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Mid-Year Business Finance Check-up

Can you believe that we’re coming up on the mid-point of 2021? Time sure flies when you’re running your own business! It’s a real challenge to take a pause to do a “check-up” on your business to make sure it’s financially healthy. Mid-year is the perfect time for a business finance check-up to see if that financial health is tip-top! 

Think about it…your physical health and your business’s financial health are remarkably similar. A sudden loss of income or an unexpected expense can stop your business cold, just like a medical crisis can stop your body from functioning. A check-up can detect serious problems that you cannot see or feel, many of which are preventable if you take a pause for a finance check-up. 

At minimum, a mid-year business finance check-up should cover these three areas:

  1. Compare Actual Results to Plans

Financial performance should be compared to your planned budget to determine how actual events compare to what you thought would happen. Focus on variances in income and expense categories that most significantly impact achieving your business goals. If the budget or plan was not met, figure out why. Did conditions change?  Were assumptions realistic? Focus on “why” to refine future budgets and plans.

  1. Cash Flow

Project your business cash inflows and outflows for at least three months, working up to six months or more when you get more comfortable with the process. Determine whether expected income will cover expected (and some unexpected) expenses using information on-hand about payments receivable and payable, scheduled payments, like payroll and rent, and bank account balances. Be realistic about payment timing and amounts.

  1. Expense Control

Spending control is the most important and most difficult part of running a business. Demands to fund day-to-day operations, in addition to investing in technology and infrastructure, are constant. Prioritize essential expenses and ensure that other planned expenses are within established parameters. Carefully assess the need for any unplanned expenses to ensure that they contribute to meeting your business objectives.

Your physical health and your business’s financial health are remarkably similar. Both need a periodic check-up to detect an unforeseen problem that can stop your body or your business cold. Taking a pause for a business financial check-up is challenging, but necessary. Now, at the mid-point of 2021, is the perfect time for a business finance check-up to make sure that its financial health is in tip-top shape!

Are Social Security Benefits Taxable?

Most workers have heard about Social Security their entire lives and laughed, “Ha! I’ll never see those benefits!” Then, suddenly, those workers are approaching retirement age and thinking about when that “free money” is going to start. But is it free money? Sure, it’s free, in the sense that you don’t need to work to get it. However, a portion of those Social Security benefits could cost you because they are taxable.

If Social Security is going to be your only income in 2021, your benefits will probably not be taxable. If you receive income other than Social Security, such as wages, interest, dividends, capital gains, or net business income, you must do a few calculations to determine whether any of your Social Security benefits are subject to federal tax.

Here’s a quick way to find out if a portion of your Social Security benefits are taxable:

  1. Determine the total Social Security benefits that you will receive in 2021.
  1. Multiply the total benefits by 50%.
  1. Add the 50% of your Social Security benefits received during 2021to all your other income received in 2021, including tax-exempt interest. 
  1. If you’re married and file a joint return, you and your spouse must combine your incomes and Social Security benefits when figuring the taxable portion of your benefits, even if your spouse didn’t receive any Social Security benefits.
  1. Compare the total from #3 to the Base Amount for your tax filing status:
  • $25,000 – For single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from their spouse for all of 2021
  • $32,000 – For married filing jointly
  • $0 – For couples married filing separately and lived with your spouse at any time during 2021
  1. If the total from #3 is higher than the Base Amount, a portion of the Social Security benefits above the Base Amount is taxable, up to 85% of the benefits. The higher your income, the higher the percentage of Social Security benefits subject to federal tax.

If you are approaching retirement age and thinking about your “free money” from Social Security, you need to check on whether it really is free. A portion of those Social Security benefits could be subject to federal tax, depending on your other income and your Base Amount.

Have questions? The IRS has answers for you at https://www.irs.gov/faqs/social-security-income.

