When Does an Expense Become an Asset?

Understanding one simple matter will allow faster completion of your tax return at a lower cost and with improved accuracy. This step is identifying asset costs separately from expenses. A common burden for accountants is adjusting expenses that belong in a fixed-asset category.

Accounting for Assets

Assets appear on the Balance Sheet of a business. The Income Statement, which lists only revenue and expenses, does not convey complete financial information. The Balance Sheet shows what happened to profit that remained after earning revenue and paying expenses. Changes on the Balance Sheet over time indicate if the profit was used to repay loan amounts or acquire new fixed assets such as equipment or office furniture.

You should identify expenses on your Income Statement that require classification as assets on the Balance Sheet. Get accounting help when you borrow money to acquire a fixed asset. Loan payments also are not expenses on the Income Statement. Classify them as reduction in loan balances on the Balance Sheet.

Asset Tax Details

An asset improperly classified as an expense overstates total expenses. This

The Internal Revenue Service guideline is that property with a useful life of more than one year is an asset.

lowers your taxable profit. The reduction is not justified, because the correct process is depreciation of the asset cost over several years. If the unallowable positive impact on your income tax is discovered, you incur assessment of back taxes plus penalty and interest. To avoid this, accurate classification of assets is critical.

When your accountant sees a change in fixed assets, further details are required about the purchases. Depreciation calculations are based upon when an asset is first placed in service. Put that date as a memo in the accounting entry that records payment of the asset cost.

Cost Threshold

Identification of assets purchases is not always easy. The Internal Revenue Service guideline is that property with a useful life of more than one year is an asset requiring depreciation. You cannot list such property as an expense in the year of purchase. However, small purchases normally don’t count. For example, a bookbinding machine is a fixed asset but a paper clip is not – even though the paper clip lasts more than one year.

Discuss with your accountant a policy for identifying items with minimal cost. The limit is generally based upon the size of your business. A purchase of property that lasts more than one year is still an expense when the cost is below the established amount.

Addition to Value

Improvements to property are assets rather than expenses. However, routine repairs are expenses. To distinguish the difference, consider the impact of the expenditure. A cost that makes something operate better for the present is an expense. For instance, fixing a hole in the wall is an expense. So is replacing a few shingles on the roof.

Conversely, adding a new wall or replacing the entire roof adds to the long-lasting value of the property. Therefore, these costs are assets. They add to the value of property, which is a key ingredient to identifying a fixed asset.

Outlays over an established threshold to add value or acquire property with a life of more than one year are properly classified as assets, not expenses.

How to Get Help With Estimated Tax Payments

The federal government requires you to pay income tax throughout the year. A penalty is usually avoided by paycheck withholding or paying four estimated tax payments.

No penalty is assessed when four equal tax installments fall within $1,000 or 90% of your tax liability.

You also avert penalty with four equal tax payments totaling 100% of your tax liability in the preceding year. When your adjusted gross income for the year is greater than $150,000 – or $75,000 if married filing separately – pay 110% instead of 100%.

Estimated tax payments based upon your last tax return prevent the penalty but can create other problems. If your income for 2012 is higher than 2011, you owe more tax in April 2013. If your income is lower in 2012, you pay more than necessary as an interest-free loan to the government.

To resolve this, ask your certified public accountant (CPA) to calculate your 2012 estimated tax payments based upon the “regular installment method.” This computation requires you to provide your CPA with expected income and deductions for the entire year.

If necessary, you can make an estimated tax payment for one period in which you incur unexpected additional income.

Ask your CPA to determine an estimated tax payment based upon the “annualized installment method.” However, if you earn income throughout the year from which tax is not withheld, simply paying four equal payments is much easier. Determination of your tax each quarter is not possible without full-year estimates of income and deductions.

How to Hire the Right Bookkeeper

You cannot win a band competition without instruments, and you cannot succeed in business without a bookkeeping system.

Hiring a bookkeeping service is normally the best choice for every business that isn’t large enough to have a bookkeeper on staff.
Attempting a shortcut by assigning bookkeeping to an untrained employee as a side duty is a recipe for disaster. A sound bookkeeper is identifiable as conducting the work using the right processes.

Reliable bookkeeping services create a system of verification and reconciliation. This ensures data integrity. Bookkeepers accomplish this by comparing your accounting to statements and reports from financial institutions. Good bookkeepers know the effects of debits and credits, because bookkeeping challenges arise frequently. You want a bookkeeper who’s capable of sound thinking and determining solutions. Excellent bookkeepers also understand the big picture in order to coordinate with your certified professional accountant at tax time. Superior bookkeeping demands attention to details by professionals who aren’t afraid to ask questions so that transactions are accurately recorded.

A high-quality bookkeeper doesn’t need an extensive academic record in accounting. More important than formal degrees are experience and familiarity with your industry.

