Analyzing Income Statements

As a small business owner, it's important to track your growth to remain sustainable. It's much more of a month-to-month task than it is for larger corporations.  But being able to interpret your finances once you track them is equally vital to sustainability. Here are two ways to analyze your income statement as an investor in yourself and your business and to potentially attract outside investors!

2 Ways to Analyze an Income Statement

By John Szramiak 

March 19, 2017

As an investor, you should be digging in to a company’s financial statements.

However, you can’t look at these financials in isolation – it’s important to compare a company’s results to other companies in the selected industry, companies outside of the industry, and against other years to determine whether or not that company might actually be an attractive investment.

This causes difficulties, since it’s hard to compare companies of different sizes. For example, if Company A has $3,000,000 of debt outstanding and Company B has $30,000,000 of debt outstanding, is Company A less risky than Company B? We have no way of knowing, because we don’t know the cash positions of Companies A and B, how profitable Companies A and B are, etc.

Fortunately, there are two forms of analysis that we can perform that will help us look at income statements and balance sheets of different sizes, so that we can compare apples-to-apples – they are: horizontal analysis and vertical analysis.

Both are very easy to understand. Let’s start with horizontal analysis.

WHAT IS HORIZONTAL ANALYSIS?

Horizontal analysis, also called time series analysis, focuses on trends and changes in numbers over time. Horizontal allows you to detect growth patterns, cyclicality, etc. and to compare these factors among different companies.

As an example, let’s take a look at some income statement items for Apple and Google.

It’s almost impossible to tell which is growing faster by just looking at the numbers. So we have to do some calculations. We can perform horizontal analysis on the income statement by simply taking the percentage change for each line item year-over-year.

By using horizontal analysis, we can now clearly see that Google’s revenue, gross profit, and EBITDA grew faster than Apple’s in every year except for 2015. We can even take this one step further by calculating the compound annual growth rate for each line item from 2012 to 2016 (you can do this in Excel by using the function: =rate(nper, pmt, pv, fv)) – this tells us the average rate the companies grew in each year.

Our horizontal analysis (time series analysis) is now officially complete.

WHAT IS VERTICAL ANALYSIS?

Vertical analysis, also called common-size analysis, focuses on the relative size of different line items so that you can easily compare the income statements and balance sheets of different sized companies.

Let’s go back to our income statement items for Apple and Google. Through our horizontal analysis, we know that Google has been growing at a faster and more sustained rate than Apple… but is it a relatively more profitable company? Do both companies profits seem to be sustainable?

To perform vertical analysis (common-size analysis), we take each line item and calculate it as a percentage of revenue so that we can come up with “common size” results for both companies.

Here are just the numbers once again. I’ve added a line for research & development costs as well.

Now, let’s divide each line item by revenue.

So what does this tell us?

For starters, in 2016, Apple generated $0.39 for every $1 dollar in sales it made. Google did much better, generated $0.61 for every $1 in sales it made. However, Google’s other costs (such as sales, marketing, general & administrative, and R&D) are much higher, since Google’s EBITDA margin was 33.7%, compared to Apple’s 34.0%.

We can also look at trends within this vertical analysis. For example, Apple’s gross profit has declined from 43.9% in 2012 to 39.1%, while its R&D expenses as a percentage of revenue have increased from 2.2% to 4.7% over the same time period. This could suggest that Apple is facing tough competitive pressures. Why?

• Trends in gross margin generally reveal how much pricing power a company has. Because Apple’s gross margin is declining, this probably means that (a) Apple is dropping the price of its products to match lower cost competitors, (b) Apple’s costs to produce its products are increasing and Apple is unable to increase prices to offset this, or (c) a combination of both.
• This increase in R&D suggests that Apple is doubling down its efforts to create new, innovative products to offset its competition.

HORIZONTAL AND VERTICAL ANALYSIS OF THE BALANCE SHEET

Just like we performed horizontal and vertical analysis on the income statement, we can also run these calculations on the balance sheet (when performing vertical analysis of the balance sheet, line items are usually taken as a percentage of total assets). The process to calculate these ratios is similar to the examples we went through above and are fairly straight forward.

However, I’ve found that horizontal and vertical analysis of the balance sheet is much less helpful than on the income statement (ratios and YoY growth rates are basically requirements when analyzing any income statement) and can often be distorted by accounting policies (for example, is a debt-to-equity ratio really useful if the equity number used is simply a result of various accounting choices made over the years?).

Rather than calculate a “pure ratio” of the balance sheet, we can instead calculate “mixed ratios” – such as an interest coverage ratio (operating income / interest expense), leverage ratio (debt / EBITDA), or even efficiency ratios like days sales outstanding (DSO) and days payable outstanding (DPO).

Reblogged from BusinessInsider.com. To view original article, click here.

2017 New Tax Laws for Small Business Owners

It's my job as an accountant to help small businesses thrive and plan for their financial future.  Taxes are a big part of the picture, especially if there's a big liability at the end of the year.   There are strategies that can be put into place to avoid this, deductions you may not know about and proactive steps you may take to decrease the impact of the annual tax bill on your small business finances.  Doing it online, especially if you have questions or are unsure of what liberties you can and cannot take when filing, may end up costing you more.  Call a professional to save you time, money and stress!

New Tax Laws That Impacts Small Business Owners in 2017

Published February 3, 2017 Entrepreneur.com

Since it’s always best to be well-prepared when it comes to taxes, here are some of the new changes that you should be aware-of. As with anything to do with the government or taxes -- if you really want to stay-top of this information, meet with your tax advisor and frequently check for updates on IRS.gov.

Keep in mind, this isn’t legal advice as I’m not in that space … but more a few new tax laws for 2017 that I’ve noticed that business owners should pay attention too.