Clarify Expectations with Written Agreements

Most businesses and nonprofits simply can’t afford to employ all the professional expertise they need to help them navigate issues around complex topics, like finance and human resources. Mistakes related to HR, finance or legal can be expensive. To avoid expensive mistakes, organizations get their professional services from a third party, or outsourced, provider.

Outsourcing for professional expertise can help tackle issues, or it can backfire and become an issue itself. This can happen when expectations for the services to be provided are not clearly understood by the organization and the professional. Assumptions about what words or terms mean and omitting specifics or requirements are the ingredients for a disaster recipe. The best way to prevent this sort of disaster from happening to your business or nonprofit is with a clear, written service agreement that both the organization and the outsourced provider can understand and follow.

A written service agreement clarifies expectations in four important areas:

  • Objective and Scope

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

  • Time Frame 

Specify delivery dates and how often your organization needs the 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 business or nonprofit couldn’t get timely financial statements to manage the organization’s performance? Highlight timing and frequency to make sure the needs are clear.

  • Quality

Describe the industry requirements, conditions, or format that are essential for the services to achieve the organization’s objective. Does the training class need to be two-hours long, taught by a credentialed instructor, and meet specific learning objectives? Are processes required to comply with any laws or regulations? Don’t presume that the provider will know all the organization’s specific needs. Put them in writing.

  • Cost and Payment

Last, but certainly not least, be clear about the total cost and when payment is expected. Specify what is included in the total cost and how that cost is calculated. For example, does the consultant cost an hourly rate plus expenses, or will she absorb those expenses? Are progress payments required based on meeting specific milestones? Accountability is easier to manage when performance expectations are stipulated are clearly documented in a service agreement.

All organizations need help with professional services that they cannot afford to hire full time. A clear service agreement can help prevent wasting time, effort, and money because the provider or the organization did not understand the scope, timing or requirements involved. A written service agreement is the single best way for organizations to clarify expectations and get the help that they need.

Attempted Ransomware Scam Averted

Within hours of writing last week’s blog post, Low-Cost Cybersecurity Tips, I was the victim of a ransomware attempt. Ironic, eh? The scammer’s approach was sophisticated and targeted. I was drawn in by the message, initially replied, and was astounded by what happened next. Good news – this story has a happy ending. But it could have turned out much differently.

I’m sharing this recent brush with cybercrime to illustrate just how insidious online scammers are, and how capable they are of masquerading as a trusted sender. Perhaps reading about my experience will help you avert a ransomware or other cybercrime.

As an established tax professional, I often receive emails from prospective tax clients. Some are referred or introduced to me by an existing client or referral partner. Some prospective clients find me through my website or the IRS’ Tax Pro Directory. On May 20th, I received a message from an individual saying that he and his wife needed a new tax preparer. He acknowledged that he had missed the May 17th filing deadline and provided a few details about their income. He asked me to tell him how much it would cost to prepare their 2020 income tax returns.

Even though I am not taking new tax clients now, I didn’t want to be rude and not respond. I also wanted to be as helpful as possible to a taxpayer in need without committing to perform any work. So, I took a few minutes to write back to explain that I am not available and to share an IRS website link with tips for finding a tax professional and a directory by location of individuals with tax credentials (https://www.irs.gov/tax-professionals/choosing-a-tax-professional).

I noticed that the sender’s email address contained extensions that indicated his location to be in the United Kingdom. That did not make me suspicious of the sender’s identity because I have tax client who live or used to live in the UK. It did, however, prompt me to also send the prospective client another IRS link to information about US taxpayers living overseas (https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-outside-the-united-states). Feeling like I had done a good deed, I hit “send”.

Within a few minutes, I received a second message from the sender saying that he had scanned his 2019 returns for my review with a link to access the return copy. Red flag! I stopped in my tracks to absorb what I was reading. It was a clear indication that my “prospective client” was a scammer luring me to click on a link that would probably have held my data for ransom. My valuable tax client files that that contain all sorts of confidential and private information, like bank account and Social Security numbers.

