Tax Rules for Children with Investment Income

Children who receive investment income are subject to special tax rules that affect how parents must report a child’s investment income. Some parents can include their child’s investment income on their tax return while other children may have to file their own tax return. If a child cannot file his or her own tax return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on the child’s behalf.

Here’s what you need to know about tax liability and your child’s investment income.

1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.

2. Special rules apply if your child’s total investment income in 2015 is more than $2,100 ($2,000 in 2014). The parent’s tax rate may apply to a part of that income instead of the child’s tax rate.

3. If your child’s total interest and dividend income are less than $10,500 ($10,000 in 2014), then you may be able to include the income on your tax return. If you make this choice, the child does not file a return. Instead, you file Form 8814, Parents’ Election to Report Child’s Interest and Dividends, with your tax return.

4. If your child received investment income of $10,500 or more in 2015 ($10,000 in 2014), then he or she will be required to file Form 8615, Tax for Certain Children Who Have Investment Income of More Than $2,100, with the child’s federal tax return for tax year 2015.

In addition, starting in 2013, a child whose tax is figured on Form 8615, Tax for Certain Children Who Have Unearned Income, may be subject to the Net Investment Income Tax. NIIT is a 3.8 percent tax on the lesser of either net investment income or the excess of the child’s modified adjusted gross income that is over a threshold amount.

If you have any questions about tax rules for your child’s investment income in 2015, don’t hesitate to call our office.

Tips on Travel While Giving Your Services to Charity

Do you plan to donate your services to charity this summer? Will you travel as part of the service? If so, some travel expenses may help lower your taxes when you file your tax return next year. Here are several tax tips that you should know if you travel while giving your services to charity.

• Qualified Charities.  In order to deduct your costs, your volunteer work must be for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are qualified, and do not need to apply to the IRS. Ask the group about its IRS status before you donate. You can also use the Select Check tool on IRS.gov to check the group’s status.

• Out-of-Pocket Expenses.  You may be able to deduct some costs you pay to give your services. This can include the cost of travel. The costs must be necessary while you are away from home giving your services for a qualified charity. All  costs must be:

o Unreimbursed,

o Directly connected with the services,

o Expenses you had only because of the services you gave, and

o Not personal, living or family expenses.

• Genuine and Substantial Duty.  Your charity work has to be real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.

• Value of Time or Service.  You can’t deduct the value of your services that you give to charity. This includes income lost while you work as an unpaid volunteer for a qualified charity.

• Deductible travel.  The types of expenses that you may be able to deduct include:

o Air, rail and bus transportation,

o Car expenses,

o Lodging costs,

o The cost of meals, and

o Taxi or other transportation costs between the airport or station and your hotel.

• Nondeductible Travel.  Some types of travel do not qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or a vacation.

For more on these rules, see Publication 526, Charitable Contributions.

If you have any questions about your personal or business taxes, please feel free to contact our office.

Source: IRS

5 Legal Pitfalls Every New Business Should Avoid

Almost every startup faces the same two challenges. First, the formation and early-stage operation of your company presents many complex issues that can create severe problems if not handled correctly at the outset. Second, you have little or no money available to help solve these issues until sometime in the future when your vision can attract capital.

Cutting corners and efficiently solving problems are things every early-stage entrepreneur needs to do. However, don’t let your lack of financial resources cause you to make these five critical mistakes that could cost you much more to fix and even perhaps derail your efforts entirely.

1. Failing to Use Contracts Between Founders

Co-founders often feel comfortable enough to “trust” each other at the outset of their business venture. Why not? Your co-founder is probably someone you have known a long time, perhaps a close friend or someone you worked closely with in school or prior business experience.

You know that you intend to work hard and that you will be unduly devoted to the success of your new startup. Isn’t it appropriate that you assume your co-founders will do the same?

Unfortunately, it is more likely than not that you and your co-founders will not end up together when—and if—your venture achieves success.

There are many reasons for this. The things that brought you together, like friendship, common experiences and camaraderie, are not necessarily the attributes that will make you good business partners.

