Taxes and S-Corps

     S Corporations have been popularized as a way to structure a small business because of the many advantages it once held to avoid certain types of taxes at the end of the year.  The shareholder-employees of a pass-through entity, that defines an S corporation, could once navigate the vague terminology written in the tax law to lessen their payroll tax liability as well as dodge the self-employment tax.  In previous years minimizing one’s compensation in favor of shareholder distributions was considered savvy in order to minimize payroll taxes.  However, in the past few years, tax court precedents have been set that more clearly defines what reasonable compensation means, eliminating the ability to shirk tax liability through the shelter of an S corp business structure.

    An advantage of structuring your business as an S Corporation is not having to pay entity-level tax on the company's taxable income.  Attributes and income are instead distributed among the shareholders.  Those individuals then pay personal income taxes on these reported items.  This sheds light on the tax advantage over sole proprietorships, partnerships and LLCs.  Unallocated shares of the corporation’s income aren’t treated as self-employment income.  The other business structures would be liable for paying self-employment taxes. Employers and employees currently have to split 12.4% social security tax up a certain amount and 2.9% in medicare on all wages, without limitation.  Self-Employed individuals are responsible for the full amount.  S Corporation income is not at risk of the self-employment tax.  There is also great incentive for shareholders to prefer distributions over compensation, as distributions are not held to payroll taxes, either.

     However, no longer can a shareholder-employee evade payroll taxes by eschewing “reasonable” compensation.  Until recently it was left unclear what exactly reasonable meant and there was little guidance in how to prescribe a shareholder-employee’s salary.  Many methods have been used, some avoiding a salary in favor of distributions entirely, others have opted to disguise compensation as independent contractor fees and most popularly, under-compensation.  The IRS is now aware of these liability evading methods and have more clearly set compensation guidelines.

     In three court rulings over the past three years, the IRS has been building road blocks for those S Corporations trying to eschew their tax responsibility in these ways.  In one case, it was ruled that shareholders/employees who provide eminent services for a company may not take distributions in place of compensation.  In another case, a shareholder’s compensation was way below the industry average especially when taking into consideration his years of experience and level of education.  Independent contractor fees have been annexed from creative compensation options as well.  A court did rule, however, against the IRS in one of these claims dealing with S Corporations in which a shareholder took distributions in lieu of salary, but was able to justify it because of his minimal contribution to the company.

  

     Three determining factors in reasonable compensation has come out of these various rulings.  First is the performance of the employee; how much they contribute to the revenue of their business.  It is no mystery why professional fields such as law, accounting and real estate have set these precedents, because company profit is highly based on personal performance.  Salary comparisons within professional fields.  Based on region and firm size, a shareholder/employee should be making within a certain pay scale.  That pay scale can also be determined by company conditions.  If the business has excess capital not being used for expansion or reinvestment, that is a red-flag for the IRS.  Other company’s not in danger of this scrutiny would be where profit is based on capital and assets like in manufacturing and distributing.  In this arena, individual performance does not necessarily effect revenue.

     S corporations still hold their lustre as a tax saving business structure, it is just important to follow these guidelines in determining compensation so as to not raise any red flags.  There are also strategies in avoiding a large tax bill at the end of the year.  To be continued...

     

Recap: Prepping for Taxes Lunch & Learn

The Lunch and Learn yesterday was quite a success.  Some of the topics I went over, ironically one of them being how to pay your accountant less, were met with helpful questions and led to the group discussion “learning” portion of the lunch.  I’d like to go over some of the points I made just to recap and not leave out anyone that couldn’t make it.

How Prepping Can Save You Accountant Fees:

     This seems like a self-defeating point to make, but in fact it’s the opposite.  Most of our workload is done just a few months out of the year and the way you pay me less is by having your documents organized.  By saving me time, it saves you money.  Using expense and mileage apps organizes the information that you need and if you’re averse to technology, go through your shoebox of receipts ahead of time.  Organizing the information you gather from your documented expenses onto a sheet of paper that your accountant can decipher is very helpful.  Save the documents for your records, all an accountant needs is the numbers.

