When it Comes to Accounting, Communication is Key

By: Kristie Rants, Eide Bailly LLP

We get it: the thought of sitting down and talking with your accountant might be a little scary. After all, all they do all day is sit and stare at numbers and do math, and their jargon and lingo is hard, if not impossible, to understand, right?

Not exactly.

While the thought of having conversations with your accountant might be intimidating, it really shouldn’t be. More often than not, your friendly number cruncher wants to talk to you, too (and we promise to use words that make sense)!

To help the conversation go smoothly, we came up with some tips to help you have successful conversations with your accountant.

Communication is key

  • First and foremost: figure out the best method for communicating with your accountant. Whether it’s in person, email or even Skype, agree on what works best for both of you.
  • Decide on frequency for communicating. Some businesses may need to have meetings weekly, while others may be on a monthly schedule. This is usually driven by business needs.
  • Make sure you’re both on the same page. It’s important that your accountant understands your business, just as you should be able to understand what they’re talking about. If you are unsure about the topic being discussed, don’t nod your head – ask more questions!
  • Establish a relationship. Create an environment where both you and your accountant are comfortable with each other. When you have a solid relationship with your accountant, it’s often easier to ask whatever is on your mind, no matter how basic it may seem.

 

Be prepared

  • Come prepared to each meeting. Make sure you have organized and complete information to share. If you’re not sure what exactly to bring, ask your accountant. He or she can give you a list of documents and information that might be needed.
  • Be prepared to share any changes occurring in your business. This keeps your accountant in the know and decreases the likelihood of any unwanted surprises in the future.
  • Ask questions throughout the year and as they arise rather than holding them all in. It’s easier to remember and examine information right away, rather than waiting six months down the road.
  • If your accountant sends out newsletters, articles, etc., read them! These often contain current and important information that can impact your business. If your accountant thinks it’s important, you should give it a read as well.

Accountants wear many hats

  • Your accountant likely has access to many resources to help you with any phase of your business. Your accountant can do all sorts of tax planning, whether you’re interested in putting away additional money in a retirement plan or wondering what your options are for depreciating equipment. Maybe a cost segregation study to accelerate depreciation or a 179d study makes sense for you!
  • Accountants can even help train you or your staff. Ask them if they offer an on-site service. Sometimes a few hours of training makes all of the difference. (Shameless plug: our accounting coach services do just that)!
  • Consider what stage your business is in. If you’re thinking about selling (or buying) or even retiring, your accountant can likely help you or introduce you to someone who can get you on the right track for a successful transition. They have the expertise to help you succeed.

The moral of the story…

Communicating with accountants can seem intimidating and confusing. Using these tips can help you have successful conversations. If you’re still intimidated, reach out. We promise to help you understand the accounting side of your business so you can get back to doing what you love.

Is it a Hobby or a Business?

Every business idea, no matter how big or small, starts somewhere. Whether it came from a random daydream or a well thought out business plan, your idea was fueled by something you thought the world needed.

Perhaps you had another job or responsibility you were attending to at the time, and you weren’t able to devote all your time and resources to your new idea. Instead, you kept it as a side project which turned in to a fun little hobby.

While keeping your main job and running a hobby business can be fun and energizing (after all, you’re running your own business now!), there are certain tax implications that must be taken into consideration when your business idea is just a hobby.

Your tax liability will be affected depending upon whether your work is classified as an actual business or as a hobby. Here are nine factors from the IRS regulations used to determine if an activity is a business or a hobby:

  • Do you conduct the activity in a businesslike manner? This includes keeping accurate books and records and pursuing operating methods and business techniques with the motive of turning a profit.
  • Do you have expertise in the business?
  • Do you devote much time and effort in carrying on the activity?
  • Are the assets of the activity expected to appreciate in value?
  • Have you had success in starting a new business or converting an unprofitable business into a profitable one?
  • Is the history of income or losses from the activity indicative to a profit motive? If you have continued losses, this may suggest that the activity is a hobby. There is a safe-harbor rule that states if you generate a profit in three out of five years, your activity is deemed a trade or business. For horse racing, breeding, training or showing the test is two out of the last seven years. The IRS can still disagree, but the burden of proof to show the activity is a hobby versus a trade or business has now shifted from you to them.
  • What is the amount of profits in relations to losses? An occasional small profit in an activity which generates large losses or from an activity in which a large investment has been made would not necessarily translate into a profit motive.
  • Do you have substantial income or capital from other sources? If so, losses from the activity may generate tax benefits by offsetting income from other sources, which is generally not looked kindly upon by the IRS.
  • Does the activity present personal pleasure or recreation? The IRS is more likely to attack an activity that has recreational elements such as racing, horse or dog training or showing, or even weekend farming, rather than tax preparation services (although we think this is kind of fun!).

So what does this mean for you? Any form and amount of income, no matter where it is coming from, is taxable and should be reported. However, hobby activities are reported differently than trade or business activities and have certain limitations. On a positive note, hobby activities are not subject to self-employment tax. However, expenses related to hobby activities are only deductible as itemized deductions subject to 2% of adjusted gross income. Taxpayers who utilize the standard deduction do not receive any benefit from these expenses and those with higher income will also be limited. Additionally, retirement plan contributions, self-employed health insurance and an array of other deductions cannot be used to offset hobby income.

The moral of the story…

The IRS needs to know about any money you’re bringing in, whether it’s from your daily job, or the hobby app building company you run from your garage. If your business is just a hobby, remember you still need to report it and planning can go a long way in terms of tax benefits and pitfalls.

Accounting Tasks for Small Business Owners

Being a small business owner can be tough. You have a lot on your plate to handle, and sometimes it can seem downright overwhelming. From keeping up with the competition to making sure your employees are satisfied, being a small business owner always keeps you busy.

In the midst of all this, it’s important to ensure you’re not neglecting parts of your business. One area is (you guessed it) your accounting and finance functions. These functions often sound daunting and somewhat scary (don’t worry – we can help!), but they are too important to be forgotten.

We’re not saying you need to drop everything and pay attention to your accounting and your accounting only, but there are some simple tasks every small business owner should stick to in order to keep the business finances operating smoothly (and help make your accountant’s job a little easier).

  • Stay away from the back burner – When you’re busy and have a million thoughts running through your head, it’s easy to look at something and think, “I’ll take care of it later”. When it comes to invoicing, send the invoice right away. Better yet, add a process to automate invoices being sent right away. This will get the bill to the client quicker, which can in turn lead to you getting paid quicker, and who doesn’t want that? This reduces the risk of you forgetting to send it altogether, and can lead to improved customer satisfaction by being on the ball. When you receive this payment, deposit/cash/spend it right away, rather than letting it sit around and risk it getting lost or even stolen. Another option is to consider receiving electronic payments.
  • Keep your eyes open – Running a business means you have a lot of financial statements to deal with (think balance sheet, income statements, etc.). Likely you have an accountant who is helping you maintain these records and keeping track of what is going on with your financials (and if you don’t, let us know!). But, you should still be doing some monitoring yourself. No one knows your business as well as you do, so you should be able to notice if something seems off. Start by reviewing your cash flows weekly. Your cash flow can tell you the money that is coming and going from your business during the week, and this can give you a good picture of where you’re standing. Occasionally viewing other financial statements allows for more eyes to be on the lookout for any issues and red flags that may arise.
  • Track your taxes – We know that taxes aren’t everyone’s favorite topic, but they are really important. As nice as it would be to only worry about taxes during tax season, that’s not the case. Taxes should be monitored and kept up throughout the entire year, whether it be filling out forms, making tax payments or just keeping note of what you may need to change when you file your year-end taxes. Being alert and aware of what’s going on with your taxes can lead to less surprises come tax season.
  • Keep in touch –While looking over your financials and taxes, remember to keep your business advisor or accountant in the loop. Not only will it make their job a little easier, they’ll also be able to provide helpful feedback and answers so you can make smart, informed business decisions.