Section 179 expensing/bonus depreciation
Under Section 179 of the tax code, explains Brian McCuller, JD, CPA, “the expensing provision allows capital investments of up to $500,000 for certain property to be taken as an expense deduction -- rather than being depreciated break -- which was made permanent under the PATH Act passed at the end of 2015 -- phases out for asset purchases above $2 million.”

Additionally, HVAC units are now eligible as an expense deduction instead of depreciation in tax years beginning after Dec. 31, 2015.

“The bonus depreciation provision allows businesses to claim additional depreciation for certain property in the first year of the recovery period if placed in service from 2015 to 2019 (with an additional year for certain property with a longer production period),” adds McCuller. “For property placed in service in 2015, 2016 and 2017, the bonus depreciation is 50 percent. For 2018, it drops to 40 percent; for 2019 it goes to 30 percent.”

In other words, if you purchased or leased new hardware or software for your business, for example, you can depreciate half the cost as part of “bonus depreciation.” For 2017, it may be in your best interest to invest in the most up-to-date equipment possible.

Tighter filing deadlines
Filing deadlines have been changed so that flow-through entity return deadlines are due prior investor return deadlines. This means that partnerships and S-corporations operating on a calendar year will have a new deadline of March 15. The deadline for calendar year based C-Corporations will be pushed from March 15 to April 15.

Below is a the complete list of changes to deadlines for each state.

Furthermore, if your business provides health benefits then please note that the deadline for Form 1095, which is the proof of insurance coverage, will be on January 31. Also take note that hard filing deadlines have been imposed for Forms 1094-B and 1095-A, B and C. These are due by February 28 by mail or by e-file on March 31.

New partnership audit rules
Effective in 2018, partnerships could be liable at the entity, as opposed to partner level for audit related tax collections. This change will have a significant impact on how partnership interests are valued and transferred. Because they’re also so complex, it’s best to speak to your tax advisor for additional information.

Expanded eligibility for R&D tax credit
Until the PATH Act, the development of internal use software was not eligible for the research and development tax credit.

Organizations, particularly in construction, software, manufacturing, wine, aerospace subcontracting, boat building and biotech, can qualify for this credit if they have engineers, scientists or product development personnel on staff.

Other qualifications include software that is innovative and can be commercially sold.

Tom Sanger, a partner with accounting and advisory firm Moss Adams, says that, “small businesses, now defined as having an average of less than $50 million in gross revenue over the prior three years, will be able to offset (the alternative minimum tax ) AMT with R&D credits generated after Jan. 1, 2016.”

“This provision opens up the credit to small corporations subject to the AMT, as well as pass-through entities (where the credits flow through to shareholders),” Sanger adds. “In the past, these credits were suspended and carried forward for up to 20 years until they were no longer subject to the AMT.”

Pending estate planning changes
“The IRS has proposed changes in the rules for how minority stakes in family-owned businesses are valued when owners transfer interests to the next generation during their lifetimes,” explains McCuller. “The changes have not been finalized, and business owners who have been considering passing along part of their ownership interests may want to consult with their tax advisors about accelerating those plans to take advantage of current rules.”

Possible tax laws under President Trump
In addition to the changes listed above, business owners should also pay attention to the tax laws that may take effect under President-elect Donald Trump.

For starters, “The Trump plan would reduce the corporate tax rate from a maximum rate of 35 percent to a rate of 15 percent (the GOP Blueprint calls for a U.S. corporate rate of 20 percent),” says accounting, tax and consulting firm Elliott Davis Decosimo. Also, “U.S. manufacturers would be able to fully expense new plant and equipment investments, though by doing so would forego any deduction for net interest expense.

“Most tax credits, other than the research credit would be eliminated. For U.S. taxpayers with foreign subsidiaries, there would be a one-time deemed repatriation tax of 10 percent on foreign earnings of those subsidiaries.”

This could have major tax consequences for small businesses. In fact, Trump’s tax reform will most likely benefit the wealthy and large corporations as opposed to SMBs.

(By John Rampton)

Tax Credits and Tax Deductions: What's the Difference?

As we move through the first quarter of 2017 tax season is already upon us.  If you are concerned with reducing your liability knowing the difference between tax credits and tax deductions can have an impact.  Both of these methods can save you big money but in very different ways.  Check out this article published by NerdWallet to learn how to maximize your savings.

Tax Credits vs. Tax Deductions
Published September 9, 2016

Tax credits and tax deductions may be the most satisfying part of preparing your tax return. Both reduce your tax bill, but in very different ways.

Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. A tax credit valued at $1,000, for instance, lowers your tax bill by the corresponding $1,000.

Tax deductions, on the other hand, reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 25% tax bracket, a $1,000 deduction saves you $250.

The catch to tax credits

Some tax credits are intended to help cover individual costs around adopting a child, child care expenses or caring for an elderly parent.

But these are nonrefundable tax credits.  If you don’t owe a lot in taxes to begin with, you don’t get the full value if the credits take your tax bill below zero.  In other words, a $600 tax bill combined with a $1,000 credit doesn’t get you a $400 tax refund check.

Other credits are refundable. If you qualify to take refundable tax credits — things like the Earned Income Tax Credit, the Premium Tax Credit, the Child Tax Credit and the Additional Child Tax Credit — the value of the credit goes beyond your tax liability and can result in a refund check.

The IRS lays out specific criteria you must meet to qualify for both nonrefundable and refundable credits.

As you run the tax credit calculations in your return, keep in mind that you must determine your tax liability before you apply any credits. The credits don’t reduce your taxable income.

But tax deductions do.

The catch to tax deductions

There are two types of tax deductions.

The standard deduction is a one-size-fits-all reduction in the amount of your income that’s subject to tax. You don’t have to do anything to qualify for the standard deduction or provide any documentation.