I quickly shifted from “helpful” to “obstructive”. I erased the message string and dumped my email trash. It’s only been a few days, but it looks like that scammer is not coming back. I managed to avert that ransomware scam attempt, but there will be others. We all need to be aware and diligent to avert them. Want some tips? Check out last week’s blog post!

Low-Cost Cybersecurity Tips

Hacks and ransomware crimes are all over the news headlines. Seems like there’s a new one reported every day. Victims include federal government agencies, insurance companies, energy infrastructure, and computer system vendors. Those are some highly sophisticated players that have invested tons of money in cybersecurity. So, what chance does a small business have defending itself against all those sophisticated cybercriminals? 

Bottom line, the tons of money that organizations invest in cybersecurity can go right out the window if the users – ordinary and fallible people – don’t follow safe system security practices. Systems are only as safe as the security knowledge and practices of the least knowledgeable system user. All it takes to open the door to a cybercriminal is one person clicking on the wrong link from an unknown source, or from a hacker masquerading as a trusted sender.

Believe it or not, periodic reminders of these low-cost cybersecurity tips will help organizations of all sizes and types to follow safe cybersecurity practices:

  1. Keep software systems up to date and use a good anti-virus program.
  1. Examine the email address and URLs in all correspondence to detect a scammer mimicking a legitimate site or email address.
  1. Ignore text messages, emails, or phone calls asking you to update or verify your account information and go to the company’s website to see if something needs your attention.
  1. Never open unexpected attachments until verifying the sender’s email address and use virus scan before opening any document.
  1. Scrutinize all electronic requests for a payment or fund transfers.
  1. Be extra suspicious of any message that urges immediate action.

Human action is a risk that can throw an organization’s cybersecurity investment right out the window. People who click before thinking can allow hackers in to do all sorts of expensive and embarrassing damage. By promoting a few low-cost cybersecurity tips, business or all sizes and types can avoid becoming a victim of sophisticated hackers and other cybercriminals. 

Act Now and Reduce Tax Stress Later

Rejoice! The 2020 tax filing season is finally over! That is, unless you needed more time to file and requested an extension after reading my May 5th blog post (https://buff.ly/3t0X73l). Between all the changes from the COVID-19 relief packages and deadline delays, this tax filing season was another wild ride for taxpayers and their preparers. 

Well, how did it go for you? Stressful? Expensive surprises? Not knowing what to expect makes an already stressful situation – doing your taxes – even worse.  Here are a few actions to take now that will reduce your tax stress later:

  • Do a “Paycheck Checkup” 

Did you owe a lot when you filed for 2020, or did you get a big refund, aka an interest-free loan to the government? An IRS Paycheck Checkup can help to make sure you don’t get an expensive surprise when you file your 2021. Use this online tool to see if you need to change your withholdings https://www.irs.gov/paycheck-checkup. Have investment other non-wage income? Check on whether you need to make quarterly estimated tax payments here https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

  • Make Tax Payments Electronically

Using any of the IRS electronic payment options puts you in control of paying your tax bill. You determine the payment date and receive an immediate confirmation from the IRS. It’s easy, secure, and much quicker than mailing in a check or money order. Go to IRS.gov/payments to see all the free electronic payment options: online, by phone or from a mobile device using the latest encryption technology. Check with your state for online payment options.

  • Contribution Deduction for Nonitemizers

Even if you don’t itemize and take the standard deduction, you may be eligible to take a charitable deduction for cash contributions up to $300 made to qualifying charities in 2021. Eligible contributions must be made via cash, check or credit card. Use the IRS Interactive Tax Assistant tool – Can I Deduct My Charitable Contributions? – for answers about cash donations.

  • Tax Credit Eligibility

You could qualify for credits like the Child Tax Credit and Child and Dependent Care Credit. You might be able to claim the Credit for Other Dependents if a dependent is not your child. If you pay qualifying higher education costs for yourself, your spouse, or a dependent, you may be eligible for education tax credits or deductions. Taxpayers earning $57,414 or less can check if they qualify with the EITC Assistant, available in both English and Spanish.

