Updates to Form I-9

We want to keep you up to date on all changes that effect your business. Today, we bring you a compliance update from the American Payroll Association regarding the new Form I-9.

What is it? 

According to the US Citizenship and Immigration services, Form I-9 is used to verify the identity and employment authorization of individuals who are hired for employment in the U.S. Employers are required to complete a From I-9 for each person they hire to work in the U.S., including citizens and non-citizens.

What’s the story?

Form I-9 got a facelift. The U.S. Citizenship and Immigration Services released a new Form I-9, along with updated instructions. Along with these changes comes a new date. Employers have to start using this new version by January 22, 2017. Until that date, employers have the flexibility to use either the new form, or the old version.

So what changed?

Electronic seems to be the way to go in today’s day and age, and tax forms are no exception. Revisions have been made to Form I-9 so it’s easier to complete on a computer. Some new features include a start over button, on screen instructions for each section and drop down lists, to name just a few.

The electronic changes also bring options. Employers can now use either the computer form, the paper copy or both. However, the form available on the U.S. Citizenship and Immigration Services website can’t be signed electronically. The form must be printed, signed and dated by hand, where required. An exception to this rule is if the employer has their own I-9 system that meets certain requirements, in which case they may choose to use e-signatures.

Other changes made to the From I-9 include:

  • Wording Changes
  • Prompts to ensure correct information
  • A separate area to add additional information
  • Ability to add multiple preparers/translators and a supplemental page for them

But that’s not all …

Another change to the Form I-9 is the separation of the instructions. The instructions now include specific directions for completing each portion of the form. The new and improved instructions also include a list of documents used during the verification process, as well as commonly used abbreviations. If an employer is planning to rehire an employee, they will find guidance on when and how a previous Form I-9 may be used if the rehire is within three years of the previous date on the I-9.

The moral of the story…

One thing is certain: employee forms are complex. If you don’t stay up to date on changes, Uncle Sam might be shaking his finger at you and your business. If you ever find yourself struggling to keep up with these changes, let us know – we’re ready to help!

Lease Accounting: Capital versus Operating

What is a lease?

A lease is a contract that gives you the right to use an identified asset (such as a vehicle, copier, etc.) for a period of time in exchange for other considerations (like cash).

There are two types of leases: capital and operating. In this blog, we will take a look at leases from a lessee’s perspective.

What is a capital lease?

A lease is a capital lease if any of the following criteria are met at inception:

Transfer of Ownership |At the end of the lease, you will own the asset. In other words, you financed the asset with a lease.

Bargain Purchase Option | At the end of the lease, you have the option to buy the asset below the fair market value.

For example if your lease includes the option to purchase the asset for $1.00 (it’s common), that’s a bargain purchase option and the lease would be considered a capital lease.

Lease Term | The lease term is equal to 75% or more of the estimated economic life (that is…how long you will be able to use the asset with normal repairs and maintenance).

For example if the lease term is four years and the life is five years, the lease term is equal to 80% of the estimated economic life and the lease would be considered a capital lease.

Lease Payments | The present value of the minimum lease payments is equal to 90% or more of the fair market value of the asset at inception. Here’s an example:

The lease term is five years. Monthly payments of $1,200 are due in advance (at the beginning of the month). The borrowing rate is 6%. The present value of the lease payments is $62,381. If the fair market value of the asset is $56,143 or greater, the lease would be considered a capital lease.

How do you calculate present value?

Use Excel’s present value formula (=PV(rate, nper, pmt, [fv], [type]).

Rate: 6%/12 or .05% (interest rate divided by frequency)

Nper: 5*12 or 60 (term multiplied by frequency)

Pmt: $1,200

[FV]: Always enter zero

[Type]: 1 (1 if the payment is due at the being of the period or 0 if the payment is due at the end of the period)

=PV(.05%, 60, 1200, 0, 1) = $62,381

How do you account for a capital lease?

Going back to the example above (assuming it was determined to be a capital lease), at the inception of the lease you would record an asset and a corresponding capital lease liability.