     Another way to save money is to get your documents in as early as you can.  It’s not uncommon for accountants to charge more for their work if you really put them in a time crunch.  This comes in handy in a couple ways, in fact.  Preparing your tax return early doesn’t necessarily mean filing your taxes early.  I recommend waiting until mid to late February to be able to adjust to any amendments that might be issued by then.  Also, it is helpful if you plan on filing for an extension.  You need to have a good estimate of your tax liability before filing for an extension and the best way to make that estimate is by preparing a tax return.

     One more note on organization.  If you’re self-employed, it is important to clearly separate your personal expenses from your business expenses for your accountant.  Again, it is a time saver.  Furthermore, separating your expenses by becoming a corporation or a limited liability company saves your personal finances from being encroached upon if your business is on the hook for any sum of money.  Separating your finances also helps you claim the “reasonable compensation” you’ve paid yourself throughout the year.  The format in which you do so depends on which business structure you choose. 

Planning:

     Plan for the self-employment tax.  If you are a pass-through entity or a sole proprietor, I recommend deciding on a fixed percentage to withhold on your W-4 form to do this, especially if you estimate you’ll have a good business year.  You can reduce your tax liability by keeping accurate records of your work mileage and expenses throughout the year.  If you have a home office, you can reimburse yourself through the company for that space in your home.  Another way to avoid that big bill you’re expecting by making scheduled payments, however, depending on your company’s financial status I don’t necessarily recommend doing it this way.  Less funding is going to the IRS, which means less agents.  I’ve personally known some scheduled tax payments to be lost, so again, I stress: document, document, document!

     Make sure your financial planner and your accountant are in cahoots.  The best way to achieve your financial goals is to make sure these two entities are talking with each other.  It helps your accountant know how to file, how to better spread your finances throughout the year, etc.  These two capacities, while very different, are complimentary to each other and can help you better if they’re working with each other.

Being Selective:

     If you have any more than a W-2 form, I recommend seeking a professional tax-preparer.  However we are not all equal.  Seeking out an Enrolled Agent or a CPA is probably best for your business and tax liability.  While a CPA can represent you in tax court, both enrolled agents and CPAs pass similar standard tests to assess their proficiency.  Other tax preparers who are not held to these standards, simply have to file for a PTIN, a tax preparer identification number, annually in order to do your taxes.  Interview your tax preparer and ask for their qualification and experience.

Thanks to all those that made yesterday’s Lunch and Learn a success!  I enjoyed it.  I’m glad both Pat and I had a chance to share our knowedge with local business owners during tax season.  Hope it helped to get the most out of your return

Tax Time - Last Minute Considerations

When you’re running a business it’s hard to do it all. Filling your taxes in a timely manner can be difficult and if you’re a business owner this is especially true because you typically have a lot on your plate. The problem with waiting until the last minute to file your taxes is that you may miss some things that will work to your advantage. Here are some of the things you want to pay attention to when you’re filing this year:

Free Filing

If you made less that $57k in the past year, you are eligible to use free e-filing software. What’s great about this is that there is little to no out of pocket expense to you and it's typically self-explanatory. You get asked questions about your business and finances, and you fill out the form like you would any other questionnaire. 

Start-Ups

Did you start your business last year? You qualify for a $5k deduction since starting a business is considered a capital expense. This may not apply to everyone but it definitely applies to some, and if you did start a new business last year, congrats! It’s not easy. 

Education

Did you take a class or course to receive training to improve your business? If so, that also qualifies as a deduction. Things like seminars and conventions count too!

Driving

Mileage is one of the easiest deductions for you to qualify for. Whether it’s meeting clients, getting supplies or doing research around town, you can get a deduction for using your own vehicle to run your business. Most business owners have to do this at some point or another, just make sure that you keep track of your miles and maybe even use a helpful app to do it for you!

Working from home

Being your own boss is great, but if you also get to work a lot from home and have a dedicated space just for that, that also qualifies as a deduction. You do have to specify square footage but that shouldn’t take too long to figure out. 

Insurance

There’s no one looking out for you but yourself when you’re self employed, this is why getting health insurance is on you. Not to worry though, IRS knows that this can be a costly expense on someone who has their own business and sometimes either offers assistance or a tax break to ensure you’re healthy enough to run your business. 

Software and subscriptions

Quickbooks, Photoshop, Paypal - if you’re a business owner you may be familiar with some of the these software programs. Most of these require a monthly subscription which can end up costly hundreds of dollars a year, take this as a deduction also because it is considered a business expense.