Just because someone is your friend or you have shared meaningful common experiences together, or even that you perceive them to have an appropriate skill set, does not mean that each of you will bring the proper skill set to the venture to make it successful. And let’s face it: Creating a startup is hard and can be very taxing on a person’s life. Everyone handles that kind of stress differently.

These are the reasons why, no matter the trust level, co-founders of a startup should always have a very clear understanding of their expectations of each other and create meaningful contractual relationships so that the venture (and maybe even your relationship) can survive the loss of one or more founder.

First, make sure you have honest and frank discussions about what level of commitment will be required. These talks should cover issues such as the time commitment each founder will devote to the venture, particularly if one or more of them are working “day jobs,” how long one can devote to the venture prior to a funding event occurring before that person will necessarily need to depart, what each founder’s specific role and responsibilities will be, and perhaps even a methodology for resolving contentious situations.

Specific actions you should consider are:

1. Entering into written employment agreements specifying roles and responsibilities.
2. Creating contractually binding “vesting” arrangements with respect to founder stock, typically over a four-year vesting period.
3. Having a clear understanding as to when and under what circumstances early founders will step off the board of directors or out of senior management roles as the company grows and requires those functions be performed by others.
4. Creating a shareholders’ agreement to cover issues such as voting for a board of directors, restrictions on transfer of founder shares (buy-sell, co-sale, drag-along rights and rights of first refusal), and other transfer issues such as death, disability, divorce and dispute resolution among shareholders.

2. Not Protecting Intellectual Property

Another common mistake that early-stage entrepreneurs make, particularly when resources are tight, is failing to properly document the creation, contribution to, modification and protection of intellectual property.

Most entrepreneurs think that they will “eventually” get around to looking at their intellectual property protection and decide whether there are inventions that can be patented or trademarks that should be filed. Intellectual property is the lifeblood of every startup. Your intellectual property begins the day you start thinking about and planning your venture.

The most common mistakes are failing to properly transfer existing intellectual property into the business venture, not documenting or ineffectively documenting the contribution of independent contractors, failing to implement proper employee protocols and investing effort in a brand without fully understanding its availability.

When you go to raise money for your venture, investors will perform diligence on your company and expect to see that you have properly protected all of your intellectual property from inception. If the venture starts off with intellectual property that existed prior to the formation of the venture (perhaps existing assets of one or more of the founders, or assets that were created prior to the creation of the legal vehicle), make sure those assets are properly transferred and/or assigned to the business venture.

This process should also be coordinated with the issuance of equity to the founders (see discussion below), as these intellectual properties can often serve as the basis for the issuance of equity and can create tax issues for the founders if not properly transferred.

Frequently, founders utilize the services of independent contractors, whether they are developers or otherwise, to assist in the development of the company’s creative works, such as software or other technology. However, contributions to your intellectual property can include other, less obvious things such as questions, comments, ideas, images, writings, music, sounds, audiovisual works or effects, artwork, design elements, graphics, suggestions, concepts, notes or other materials.

As a general legal matter, any of these types of contributions that are created by an independent contractor (i.e. someone who is not an actual employee) are owned by the author and not by the company absent a written agreement to the contrary. Therefore, it is critical that independent contractors sign a written agreement prior to the commencement of any efforts on behalf of the company.

Similarly, although an employer generally owns the results and proceeds of intellectual property created by its employees, there are a number of tricky issues relating to employee development that should also be covered in a written agreement. These documents are typically referred to as Employee Proprietary Invention Agreements and should be executed by every employee, including the founders, prior to commencement of employment.

Finally, while meaningful intellectual property protection, such as a patent filing or a trademark registration, can be cost-prohibitive to an early-stage venture, you should nonetheless pick your brand or branding attributes carefully and review publicly available resources, such as the U.S. Patent and Trademark Office (USPTO)website, before investing significant effort in branding your business.

Entrepreneurs frequently pick a brand because of a convenient URL, only to find later that a potential trademark-infringement claim forces them to entirely rebrand their business. With a little bit of guidance at the front end, these problems can be avoided.

3. Issuing Securities (or Promising to Do So) Without Proper Documentation

The issuance of equity securities (i.e. any ownership interest in your business) is regulated by both the federal government and each state in which the company is domiciled, the recipient of the securities is domiciled or the transaction is effected. It is essential that the initial issuance of “founders” shares and every subsequent issuance of equity securities be properly documented and comply with regulatory requirements.