Running a business can be a challenge, and not monitoring your financials can make it more difficult than it really needs to be. By keeping up with these simple tasks, you can put you and your business in a better position and get back to working on what really matters – the success of your business.

Is Your Business Struggling Financially?

Starting a business can be fun and exciting, but it can also have its ups and downs. Your business might go through periods of growth where business is booming, but you also might see times when you’re not bringing in any money and your business is struggling to hang on. However, sometimes these financial issues are more than just temporary. Often times, there are underlying issue that cause financial struggles.

Here are some signs your business may be facing some serious financial struggles.

1. Cash Flow isn’t Flowing Smoothly – Cash flow issues are common throughout the life of the business – they’re even considered normal. What’s not normal is when these cash issues become a routine. These cash flow issues can have a number of causes, but some of the most common include smaller profit margins, loss of sales, theft and allowing accounts receivables to get too backed up. For help understanding cash flow, look here!
2. Tax Troubles – Ah yes, taxes. Just like individuals, businesses too must pay taxes. Businesses usually have income tax on the federal and state levels, as well as sales tax and employee taxes. When your business starts struggling to make these payments, something isn’t quite right. By not being able to pay taxes, a business can find itself falling behind on other financial obligations, and might even find themselves in some hot water with the IRS.
3.  Mountains of Accounts Payable – It should go without saying that you need to pay your bills. Whether it be your vendors, your internet service provider or your cleaning company, these people need to be paid for their services. When you “pay” for these on credit, they go to the accounts payable ledger, and not paying them off can create quite a mountain of bills. Struggling to pay your bills is a huge red flag that your business is having serious financial struggles.
4. Aging Assets – Wear and tear happens – it’s part of a product’s life cycle. However, a lot of this can be prevented or lessened by working on the upkeep of your assets. By failing to take care of them, serious problems can arise. If you neglect your store front and let it look run down, this can turn customers away as it isn’t appealing. If you have manufacturing machinery that isn’t preforming smoothly anymore due to wear and tear, production may slow down, be incorrect or even stop altogether.
5. Bookkeeping Blunders – Bookkeeping is cool – it tells the story of where your business has been, where it is right now and where it could go in the future. Neglecting your books can lead to some serious financial complications. Without accurate records, you may not know how much money you actually have, and this can lead to uninformed decision making. Having accurate books can also help you discover any issues, such as fraud, that may arise.
6. Cobwebs in the Bank – When you have cobwebs in the bank – you know, an empty or really low account balance – your business can face some serious financial consequences. Having a low balance can lead to overdrafts, and overdrafts can lead to some nasty charges for spending money your business doesn’t have. If you keep encountering these fees and charges, you will just end up digging your business into an even deeper hole – one that may be impossible to get out of.
7. Missing in Action – There’s an old saying “when the going gets tough, the tough get going.” However, in your business, leaving is the last thing you want to do. Often times, when businesses face financial issues, the owners are hard to find or contact. They may be overwhelmed, or feel like a complete failure. However, this can just lead to more problems, such as a decaying reputation, confused employees and deterioration of the already terrible financial issues.
8.  Inventory Issues – If you are selling products, you want them to fly off the shelves. When your products aren’t selling like hot cakes and are instead sitting in inventory for long periods of time, this could be a sign of a major problem. If you’re holding on to too much inventory and not selling it, you’re basically spending money on storage. If you sell products that could spoil, keeping them in inventory too long can result in losing money off ruined items.
9. Empty Handed Employees – Your employees keep your business running smoothly. When you’re not able to pay these precious assets, you know your financials are struggling. Not being able to pay your employees can result in them leaving the company and even bad-mouthing about how they were treated. This can lead to more reputation issues. Without employees, it will be tricky for your business to remain successful.
10. Profit Problems – As a business, your main goal is likely to make a profit. Profit, in its simplest form, is when you have more revenue than expenses. Although an obvious sign that your business is struggling financially, this is an important one to keep in mind. If your profits, such as gross profit, operating profit or net profit aren’t looking pretty, something isn’t right. Along with your profits, you want to have high profit margins, which signify what percent of your revenue actually turns into profit for your business.