You can claim the standard deduction on whichever form you file: Form 1040, 1040A or 1040EZ. The amount varies depending on your filing status. The standard deduction in 2016 for single filers and married couples filing separately is $6,300; it’s $12,600 for married couples filing jointly. For those filing as heads of household, the standard deduction is $9,300. In 2017, the standard deduction for single filers and married couples filing separately is $6,350; it’s $12,700 for married couples filing jointly. For those filing as heads of household, the standard deduction in 2017 is $9,350.

But you may be better off opting to use the second type of deduction, the itemized deduction, instead.

Itemizing allows you to total the amount you spent on allowable deductions such as home mortgage interest, medical expenses or charitable donations. If together they exceed the value of the standard deduction, you’ll want to itemize.  You’ll need to use the regular 1040 filing form and Schedule A.

Taking the standard deduction or itemized deductions is an either/or situation.  You can claim one kind or the other, but not both.

And, just as with tax credits, taking certain deductions requires meeting certain qualifications based on your filing status, current life events and the amount of your income that’s taxable. Be sure you meet IRS criteria to qualify for both tax credits and deductions.


To read the original article, visit NerdWallet.com

Key Accounting Issues for 2017

4 Key Accounting Issues to Watch in 2017
Terry Sheridan
Jan 11, 2017
accountingweb.com

As if 2017 doesn’t promise enough drama and change already, the accounting profession is poised for a year brimming with expected regulatory issues and scrutiny.

Bloomberg BNA recently released its 2017 Tax & Accounting Outlook report that covers the gamut of legislative, state, international, and tax administration issues. But it also highlights the following four key accounting issues that could impact practitioners and companies in the new year.

1. Banks and credit losses. New rules on the reporting of loans and other credit losses portend one of the biggest changes ever in the financial accounting of banks and other companies, the report states.

Under Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was issued by the Financial Accounting Standards Board (FASB) last June, banks and other lending institutions will be required to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

The “current expected credit loss model,” the core of the new standard, replaces the long-standing accounting model shaped around incurred losses.

This year “promises to be a period of preparing for the sweeping modifications in accounting for credit impairments,” the report states. “Companies have to assess what information must be assembled to shift to the new standard.”

Companies that file reports with the US Securities and Exchange Commission (SEC) will apply the new rules beginning in January 2020. Smaller and private companies have until 2021.

“Work that led to the credit losses rules of FASB and the International Accounting Standards Board was spurred by the 2008-09 financial crisis,” the report states. “Working in tandem for several years, the two boards sought to remedy the widely seen problem of recording loan losses ‘too little, too late.’”

2. Insurance. Life insurance and annuities are complex as it is, and a FASB proposal to change insurance accounting rules “brings hurdles, because of challenges inherent in the sector as a whole,” the report states.

Overall, the proposed ASU, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, seeks to modernize an accounting model dating back more than 35 years that doesn’t address the newest insurance products, Bloomberg BNA says. FASB contends that better and more consistent information will result.

Companies will need more data, which means more IT, internal controls, and more people in an industry that’s already faced cutbacks.

The proposal, which was issued last September, is expected to most affect traditional life insurance companies that issue long-term care policies and disability income, sell participating contracts, and sell products with market risk benefits, such as variable universal life and variable annuities, the report states.

Trouble spots include financial reporting projecting 30 years outward; how companies account for market risk benefits, like variable annuities; and disclosures.

Look for a FASB public roundtable early this year on the proposal and at least some changes to be made final later in the year.

3. Non-GAAP financial reporting. Will the SEC’s intense scrutiny of non-GAAP financial reporting continue this year? That’s the big question, according to Bloomberg BNA. A “flurry” of cautionary letters is expected, says one SEC staffer in the report.

Proponents of non-GAAP reporting indicate that its use can tell a better corporate story than GAAP, particularly in earnings reports. Whether the FASB will get involved isn’t clear, but at least one industry source in the report indicates that the board might want to begin by considering what issues lead to non-GAAP reporting.

When Bloomberg BNA recently asked SEC Chief Accountant Wesley Bricker whether the commission would continue to aggressively address non-GAAP reporting in 2017, he said, “I am confident that the commission will remain focused, as it always has, on the appropriate administration of the securities laws.”

4. Auditor disclosure rules. New requirements in audit transparency and a revamp of the auditor’s report are coming, courtesy of the Public Company Accounting Oversight Board (PCAOB).

Beginning on Jan. 31, audit firms must disclose the name of the audit engagement partner in the new PCAOB Form AP, Auditor Reporting of Certain Audit Participants. The form also will disclose other accounting firms that participated if they did at least 5 percent of the total audit hours. Foreign countries already require this.

“US auditors have vehemently opposed this requirement for liability reasons,” the report states.

Audit firms will have until June 30 to disclose the other firms’ participation.

A proposed revision to the auditor’s report will require auditors to explain “critical audit matters,” which PCAOB members initially described as “those matters that kept the auditor awake at night,” the Bloomberg BNA report states.

The board also wants experienced or “lead” auditors to supervise inexperienced auditors instead of simply signing off on their work.

The report cites an email from Larry Shover, a member of the PCAOB’s Investor Advisory Group, in which he states that the supervision of other auditors is the most significant of all the board’s projects to investors.

New Year's Payroll Resolutions

We want to help you start off the New Year right with your payroll services.  Having served Richmond’s small business community for over 10 years, we have seen a demand for affordable accounting services, including payroll, and have decided to fill it.  Beginning in 2017 we are offering competitively priced, comprehensive payroll services that are tailored specifically to your small businesses’ needs.

