Prepare Now and Save Money at Tax Time

Efficiently organizing the information needed to prepare your income tax return is more than just a courtesy to your accountant.

Better organization permits your accountant to prepare the tax return faster and minimizes your cost.

More important, anyone involved in preparing your tax return is required by law to understand information you supply about income and deductions.

Rules of the Internal Revenue Service require tax professionals to conduct reasonable inquiries into taxpayer information to assure that income is not understated.

Categorize Deductions

Your accountant has to spend time clarifying details when your tax deductions are not organized.

Tax deductions should be partitioned among the associated income-producing activities.

In addition, provide totals for each category of tax-deductible expense. Don’t simply list expenses chronologically.

List expenses for a rental property with the rent received.

Be sure to list each property separately. Don’t combine landlord expenses for all properties.

Know What to Provide

Your accountant can help you determine which incurred costs are tax-deductible.

A tax organizer is available each year that shows you the different types of income and associated expenses from your prior year tax return.

Give particular attention to detail about various deductions.

For example, do you have a business home office? If so, you provide your home utilities. This includes only costs to maintain normal use of the home – which is heating and cooling the house, not home telephone and cable television.

Mortgage interest is reported by your lender on Form 1098, so provide that form to your accountant.

Property taxes are an income tax deduction in the year they are paid, not the year assessed. If you paid a 2010 property tax assessment in January of 2011, it’s not deductible until you prepare the 2011 tax return another year from now.

If you started a new business in 2010, list the income along with the ordinary and necessary expenses you incurred.

If you purchased or sold a rental property, provide the settlement statement from the closing. Then list the rental income you received and categorize expenses you paid.

If you received money for any reason that was not a gift, it is probably taxable income. List the amount and the nature of the income.

Provide every Form 1099 you receive.

Don’t Perform Calculations

Don’t attempt to perform calculations for your tax return.

For example, if your business has a home office, just provide the total square feet for your home and for your office space. Then list your housing expenses for utilities, repairs, insurance, maintenance, homeowner association dues and other expenses of maintaining your home.

How to Make Your Bookkeeping More Efficient

Proper management of bookkeeping information not only improves accuracy but also saves time and money. This is true if you perform your own business bookkeeping or hire a bookkeeper.

Don’t expect all the responsibility for efficiency to rest completely with your bookkeeper. If you do your own bookkeeping, you already know that a stop-and-go process is costly. It involves having to cease a smooth workflow in order to locate details required to proceed.

Whenever a bookkeeper has to stop a work session, an entire process is interrupted. Think about how much time is spent just getting started with bookkeeping procedures – starting a computer, launching the accounting software, using the password login and reviewing tasks for this session. Stopping the process in order to search for details requires logging out, listing missing data and tracking down information.

Because of the fixed steps, batching work for each session is critical. Resolve this year to always have complete information ready for each bookkeeping session. Don’t let any session become interrupted by large documentation gaps.

Have a method for your bookkeeper to convey minor issues requiring further clarification after each session. Then make sure you provide complete answers for the bookkeeper to act upon in the next session.

Develop a consistent process of providing your bookkeeper with your non-urgent questions. Let your bookkeeper answer in the subsequent bookkeeping session. These habits permit you to maximize bookkeeping efficiency.

How to Avoid Costly Mistakes With Petty Cash

Using petty cash is a convenient way to make small purchases or reimbursements, but it is prone to accounting errors.

Rules for the Cash

Establishing a petty cash fund does not mean that the money in the pot is an expense. Rather, the cash is an asset just like a bank account and thus must be subject to similar controls.

Accounting for Petty Cash

The petty cash custodian should periodically total the receipts and determine the amount of petty cash spent on each category of expense. Someone other than the petty cash custodian should occasionally verify this.

Reimbursement Rules

Providing reimbursement to employees requires you to have an accountable plan under rules of the Internal Revenue Service (IRS). Reimbursements under an accountable plan are not considered income to employees. As a result, they are not subject to payroll taxes. Instead, the expenses are simply recorded as if the business had paid them directly instead of reimbursing employees for them.

The requirements for an accountable plan with the IRS are that the expense reimbursed must be reasonable and have a business connection, that there must be reasonable accounting for the expenses and that employees must return any advances in excess of their actual expense amounts within a reasonable time.