Hotels and Meals

We never know where work will take us, but we do know that covering these expenses can get costly. That is why saving all your receipts for both meals and hotels is important. Most of these things, as long as they are a business expense, are also deductible. 

Want to know more? Accounting works will be hosting a Lunch & Learn free to members of the Richmond Business Alliance 3.3.2015. Non-members can attend for $10.00. RSVP right here.

Official Event Name: Lunch & Learn - Tax Time Sponsored by Accounting Works & Pat McAleer, CFP®, ADPA® from Kasch, Levitch, McAleer & Associates 

Also, check out our Facebook event here.

7 Helpful Accounting Apps

If you’re a small business owner, most likely you are running your finances through computer software that creates invoices, tracks expenses, process payments, etc.  But with the world getting more and more mobile, why not have access some of these accounting tools at your fingertips?  Being able to keep track of certain things as they’re happening has the advantage of greater accuracy and less time spent in the office going over the numbers.  While your desktop software is absolutely necessary for more in-depth accounting features, using your iPhone or iPad for your basic expense needs has its instant advantages.  Using cloud technology guarantees its up-to-date no matter which device you access it from.

Easy Books 

(Free)

This app keeps track of your basic finances, with a mobile version of the Easy Books software available.  Its free version allows you to send invoices to your customers as well as create quick estimates and reports to see an overall view of your expenses.  This app allows you to pay for individual features as you need them.  The advantage is that you're not paying for more than what you need, and as your company grows you have the option to add more.  If you have the Easy Books desktop software version, information will automatically sync between the mobile version.

Visit their site here

Kashoo

(Subscription ~$20/month)

Designed for the iPad, this is a full-featured accounting app.  Free for your iPhone once you sign up for the monthly service, it keeps track of nearly everything you need for your small business.  Tracking payments and transactions, creating invoices and recording expenses, you can even snap a photo of your receipts and they are scanned in.  This app also allows data sharing between you and your business partner or accountant.  Set regular intervals for this app to automatically create a financial report for you.

Visit their site here

Shoeboxed

(Subscription -$10/month)

This app will be a lifesaver when it comes time to file taxes for the small business owner.  Take a photo of your bills and receipts, the app will automatically extract data like: vendor, date, total amount and payment type.  This app creates a database for all your transactions that you can easily search through at any time using the information you’ve entered by uploading a photo.

Visit their site here

Mint

(Free)

While the Mint app is listed for personal finance, it has the basic, minimal tools to help you see where your money is going.  It keeps track of your spending from your credit cards and your accounts and creates user friendly graphs for a full view picture of your finances.  Mint will automatically categorize your spending once you add accounts and cards to the app to keep track of.  Mint offers a general view of your transactions to help the entrepreneur or small business owner focus on operations.

Visit their site here

InDinero

(Price varies)

InDinero works a lot like Mint, except it is tailored to your specific business.  Add accounts and credit cards to have it automatically track your expenses, InDinero will create comparisons like spending vs. revenue.  A little more in-depth, it allows you to keep track of inventory costs as well as travel expenses or insurance costs.

Visit their site here

QuickBooks for iPhone

(Free with subscription -$13/month)

A great companion to the desktop software,  QuickBook mobile offers similar services such as invoice issuing, tracking payments and sales.  An excellent tool in your arsenal while away from the office.

Visit their site here

Freshbooks

(Subscription -$20/month)

Very user friendly, its a contender to the QuickBooks app.  Also offering invoice services, financial tracking and business profits, this app allows for easier invoice creation by tracking the time spent by you or employees on a specific project.  It also creates charts to help make better tax decisions for your business when it comes time to file.

Visit their site here

Lots of these apps offer free trials to make it easier to decide which works best for you business.  There are loads of options and features out there to help your small business finances stay healthy and your revenue progressing.  Spending less time doing paperwork and having automatically generated graphs and comparisons can save you money and help you think on your feet.  So empower yourself and your business to move with the times and away from your office.