Finances keep your business up and running, but when your business has financial issues, everything can come crashing down in a hurry. Luckily, our numbers nerds understand these money problems, and are ready to help you dig your business out of the deep, dark hole of financial struggles.

Exemption Certificate Errors

We figure with it being tax season, we can never talk too much about taxes and all the rules and regulations that go along with them. So, without further ado, we bring you another tax blog. Today’s topic: exemption certificates.

What is an exemption certificate and why do I need to know this?
Sales tax applies to most items of tangible property – something you can usually touch or see –unless there is an exemption under the law, or an exemption certificate. Exemption certificates usually are presented by a customer to a seller. If the exemption certificate is properly completed, the seller will not be required to collect sales tax.

Can all types of sales be exempt?
Generally speaking, there are three different reasons a sale can be exempt from sales tax. These are considered the type of exemption.

  1. Use Based – These exemptions come from the idea of where and how the product will be used after the sale. Items that are intended for resale are a common example of a use based exemption.
  2. Product Based – This exemption has to deal with – you guessed it – what type of product is being sold. Exemption laws vary from state to state. For example, shoes are taxable in ND and exempt in MN.
  3. Buyer Based – Exemptions that are buyer based focus on the type of buyer who is making the purchase. Examples could include government, hospitals or some not for profit entities.

What’s on an exemption certificate?
As mentioned before (and like anything tax related), the rules and specifications of exemption certificates vary based on state. However, there are some general points that are almost always included on an exemption certificate, no matter which state you are in.

They include:

  • Type of exemption
  • Name and address of both the buyer and the seller
  • Explanation of what is being purchased
  • Tax registration number or other unique identifiers such as a SSN or FEIN.
  • Signature

Sounds good. Anything else I should know?
We’re glad you asked. When state sales tax auditors do their work, they review invoices, types of payment and the information on the certificate for exempt sales. Lately, we are seeing issues where the exemption certificates are not valid because pieces don’t match up.  We will give you some examples.

Example one: A tractor was sold exempt from sales tax with a completed exemption certificate on file. The invoice lists Johnson Farms as the as the buyer. However, the financial paperwork indicates Johnson Auto Parts, and the exemption certificate is from Johnson Farms, claiming a farm exemption. Rather than this transaction looking like a farm use sale, it now looks like it was a non-farm use sale at the auto parts store.

Example two: A riding lawnmower was sold exempt from sales tax with a completed exemption certificate on file. The invoice and exemption certificates list Wee-Town Schools as the buyer. The payment for the sale comes in the form of a check from Mike Johnson. Because the schools name is not on the exemption certificate, it appears the lawnmower is not paid for by the school, and is instead an employee trying to buy an item for his own personal use exempt from sales tax.

Example three: An engine is being sold. The invoice lists Ace Anderson Auto Sales, and is paid for in cash. The exemption certificate, however, comes from Alex Anderson for resale. Alex has gone by Ace his entire life, but only uses the name Alex for official business. Although this is the same person, the auditors do not see it that way. Because the names do not match up, there is a problem with this sale.

The moral of the story…
For an exemption certificate to work properly, the name on it must match up with the invoice/payment. We get it, all this sales and use tax stuff can be pretty tricky (although this blog is pretty helpful). Luckily, our trained professionals are here to give you guidance when you need it.

A Holiday Cheat Sheet: What Your Business Needs to Know

Happy holidays from your jolly numbers nerds. Throughout the year, we’ve told you about several upcoming changes that could impact your business. As our gift to you (yeah, we’re nice like that), we’ve wrapped all these updates up in one big inclusive blog so you can find all you need to know in one spot (you’re welcome).