Employers that fail to account for reimbursements risk having all reimbursements considered wages.

How to Make the Most of Home Office Tax Deductions

Did you know that you may be able to deduct a portion of your home for business use – even if your business has a different primary location?

To claim a business deduction for your home there must be an area used exclusively and regularly for business. When the area is not your principal place of business, it must be a part of your home used only to meet or deal with clients, customers or patients in the normal course of business. It may also be a separate structure not attached to your home with an exclusive and regular connection to your business. For storage uses, you are required only to use the location regularly but not necessarily exclusively.

Terms Defined

“Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use.

Corporations

If your business is a corporation – including an S corporation – you may be able to claim a home office deduction under the rules that apply to employees. For an employee to deduct home office expenses, the regular and exclusive business use must be for the convenience of the employer. When a home office is merely helpful, you cannot deduct expenses for the business use of your home.

The convenience requirement is often met when the principal business location is a manufacturing facility without office space. In that case, office functions done at home by the company president may qualify as meeting the convenience condition.

Is Your Business Wasting Money with Payroll Errors?

It seems that many business owners could be wasting money because of bookkeeping errors relating to payroll.

The thing is that taxes you pay that are associated with payroll are not your payroll tax expense, and if your bookkeeping records show that they are, your accountant has to fix the error. That’s not an easy task, considering how many pay periods there are in an entire year. This inevitably leads accountants to make a “reasonable” determination about your actual payroll expenses in order to prepare your income tax return. This results in higher costs and missed tax deductions.

Payroll Tax Explained

Your payroll tax expense does not include the taxes withheld from employee pay. That is wages expense. The employees pay the deducted taxes. You simply withhold them and remit them to the Internal Revenue Service (IRS) for the employees.

Your quarterly payroll reports reflect this. Remember, the IRS receives a quarterly payroll tax report with this information. It also obtains your annual income tax return. The IRS compares details from both sources. The wages stated on the quarterly reports must match your income tax return. If they do not match, you are likely to receive a notice from the IRS requesting an explanation. A reply requires time and is costly.

Your quarterly payroll reports to the IRS should also match your annual filing of employee W-2s. If you decide to pay some bonuses at year-end, they must be reported on both the W-2s and the fourth-quarter payroll report to the IRS.

How Your Accountant Can Save You Money

Your accountant helps you by ensuring that deductible wages on your tax return equal wages on the W-2s. If your bookkeeping does not show the exact total on the W-2s as your deductible wages, your accountant does an important exercise. The amount your books show as wages is added to the amount indicated as payroll taxes. The accurate amount of wages – known from the W-2s or quarterly payroll reports – is then subtracted. The remainder must be the payroll taxes. If that figure is not reasonable, more time and cost are involved to determine the error.

To avoid the time delay and cost for locating errors, minor inaccuracies are often ignored. This is a disadvantage to businesses with inaccurate records, because discrepancies are simply lost tax deductions. The cause is normally failure to record in the bookkeeping payroll those taxes that have accrued at year-end. Cash basis accounting records expenses, except for payroll taxes,  when they are paid. The taxes are deductible expenses for the year that the wages are paid. So the payroll taxes you incur for payroll dates this year are tax-deductible this year – even if the taxes are remitted next January. Likewise, the payroll taxes remitted in January of this year relating to wages paid last year should not be recorded in your bookkeeping as current year expenses. Those are last year’s expenses.

You cannot rely on your accounting software to eliminate the possibility of error. Your accountant should help you correctly set up the automated system. Have your payroll accounting reviewed by your accountant at least one other time during the year in addition to tax preparation season. Make sure your payroll reports match your bookkeeping to avoid costly problems and missed tax deductions.

Payroll Taxes: What Business Owners Need to Know

As an employer, you are required by law to withhold money from employees’ pay and remit the amounts to various agencies. In addition, you have direct liability for certain taxes based on workers’ wages.

The taxes that you’re required to withhold on behalf of workers and those that you must pay directly comprise your payroll taxes. Statutory payroll taxes include federal, state and local income taxes, Social Security and Medicare taxes, federal and state unemployment taxes, and, in some states, disability insurance taxes.