Now, immediately after filing your 2020 tax returns, is the perfect time to act and reduce tax stress next filing season. Whether you prepare your own taxes or use a tax preparer, the more you know in advance, the less stressful that your tax return filing experience will be for 2021.

Planning Business Finances

History shows that typically, before the pandemic, more than half of new businesses will fail within two years. The main reason is because they run out of money. Their initial funding was inadequate, often because the owner started without a reliable budget or financial projections in their business plan. They don’t – or don’t know how to – do the necessary homework to learn the real cost of delivering their product or service.

Projecting the financial needs for a new business is not the time for being overly optimistic or taking wild guesses. It’s important to invest the time needed to research actual costs and develop realistic assumptions for revenue and expenses. The investment will really pay off.  

Planning business finances so you don’t run out of money can be done by following these three realistic assumptions:

  1. Revenue Takes Time to Ramp-Up

Even with a huge demand for your business in your market, achieving projected revenues will take time. Ramping up and making contacts does not happen overnight. Top potential revenue will not happen in the first year. Develop one-to-five-year projections to illustrate revenue growth and the crossover point when expenses are expected to be covered, adjusting as needed.

  1. Expenses are Always More Than You Think

Research the actual cost of labor, materials, space, transportation, equipment, etc., based on market rates and quality requirements. Worker costs should include the employer portion of payroll taxes, benefits, licenses, training. Don’t forget back-office costs, like payroll services, billing, financial management and reporting, and tax preparation.

  1. Build in a Financial Cushion

Avoid failure from under-estimating costs and over-estimating revenue by building in a financial cushion. Initial funding needs should include an amount equal to a few months of estimated expenses to cover payroll and overhead in the months when revenue is not enough to cover costs. Of course, that’s on top of funding for equipment, legal fees, and other start-up costs.

Planning business finances is not an easy task. Don’t take the easy way out by guessing or painting a rosy picture that probably won’t come true. Avoid being among the one-half of new businesses that fail within two years by applying these three realistic assumptions about revenue, expenses, and funding.

Not Ready to File by May 17?

For the second year in a row, the income tax filing deadline is delayed. This year, the filing due date for the IRS and most states is May 17th instead of the “normal” April 15th. Despite the delay, the tax deadline can sneak up on you. If you’re in a panic because you haven’t started gathering your tax documents, you can probably relax. 

You can request a tax filing extension to postpone from May 17th to October 15th. You don’t need to provide a reason for needing the extension, but it does take a little time to get it done right and avoid possible underpayment penalties.

Three tips for getting an income tax filing extension:

  1. You Must Apply

Individuals can request a tax filing extension by filing IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, online at the IRS website, via approved tax software, or in paper form. It must be sent or postmarked no later than midnight on the original due date. The extension is automatically approved if a refund is expected or if the estimated amount due is paid with the extension request.

  1. Pay Amounts Due

Use the IRS Form 4868 instructions at https://www.irs.gov/pub/irs-pdf/f4868.pdf to estimate your 2020 income tax liability. Compare your estimated taxes to your tax withholding or quarterly estimated payments and enter the numbers on the extension request. If you owe more in taxes than you’ve paid in, the balance due must be paid with the extension request. Failure to pay the amount due results in an underpayment penalty and interest accrued daily on the unpaid balance.

  1. Check Your State

Each state has its own set of rules and processes for its residents to request an income tax filing extension. As mentioned above, most states followed the IRS and delayed their 2020 tax filing deadline, but some did not match the IRS’ May 17th deadline. Check your state’s tax department website for deadline updates and links to information about requesting an extension of time to file for 2020.

Rushing at the last minute is stressful and causes mistakes, especially with an already stressful activity like filing your income tax returns. Get more time to file your 2020 federal income tax return by requesting a tax filing extension. Go to the IRS website at https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return for details and help estimating any taxes you owe with the extension request.