 

Account Debit Credit
Asset $62,381
Capital Lease Liability $62,381

When you make payments, you will record the payment along with depreciation and interest expense.

 

Account Debit Credit
Accumulated Depreciation $1,040
Depreciation Expense $1,040*
Cash $1,200
Interest Expense $31**
Capital Lease Liability $1,169

*Depreciation expense was calculated using the straight-line method ($62,381/60 = $1,040).

**Interest expense is calculated based on the capital lease liability balance multiplied by the interest rate for the period ($62,381*.05% = $31). Each payment will reduce the capital lease liability balance. Therefore, you will need to refer back to your amortization table (that’s a schedule that tells you the principle and interest portion of each payment).

What is an operating lease?

That’s an easy one…any lease that doesn’t meet the criteria of a capital lease.

 How do you account for an operating lease?

Going back to the example above (assuming it was determined to be an operating lease), as you make the payments, you will record a rental expense.

 

Account Debit Credit
Expense $1,200
Cash $1,200

Changes are coming…

And because we are nice, we want to give you a heads up that the lease accounting standards are changing. You have some time to implement (if you are a calendar year-end, the new standard will be effective on 1/1/2019 and 1/1/2020 for public and private companies, respectively).

What’s changing?

Leases will be classified as financing, operating or short-term.

Financing Leases | These leases have similar criteria to capital leases. In addition, the accounting is effectively the same. However, you will be recording a right to use asset and finance lease liability.  See capital lease example above.

Short-Term Leases | These are leases with terms less than 12 months (unless there is an option to renew and the renewal is reasonably certain).  The accounting for short-term leases will be the same as the previous operating lease category. See the operating lease example above.

Operating Leases | These will be leases that don’t meet the requirements of financing or short-term. The accounting for operating leases will require you to record a right to use asset and an operating lease liability.

Going back to the example again (assuming it was determined to be an operating lease under the new standard), at the inception of the lease you would record a right to use asset and a corresponding operating lease liability.

 

Account Debit Credit
Right to Use Asset $62,381
Operating Lease Liability $62,381

When you make payments, you will record the payment along with depreciation and interest expense.

 

Account Debit Credit
Accumulated Depreciation, Right to Use Asset $1,040
Depreciation Expense $1,040*
Cash $1,200
Rent Expense $160**
Operating Lease Liability $1,040**

*Depreciation expense was calculated using the straight-line method ($62,381/60 = $1,040).

**The operating lease liability will be reduced over the life of the lease using the straight-line method ($62,381/60 = $1,040). Rent expense is calculated based on the payment amount less the operating lease liability portion ($1,200-$1,040 = $160).

How do you account for an operating lease under the new standard?

Going back to the example above (assuming it was determined to be an operating lease under the new standard), at the inception of the lease you would record a right to use asset and a corresponding operating lease liability.

 

Account Debit Credit
Right to Use Asset $62,381
Operating Lease Liability $62,381

And when you make payments, you will record the payment along with depreciation and interest expenses.

 

Account Debit Credit
Accumulated Depreciation $1,040
Depreciation Expense $1,040*
Cash $1,200
Rent Expense $160**
Operating Lease Liability $1,040**

*Depreciation expense was calculated using the straight-line method ($62,381/60 = $1,040).

**The operating lease liability is reduced using the straight-line method ($62,381/60 = $1,040). The rent expense is calculated by subtracting the current portion of the operating lease liability from the total payment ($1,200-$1,040).

Want to know more or need help…

We know this accounting stuff can be a headache. Reach out to your business advisor, audit or tax professional if you need help. If you don’t have one, we have plenty of them that love this stuff.

Want to know more on this topic? Click here for a more in-depth take on the topic.

 

 

 

 

 

 

Exit Planning: Estate Planning

As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).

After several blog posts, we’ve reached the final post in our exit planning blog series. So, what does the final component of the exit planning process have in store for you? Personal wealth and estate planning!