The best bookkeepers are also proficient with technological tools.
Therefore, be sure to ask about the bookkeeping software used and confirm that it renders the reports you expect. Discuss when and how you’ll obtain needed reporting.

Four Questions to Ask Your Accountant

The allure of software for completely in-house bookkeeping and tax return preparation is a constant temptation to small-business owners.

Unfortunately, the odds are against a mere software purchase achieving financial paradise.

Bookkeeping software is only as reliable as the input. A substantial number of business owners don’t understand double-entry bookkeeping.

Likewise, tax preparation software helps prepare accurate tax returns only when the input correctly follows tax rules.

Tax software doesn’t know what expenses a business incurred. It cannot judge whether eligible expenses are entered in the correct categories. Tax specialists are valued because of their knowledge, especially regarding complex matters for businesses.

Working with accounting professionals is almost always the right strategy for business owners. But tax accountants and bookkeeping services may not automatically convey all details about the nature of your relationship with them. So, you have to inquire about these issues.

Following are four things to ask your accountant:

1. Ask your accountant what substantiation you need for certain tax deductions. Some items require distinctive supporting documents. For example, reimbursements for business use of a personal vehicle necessitate a mileage log with specific details. Also, large payments to contract labor demand that the business issue a Form 1099 to each worker. You also need to know how much of your documentation you need to provide for preparation of tax returns or financial statements.

2. Ask if your accountant will notify you of any questionable matters on a tax return. For example, an expense category for utilities without any office rent is a likely error. Utilities for a home office are a separate matter from ordinary business expenses. Make sure that your accountant identifies situations where the basis for a deduction seems unsound.

3. Find out what privileged disclosure is available with your accountant. A limited privilege is available with certified professional accountants and other tax practitioners authorized by the Internal Revenue Service (IRS). This is not the same as privileged disclosures with attorneys, which are a fully protected right of common law. Privileged disclosure is important because it affects the facts you are willing to present in order to obtain advice. Accountants can assert privilege only in civil matters brought before the IRS or federal courts. It does not apply to criminal proceedings, state taxes, preparation of tax returns or civil proceedings that involve tax shelters. Be sure to identify the professional credentials possessed by the individuals with whom you communicate about your taxes.

4. Ask your accountant about who is actually preparing your tax return. At firms with large staffs, your tax return is likely delegated to young associates or even a temporary employee. This is not necessarily bad, but you should find out. As long as your accountant is signing the tax return, you can rest assured that the signer is at least reviewing any preparation work by someone else. Make sure that your accountant is responsible for any mistakes in reporting figures you accurately present.

Why Proper Payroll Accounting Is Critical

Accurate payroll accounting is important to businesses of all sizes.

Avoiding sloppy payroll accounting ensures accurate tax returns, reduced cost from accountant untangling and no omissions of valuable tax deductions.

Few businesses realize that the Internal Revenue Service makes an accuracy assessment by comparing payroll figure consistency on a variety of filed reports. No business escapes notice by the IRS.

The person with authority over business payroll matters is personally liable for accounting of wages and payroll deductions. This means that the boss who signs payroll tax returns is required to certify that payroll taxes are correctly calculated and remitted. Total gross wages are reported on payroll forms that are normally submitted quarterly.
Amounts on the payroll forms must match wages and payroll tax expense on the income tax return.

Businesses with workers must separately account for taxes withheld from wages and the payroll taxes paid as employer expenses.

The withheld amounts are not an expense for payroll taxes. These are merely part of the compensation paid to employees. You therefore have to account for withheld taxes as “wages” expense.

Your accounting system must record gross compensation paid to employees before any deductions. Most fringe benefits you provide employees are also recorded as gross wages expense. Tax laws permit excluding some benefits – notably health insurance paid according to certain rules. Accurate payroll accounting requires tracking types of withheld amounts and subsequent remittances.

Some deductions from wages reduce an employee’s compensation subject to income tax but do not reduce wages subject to Social Security and Medicare taxes. A prominent example is retirement plan contributions made by an employee. These are part of the business expense for “wages.” The only “retirement plan” expense of a business is contributions to retirement accounts by the company that are not withheld from wages.

Every year, accounting firms spend an extraordinary amount of time preparing income tax returns that show expenses for “wages” that match payroll tax reports. This process transpires because businesses fail to correctly account for tax withholding from employee pay in the “wages” expense category.

When amounts are withheld from wages, they are described as accrued by the business until they are later paid.

This same accrual for future remittance also occurs with the payroll tax expenses of the business.

Each employer pays contributions to Social Security and Medicare based upon wages. These are the tax amounts not withheld from worker compensation. They are payroll tax expenses of the business.
Unemployment tax is another employer expense not withheld from wages.
Even a business that uses cash-basis accounting is entitled to deduct un-remitted payroll taxes that accrued for prior pay dates. The payroll tax expense of the business is recorded when employees are paid.