This is a particularly tricky issue with respect to equity granted to persons who will either work for or contribute to the success of the venture other than simply by investing in the business. Equity that is granted to persons for services is “compensatory” and raises additional issues relating to the valuation associated with the performance of those services.

Founders often promise equity in consideration of the performance of services. If those promises are not contemporaneously documented, they cannot subsequently be documented at the same value at a later time. Because of complicated tax regulations that are beyond the scope of this article, the granting of any equity in lieu of services must be made at the fair market value of such equity on the date of grant.

There are severe penalties for the failure to do so, which generally result in excessive tax liability or costly economic consequences when these transactions are attempted to be documented after the fact.

4. Failing to Understand Your Cap Table

Many investors end up walking away from a deal because of issues associated with the company’s capitalization table and/or a fundamental misunderstanding surrounding the valuation they believed was being negotiated. You may not be a “math person” as a founder, but you need to fundamentally understand your cap table. Investors expect to see your company presented in a certain way, and they don’t like surprises.

Cap-table issues occur when equity transactions are offered, discussed and/or documented without precision. For instance, you tell a programmer that, in exchange for reducing their hourly rates, you will issue them 3% of your company. Sounds pretty simple, right? Wrong.

Did you just give the programmer 3% of the amount of stock that is currently outstanding among the founders? Did you give the programmer 3% of the total amount of stock that is outstanding among the founders plus the number of shares the programmer is going to receive as their 3%? In other words, does the programmer have a full 3% after they get their shares, or does the issuance of their own shares dilute their 3%? Furthermore, what about stock options and other promises that may be outstanding? Is the 3% fully diluted, meaning does it contemplate the entire stock-option pool in any other contingent promises that may be out there?

These simple questions illustrate that a simple equity transaction may be more complicated if you don’t fully understand your capitalization structure.

In an investment scenario wherein you negotiate for a particular value of the company—say 20% for a $2 million investment—what have you actually agreed to? On the surface, it seems like you agreed to an $8 million pre-money valuation, which, when combined with the investment, implies a $10 million post-money valuation. However, what happens if there is a prior convertible note issued? Is that converting into the pre-money valuation or post-money valuation? What happens if other investors join in the investment alongside the investor, so that the total investment is more than $2 million? Is the investor still getting 20% post-money? What about the stock-option pool?

These issues are intended to illustrate the necessity for a founder to fully understand what a cap table is, how it is impacted by every transaction in the company’s equity (including transactions in convertible or derivative instruments like convertible notes and stock options) and to have clarity in the negotiation process.

5. Raising Seed Capital Under Egregious Terms

Many entrepreneurs raise capital under instruments commonly referred to as “convertible notes.” Convertible notes are frequently used as an appropriate way for a company to take in investment without having to deal with valuing the company at a stage of its development where doing so is impossible because of a lack of valuation metrics.

Generally, the parties simply agree that the amount invested will convert into future equity of the company at a valuation negotiated with investors at the time of the more-recent investment, subject to a discount on conversion (typically in the 20% to 25% range) to compensate the early investor for taking the additional risk of investing prior to the evaluation transaction.

While the concept seems simple enough, founders need to keep their eye on a few significant issues. Here are the three big ones.

First, convertible notes will almost always include a “cap” on conversion, so the investor is getting a discount equal to the greater of the negotiated discount, or what it would receive upon a conversion at the cap. There is a legitimate reason for including a cap. The investor is agreeing not to value the company (which would likely result in a much larger equity stake given the relative proportion of the investment to the overall value).

The investor should not therefore be “punished” because the company is able to use that initial investment and bootstrap to a very large pre-money valuation at the time of the investment. Negotiation is often one of the most difficult aspects of raising money through convertible notes, and there should be a reasonable compromise between what would be a very low actual valuation at the time of the convertible note and a meaningful guess as to what a reasonable pre-money valuation might be when the company achieves what it is intending to accomplish with the proceeds of the convertible-note financing.