As a note, just because this is the last step in the process, it doesn’t mean this shouldn’t be considered when you’re actually out of the business. In fact, the earlier business owners start this step, the more benefits they may receive.

It’s no surprise that the IRS lays claim to a business owner’s wealth, especially when it comes to estates. However, there are other beneficiaries a business owner might want this wealth to go to. As a business owner, you will want to have a wealth transfer method that will pass on the wealth with minimal interruption from that pesky IRS.

So, how do you go about keeping the IRS interruptions to a minimum? According to the BEI, focusing on the following three issues can help ensure success in the wealth preservation planning process.

  1. Money for Yourself – To make decisions regarding how much money should be left (to children, charities, etc.), you must first decide how much wealth you want to keep for yourself after exiting the business. This can be determined by looking at the objectives and goals you set in the beginning of your exit planning process.
  2. Money for Kids – The idea of leaving money to children after the sale of the business is a common, but sometimes difficult one. It’s often hard to decide, given the success of the business, how much is too much or too little to leave to children. It’s important to remember that children usually do not receive the full amount up front. Rather, it is transferred through trusts or over time.
  3. Minimize Tax Impact – With tax outcomes always fluctuating due to governmental policies and procedures, it’s hard to make a solid plan and know exactly how much money will be left untouched. To try to keep the amount of money taxed to a minimum, business owners (and their advisors) must be proactive.

A few other pointers for estate planning…

  • Estate Planning Preferences –Having your preferences documented can make the estate distribution process go a lot smoother. Consider including how you want personal property distributed, any personal representatives you may have, donations to charities, how the estate will be distributed, trust designs and power of attorney, to name a few.
  • Personal Lifetime Wealth Management – Understanding the decisions and actions that must take place to manage your personal wealth is crucial in making sure you obtain the highest amount upon leaving the business. It is important to consider spending strategies, estimated income and retirement, investment strategies and possible insurance strategies.
  • Wealth and Estate to Family – More than likely, you have decided to leave some part of the estate to family members, be it your children, spouse or both. Things to consider for your family include insurance proceeds, timing of income stream, transfer of assets and estate allocation preferences.
  • Protection of Personal Assets – Protecting your personal assets can enhance security of your assets against any claims against your company. Such assets to be considered may be loans to the company, collateral, ownership and rights and lifetime transfers.

Personal wealth and estate planning can help ensure you have a solid exit plan in place that is ready for whatever life may throw at you next.

In closing, we want to remind you that exit planning is a crucial step to ensure your business continues on long after it has left your hands. If done correctly, having a solid exit plan in place can help business owners be sure their dreams and goals are reached.

Overtime Ruling Delayed

Remember that time we told you about the new overtime ruling and why you need to care? (If you need a refresh, go here)

Well before you put everything into action, you may need to pump the brakes.

On November 22, Judge Amos L. Mazzant III, a judge in the U.S. District Court for the Eastern District of Texas, delayed the new salary level threshold for overtime pay.

What?

As a reminder, earlier this year, the U.S. Department of Labor updated its overtime regulations. That update more than doubled the salary level for employees to be exempt from overtime pay. Prior to the update, the overtime pay threshold was $23,660 annually. Under the new ruling, it’s now $47,476 annually.

This means that an estimated 4.2 million U.S. workers who previously were not required to receive overtime will now be eligible for overtime.

Cue some unhappiness.

So why is there a delay?

In October, several states filed a request for a preliminary injunction. This basically means they challenged the Final Rule put in place by the U.S. Department of Labor. And Judge Mazzant granted their request.

What does this mean for me?

The most immediate consequence will be that the new overtime ruling will no longer take effect on December 1. Instead, there will be time for further court hearings and discussions on the Final rule.

In other words, we all have to stay tuned. But for now, the current ruling is still in effect. We’ll keep you posted as things progress.

A version of this post first appeared on eidebailly.com.

 

Behind the Metrics: Profit & Profit Margin

profit-profit-margin-2This set of blogs will take you behind some of the metrics you should be measuring in your business. We’ll talk about what they are, what they really mean and more.