Best Mileage Trackers for Keeping Up This Year (For iOS)

So it’s come time to do your taxes, and you realize how inaccurate, unused, sparse or missing your mileage data spreadsheet is.  It is hard to paint a clear picture for work mileage deductions, or even compensation from an expense account if your record keeping is not complete.  No one wants to lug around a ledger, or go back to the office after a business trip to record exactly how far you’ve gone.  Help yourself and your accountant this year, by keeping up with your miles in the technology age.  While apps don’t necessarily make your record keeping less boring, it certainly makes it more convenient.  Here are a few reviews of the best apps available.  Consider getting your money’s worth this year just with a few clicks at your fingertips.

Mileage Tracker +

$9.99

Previously Trip Cubby, Mileage Tracker + is just as praised.  Easily log and store your trips by setting beginning and end destinations, this app will add up the miles for you.  Frequently travelled routes can be saved for easy access at any time, and reports can even be exported within the app.  You can track business miles and even count charity and medical miles as well.  Mileage Tracker + uses current standard IRS rates.

Auto Miles

Free ($4.99)

Auto Miles does exactly what the title implies, it detects when you’re driving and starts keeping track.  Every mile you travel will be stored in this app.  If you have a personal trip you don’t want put on your expense report or claim, simply swipe and delete.  The 5s version of the iPhone and up uses M7 or M8 motion technology to do this for spot on mileage.  This app is free up to 100 miles before you have the option to upgrade to the full version for $4.99.  Most businesses or individuals that need mileage apps usually log more than 100 miles, so its more of a free trial.  You can export the data to a spreadsheet for your expense reports to your accountant or finance office.  If you frequently forget to log your miles, this is a good app for you.

klicks

$2.99

If you need on the go tracking, like easy access to start logging after you’ve already started your journey, klicks is all about automatic input.  Typing your end destination and choosing from options automatically provided in the search field, your current location is used as the starting point.  Previously selecting your preferences in Settings, it will automatically record your round trip.  Click to add the trip to your journey log and export it through email in a .csv file.

These top rated apps should get you revved up about staying organized this year for next tax season.  Not only get the most out of your mileage, but have the records at your fingertips.  You want to make sure you can store data from all your business trips, as well as have an easily exportable format for yourself and your accountant.  You may also want to consider a maintenance feature within the app for vehicle upkeep.  While this is by no means a comprehensive list, it should get you thinking about what will work best for you.  Bon voyage!

(All apps available in the app store) 

6 Best Business Invoicing Practices

     When starting your own small business, invoicing plays a vital role in the life-blood of your company.  It's how you make money and make an impression on your clients.  It can also be one of the hardest things to keep up with.  Invoicing takes practice, a rhythm.  Here are 6 tips to avoid getting off schedule in creating and sending invoices as well as tracking down late-payers so you have time to focus on other aspects of running your company.

1.    Make your invoices as professional as possible.  If you send out handwritten scribble on invoices you’ve ordered for $.20 in bulk, some of your clients may be less inclined to pay you as promptly as other, more official looking requests for payment.  Be proud of your brand; have it printed on your invoices.  Make sure the amount owed is very clear and easy to understand.  Be detail oriented down to the color, font and wording of the document.  Be clear, plain and very official.  If you feel the necessity to include legal jargon, have a lawyer help you translate what you’re trying to say in plain english.

2.     Invoices are official records, so what’s on it must be correct and follow standard business practice laws.  If you’re an LLC, an LLP or other limited company you must provide your business’s registered address and phone number.  If you have one member or executive's name listed, you must have them all listed.  Make sure your document follows all of your local and state business requirements.  One of the benefits of purchasing an  accounting system for your business is that all of these things can be done for you.

3.    Stay organized by using invoice numbers.  Secondary to the total amount due, keeping your invoices organized and easily referenceable is key.  You can use a unique sequential number for each of your clients, or use a chronological method of organization where the date part of the sequence of numbers.  Assigning your client with their own customer number at the beginning of the sequence gives you a secondary way of referencing a specific client’s invoice.  Two examples for customer number 47 that had their first invoice on February 2, 2015 could be 0047-02022015-01 (Customer number, date, sequential number) or 0047-0001 (customer number, sequential number).