Generally speaking, an employee’s gross pay (pay rate times number of hours worked) minus all statutory payroll tax deductions minus voluntary payroll deductions equals net pay. Statutory payroll tax deductions include the following:

•    Federal income tax withholding (based on withholding tables in Publication 15)

•    Social Security tax withholding (6.2% up to the annual maximum)

•    Medicare tax withholding (1.45%)

•    State income tax withholding

•    Various local tax withholdings such as city, count, or school district taxes; state disability; or unemployment insurance

If an employee chooses to participate in certain benefit programs, belong to a professional organization or make designated charitable contributions, these voluntary payroll deductions may also be withheld. Voluntary payroll deductions can include such things as health and life insurance premiums and retirement plan contributions. Voluntary deductions may be paid with pretax dollars or after-tax dollars, depending on the type of designation.

Your responsibility for payroll taxes continues even after paychecks have been issued to employees since you must pay the employer’s share of payroll taxes, deposit the money that has been withheld from workers’ paychecks, prepare various reconciliation reports, account for the payroll expense through financial reporting and file payroll tax returns.

An employer’s portion of payroll taxes is an added expense over and above the expense of an employee’s gross pay. The employer portion of payroll taxes includes the following:

  • Social Security taxes (6.2% up to the annual maximum)
  • Medicare taxes (1.45% of wages)
  • Federal unemployment taxes
  • State unemployment taxes

The Federal Insurance Contributions Act (FICA) tax consists of Social Security and Medicare taxes, which are split 50/50 between the employer and employee. Together the two halves of the FICA taxes add up to 15.3%. The 15.3% FICA tax is broken down as follows:

  • Social Security (employee pays 6.2% and employer pays 6.2%)
  • Medicare (employee pays 1.45% and employer pays 1.45%)

Employers are required to report their payroll tax obligations and to deposit payroll taxes in a timely manner. The key to controlling your payroll tax obligations is making all payments on time, so you avoid getting hit with costly fines and penalties.

Which Bookkeeping System Is the Best for You?

It’s important to find the right system to handle your bookkeeping, bill paying and accounting tasks. Depending on the size and complexity of your business, your needs may vary from simple bookkeeping and bill paying to a more full-featured accounting solution.

To clarify your needs, identify the processes you undertake or expect to undertake in the future. Next, assess the functionality you need. In addition to basic recording and statement reconciliation, you might require such things as data import and export, electronic banking or payroll administration. Exercise due diligence and give careful thought to the following aspects of the system you select:

Management Reports: Choose a system that can quickly and easily provide you with the information that is essential to running your business. Some can create only predefined management reports, while others offer flexibility and allow for customization.

On-Premise or On-Demand Delivery: An online approach offers accessibility, scalability, fixed cost, low maintenance and easy go-live, but issues such as information security and privacy must also be factored in.

Total Cost: Pay attention to the fine print and don’t forget about maintenance, upgrades, service and support costs.

Safety, Security and Data Backup: Check out the backup provisions that are in place. How often do backups occur? What business continuity plans are in place?

Long-Term Viability: Look for a reputable product and a reliable supplier who will be there for the duration.

Ways to Protect Your Business From Internal Fraud

There’s a principle in fraud prevention circles known as the 10-10-80 rule. According to the rule, 10% of employees will not steal under any circumstances, 10% will steal at any opportunity and 80% of employees will steal if they can rationalize the act.

Small businesses are especially vulnerable to employee fraud and theft, and they are often less able than big corporations to absorb such losses.

The first step to preventing employee fraud is to screen job applicants carefully. Before hiring a new worker, you should conduct a thorough background review that includes a criminal history check and drivers abstract scan as well as verification of education and credentials, past employment and reasons for leaving, and references.

Consider running a credit check on prospective employees, especially those who will handle money or deal with financial matters. To obtain a credit report, you are legally required to notify job applicants in writing and to obtain their written consent.

In addition to screening employees, always follow these basic accounting controls:

•    Never allow your business finances to be handled exclusively by a single individual.

•    No employee should be responsible for both recording and processing transactions.

•    Don’t allow the person who sends out bills to collect the mail and prepare bank deposits.

•    Reconcile bank statements at least once a month and conduct random audits or have an outside auditor review your books periodically.

•    Make sure all checks, purchase orders and invoices are consecutively numbered.