Through our platform, business owners and employees alike can log in through a website to easily view payroll periods, expenses and reports. Employees can download pay stubs and W2s.  Payroll advances, garnishments, and before and after tax deduction reports that any other full-service payroll company can provide, including:

-Year-to-Date Reports
-Check Register
-Taxable Wages
-Cash Requirements Report
-Generate checks
-Worker’s Comp Audits
-Direct Deposit

We are offering flat-fee rates for businesses with 10 or fewer employees and have a variety of flexible solutions for over 10 employees.  We want to save you time, money and headaches by filling your payroll needs.

Payroll Complaince Update

As Accounting Works rounds out the rest of the year, we will be turning our focus to offering comprehensive and competitively priced payroll services to our clients in 2017!  With an easy to use platform, we will be offering a flat rate for businesses with 10 or fewer employees and only a small fee for any additional employees! Of course, we'd like to work with any size business, so if you have a larger company we'd be happy to work out a plan that fits your needs.

That being said, it can be hard as a small business owner to keep up with changing regulations, especially if you're doing payroll yourself.  As a reminder, these payroll changes will take effect December 1, 2016!

Final Rule: Overtime
From the Wage and Hour Division (WHD) of the US Dept of Labor

Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees under the Fair Labor Standards Act

On May 18, 2016, President Obama and Secretary Perez announced the publication of the Department of Labor’s final rule updating the overtime regulations, which will automatically extend overtime pay protections to over 4 million workers within the first year of implementation. This long-awaited update will result in a meaningful boost to many workers’ wallets, and will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.

In 2014, President Obama signed a Presidential Memorandum directing the Department to update the regulations defining which white collar workers are protected by the FLSA's minimum wage and overtime standards. Consistent with the President's goal of ensuring workers are paid a fair day's pay for a hard day's work, the memorandum instructed the Department to look for ways to modernize and simplify the regulations while ensuring that the FLSA's intended overtime protections are fully implemented.

The Department published a Notice of Proposed Rulemaking (NPRM) in the Federal Register on July 6, 2015 (80 FR 38515) and invited interested parties to submit written comments on the proposed rule at www.regulations.gov by September 4, 2015. The Department received over 270,000 comments in response to the NPRM from a variety of interested stakeholders. The feedback the Department received helped shape the Final Rule.

Key Provisions of the Final Rule

The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:

1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.

The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.

Do You Qualify for the Earned Income Tax Credit?

As a small business owner, you could qualify for the Earned Income Tax Credit!  It's different than itemized deduction and available for those that qualify with or without children.

What is the Earned Income Tax Credit?
By Maurie Backman on Fool.com

Taxes can be a huge burden for low-income Americans who need every penny they can get to pay the bills. Thankfully, there are tax credits available to help lower earners make ends meet. One such credit is the Earned Income Tax Credit. The Earned Income Tax Credit, or EITC, is a federal tax credit that can save eligible low-income Americans money on their taxes. You must meet certain criteria to file for the EITC, but if you qualify, you could receive up to $6,318 for 2017. Best of all, the EITC is refundable, which means that if it reduces your tax liability to $0, you'll actually get a check for the difference.


Tax credits versus deductions

Some people use the terms "tax credit" and "tax deduction" interchangeably, but in reality, they're not the same thing. A tax deduction reduces your taxable income, while a tax credit is a dollar-for-dollar reduction of your tax liability. If you're eligible for a $3,000 tax deduction and your effective tax rate is 25%, that deduction will save you $750 in taxes. But if you get a $3,000 tax credit, it'll save you $3,000 in taxes.

Now many tax credits are non-refundable, which means that if they reduce your tax liability to $0 with money left over, you won't be eligible to receive the difference. The EITC, however, is refundable, which means that it has the potential to put even more money back in your pocket. Let's say you owe $2,000 in taxes but are eligible for an EITC credit in the amount of $3,400. Because the EITC is refundable, you'll actually get a check for $1,400.

How do I get the Earned Income Tax Credit?

There are certain criteria you must meet to be eligible for the EITC. To qualify, you must have earned income from a job or business that you own. Furthermore, your tax filing status must be single, married filing jointly, head of household, or qualifying widow. Additionally, for 2017, your investment income for the year can't exceed $3,450.

There are also income limits that determine your eligibility to receive the Earned Income Tax Credit, and they depend on the number of qualifying children you have in your household. The following table shows what the 2017 EITC income limits are based on your tax filing status and number of qualifying children:

How much can I get from the Earned Income Tax Credit?

The amount of money you get from the EITC depends on your income and number of qualifying children. For 2017, the maximum you'll receive from the EITC is:

• $6,318 if you have three or more qualifying children
• $5,616 if you have two qualifying children
• $3,400 if you have one qualifying child
• $510 if you don't have any qualifying children

Don't pass up free money

To benefit from the Earned Income Tax Credit, all you need to do is claim it on your tax return. Surprisingly, an estimated 20% of eligible tax filers fail to claim the EITC and lose out on much-needed money each year as a result. If you're a low earner, it pays to see whether the Earned Income Tax Credit could lower your taxes or, better yet, put extra cash back in your pocket this year.

The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.

Charitable Donations for Small Business

As the year comes to a close, many small business owners and individuals look for ways to make deductions on their taxes.  Contributing to your favorite cause is a great way to minimize your bottom line.  Here's how to make those charitable donations count!

Small Business Guide to Deducting Charitable Donations
By Bonnie Lee

Businesses can make tax deductible donations to bona fide nonprofit organizations. But you may be surprised to learn how it is deducted on your tax return. In fact, the only entity able to deduct a cash charitable contribution as a business expense is a C Corporation.