Both withholdings from gross wages and the employer payroll taxes are simply payable in the future. But the wages and employer tax liability are accounted for as expenses on payday.

What You Need to Know About Taxes and Employee Tips

Tip income is an important area of concern for several types of businesses. Employers are responsible for including tips received by workers on their W-2 forms.

Workers must report to their employers the total tips received in a calendar month whenever the amount exceeds $20. Employers include reported tips in calculations for withholding of income tax as well as Social Security and Medicare taxes.

Box 1 on a W-2 for wages should include reported tips. In addition, Boxes 3 and 5 for Social Security wages and Medicare wages are applicable for reported tips.

Paychecks can possibly have insufficient wages to cover withholding requirements on tip income. Any required withholding that isn’t collected is reported in a special box on Form W-2. This figure should match the adjustment on an employer’s quarterly federal payroll reporting. Alternatively, workers may give their employers money from collected tips to cover calculated withholding amounts.

Food and beverage businesses have a special rule about tips. When reported tips are less than 8% of gross receipts, most food and beverage establishments must calculate the deficiency. This figure is then allocated among employees according to a formula based upon proportions of gross income or hours worked. Allocated tips are indicated in a special box on Form W-2. No withholding is required on allocated tips.

The IRS has escalated enforcement of tip-reporting rules. Businesses in industries where tipping of employees is common should ensure that compliance measures are executed for all income from tips.

How to Raise Prices and Retain Customers

Generosity is a beautiful thing. But that doesn’t mean you should give away money to business customers who aren’t even asking for a handout. This is exactly what you’re doing, though, if you charge less than the value people are willing to pay.

Business owners are always reluctant to raise prices. They worry that charging more will bring customer objections.

Whether you’re an independent freelancer with a few clients or a small business with several employees and many customers, your concern about hiking prices is unfounded.

If you are raising prices, start a smooth transition with specific communication to customers about what your business offers. Avoid vague generalizations about your business that create difficulty in raising prices.

For example, most photographers present themselves as specializing in weddings and social events. Their websites and showrooms display photos from these activities. The specialty justifies higher fees, which they still charge even for simply shooting a portrait.

Your attorney probably focuses on a particular legal area, such as complex real estate law or employment law. He or she will still prepare a simple last will and testament for you, but the hourly rate will be the same as what he or she justifies as a specialist.

Bookkeepers who promote themselves as catering primarily to doctors and similar professions also generally charge higher fees. They still accept business from other industries, but at a higher fee because they target specialized services.

A simple method to justify rate increases is to make them a regular part of business. This eliminates waiting for the right time to raise your prices. Instead, you simply schedule increases as a cost-of-living factor. You remove having to explain sudden price changes, but you have a simple reason if anyone asks.

An especially easy way to change prices is by providing variations, depending upon the type of purchase. Retail establishments do this all the time by giving discounts at particular times of the day or a bargain price but a small unit size. Service businesses can copy the approach by charging not only hourly rates but also weekly retainers or creating monthly contracts for limited services.

A corollary to this approach is offering tiered pricing. Charge more for the first hour of service. Give a 50% discount for buying three items or give the fifth one free.

Offer home delivery or setup for an extra fee. Allow customers to decide if they want to pay more for rush service. Your good customers want the best and are willing to pay extra for it.

Innovative businesses offer differential prices to members of a special buyers’ club. They provide discounts to visitors on the website or social media pages of the business.

This improves marketing exposure for selling new services or products.
Exposing customers to closely related items makes them purchase more. Your business increases revenue per person without really charging higher prices, because of the discount.

There is no such thing as a fair price for any product or service.

You can determine your value only by trying some of these price-raising approaches.

Keys to Meeting Your Bookkeeping Needs

Generosity is a beautiful thing. But that doesn’t mean you should give away money to business customers who aren’t even asking for a handout. This is exactly what you’re doing, though, if you charge less than the value people are willing to pay.

Business owners are always reluctant to raise prices. They worry that charging more will bring customer objections.

Whether you’re an independent freelancer with a few clients or a small business with several employees and many customers, your concern about hiking prices is unfounded.

If you are raising prices, start a smooth transition with specific communication to customers about what your business offers. Avoid vague generalizations about your business that create difficulty in raising prices.

For example, most photographers present themselves as specializing in weddings and social events. Their websites and showrooms display photos from these activities. The specialty justifies higher fees, which they still charge even for simply shooting a portrait.

Your attorney probably focuses on a particular legal area, such as complex real estate law or employment law. He or she will still prepare a simple last will and testament for you, but the hourly rate will be the same as what he or she justifies as a specialist.