Today we’re talking about something you more than likely care about in your business: PROFIT.

But what exactly is it? Bottom-line profit is when you have more revenue (sales) than expenses.

Three Types

Yes, there’s more than one kind of profit. Or rather, more than one way to measure profit. These three types include: gross profit, operating profit and net profit. And they’re all three found on your income statement.

Gross Profit

This is your total revenue minus the cost of goods sold. In other words, it’s the amount of money you’re getting from your customers less the expenses it took to make your product or provide your service.

Revenue – Cost of Goods Sold = Gross Profit

Operating Profit

Operating profit is your profit from your core business functions (the reason you’re in business in the first place).

The difference between gross profit and operating profit is pretty straightforward. Gross profit is a direct look at your revenue after expenses from sale. Operating profit looks at profitability after you take into account your operating expenses. We’re talking salaries, administrative costs, etc.

Gross Profit – Operating Expenses = Operating Profit

Net Profit

Consider this how much profit you make after you take into account ALL of your revenue and expenses.

Operating Profit ± Other Income & Expenses = Net Profit

Other income and expenses? We’re talking investment income, income (or loss) from sale of property and equipment, interest income or expense, taxes, etc. This is your “bottom-line”.

But wait, there’s more.

Along with your profit is a fun thing called profit margin. These profitability ratios helps show the financial health of your business. Profit margins can be looked at as a trend (this year compared to last year, this month compared to last month, etc.). Or you can benchmark yourself against similar companies to gain a better understanding of how you compare to your peers.

By monitoring your profit margins, you can see if what you’re doing is working or if you need improvement. Further, it will help you forecast (budget) your future revenues and expenses. It’s pretty powerful.

Of course, as you may have guessed, there’s more than one type of profit margin.

Gross Profit Margin

Gross profit margin looks at the percentage of revenue left over after you account for all of your costs of goods sold. It’s calculated by taking gross profit and dividing it by revenue.

Gross profit margin tells a story (you knew it was coming) about how effectively and efficiently your business is producing your product or providing your service.

Net Profit Margin

Net profit margin looks at the big-picture of your business. It portrays the percentage of revenue that actually turns into profit for your business. It’s calculated by dividing net profit by revenue.

Net profit margin is particularly important for your business because it gives you a bottom-line view of your profitability and overall health.

The moral of the story

Profit and profit margins are among some of the most important metrics to track for your company. They give you a picture of where you’re currently at, what’s working (and what’s not) and can even show you where you could be headed in the future.

 

A Business Owner’s Thanksgiving

thanksgiving-graphicHappy Thanksgiving from all of us here at Eide Bailly! With the big day being tomorrow, we hope your turkeys are roasting, pies are baking and stomachs are ready to enjoy a delicious meal shared with friends and family.

There are many things people are thankful for– whether it be friends and family, having food on the table or good health.

What are you, as an owner, thankful for about your business?

Here are a few friendly suggestions:

  • You’re living your dream –Just like the pride felt from cooking up a delicious meal to share and seeing everyone enjoying your hard work, business owners should be thankful for the pride that comes from running their own business. Your hard work and determination got you to where you are, and you’ve been through the ups and downs of the business and still made it through.
  • Passion –As you watch some Thanksgiving football, think about the players who are passionate about the game or the fans who are passionate about their team. Business owners can also be passionate about their company and job. Most entrepreneurs love what they do, and channel that passion into their business to make it the best it can be. Being passionate about your business can help lead to success, and that is something worth being thankful for.
  • Creativity — As a business owner, creativity has likely been a key factor in getting you to where you are. Whether it helped you come up with your logo or even your business strategy, creativity has been key in helping your business come to life. The excitement and challenges that come with owning a business allow for a business owner to constantly call on that creative function to come up with new solutions and answers to make the business better.
  • Failure – Yep, you read that right. It is common for entrepreneurs to have faced failures throughout the process of starting their business. However, it is important to be thankful for these failures because they are also learning opportunities. When you work for someone else, you might not get the opportunity to take risks and learn from those failures. Being a business owner allows you to take risks and innovate with the freedom to fail and learn.
  • Flexibility –It would be difficult to not be thankful for the flexibility that comes with owning your own business. Owning your own business allows you to make your own schedule (most of the time), attend events without having to ask for permission or time off and to be your own boss. No matter how tough things may get, it’s rewarding to work for yourself. Although you may work extremely hard, the flexibility to be your own boss deserves some thanks.