Second, when the venture capital financing ultimately occurs, the investors will receive what is called a “liquidation preference,” meaning they will have the right to get all of their money out of the company first before any distribution is made to the founders. In most circumstances this is simply a downside protection, which the investor must waive (and take their ownership percentage as opposed to the liquidation preference) in the event the liquidity transaction would return substantially more than the amount of their investment.

This is commonly known as a 1X, non-participating preference. The problem that the convertible note presents is that the investor is getting a discount, perhaps even a substantial discount in the event that the conversion occurs at the cap, which means the investor receives a liquidation preference that is substantially greater than the amount of dollars it actually invested.

For example, if $100,000 is invested in a note with a 25% discount, the investor receives $133,333 in liquidation preference because they are buying each $1 in equity for $0.75 ($100,000/$0.75 = $133,333). In a downside scenario, this adversely impacts the founders’ ability to recover any portion of their own investment. This problem is easily solved if it is specifically addressed in the language of the note that provides for the “discounted” portion of the conversion to be issued as common stock or some other kind of equity that does not include a liquidation preference.

Third, while everyone expects that a convertible note will ultimately convert into equity, it is nonetheless a note that gives creditors remedies to the holder upon maturity. It is not uncommon for a startup to take longer than expected to reach an inflection point, and oftentimes founders find themselves up against a maturing convertible note that gives the investor a great deal of leverage. Consider this factor carefully when entering into the convertible note, and negotiate for enough runway to achieve success.

If you have any questions about starting up a business, please feel free to contact our office.

The 4 Facets of Employee Retention

Great employees are a cornerstone of any successful business, but the benefits of good employees can be amplified for smaller business operations. However, hiring and keeping the best staff possible can be a challenge for small-business owners. Small businesses reported that finding and retaining good talent was their biggest hurdle in a survey conducted by Bank of America in 2013.

Employee retention is an issue that continues long after a new hire’s first day. Here are four crucial aspects to consider about finding and holding onto amazing workers.

Bad Employees Can Damage Company Culture

Studies show that hiring a bad employee can reverberate among the entire staff — one bad employee can lower morale and productivity significantly. The overall costs of an unproductive, disgruntled, or listless worker are difficult to measure, but chief financial officers around the country report how destructive these employees can be. In a 2014 survey of over 2,100 prominent CFOs by professional staffing firm Robert Half, 39 percent of those surveyed claimed lower staff morale was the greatest impact of a bad hiring decision, with another 34 percent complaining of lost productivity. In fact, only a quarter claimed monetary losses were the greatest “cost” of a terrible employee.

There is no way to guarantee every person you hire will turn into an excellent employee, but mastering interviewing techniques and writing effective job postings are key, as is making sure you always check references.

Turnover Costs Real Money

While turnover is extremely high in some sectors (the National Restaurant Association noted that the hospitality industry saw a 66 percent turnover rate in 2014), frequent turnover is an extremely wasteful practice for companies of all sizes. For small businesses, though, the costs are far more obvious. Hiring and training new employees can cost thousands of dollars in time and effort. Companies pay an average of $15,000 to replace an employee making less than $75,000 a year, according to a study published by the policy think tank Center for American Progress. Loss of knowledge is another important factor, especially if the business pays for employees to go to attend expensive training programs, for example.

In addition, calculating the cost of turnover can be important to combat the sunk cost fallacy, a tendency economists claim we have to keep investing in something we’ve spent a lot of time or money on, even if it would be rationally better to stop. While it can be costly to replace an employee, the damage a bad hire can do in the long term could be worse. There are detailed calculators available online that can help you in this decision.

Creative Compensation Keeps You Competitive

In many cases, a giant company can promise a great prospective employee a better salary than a small business. While you might not be able to hand over the same salary offer, creative compensation could convince a candidate to join you. Annual bonuses, for example, could be directly tied to overall business profits, a system that is also a great way to incentivize workers. Small businesses can attract candidates with options like medical benefits, life insurance, and paid leave. Nonmonetary benefits can be attractive, too, like flexible scheduling or telecommuting options. A company’s culture can be incredibly enticing — team movie nights, dinners, or other events could woo a hire away from a less exciting workplace.