•    Mark incoming checks “for deposit only” so they cannot be cashed.

•    Require all checks above a specified amount to have two signatures.

•    Never sign a blank check.

•    Sign every payroll check personally.

•    Avoid using a signature stamp.

Follow up personally if a customer says that they have not received credit for a payment.

Open bank statements and examine canceled checks carefully for red-flag items such as missing check numbers. Look at the checks that have been issued, to make sure the payees are legitimate and signatures are valid.

Review accounts payable by checking cash disbursements and payments.

Finally, be clear with employees that your company has zero tolerance for fraud or theft of any sort. Write and distribute a company policy that spells out what constitutes fraud and specifies the consequences. By establishing internal controls and letting employees know that you are vigilantly looking out for fraud, you can prevent many of your employees from committing fraud.

In addition, a positive work environment has been shown to help deter employee fraud. Open lines of communication and fair employment practices will also go a long way in helping to reduce the problem.

How to Read Your Profit and Loss Statement

A profit and loss statement (P&L) summarizes your business’s revenues and expenses over a given period of time – usually a quarter or fiscal year.

A basic P&L lists net revenue at the top, along with primary income sources such as delivering or producing goods, rendering services, or other activities that constitute ongoing operations. Income from sources other than primary business operations, such as rental income, patents or sales of fixed assets, is itemized separately.

The revenue section is followed by various categories of expenses. Operating expenses can include:

•    General and administrative expenses such as management salaries, legal and professional fees, utilities, insurance, depreciation of buildings and equipment, rent, and supplies

•    Selling expenses such as sales salaries, commissions, travel expenses, advertising, freight and shipping

•    Production-related expenses such as raw materials, equipment maintenance and repair, and labor

•    Depreciation for fixed assets that have been capitalized on the balance sheet

Nonoperating expenses are costs that are not related to primary business operations. Irregular items are generally unusual and nonrecurring. They are reported net of taxes.

What’s left at the end – the bottom line – is your company’s net income or profit.

How to Put Together a Simple Cash Flow Budget

As a small-business owner, it’s up to you to make sure your company has the financial wherewithal to stay afloat, the resources to achieve your business goals and the reserves to fund growth – next week, next month and next year. This requires planning, analysis and a good cash flow budget.

A cash flow budget, also known as a cash flow forecast, is essential to a business’ near-term financial processes and long-term survival. A cash flow budget can help you:

•    Time expenditures based on projected revenues

•    Ensure that you have the cash to pay all your obligations

•    Be proactive about growth and expansion

•    Maintain control of your financial situation

A cash flow budget doesn’t have to be complicated. You can use a simple spreadsheet, purchase budgeting software or even create a forecast by hand. Following are the steps to developing a basic cash flow budget:

•    Determine your projected revenue based on monthly sales or billings.

•    Estimate when you can reasonably expect to collect accounts receivable (AR).

•    Identify any additional expected cash inflows, such as loans, refunds, deposits, etc.

•    Compile all your expenses and other payables.

•    Estimate payment dates for your payables.

•    Add the amounts to your cash disbursements forecast.

You should not include noncash items in your cash flow budget. Although noncash items such as depreciation and amortization are relevant to your financial condition, they do not involve cash outlays and so are not part of the cash flow budget.

Use prior years’ experience and realistic AR estimates as a basis for timing your payables. Items such as payroll, rent and utilities are relatively fixed and recur regularly. Expenses such as advertising, travel and entertainment are somewhat variable but are usually paid in the current budget month. Be sure to figure in fixed asset purchases and loan repayments that you will make during the year.

Once you have created a preliminary cash flow budget, compare your actual results with your budget forecast and note any significant variances. Compare your outstanding AR and accounts payable (AP), focusing on those AR that you expect to collect and AP that you expect to pay in the month ahead. Does the difference between the two equal the amount in your cash flow budget? Are you comfortable with the amount, given your current and future cash position?

Think of the cash flow budget as a living document, and update your budget forecast to reflect new information, such as macroeconomic factors, microeconomic trends or new business activities that will likely impact your business and cash flow.

Use the cash flow forecast as a basis for timing capital expenditures and making expansion and hiring decisions. Also be sure to review the AR list weekly against your projections. Throughout the month, try to make payments within your budget so that you stay close to your planned net cash flow position.