Bookkeepers who promote themselves as catering primarily to doctors and similar professions also generally charge higher fees. They still accept business from other industries, but at a higher fee because they target specialized services.

A simple method to justify rate increases is to make them a regular part of business. This eliminates waiting for the right time to raise your prices. Instead, you simply schedule increases as a cost-of-living factor. You remove having to explain sudden price changes, but you have a simple reason if anyone asks.

An especially easy way to change prices is by providing variations, depending upon the type of purchase. Retail establishments do this all the time by giving discounts at particular times of the day or a bargain price but a small unit size. Service businesses can copy the approach by charging not only hourly rates but also weekly retainers or creating monthly contracts for limited services.

A corollary to this approach is offering tiered pricing. Charge more for the first hour of service. Give a 50% discount for buying three items or give the fifth one free.

Offer home delivery or setup for an extra fee. Allow customers to decide if they want to pay more for rush service. Your good customers want the best and are willing to pay extra for it.

Innovative businesses offer differential prices to members of a special buyers’ club. They provide discounts to visitors on the website or social media pages of the business.

This improves marketing exposure for selling new services or products.
Exposing customers to closely related items makes them purchase more. Your business increases revenue per person without really charging higher prices, because of the discount.

There is no such thing as a fair price for any product or service.

You can determine your value only by trying some of these price-raising approaches.

Why Bookkeeping Can Help Your Business Thrive

The bookkeeping process for a small business gets about as much respect as the children’s table at a big family reunion. You know it’s there, but coordinating the details isn’t too important.

The excitement in business is conducting sales, creating marketing campaigns, implementing new technology, improving efficiencies, and expanding with new products or services. But bookkeeping is crucial. Business managers who give bookkeeping the attention it deserves are more likely to succeed in both good times and not-so-good economic environments.

Before assigning your bookkeeping process, evaluate the situation for your business. Maybe you or someone on your staff can handle the bookkeeping along with other tasks. But don’t stick just anyone with the assignment. Select a person with bookkeeping ability.

If you’re just getting started or you conduct business as an independent contractor, you might want to do the bookkeeping yourself. Take the responsibility seriously. Read a book or take a course on bookkeeping for nonaccountants. Then get a CPA to periodically check your work.

If you don’t understand double-entry bookkeeping and can’t determine whether to debit or credit an account, stay away from the bookkeeping and hire a professional.

Accurate bookkeeping gives clarity to your financial situation, allows for better planning, helps you avoid cash-flow problems, improves your ability to borrow or raise capital, and facilitates audit-proof tax preparation.

5 Cost-cutting Ideas for Small Businesses

Small-business owners understand the expression that you have to spend money to make money. But that doesn’t mean you should spend unwisely.

Wasting money is a luxury in good economic times and a path to certain doom in a strained economy. Determining expenses to cut is an effort that too many small-business managers find excuses to avoid.

Following are five views on expense reduction in several categories to help you get started on improving cash flow:

Advertising

Carefully targeted advertising is often effective at attracting customers, but it’s not always a worthwhile expenditure. According to Lin Grensing-Pophal, author of Marketing With the End in Mind, more cost-efficient ways exist for small businesses to generate awareness of their products or services. An especially popular way to build sales is with social media.

Companies can build relationships and attract frequent visits to their social media pages by offering online coupons and loyal customer discount codes.

Another way that Grensing-Pophal says local companies are gaining exposure is with regional publications that are distributed only to local markets.

Shopping for Discounts

When economic conditions are constrained, less spending occurs. That means retailers are commonly discounting merchandise to keep inventory moving. Small businesses can take advantage by adding assets while prices are low.

An article in Entrepreneur magazine says that discount shopping for furniture and supplies can save businesses 60% off retail prices. For a business looking to replace equipment, plenty of used and refurbished options are available.

Paper

Circumstances today have never been better for going paperless. Computer storage space is cheap. Scanning software is also inexpensive. All you need is a data system for filing paperless information that is easily understood for simple retrieval of archived documents. Start by training your employees to save emails and all attachments to folders in your automated system. Eventually, you can send invoices and purchase orders via email instead of printing and mailing.

Worried about security and data backup? Consider using secure cloud computing services. Customer records, company manuals and memos stay online with encrypted security. Password-protected access to files is available at any location with an Internet connection.

Direct Deposit

Encourage employees to accept direct deposit of payroll. An article in 2009 on Inc.com states that companies can save an average of $176.55 per employee every year by using direct deposit. Even for a small company with 10 employees, that’s enough money to help meet an emergency expenditure. Offer employees a one-time bonus for signing up to use direct deposit.

Outsource

Don’t make staff additions when you can outsource the job to an independent contractor. Small businesses that use outside service providers save costs. Routine functions that are ideal for outsourcing include website administration, bookkeeping and payroll, and technical writing.