice customers immediately after the work is performed, or on a regular schedule for longer projects. Make sure that invoices, contracts/agreements, and purchase orders include payment terms, including penalties for late payment. Automated invoicing and tracking makes the process more efficient.

2. Review Bills before Payment

Paying bills that contain errors costs money, not to mention the extra time spent correcting those errors. Verifying invoices against contract prices and receiving documents before payment reduces costs over the long run. Plus, knowing that you’re paying attention keeps vendors on their toes.

3. Monitor Finances Regularly

Avoid nasty financial surprises by monitoring actual activity vs. the plan (i.e., the budget). Effective monitoring requires up-to-date accounting records and bank reconciliations. Income or expense categories that vary from the budget more than a defined threshold, such as 10%, should be assessed for corrective action.

New Year’s resolutions are opportunities to start a new habit, behavior, or process. It could be going to the gym to get healthier, or getting more control over business finances to increase profits. Sounds like if you plan it right, keeping your 2016 New Year’s Resolutions can expand your profits and constrict your waistline.

New business owners need help to address questions about business taxes. The answers all depend on the type of business they set up. Sole proprietorship? Corporation? The choices can be confusing.

I recently blogged about operating as a sole proprietor. I described it as the simplest way to establish a business. But what about operating as a Subchapter S Corporation? That could be an option, but it’s not for everyone.

A business must qualify to take the Sub-S Election. Requirements for the election include having 100 or fewer domestic shareholders and issuing one class of stock. Some advantages are limited shareholder liability and no double income taxation. Disadvantages include additional legal documents and tax forms and no outside capital funding.

Deciding to take the Sub-S Election generally boils down to three factors:

1. Capacity for Additional Recordkeeping

A Sub-S Corporation is required to file a separate federal income tax return, IRS Form 1120S. The Sub-S employs any shareholders, requiring federal, state, and local payroll processing and reporting. Shareholders also receive an IRS Form K-1 for their pro rata share of non-wage income and expenses. Shareholders are responsible for tracking the basis of their shares, which impacts how distributions are taxed.

2. Ability to Manage How Income and Losses are Reported

To prevent underpayment of payroll taxes, the IRS requires that wages paid to shareholders be “reasonable.” As noted above, the tax treatment of distributions reported on IRS Form K-1 depends on the basis of the shareholder’s shares. While complex, the Sub-S Election provides tax planning opportunities for shareholders.

3. Possibility for Favorable Tax Treatment upon Sale

Any gain on the sale of Sub-S Corporation shares qualifies for more favorable capital gains rates. The tax treatment the gain or loss upon sale for each shareholder depends on her or his share basis.

Taxes are complicated. Sub-S Corporation rules are particularly complex. Knowing the right forms and when to file them can be overwhelming. Consulting a qualified tax professional helps to sort it out, and decide what’s best for you and your business.

It happens every year at this time – organizations asking for year-end donations. Whatever charity your heart tells you to support, you also expect to save some tax money.

But how do you know that your donation is going to a qualified charity? Is it deductible? Here are answers to three common questions about charitable donations and their tax deductibility.

What Donations are Deductible?

Only donations to qualified charities that meet IRS non-profit status requirements are deductible. Qualified charities include humanitarian, religious, educational, scientific, and cruelty-prevention organizations. A list of qualified charities is posted in the IRS’ “Exempt Organizations Select Check” tool at http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.

Who Can Take a Deduction?

Eligible charitable donations can only be deducted by taxpayers who itemize their deductions using IRS Schedule A. Deductible amounts could be limited if adjusted gross income exceeds annually adjusted amounts. Donations must be acknowledged in writing at or near the donation date. Donations of $250 or more must be supported by a letter from the charity stating the date and amount of the donation, reduced by the value of anything in received by the donor in return, such as the cost of a fundraising dinner.

What about Property Donations?

Donations don’t have to be monetary. Items such as clothing, household goods, vehicles, stock, or real estate, can also be donated, but they are subject to more reporting rules. In general, clothing and household items can only be deducted if they are in good usable condition. The deduction per items is based on the “thrift shop” value, unless an appraisal is obtained. Donated vehicles valued at more than $500 and donated real property and other items valued over $5,000 are subject to even more rules and documentation requirements.

The information presented here is very general. For more information, consult a qualified tax professional or do your own research with IRS Publication 526, Charitable Contributions, at http://www.irs.gov/pub/irs-pdf/p526.pdf.

You are busy running your business or non-profit. Invoices and credit card bills arrive. Your bookkeeper pays them. Should you pay more attention to those invoices than just signing the checks?

You work hard for your income or donations. It’s important that your organization only pays for the goods and services it receives, at the agreed-upon price. Avoid costly invoice payment mistakes by putting these three steps in place:

1. Verify that the invoiced goods or services were received

Establish a process to ensure that ordered items were received and that services were provided. The process should include receiving documentation that can be matched with the invoice. The matching and verification process should be done before the invoice is paid.

2. Check invoice prices against the contract or purchase order

Spot-check invoice prices with the signed contract or other document that reflects the agreed upon price. Every line item does not need attention – focus on larger items and a few of the smaller ones. Take more time with new suppliers and service providers sothey know you are paying attention.

3. Ensure that each invoice is only paid once

Avoid paying invoices more than once with invoice tracking processes. Log invoices electronically or manually, including the date, when received. Cancel or mark vendor invoices when payment is made. Maintain unpaid electronic or manual invoices separately from paid invoices to avoid confusion.

Even small businesses and non-profits with just a few employees or volunteers can implement these three steps at little or no additional cost. Attention to this part of your business or non-profit not only reduces costly mistakes; it also sends a strong signal to all stakeholders that you are monitoring your organization’s payment activities.

Every year, more than 500,000 small businesses are born, according to the SBA. That translates into a lot of new business owners with the same concerns – How do I keep my finances straight? What do I have to do? It has to be EASY!

Even if you have the budget to hire a qualified bookkeeper or accountant to help you out, you need to understand the recordkeeping needed to manage your business. Without that understanding, you won’t know enough to make the best investment decisions about your financial systems and processes.

Free Help

You may not hear this every day, but the IRS is pretty darned helpful. They offer plenty of recordkeeping guidance, whether you keep your business records using paper or a computer. Loads of written instructions and examples about business financial records and taxes are right on their website at http://1.usa.gov/1MRdHHx. A great place to start is Publication 583, Starting a Business and Keeping Records, at http://1.usa.gov/1T3D1h5.

Any System Requirements?

No, the IRS does not specify a particular system or format for business records. Computer software packages purchased online or in retail stores are acceptable. They are generally very helpful and relatively easy to use, and require very little knowledge of bookkeeping and accounting.

The only requirement is that any system you use is set up so your transactions and reports are accurate and complete. To meet this requirement, the financial system must reconcile and provide enough detail to identify the underlying source documents. Those underlying source documents may be kept electronically.

Focus on Results

However you decide to keep your business records, focus on getting the results you need – sufficient information to manage your business and determine your correct tax liability. “Sufficient” is different for each business. Be sure your system meets your needs by documenting a complete description of these four processes:

(1) Functions being performed as data is processed or as it flows through the system;

(2) Processes to ensure accurate and reliable information;

(3) Processes to prevent the unauthorized addition, alteration, or deletion of retained records;

(4) Charts of accounts and detailed account descriptions.

Paying a qualified and experienced professional to help set-up sufficient recordkeeping is a great option. It’s even better to get free information and feel confident that your records are adequate for your business and the IRS.