Continually developing perks and bonuses helps solidify staff loyalty. Keeping your workforce happy and motivated is an ongoing process.

Employee Retention: More Than a Management Strategy

Creating a positive corporate culture is one of the best ways to retain quality employees. Almost 90 percent of employees believe a distinct workplace culture is essential to business success, according to a survey by financial consultancy Deloitte. Open communication is a fundamental aspect of a healthy culture. Keeping office doors open can be reassuring, for example, and encouraging employee collaboration on varied projects can keep your staff on the same page.

Listening to employees’ ideas and concerns not only increases employee satisfaction, but it can also inspire new practices that could improve your bottom line. You could host company-wide brainstorming events, for example. An employee could pitch an idea that could pivot your entire business.

Because they focus on a specific part of a business every day rather than the overall enterprise, your employees can have insightful thoughts about improving processes, increasing return on investment, eliminating waste, and other money-saving ideas.

If you have any questions about your company HR, please feel free to contact our office.

Accounting 101: Adjusting Journal Entries

Recording transactions in your accounting software isn’t always enough to keep your records accurate. If you use accrual accounting, your accountant must also enter adjusting journal entries to keep your books in compliance. By recording these entries before you generate financial reports, you’ll get a better understanding of your actual revenue, expenses, and financial position.

Accrual Accounting and Adjusting Journal Entries

Under the cash method of accounting, a business records an expense when it pays a bill and revenue when it receives cash. The problem is, the inflow and outflow of cash doesn’t always line up with the actual revenue and expense. Say, for example, a client prepays you for six months’ worth of work. Under cash accounting, revenue will appear artificially high in the first month, then drop to zero for the next five months.

Under accrual accounting, revenues and expenses are booked when the revenues and expenses actually occur instead of when the cash transaction happens. To put these revenues and expenses in the right period, an accountant will book adjusting journal entries. For this example, the accountant would record an equal amount of revenue for each of the six months to reflect that the revenue is earned over the whole period. The actual cash transaction would still be tracked in the statement of cash flows.

Types of Adjusting Entries

Most adjusting entries fall into one of five categories:

01. Accrued expenses are those you’ve accrued but haven’t paid yet. A common accrued expense is a loan interest payment that’s due once a year. Accrued expenses usually appear as accounts payable liabilities.

02. Deferred expenses are expenses you’ve paid but not yet realized the benefit of. If you prepay your insurance a year in advance, for example, that’s a deferred expense. Deferred expenses appear on the balance sheet as assets.

03. Accrued revenues are those on which you’ve earned the revenue but are waiting for the cash payment. These appear as accounts receivable, an asset account.

04. Deferred revenues occur when you’ve been prepaid by a client but you haven’t finished the work yet. This appears on the balance sheet as a liability.

05. Noncash transactions represent expenses and reserves that don’t have a cash effect on your business. Depreciation and allowance for doubtful accounts are two examples of common noncash transactions.

Why and When to Book Adjusting Entries

How often your company books adjusting journal entries depends on your business needs. Once a month, quarterly, twice a year, or once a year may be appropriate intervals. If you intend to use accrual accounting, you absolutely must book these entries before you generate financial statements or lenders or investors.

Ideally, you should book these journal entries before you make any big financial decisions or evaluate your finances. If the entries aren’t booked, it’s easy to forget about obligations and get a skewed picture of your financial position. For example, if you have an annual loan interest payment due in February and no liability is reflected on the books in January, you’re going to overestimate your available cash. Likewise, if you make an annual business insurance payment and it’s not adjusted, you may believe your overall cost of doing business has increased when it hasn’t.

Booking the Journal Entries

Booking adjusting journal entries requires a thorough understanding of financial accounting. If the person who maintains your finances only has a basic understanding of bookkeeping, it’s possible that this person isn’t recording adjusting entries. Full-charge bookkeepers and accountants should be able to record them, though, and a CPA can definitely take care of it.

Adjusting journal entries can get complicated, so you shouldn’t book them yourself unless you’re an accounting expert. Your accountant, however, can set these adjusting journal entries to automatically record on a periodic basis in your accounting software. That way you know that most, if not all, of the necessary adjusting entries are reflected when you run monthly financial reports.

