Setting up Your Business Accounting System

Setting up your business accounting systemYou’ve done the hard work. You have a new business idea or you’ve found an existing business to purchase. Want to help ensure your business success? Pay attention to correctly setting up your business’ accounting system.

Why it matters

Action 1 Honoring cash flow. Often success or failure of your business is predicated on whether you have enough cash to pay your bills. Determining your cash needs means understanding the cash situation of your business. To do this requires a good set of records. This includes recording your current situation on a timely basis and establishing a forecast of cash needs throughout the year.
Action 1 Fortress balance sheet. Banks love a strong balance sheet. If you think your business may need money for expansion, you will want to focus on developing a strong balance sheet that is low in debt and high in liquid assets like cash and accounts receivable. The irony here is that it is easy to borrow money when your records show you don’t need it and it is hard to borrow money when your business records show you need the funds.
Action 1 Understanding financial pressure points. Every business has a few financial items that drive profitability. Do you know yours? It might be payroll in a labor-intensive business. It might be rent in a retail establishment. Perhaps your margins are low because of heavy promotional costs. A strong accounting system will help you stay focused on the more important financial elements of your business.
Action 1 Understanding seasonality. By setting up a good accounting system AND forecasting performance over a twelve-month period, you will understand the true needs of your business. This is especially important if your business is seasonal in nature.

Things to consider

Action 1 Separate books. If starting a business from scratch, remember to set up separate bank accounts and recordkeeping. IRS auditors are quick to disallow expenses when your business expenses are mingled together with personal expenses. The same is true with credit cards. Use a separate credit card for your business transactions.
Action 1 Consider business entity. Choosing the right legal and tax entity for your business is important. Consult experts to discuss your options. On the tax side, sole proprietors use a Form 1040 Schedule C to report their activity, while other business entities “flow-through” profits to your individual tax return through a Schedule K-1. Still others like C-Corporations require separate tax returns without flow-through of profits onto your personal tax return.
Action 1 Cash versus accrual. There are different approved methods of accounting. You will need to determine which is best for you. Sometimes your business dictates a required method, but not always. The basic difference lies in when you can book revenue and expense. One method (cash) is based upon when you actually receive or make payment. While the accrual method allows capturing this same information when there is an established obligation.
Action 1 Sub-ledgers. Well-run businesses understand the need to organize elements of their business into accounting categories. These categories often use their own reporting system called sub-ledgers. Common areas are sales, accounts receivable, accounts payable, fixed assets, and inventory.

Remember, by spending time setting up the accounting system that is right for you, you are increasing your business’ chance for success. As a final thought, if recordkeeping and accounting is not a strength of yours, ask for help.

 

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Planning: Leverage Kiddie Tax Rules

Now is the time to take action on reducing next year’s tax bill. One area to help reduce your tax obligation is leveraging your kids to the fullest by understanding the “kiddie tax” rules.

Background

The term “kiddie tax” was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child’s lower tax rate. In 2014 the law requires a child’s unearned income (generally dividends, interest, and capital gains) above $2,000 be taxed at their parent’s tax rate.

Applies to

Point 1 Children under the age of 19
Point 2 Full-time students under the age of 24 and providing less than half of their own financial support
Point 3 Children with unearned incomes above $2,000

Who/What it does NOT apply to

Point 1 Earned income (wages and self-employed income from things like babysitting or paper routes)
Point 2 Children that are over age 18 and have earnings providing more than half of their support
Point 3 Older children married and filing jointly
Point 3 Children over age 19 that are not full-time students
Point 3 Gifts received by your child during the year

How it works

Point 1 The first $1,000 of unearned income is generally tax-free
Point 2 The next $1,000 of unearned income is taxed at the child’s (usually lower) tax rate
Point 3 The excess over $2,000 is taxed at the parent’s rate either on the parent’s tax return (Form 8814) or on the child’s tax return (Form 8615)

Planning thoughts

So while your child’s unearned income above $2,000 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:

Point 1 Maximize your lower tax investment options. Look for gains in your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.
Point 2 Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by exposing more income to the Alternative Minimum Tax or reducing your tax benefits in other programs like the American Opportunity Credit.
Point 3 Leverage gifts. If your children are not maximizing tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child’s financial aid when approaching college age years.