If you are a sole proprietor and you make a donation of $100 to a dog rescue society which is registered as a 501(c)(3) with the Internal Revenue Service – all bona charities must be registered as such for your gift to be tax-deductible – and your business received no goods or services in return, the deduction is listed as an itemized deduction on Schedule A of your tax return. This provides a tax benefit only if you are able to itemize deductions.

You cannot deduct this contribution on Schedule C. It is not a business expense; it will not reduce your self-employment tax. The IRS views it as a personal expense paid from business funds.

But now let’s say you want to support young athletes and therefore donate $100 from business funds as a sole proprietor to the local soccer league. In exchange, they run a small display ad for your business on their program. This is no longer a donation. This is an advertising expense; you received something in return which can be classified as an “ordinary and necessary business expense,” and therefore the cost is deductible as such on Schedule C.

If as a sole proprietor you donate your services to a bona fide 501(c)(3), you have no deduction whatsoever. Doesn’t seem fair, does it? But the IRS places no value on your time or expertise. A manicurist donated her time to do nails for women clients at a shelter who were preparing for job interviews. While she was not allowed to deduct the $35 per manicure she would normally charge, she was able to deduct her mileage to and from the shelter, and the cost of all supplies and materials used in the performance of the manicures. She gave away bottles of nail polish to be distributed by the nonprofit to their clients. These were a write off for her as well.

By the same token, if this manicurist were to give away a nail care set of polish and files and other products to a poor individual who needs help, she would not be able to write off the donation. This is simply because the IRS does not allow the deduction of gifts to individuals, or for that matter to political organizations or candidates.

If your business is incorporated as an S Corporation or formalized as a partnership filing Form 1065, the same rules apply. In fact, any donations made at the S Corporate or partnership level flow out as a special line item on your Schedule K-1 and end up on Schedule A of your individual income tax return. Again, this is a tax benefit only if you are able to itemize deductions.

A C Corporation may take the deduction on Form 1120 but must follow all of the IRS rules regarding donations.

Remember to acquire and retain the acknowledgment letter from the nonprofit for your donation. Your canceled check is not enough documentation and the IRS may disallow the deduction if you cannot provide this document. It must be obtained before filing your tax return. You cannot request it later during an IRS audit.

To view the original article, click here.

Celebrate National Wine Tasting Day @ Secco Wine Bar

Did you know that November 5, 2016 is National Wine Tasting Day?  As an avid wine drinker, I was delighted to learn of the event and excited that it gave me an excuse to visit one of my favorite clients in Richmond serving my favorite beverage— Secco Wine Bar! Having recently moved to their new location (something we both have in common...) they've been able to expand their menu as well as their seating with a heated patio outdoors and more space inside.  Celebrate this holiday with me and go to your favorite local wine bar...as if you needed the excuse.

Tax Planning for Small Business

It’s fairly common knowledge that when you plan ahead, things generally cost you less money.  You have more time to shop around for the best deal and you aren’t paying exorbitant fees for last minute convenience.  While it comes to mind that this rule is especially true for travel expenses, it is also very true when it comes to tax planning for your small business.  The more you plan ahead, the more likely you are to find a strategy or that new tax law, that saves you hundreds.

Cash flow is incredibly important for small businesses, and minimizing your tax liability means more money for growth and investment.  Money saving strategies like making contributions at end of year are also beneficial to your bottom line.  Further, knowing your bottom line months in advance can give you more time to plan on making that payment.  Would you rather learn about a $10,000 bill a week in advance or 4 months in advance? Exactly.

Tax Planning for Different Business Forms

SOLE PROPRIETORSHIPS AND PARTNERSHIPS Tax planning for sole proprietorships and partnerships is in many ways similar to tax planning for individuals. This is because the owners of businesses organized as sole proprietors and partnerships pay personal income tax rather than business income tax. These small business owners file an informational return for their business with the IRS, and then report any income taken from the business for personal use on their own personal tax return. No special taxes are imposed except for the self-employment tax (SECA), which requires all self-employed persons to pay both the employer and employee portions of the FICA tax, for a total of 15.3 percent.

Since they do not receive an ordinary salary, the owners of sole proprietorships and partnerships are not required to withhold income taxes for themselves. Instead, they are required to estimate their total tax liability and remit it to the IRS in quarterly installments, using Form 1040 ES. It is important that the amount of tax paid in quarterly installments equal either the total amount owed during the previous year or 90 percent of their total current tax liability. Otherwise, the IRS may charge interest and impose a stiff penalty for underpayment of estimated taxes.

Since the IRS calculates the amount owed quarterly, a large lump-sum payment in the fourth quarter will not enable a taxpayer to escape penalties. On the other hand, a significant increase in withholding in the fourth quarter may help, because tax that is withheld by an employer is considered to be paid evenly throughout the year no matter when it was withheld. This leads to a possible tax planning strategy for a self-employed person who falls behind in his or her estimated tax payments. By having an employed spouse increase his or her withholding, the self-employed person can make up for the deficiency and avoid a penalty. The IRS has also been known to waive underpayment penalties for people in special circumstances. For example, they might waive the penalty for newly self-employed taxpayers who underpay their income taxes because they are making estimated tax payments for the first time.

Another possible tax planning strategy applies to partnerships that anticipate a loss. At the end of each tax year, partnerships file the informational Form 1065 (Partnership Statement of Income) with the IRS, and then report the amount of income that accrued to each partner on Schedule K1. This income can be divided in any number of ways, depending on the nature of the partnership agreement. In this way, it is possible to pass all of a partnership's early losses to one partner in order to maximize his or her tax advantages.