If you have any questions about your business accounting, please feel free to contact our offic.

Refocus your business

Are problems beginning to surface in your business? Have profits been dwindling? Are customers complaining with greater frequency? Are competitors encroaching on your market share? These are warning signs that you’re headed in the wrong direction – and you don’t want to ignore them until it’s too late. Here are suggestions for turning things around.

• Focus on the money-makers. Perhaps your business has developed products your customers aren’t willing to buy. If so, it may make sense to redirect your company’s available resources. Does that mean you should never create new product lines or expand into new markets? No. But new products must eventually improve the bottom line. If they don’t make money within a reasonable time, refocus.
• Establish (or reestablish) your brand. Identify what you do best; then tell everyone. Your goal is to educate customers, vendors, and employees on the reasons why your product or service is better than the competition. Be specific. Of course, to remain credible you must back up your claims, so be realistic as well. Win trust by following through.
• Track results. Once you’re refocused on the money-making segments of your business, keep a close eye on the numbers. Know whether customer complaints are down, cash flow is improving, back orders are declining, and market share is holding steady or increasing. If profits aren’t showing an upward trend, take another look – then adjust and remeasure.

For help getting your business back on track, contact our office. We will be glad to help you out.

Cash Flow: The Pulse of your Business

Cash flow is the lifeblood of any small business. Some business experts even say that a healthy cash flow is more important than your business’s ability to deliver its goods and services! While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, then you’re out of business!

What is Cash Flow?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are calledinflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. It is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

Note: An accountant is the best person to help you learn how your cash flow statement works. A tax professional can prepare your cash flow statement and explain where the numbers come from. If you need help please contact the office.

Cash Flow versus Profit

While they might seem similar, profit, and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.

In theory, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

Analyzing your Cash Flow

The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.

The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.

Some of the more important components to examine are:

• Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.
• Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
• Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy – neither too strict nor too generous – is crucial for a healthy cash flow.
• Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
• Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable at some point in the near future – “near” meaning 30 to 90 days. Without payables and trade credit, you’d have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.

Make sure your business has adequate funds to cover day-to-day expenses.

If you need help analyzing and managing your cash flow more effectively help is just a phone call away.

8 Business Expenses You Can’t Write Off

 

The IRS is fairly generous when it comes to tax deductions for small businesses. As a general rule, a business can write off any ordinary and necessary expense it incurs. There are, however, some notable exceptions to that rule. These eight expenses seem like legitimate deductions — but can be difficult or impossible to write off.

1. Gifts for Customers

Business gifts are deductible — but to a very limited extent. The IRS allows taxpayers to deduct the first $25 worth of gifts to a customer. That means if you give a $25 gift to 10 different customers, you could take a total deduction of $250. But if you give a $250 gift to one client, you could only deduct $25.

2. Business Clothes

Unless it’s a uniform you have to wear for work or a form of protective equipment, clothing or shoes you buy for work aren’t deductible.

3. Commute Costs

If you travel for business using your own vehicle, feel free to deduct the mileage at the IRS standard rate, which is currently 57.5 cents per mile. Your commute to your place of business, however, can’t be deducted. To account for this, you need to subtract the length of your commute if you visit a client site instead of your place of work. For example, say your office is a 10-mile round trip from your house and instead you go straight from your home to a client site for the day. If the client’s location is 30 miles from your house round trip, you can only deduct 20 miles (30 miles minus your usual 10-mile commute).

4. Eating Out

If you take a client out to lunch, you can deduct half of the cost as meals and entertainment expense. However, if it’s just you, or if the lunch has no business connection to it, it’s not deductible.

5. Fines or Penalties

Any fines or penalties levied against you for breaking the law aren’t deductible. That means that you can’t deduct traffic or parking tickets even if you receive them when traveling for business.

6. Life Insurance Premiums

On the whole, any benefit premiums or payments you make on behalf of your employees are deductible, but there’s an exception for life insurance premiums. If you pay the premiums and your business is not the beneficiary of the plan, you can deduct them. But if your business is a beneficiary or receives some sort of indirect benefit if the employee dies, you can’t deduct the premium payments.