We’ve even thrown in a few new stocking stuffers to make sure you’re in the loop. Why? With a new presidency coming quickly, policies are bound to change, and staying up to date will help your business stay out of trouble.

Taxes

  • The deadline of the W-2 has been moved up to January 31st, rather than the typical due date at the end of February. Form 1099-MISC is also receiving this new deadline. For a refresher on when forms are due, check out this infographic.
  • Partnership tax returns and c-corporation tax returns are getting new deadlines. Partnership returns, which were previously due on April 15th, are now due on March 15th. C-corporation returns switched and are now due April 15th rather than March 15th. Of course, there are some exceptions to this based on when your business operates its fiscal year. If your corporation has a June 30th year-end, you do not get the extra month; your returns still have to be filed by September 15th. Look here for that information.

Affordable Care Act (ACA)

  • Form 1095, which previously had leniency until its March 31st due date, has now moved and become a little more strict. The form now needs to be submitted no later than January 31st to ensure your employees get this form on time. As a refresher, Form 1095 contains three different forms: 1095A, B and C.
    • Form 1095A, which is a health insurance marketplace statement, details the coverage the employee has, how much was paid for insurance and tax credits.
    • 1095B is for employers who offer health coverage with less than 50 full-time employees, while 1095C provides coverage information if your company had more than 50 full-time employees.

Form 1095 isn’t the only one with a new due date. 1094B and C have also moved up to a deadline of February 28th via snail mail, or March 31st if being submitted electronically. Form 1094 has to be provided to the IRS to report minimum essential health care coverage. In other words, it tells the IRS about the health care options your company provides. 1094B will be completed no matter the size of your business, while 1094C is for larger employers, those with 50 or more full-time employees. (Confusing? Yes, but we can help. Just ask!)

  • Don’t forget about the Critical ACA Compliance Test. Under this rule, certain employers, those with 50 or more employees, are required to offer coverage to at least 95 percent of their full time employees, and not doing so can result in huge penalties for your business. For more ACA updates and changes, look here.

Miscellaneous

  • Form I-9 received a face lift. A new form was released, which also included updated instructions to make completing it a little bit easier (how nice of them). Along with the new look came a new date. Employers must start using the new form by January 22, 2017.
  • A long, long time ago (okay, only a few months ago) our friends at the Department of Labor released a new overtime ruling. Under this new ruling, the overtime salary threshold almost doubled to $913/week, starting December 1, 2016. However, here we are at the end of December and this rule hasn’t gone into play. So, what’s going on? Some states weren’t quite impressed with this idea, and challenged this new ruling. Because of this challenge, the changes were put on hold. As of now, there isn’t any news on when and if this ruling will move forward, but if it does, we will keep you posted.
  • We’ve got some bad news for bitcoin. Back in November, the US Department of Justice (DOJ) asked a district court in the Northern District of California for a summons to be issued for bitcoin exchanger Coinbase Inc. This summons will potentially require the company to hand over information related to all bitcoin transactions it handled between 2013 and 2015. Then, the DOJ would share this info with the IRS to match against filed tax returns. Yikes. If your business used bitcoins through this time period, it’s time to review them with your tax advisor. Don’t have one? We can help.

There you have it: a handy cheat sheet to keep you updated on changes effecting your business. With a recent election and a new presidency transition coming soon, more changes are likely on the horizon. When these changes happen, we’ll make sure to fill you in. For now, sit back, relax and enjoy this holiday season.

holiday-graphic

 

Taxes: When’s that due?

With the holiday season upon us, you’re probably thinking of the fun and festivities of the season and definitely not taxes.

Taxes? Why should you be thinking about taxes? Well, there have been some very important changes to tax due dates, and these deadlines will sneak up on you before you know it! Check out this infographic to see the deadlines so you’re not scrambling at the last minute!

tax-dates