C CORPORATIONS Tax planning for C corporations is very different than that for sole proprietorships and partnerships. This is because profits earned by C corporations accrue to the corporation rather than to the individual owners, or shareholders. A corporation is a separate, taxable entity under the law, and different corporate tax rates apply based on the amount of net income received. As of 1997, the corporate tax rates were 15 percent on income up to $50,000, 25 percent on income between $50,000 and $75,000, 34 percent on income between $75,000 and $100,000, 39 percent on income between $100,000 and $335,000, and 34 percent on income between $335,000 and $10 million. Personal service corporations, like medical and law practices, pay a flat rate of 35 percent. In addition to the basic corporate tax, corporations may be subject to several special taxes.

Corporations must prepare an annual corporate tax return on either a calendar-year basis (the tax year ends December 31, and taxes must be filed by March 15) or a fiscal-year basis (the tax year ends whenever the officers determine). Most Subchapter S corporations, as well as C corporations that derive most of their income from the personal services of shareholders, are required to use the calendar-year basis for tax purposes. Most other corporations can choose whichever basis provides them with the most tax benefits. Using a fiscal-year basis to stagger the corporate tax year and the personal one can provide several advantages. For example, many corporations choose to end their fiscal year on January 31 and give their shareholder/employees bonuses at that time. The bonuses are still tax deductible for the corporation, while the individual shareholders enjoy use of that money without owing taxes on it until April 15 of the following year.

Both the owners and employees of C corporations receive salaries for their work, and the corporation must withhold taxes on the wages paid. All such salaries are tax deductible for the corporations, as are fringe benefits supplied to employees. Many smaller corporations can arrange to pay out all corporate income in salaries and benefits, leaving no income subject to the corporate income tax. Of course, the individual shareholder/employees are required to pay personal income taxes. Still, corporations can use tax planning strategies to defer or accrue income between the corporation and individuals in order to pay taxes in the lowest possible tax bracket. The one major disadvantage to corporate taxation is that corporate income is subject to corporate taxes, and then income distributions to shareholders in the form of dividends are also taxable for the shareholders. This situation is known as "double taxation."

S CORPORATIONS Subchapter S corporations avoid the problem of double taxation by passing their earnings (or losses) through directly to shareholders, without having to pay dividends. Experts note that it is often preferable for tax planning purposes to begin a new business as an S corporation rather than a C corporation. Many businesses show a loss for a year or more when they first begin operations. At the same time, individual owners often cash out investments and sell assets in order to accumulate the funds needed to start the business. The owners would have to pay tax on this income unless the corporate losses were passed through to offset it.

Another tax planning strategy available to shareholder/employees of S corporations involves keeping FICA taxes low by setting modest salaries for themselves, below the Social Security base. S corporation shareholder/employees are only required to pay FICA taxes on the income that they receive as salaries, not on income that they receive as dividends or on earnings that are retained in the corporation. It is important to note, however, that unreasonably low salaries may be challenged by the IRS.

This article originally appeared on ReferenceforBusiness.com and includes some other great resources as well!

Payroll Services for Small Business

Accounting Works has offered a variety of accounting services in Richmond for many years, working with many small business owners has made us realize that there are certain accounting needs not being met. I am speaking of Payroll Services.  Small to medium size businesses feel that the cost of outsourcing this service is not justifiable and instead opt to handle it in house, consuming both time and resources they can’t afford to lose. This has prompted us to begin a program for Payroll Services for businesses who need it.

Start your small business Spring Cleaning with payroll services at Accounting Works.  We are offering flexible and affordable payroll solutions to save small business owners time at a competitive price! Through our platform, business owners and employees alike can log in through the website. Employers can easily view payroll periods, expenses and reports. Employees can download pay stubs and W2s.  Payroll advances, garnishments, and before and after tax deduction reports that any other full-service payroll company can provide, including:

• Year-to-Date Reports
• Check Register
• Taxable Wages
• Cash Requirements Report
• Generate checks
• Worker’s Comp Audits
• Direct Deposit

For employers with 10 or fewer employees, we are offering these services for a flat fee of $155 per month, with only a small charge for any additional employees.  If you have more than 10 employees, don’t worry! We will work with you on a bulk solution to your payroll needs.

Accounting Works has been providing affordable accounting services to Small Business owners for years.  We’ve seen the need for affordable payroll solutions and we’re here to help!

Payroll Services for Small Business

Accounting Works has offered a variety of accounting services in Richmond for many years, working with many small business owners has made us realize that there are certain accounting needs not being met. I am speaking of Payroll Services.  Small to medium size businesses feel that the cost of outsourcing this service is not justifiable and instead opt to handle it in house, consuming both time and resources they can’t afford to lose. This has prompted us to begin a program for Payroll Services for businesses who need it.

Make it your New Year’s resolution to start your payroll services with Accounting Works.  We are offering flexible and affordable payroll solutions for small businesses beginning the first of the year! Through our platform, business owners and employees alike can log in through the website. Employers can easily view payroll periods, expenses and reports. Employees can download pay stubs and W2s.  Payroll advances, garnishments, and before and after tax deduction reports that any other full-service payroll company can provide, including:

• Year-to-Date Reports
• Check Register
• Taxable Wages
• Cash Requirements Report
• Generate checks
• Worker’s Comp Audits
• Direct Deposit

For employers with 10 or fewer employees, we are offering these services for a flat fee of $155 per month, with only a small charge for any additional employees.  If you have more than 10 employees, don’t worry! We will work with you on a bulk solution to your payroll needs.

Accounting Works has been providing affordable accounting services to Small Business owners for years.  We’ve seen the need for affordable payroll solutions and we’re here to help!

No Tricks, Just Treats!

Now that we're all settled in, help us celebrate our new location at 122 Granite Ave!  We are inviting all of our friends, family, clients and colleagues to stop by for some grilled burgers and dogs along with craft beer and tasty homemade treats!