Properly managed, the “kiddie tax” rules can be used to your advantage. But if not properly managed, this part of the tax code can create an unwelcome surprise at tax time.

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Tax Quiz: How well do you know tax facts?

As April is tax month, included here is a short quiz to see how well you know your taxes. Since everyone tends to think they have it worse than their neighbors, this year’s quiz revolves around state imposed taxes. Enjoy!

Check Can you name the seven states that impose no individual income taxes?
Answer The seven states with no individual income taxes are: Alaska, Florida, Texas, Wyoming, South Dakota, Washington, and Nevada.

Check If you live in this state, your state government actually sends you a check each year. Can you name the state and the amount of the check you would receive for 2013?
Answer The state that provides a check to its residents each year is Alaska. Qualified residents in 2013 received $900 as an Alaska Permanent Fund dividend. The amount of the check depends on the income received in the fund. In 2008, residents received a record $2,069. The fund was originally established in 1976 as a means to save 25% of the oil revenue from the Trans-Alaska Pipeline System. The idea was to have funds for future generations when the resource would no longer be available.
Federal Income Tax Quiz

Check Seven states have no individual income taxes. Can you
now name the seven states with the highest marginal state
individual income tax rate in 2013?
Answer Here they are in order of highest to lowest:
#1 California (13.3%), #2 Hawaii (11.0%), #3 Oregon (9.9%),
#4 Minnesota (9.85%), #5 Iowa (8.98%), #6 New Jersey (8.97%),
#7 Vermont (8.95%)

Check State tax burdens include a combination of many types of tax
including income taxes, corporate taxes, property taxes, sales
tax, excise taxes and other taxes. Per the nonpartisan group,
Tax Foundation, what seven states tax their citizens the most
as a percent of their state sourced income?
Answer Here they are ranked from the highest level; #1 New York: 12.6%,
#2 New Jersey: 12.3%, #3 Connecticut: 11.9%, #4 California: 11.4%,
#5 Wisconsin: 11.0%, #6 Minnesota: 10.7%, and #7 Maryland: 10.6%.
Source: taxfoundation.org. Please see their reports for more information
and their methodology for their findings.

Check Can you name the state that recently became the first state
in the U.S. to tax gifts?
Answer Minnesota. There is a long-standing gift giving tax on the federal level
if an individual gives more than $14,000 to any one person ($28,000
for a married couple) in a single year. But until 2013, no state imposed
this tax. Minnesota’s law requires gifts made within three years of death
be considered part of your estate and subject to potential estate taxes.
Thanks Minnesota. Will others follow suit?

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New IRS2GO Mobile App Announced

“Where’s my Refund?” This popular feature on the IRS web site (www.irs.gov) allows taxpayers to see the status of their refund after filing their income tax return.

Now with a recent announcement, the IRS is making their Refund Status service available on the 2014 version of their Mobile App called IRS2GO.

What can you do on the new IRS2GO?

IRS Scams
Point

Refund status. By entering your Social Security Number, selecting your filing status, and entering the amount of your anticipated refund you can see where your tax return is in the IRS filing process. For security purposes your Social Security number is being masked and encrypted. If you wish to check on the status of your refund:

When to check:
Point 1 24 hours after an e-filed tax return confirmation
Point 2 4 weeks after a mailed tax return is sent
What you need to provide:
Point 1 Social Security number
Point 2 Filing Status
Point 3 EXACT refund amount
Point Tax Records. You can also request copies of your tax return or a copy of your account transcript using the IRS Mobile App. While you may request the information from your phone, the actual transcript will be mailed to you within a few business days.

A note of caution

Remember, the IRS is also experiencing record levels of identity theft. If you plan on using the IRS2GO Mobile App, take the same security precautions you would if you were logging into your bank account. This includes, but is not limited to, using your personal internet network and not a public network.

To download the IRS2GO app with an iPhone or iTouch go to your iTunes app store. Android users can visit Google Play to download their version of the app.

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2014 Planning: Employee Business Expenses

Now may be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper substantiation, it is possible that you may be able to obtain greater reimbursement from your employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.