 We hope you find many things to be thankful for not only this Thanksgiving, but every day as well.

 

 

Good Habits for Business Owners

When entrepreneurs set out to start a new business, they know there are several possible outcomes, including success or failure. So how do you, as a business owner, position your business to come out on top?

There many attributes of successful business owners, but here are 10 habits we think are incredibly essential to the success of small to mid-sized business owners:

  1. They recognize opportunities | Successful business owners have a knack for identifying opportunities. While some might see an idea as a bit too crazy and strange, the business owner is able to think outside the box and see the benefits hiding under the shell. Successful business owners seek opportunities by going where others don’t go. They are daring, and will take risks in order to find opportunities for success.
  2. They are inquisitive | The inquisitive nature of successful business owners is a quality that should not be ignored. Being inquisitive pushes business owners to seek out mentors for help and ideas, and these mentors can help them navigate the waters of business ownership. Through this, they are able to gain advice and experience that can add to their success. They may also find new ways of doing things that can complement their skills. They may also ask questions about new trends and ideas in order to soak up as much information as possible. They are not afraid to ask questions, and are always looking for new learning opportunities.
  3. They get back up again | Failure is an inevitable part of life, and successful business owners know and embrace this concept. They see failure as an opportunity to learn and grow, rather than the be-all end-all. They recognize that from the lows can give way to the highs, which can lead to business growth and success.
  4. They move on | The idea of flexibility goes hand in hand with accepting of failure. When mistakes are made, business owners are ready to adjust and bounce back quickly, rather than being brought down by the mistakes. They are able to look at their offerings, and make changes as necessary to make their product better to fit the needs of their customers. They’re often able to make needed changes at a quick pace in order to keep their business moving along smoothly.
  5. They know that confidence is key | Successful business owners can’t be stopped. They know that haters and self-doubt can’t bring them down. They have a goal in mind, and they know what they need to do in order to reach it. With a persistent and can-do attitude, and their heads held high with confidence, successful business owners go after their dreams knowing they cannot be stopped.
  6. They have winning teams | Successful business owners know that teamwork is a key to success (check out the benefits of teamwork here), and that without team members, the business would be falling apart. Not only are they good at creating smaller teams within the business, but they also have cohesion at a higher level spanning across the entire business.
  7. They make things work | Being able to have a dream, create a plan to follow this dream and make the dream become reality is a skill of successful business owners. They are able to recognize what is necessary to make this plans come to life; whether it be knowing their target market or having a solid financial strategy, these business owners are no strangers to pulling out all the stops to make sure plans are put into action.
  8. They pace themselves | Successful business owners understand they can’t do everything all at once. Because of this, they understand the importance of prioritizing tasks and working on what needs the most attention at the time. They often complete work in small amounts, which adds up in the end. Although the process may take some time, they understand that a slow and steady pace wins the race.
  9. They delegate | Along with knowing they can’t do everything at once, successful business owners also realize they also cannot do everything in general. They often assign tasks to teams within the business. Along with this, they also choose to outsource some business processes they know can’t be completed in house. They recognize their limitations, and are sure to delegate when tasks don’t fall in this scope. Delegating allows for business owners to work on the business, rather than in the business.
  10. They are big dreamers | Last but not least, successful business owners are big dreamers. What does this mean? They see the business in their mind, and know where they want it to go and grow. They believe in their dreams, and they dare to see what’s possible.

In the end, the success of your business depends on you and your leadership. Practicing these 10 habits can be a great way to get you and your business on the track to success.

 

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