The Advantages of Professional Payroll Services

Just like hiring an accountant to do your yearly taxes or monthly bookkeeping,  outsourcing your payroll responsibilities can save a small business owner lots of time and money!  By taking a time-consuming chore off your plate, it frees you to focus on all the other aspects of running your business. Here are just some of the reasons to consider having a professional do your payroll.

The Advantages of Outsourcing Payroll Services

Writing checks, keeping accurate records, calculating and paying payroll taxes, and communicating with your employees can be very demanding and costly, especially if you are a small business owner. Outsourcing your payroll services can reduce cost, save time, and make sure that your taxes are correctly calculated. Managing a company’s payroll is considered a big hassle even by the most experienced professionals. Outsourcing payroll is a great alternative to in-house processing and can even help you save money in the long run.

Truth be told, for very small businesses it is actually recommended that they process the payroll themselves. But, if you are a small business owner, you should take into consideration the time needed and the cost associated with in-house payroll management. Without good knowledge of the process and without access to specialized payroll software, it is very easy to make costly mistakes. For example, employees, as well as tax agencies, have to be paid on time and in full, or your business will have to pay penalties.

When to Outsource Payroll Services
Processing your company’s payroll in-house requires at least the purchase of a computer, the payroll software and the training required in order to use it. Keeping up to date on changes in personnel, salaries, or tax requirements can prove to be a real hassle, so the person or team that handles your payroll must be highly trained and professional.

If your payroll expenses are fairly stable, in-house payroll management can be done without a lot of effort. But if your payroll changes on each pay period, or if you have a lot of employees that don’t work a set amount of hours each week, then outsourcing your payroll services might be the better choice.

Benefits of Outsourcing
Payroll companies normally handle calculating each employee’s salary and taxes, printing and delivering paychecks, and supplying management reports. Additional services that a payroll company may offer are: automatic check signatures, direct deposit of checks, or issuing W-2 forms. Hiring a payroll management company can have many benefits that will make running your business a lot easier. Here are the most important:

• Save time – Hiring a professional payroll company will free up time and employees, allowing the more important areas of your organization to benefit. Processing payroll, writing and delivering checks, calculating and paying employment taxes, preparing and delivering tax forms, and handling payroll inquiries are all very important parts of running a business, but your employees’ time can be spent more effectively by improving customer service, finding more business, or releasing a new product line.
• Reduce costs – You must not underestimate the cost of in-house payroll processing. The time and resources spent on internal payroll management must be taken into consideration when you consider hiring a payroll company. In most cases, business owners find that, by employing a professional payroll service company, they will save money that can be used to improve other sides of their business.
• Avoid IRS penalties – The IRS estimates that over 40 percent of small businesses in the United States pay penalties of over $800 per year. These penalties are the result of late or incorrect filing and payments. Besides being a hassle, calculating and filing payroll taxes can attract fairly large penalties if done incorrectly. Most payroll companies offer the guarantee that you won’t have to pay any penalties if you use their services. Plus, by using a payroll service, you are also guaranteed that the tax paperwork is completed and filed on time.

In Conclusion
Whether your business needs to outsource payroll services or not depends on many individual factors, and you should carefully analyze all the data before deciding to hire a professional or do your own in-house payroll management. Always exercise caution before hiring a payroll company. They will be handling a very important part of your business, so a high level of professionalism and customer service is very important. Finding and hiring a good payroll services provider will save you and your employees a lot of time and even money, allowing you to concentrate on more important parts of your business.

To view the original article, click here.

The Most Helpful Reports for Small Business Accounting

Most small business owners know that data entry - when it comes to your accounting - is important.  What's equally important is interpreting those numbers into meaningful and digestable information that can help your business thrive.  There are as many types of accounting reports as there are software tools to create them.  Here are 10 that may come in handy for you.

The 10 most helpful reports on your accounting software
By Elizabeth Gillam of myob.com

When you own a business it’s all too easy to be caught up in the day-to-day running of the business. You find yourself working in the business, not on the business.

It is tempting to stay in the comfort zone of the day-to-day rather than face the reality of the business by researching your reports.

But the only way you can truly know how your business is going is by checking your back-of-house reports to find your Key Performance Indicators. Knowing your numbers and understanding the data in your reports helps you to be a better manager — and run a better business.

Get into the habit of printing and analysing your daily, weekly and monthly reports to improve your business performance. It only takes a short time each morning, and it increases your chances of meeting your targets and budgets exponentially.

To help you out on which reports to run, let me suggest my top 10.

1. Analyse Sales report
You should run this report daily; it keeps you on your toes and details your sales history.

You have sales budgets, and it is important that you meet them. This report shows you the productivity of your sales team. It also tells you who your most important customers are — the ones who spend the most money.

Learn who these customers are to be sure you are giving them excellent customer service.

2. Sales Customer Detail report
This report shows you which customer is ordering what. This enables you to better know your customer and offer them superb customer service by suggesting other items they might like to purchase from you.

This report also enables you to set your production or ordering schedule. If you are selling items, then your stock levels need to be replenished.

3. Sales Register
This report should be done each morning to track where you are on outstanding quotes, sales in progress and finalised sales.

Your sales people value leadership, and this report allows you to have a conversation with each salesperson every morning to set their daily task list.

4. Aged Receivables Summary
Use this report to monitor your cash flow — the cash you have on hand to pay bills and run your business.

I’m sure you have terms on your invoices, and it’s important that your clients or customers don’t abuse their privileges. Each time a customer takes longer to pay their account, the more it costs you.

Make it a habit to print this report every week and ring each customer whose account is outside your terms of trade. The squeaky wheel gets the grease — make sure you are that squeaky wheel.

Want more invoicing tips? Read 6 quick fixes to improve your invoicing process.

5. Cash Flow Analysis report
This report is gold for the business owner. It will show you what cash will be coming into and out of your account over a set period of time.