7. Political Donations

You can get a write-off if your business donates to a registered 501(c)3 charity. You cannot, however, deduct donations made to a political organization or a political candidate. Any expenses you incur to lobby the government — or pay a group to lobby on your behalf — aren’t deductible, either.

8. Cell Phone Expenses

You use your cell phone for work calls, so the bill is deductible, right? Not necessarily. Thompson Tax and Accounting explains that cell phones are considered to be listed property by the IRS and require some extra legwork to deduct. Phones, along with computers and cars, are items that often have both a business and personal use. You can only write off the business portion of the expense, so you need to calculate what percentage of calls were for business and only deduct that percentage of the expense.

If you have any questions about your business accounting and taxes, please feel free to contact our office.

The Home-Based Business: Basics to Consider

More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs–home-based businesspeople.

And, with technological advances in smartphones, tablets, and iPads as well as a rising demand for “service-oriented” businesses, the opportunities seem to be endless.

Is a Home-Based Business Right for You?

Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for any product or service as you can. Before you invest any time, effort, or money take a few moments to answer the following questions:

• Can you describe in detail the business you plan on establishing?
• What will be your product or service?
• Is there a demand for your product or service?
• Can you identify the target market for your product or service?
• Do you have the talent and expertise needed to compete successfully?

Before you dive head first into a home-based business, it’s essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss, and involves an honest assessment of your own personality, an understanding of what’s involved, and a lot of hard work. You have to be willing to plan ahead and make improvements and adjustments along the way.

While there are no “best” or “right” reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:

• Are you a self-starter?
• Can you stick to business if you’re working at home?
• Do you have the necessary self-discipline to maintain schedules?
• Can you deal with the isolation of working from home?

Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment. If at all possible, you should set up a separate office in your home. You must consider whether your home has space for a business and whether you can successfully run the business from your home.

Compliance with Laws and Regulations

A home-based business is subject to many of the same laws and regulations affecting other businesses and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.

Zoning

Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.

Restrictions on Certain Goods

Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

Registration and Accounting Requirements

You may need the following:

• Work certificate or a license from the state (your business’s name may also need to be registered with the state)
• Sales tax number
• Separate business telephone
• Separate business bank account

If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.

Planning Techniques

Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.

Estimating Start-Up Costs

To estimate your start-up costs include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.

In addition, business experts say you should not expect a profit for the first eight to ten months, so be sure to give yourself enough of a cushion if you need it.

Projecting Operating Expenses

Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don’t forget to include your normal living expenses. Your business must not only meet its own needs, but make sure it meets yours as well.

Projecting Income

It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points, and cash-flow statements. Use your marketing research to estimate initial sales volume.

Determining Cash Flow

Working capital–not profits–pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you’re broke.

Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.

If a home-based business is in your future, then a tax professional can help. Don’t hesitate to contact the office if you need assistance setting up your business or making sure you have the proper documentation in place to satisfy the IRS.

Get to Know the Small Business Health Care Tax Credit

If you are a small employer, you might be eligible for the Small Business Health Care Tax Credit, which can make a difference for your business.   To be eligible for the credit, you must:

• have purchased coverage through the Small Business Health Options Program – also known as the SHOP marketplace
• have fewer than 25 full-time equivalent employees
• pay an average wage of less than $50,000 a year
• pay at least half of employee health insurance premiums

For tax years beginning in 2014:

• The maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
• To be eligible for the credit, you must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program  Marketplace or qualify for an exception to this requirement.
• The credit is available to eligible employers for two consecutive taxable years.   Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.

There is good news for small tax-exempt employers, too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability. Refund payments issued to small tax-exempt employers claiming the refundable portion of credit are subject to sequestration.

Finally, if you can benefit from the credit even if you forgot to claim it on your 2014 tax return; there’s still time to file an amended return. Generally, a claim for refund must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires later. For tax years 2010 through 2013, the maximum credit is 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities.

You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the Instructions for Form 8941. If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don’t ordinarily do so.

If you have any questions about the Small Business Health Care Credit, please feel free to contact our office.

Source: IRS