In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include:

  • Travel, transportation, meal, or entertainment expenses
  • Safety equipment, small tools, or supplies
  • Uniforms required by your employer that are not suitable for everyday wear
  • Required protective clothing
  • Dues to professional organizations
  • Subscriptions to professional journals
  • Certain job hunting expenses
  • Certain expenses for the business use of your home
  • Computer costs
  • Work-related educational expenses

You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it.

The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense. Please call our office at your earliest convenience to schedule an appointment.

Reproduced with permission from CCH’s Client Letter, published and copyrighted by CCH Incorporated, 2700 Lake Cook Road, Riverwoods, IL 60015

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To See, or Not to See, a Tax Professional

According to the National Taxpayer Advocate, nearly 60 percent of taxpayers hire paid preparers to do their taxes. With all the tax software programs out there, why do so many people turn to a professional?

“Some fans of over-the-counter tax programs would never dream of hiring a professional, but it really depends on the situation,” says Rich Rhodes, EA, an enrolled agent in Hinckley, OH. “Young, single adults with one or two W-2s can probably do fine with tax software, but what if you’re married, own a home, have kids, are going to college or have kids going to college? There are plenty of confusing tax traps just waiting for you.”

A knowledgeable tax pro should actually save you money because he or she will interview you in-person and ask a lot of questions to determine what deductions you may qualify for. Tax laws change every year, and if it’s not your full-time job, it’s hard to keep up. Here are just a few areas where you could be missing out on saving money on taxes.

Education and child care. The IRS publication explaining the variety of education credits alone is 94 pages long. How about child care expenses? That publication is a quick read at only 19 pages! Those publications cover only two line items on most 1040 forms.

Volunteer expenses. Rhodes points out that if you are a Scout leader, volunteer in your church or local food bank, deliver books to a hospital or meals to seniors, many of your volunteer expenses, including mileage, may be deductible.

Job related expenses. Perhaps you’re a traveling nurse. Do you wear a uniform? Do you carry protective gloves and a stethoscope that you are not reimbursed for? Do you have to renew a license or take continuing education courses to maintain a license? Job-related expenses may also be deductible on your tax return.

Filing status. Married people don’t always file jointly. There are as many reasons filing separately might be a good idea as a bad one.

Are you paying off student loans?  Wondering if you should contribute to a Traditional IRA? Paying alimony? You don’t even have to itemize deductions because these items can reduce your income and that reduces your tax bill. All of these are questions that impact the amount of taxes you will pay and a wrong answer can cost you money. Hiring a tax professional is a solid investment. Tax professionals such as enrolled agents are licensed and required to take continuing education courses every year to stay up-to-date on all the latest tax changes.

About Enrolled Agents

Enrolled agents (EAs) are America’s tax experts®. They are the only federally-licensed tax practitioners who specialize in taxation and also have unlimited rights to represent taxpayers before the IRS. While attorneys and certified public accountants are also licensed, only enrolled agents specialize exclusively in taxes. Call Janet Sienicki EA, ABA at 219-649-0829 for more information.

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Missing the Flow-through Deadline

The penalty that does not fit the crime

March 17th Please remember March 17th is the due date for filing Sub S Corporation tax returns that have a year-end of December 31st. While the Form 1120S does not require making a tax payment, missing the due date could cost you plenty. This is despite the fact that late filing of the sub S tax return does not impact the receipt of the taxes due on April 15th.Those that are getting this “gotcha” penalty are often sole proprietors and couples who have formed a Sub S Corporation to handle their small businesses. The penalty is calculated based on each partial month the return is late times each shareholder. So a return filed 17 days late with no tax due could cost a married couple with a small S-Corporation $350 to $400 in penalties!

Action to take

Point 1 If you have a Sub S Corporation, or other flow through entity, either file an extension or submit your tax return on time. Remember, an extension gives you six months to file and you do not owe the tax until your 1040 tax return due date (typically April 15th).
Point 2 Challenge the penalty. While you may not be successful, remember the US Treasury is still receiving the taxes owed to them on a timely basis
Point 3 Do not file your individual 1040 tax return until you have received all your K-1 tax forms from the flow-through entities you own (like tax returns from Sub S and Limited Liability Corporations).

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