If this report shows a negative, it will give you all the more reason to use the aged receivables report from above to identify those customers outside trading terms and ring them to get their money in.

6. To-Do List Receivables report
This report should be run daily. It will tell you whose account is due when.

It’s a great opportunity to ring a client when their account is due to firstly offer further sales assistance and potentially sell more product. You can also mention that their account is due.

This is a great initiative to not only build sales but also to offer superior customer service.

7. Bank Register report
Run this report daily to check to your bank statement.

It helps to identify that your sales from the day before have in fact been banked and that the right amount has been banked. The number of times I have seen money disappear from when it leaves your office until it hits the bank is mind-boggling.Finding an error the next day is always easier than trying to find it next week or next month.

8. Undeposited Funds report
This report helps you keep an eye on transactions that have been paid by the customer and receipted in your system but are yet to hit the bank.

It gives you an idea of how much cash is sitting in your store and whether it is over your insurance levels. It will also show you how much money you have waiting to be settled from credit card transactions.

9. Profit & Loss report
This is a monthly report that is essential for any businessperson to use. It shows you how much profit you have made.

Diving deep into this report will show you where your sales and expenses are coming from. Paying close attention to small improvements on every line of this report will lead to greater profitability.

Want to get a handle on the key drivers of increasing profit? Read more here.

10. Profit & Loss Report to Budget
This report compares your actual figures to those you budgeted for previously in the year.

It will show you if you are on track to reach the goals you set yourself and your business when you prepared your budgets. It helps you to run a tight ship.

Having a software system is a given in business. Using it effectively is the difference between a good businessperson and a successful businessperson.

To view the original article, click here.

A Quality Experience with KMI Insurance

    

In classic small business owner fashion, I realized a few weeks ago (in the middle of the night) that I needed business insurance immediately.  In fact, I needed it a while back and was playing catch up. After scrolling through client and vendor contacts, I decided to go through the Richmond Business Alliance (RBA) directory.

Bingo!  I have done business with fellow Richmond Business Alliances members before with great success.  I had also chatted with Kate of KMI Insurance at quite a few of the RBA’s monthly networking events.  I vaguely knew that she worked in the insurance field, but I mostly recalled the intelligent and full of laughs conversations that we’ve had.

In less than a week, Kate and her staff coordinated to go from first phone call to executed policy. Throughout all of this communication was excellent.  When I had a question, it was answered.  When I asked for her recommendation, she gave it and then explained it.  My needs were accommodated promptly and professionally.  I cannot recommend more highly the services of KMI Insurance.  I would also like to recognize that without our membership in the RBA that this business relationship may not have been formed.

If you have insurance needs, please give Kate a call.  I’m glad that I did.

Upcoming Deadlines for Small Businesses and Self-Employed

There are some upcoming tax deadlines for Small Business and those who are Self-Employed.

September 15th

• Third Quarter estimated tax payments are due. Form 1040-ES.
• Final day to file for Partnerships that filed with Form 1065 and for a 5-month extension.
• Corporations that filed a 6-month extension file a calendar year Form 1120 or 1120S.

October 17th

• Final day to file tax return for Self-Employed if you filed for a 6-month extension in April.

For a comprehensive list of deadlines visit www.tax.gov/calendar/

How We Helped Design By E

It’s no secret that we help all kinds of businesses, big or small, reach their goals and find their individual success. We have clients from all different backgrounds and we’ve learned that no client is created equal. It keeps it interesting because we are faced with a variety of unique problems to solve and we love finding great solutions for our clients' financial future.

One of our newer clients, Design By E, is no different and they offered a new kind of challenge for us. They are a small firm who specialize in creative multimedia and marketing.  Despite being small, they experienced big growth in a relatively short amount of time. They were growing at an exponential rate and needed financial direction when they sought out the services of Accounting Works Solutions.

Having been the sole proprietor of the company, the founder, Enrique Mendez, was able to create a healthy budget for himself from the start. However, the unique and valuable services offered by the company quickly gained traction throughout the small business owner community in Richmond and he was able to acquire some pretty reputable clients in a short amount of time.

In order to keep up with their gain, Enrique hired two full-time employees and needed help organizing his company's financial future quickly as his business became more complex.

When they came to us, we were we able to analyze and figure exactly where their finances stood and write down a plan for them to budget for the future. The plan included setting money aside for taxes, savings and company growth.

We reached this plan by carefully looking at their profit margins and seeing where their strength and weaknesses lie. We asked them to pay attention to those areas where they were the most profitable and maybe adjust their strategy when it came to less profitable projects.

“Accounting Works Solutions really helped us take our business to the next level,” says Enrique.  “We found ourselves so busy with work that we often forget to pay attention to our finances. Stephen was a such a big help and crucial for our future as a company.  I feel confident going forward that we’re going to continue to be profitable!”

At Accounting Works, we not only offer accounting solutions but also financial planning for growing businesses. We’re excited to have a wide portfolio of clientele and will always do our best to help our clients be at their best. If you always find that your finances are the last thing on your list to worry about, it may be in your best interest to make sure that your business is operating the most efficient way possible. We can help you achieve those goals! It can save you hundreds and maybe thousands in the long run when you talk to an expert. So give us a call today and see if you’re the best you can be!

One day to one year, how to keep accounting

From Quickbooks comes an incredibly helpful guide to your daily, weekly, monthly and annual accounting tasks to keep your small business running smoothly!

We are Richmond's One-Stop Shop!

If you're a small business owner, self-employed, a freelancer or just an individual who needs help - Accounting Works provides customized solutions for your individual needs!  We are Richmond's one-stop shop for everything accounting - even payroll services!  Let us know what we can do for you!