4.     Choose a clear payment structure.  Asking for a deposit before you begin your work, or even asking for the full payment upfront helps reduce financial risk to your business and is easier on your cash flow.  There is nothing legally stopping you from requesting a payment upfront.  If at the end of your services your client refuses to pay either the full or partial amount, you’ve lost your leverage to stop work until payment is complete because it’s already finished.  If you’re worried about losing clients by requesting a hefty sum upfront, offer your client a satisfaction guarantee or their money back.

5.   Be clear about your payment terms.  Your client should be aware and understand your payment terms when initially signing a contract with you, but make sure you remind them on your invoice.  Make sure your deadlines are clear on your invoices to remind your client of the importance to make a payment by that date.  You should also make clear and unquestionable any late penalties or fees you plan on implementing if the payment requirement is not met.

6.     Be prompt.  Not only is it efficient business practice to send out invoices as soon as the work is done, but if you’re lackadaisical about your invoicing practices you might run the risk of sending your client the impression that they can be as haphazard with their payment.  Do your book keeping and invoicing at least once a week.  Make it easy for your clients to pay you by including the different payment methods you accept by providing account numbers, online links, etc.  If you are using an accounting system, consider one that sends out automatic email alerts for late payments.  That can help you save even more time.

     Keep the cash flowing in your business by streamlining your invoicing process.  Making sure your client has no questions or doubts about how much, when and how they need to pay you is key in keeping your business afloat.  Efficiency is indispensable in invoicing practices to keep you and your client happy.  Follow these invoicing principles to help you achieve maximum cash flow and organization.

Streamlining Your Business

Congratulations! Your business has made it another year.  Your effort was spent finding out what works, what doesn’t, what you can offer, what’s cost effective, how to handle bumps in the road, the right size staff for your budget and company, and the plethora of other things on your plate this past year.  Now it’s tax season and you’re stressing about everything you didn’t keep up with, record and document.  I’m sorry, its gonna be a doozy.  However! And there is a however.... The Silver lining is another year’s experience.  Whether that’s a tacky or blindly optimistic approach, now that you have the major kinks out of your plan and a few more things figured out, this year is the time to fine-tune your operation. 

Start with the Basics

Assess your bank.  One of the major things you have going for you as a small business owner is your cash.  Many entrepreneurs and people in general don’t have a clue how much they’re paying in service charges to the bank every month and exactly what they’re paying for.  Request an analysis statement that breaks down your generic monthly service charges.  You can then decide whether or not you need them, and if you can reduce costs in this area and take your savings and cash flow to the next level.  It might even be beneficial for you, if it’s within your budget, to request other services your bank may provide to keep your finances organized.  However, if you have taken the step to have someone else do your accounting for you, those services may already be rendered by him or her.  Banks are still business and don’t like losing clients, so small negotiations with your banker could have positive results.

Make a Comparison. It’s great that your company has grown and is continuing to, but do you know how your business stacks up to growth within the industry?  Before you do a whole lot of legwork, your accountant most likely has all the industry statistics and data comparison points on file that a lot of entrepreneurs aren’t taking advantage of.  Have these numbers available for your future strategy meetings and make your bench mark this year!

Automate It.

 

Be advanced.  Do you have small bills that stack up every month?  Instead of paying a $20 dollar monthly bill, pay $120 in advance for 6 months and save time paying all your little bills, not to mention saving money in stamps and accidental late fees!  The little bit of effort has a big payoff in stress and time management.  If your business has busy seasons and slow seasons, it’s a good idea to implement this tactic during the slow seasons when you have a little looser of a belt.  That way it’s already taken care of when your belt tightens again.

Use your (other) brain. Most likely your phone is a priceless asset in time management and helping you keep track of your company day to day.  What about month to month?  Save yourself the stress of remembering dates and funds or late invoices.  Do you have an accounting package that handles your bills?  Automate the process.  Your accounting software can generate invoices, send email alerts of late payment notices to your clients and handle electronic transfers (along with your bank).   

Keep it on Schedule.  Making a schedule for multiple employees can be a nightmare.  Did you know there are software packages that make scheduling less of a headache?  Asgard System's Time Tracker, TimeClock Scheduler and TimeCurve Scheduler among others, are a few software options that have to ability to track employee hours, alert you of any scheduling conflicts and even make payroll easier in some cases.  Some of these websites offer free trials as well.  You can spend more time building your clients than laboring over the schedule on a weekly basis.