On-line (Cloud) Computing for Small Business

Posted on by William A Olson, CPA

More and more office applications are moving to cloud from spreadsheets and word processing programs to accounting systems. Some are even free of charge (Google Sheets and Wave Accounting) but others are available for a subscription fee. For the small business owner who wants to be able to access all of their data from anywhere they are on any device they are using, cloud computing is becoming more and more the solution of choice.

If you are interested in learning more about the options available to small businesses, this article from PC Magazine highlights several cloud computing options available.

QuickBooks Online: A review from the CPA Practice Advisor

Posted on by William A Olson, CPA

QuickBooks Online is a product more and more of my clients are using. It’s accounting in the “cloud” which allows you to access your accounting records from anywhere you can access the internet. You can give your accountant access to view your file so that there’s a greater opportunity to review your books mid-year.

Here’s the review.

Year End Checklist for businesses

Posted on by William A Olson, CPA

Closing Your Books

As you are cleaning up your accounting records for year-end, here are some steps you can take now to make tax-time easier:

  • Verify that you have W-9 forms for each of your independent contractors or at least have their Tax Identification Number on file.  You will need this information in order to prepare 1099 forms in January. Going forward, it’s a good practice to obtain a completed W-9 form from each new vendor before you pay them.
  • Review your Accounts Receivable.  Are all of them collectible?  If you have any bona fide bad debts on your hands, it is time to write them off before year-end. You should also review your receivables to reconcile them against your customer accounts, confirming the balance of each.
  • Review your Accounts Payable. Wherever possible, you should reconcile your vendor accounts against a statement from that vendor.
  • Reconcile all of your bank accounts using the year-end bank statements. When reconciling your bank account, be careful to review any “Uncleared” transactions, as they may be duplicate entries, checks that were lost in the mail, or simply entries that should have been deleted.
  • Reconcile all of your credit card accounts, lines of credit and outstanding loans.
  • If you carry inventory, it’s time to do a physical count of your inventory and reconcile it against the inventory reported on your balance sheet. Take this opportunity to adjust your inventory for shrinkage, spoilage, or obsolescence.
  • Make a list of all new equipment and other fixed assets acquired during the year, including the purchase date, amount and description.  If you’ve disposed of any old equipment, whether by selling it or by putting it in the dumpster out back, make a note of that, too.
  • Review your payroll liability balances (941, Michigan Withholding, unemployment, etc.) and adjust if necessary. Also double-check that all payroll tax forms have been filed as necessary.
  • Similarly, review your sales tax liability balance and confirm that your sales tax filings are up-to-date.
  • For paper records, prepare to archive any records that you need to retain. For any records considered vital, make a copy that can be kept off-site.
  • Finally, make a backup of your QuickBooks file or accounting records file to be kept off-site.

W-2s and 1099s

1. If you have employees, you must send W-2s to your employees by January 31st.

2. If you make payments to non-corporate taxpayers in excess of $600 for services or rent, you must file form 1099 to your subcontractors and/or landlord. If you have not already obtained the tax ID of the subcontractor or landlord, use form W-9. 1099s are also due to the recipients on January 31st.

If you would like me to fill out your W-2s or 1099s, please contact me with the appropriate information. If I have already been preparing your payroll and payroll tax returns, I will automatically prepare your W-2s, but will most likely need the information to prepare any 1099s you are required to issue.

Deducting business expenses… what is deductible?

Posted on by William A Olson, CPA

Deducting Business Expenses
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

It is important to separate business expenses from the following expenses:

  • The expenses used to figure the cost of goods sold,
  • Capital Expenses, and
  • Personal Expenses.

Cost of Goods Sold

If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold.

  • The cost of products or raw materials, including freight
  • Storage
  • Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
  • Factory overhead

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

For additional information, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.

  • Business start-up cost (See the note below)
  • Business assets
  • Improvements

Note: You can elect to deduct or amortize certain business start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses.

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.

Business Use of Your Home

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Home Office Deduction and Publication 587, Business Use of Your Home, for more information.

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.

Other Types of Business Expenses

  • Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
  • Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ retirement.
  • Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
  • Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
  • Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

This list is not all inclusive of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses.

Why to keep good records… the IRS’s answer

Posted on by William A Olson, CPA

Everyone in business must keep records.  Keeping good records is very important to your business.  Good records will help you do the following:

  • Monitor the progress of your business
  • Prepare your financial statements
  • Identify source of receipts
  • Keep track of deductible expenses
  • Prepare your tax returns
  • Support items reported on tax returns

Monitor the progress of your business
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make.  Good records can increase the likelihood of business success.

Prepare your financial statements
You need good records to prepare accurate financial statements.  These include income (profit and loss) statements and balance sheets.  These statements can help you in dealing with your bank or creditors and help you manage your business.

  • An income statement shows the income and expenses of the business for a given period of time.
  • A balance sheet shows the assets, liabilities, and your equity in the business on a given date.

Identify source of receipts
You will receive money or property from many sources.  Your records can identify the source of your receipts.  You need this information to separate business from nonbusiness receipts and taxable from nontaxable income.

Keep track of deductible expenses
You may forget expenses when you prepare your tax return, unless you record them when they occur.

Prepare your tax return
You need good records to prepare your tax returns.  These records must support the income, expenses, and credits you report.  Generally, these are the same records you use to monitor your business and prepare your financial statement.

Support items reported on tax returns
You must keep your business records available at all times for inspection by the IRS.  If the IRS examines any of your tax returns, you may be asked to explain the items reported.  A complete set of records will speed up the examination.

Here’s the link to the IRS site… Why to keep good records.

11 Tax Audit Red Flags

Posted on by William A Olson, CPA

According to CNN Money, the following are 11 tax audit red flags to avoid:

  1. You have a sketchy tax preparer. Regardless of what your preparer may tell you, the taxpayer is legally responsible for for all the information on their return. In addition, paid tax preparers are all required to have a Preparer Tax Identification Number (PTIN) so customers can verify that they are legitimate. Make sure this number is listed on your return as well as verifying all the information being submitted.
  2. You make stupid mistakes. Whether you accidentally omitted information or you slipped up when doing subtraction, making errors on your tax return will cause the IRS to take a second look.
  3. You have a big mouth. Beware of trying to cheat on your taxes.  The IRS offers whistleblowers a reward of up to 30% of any additional tax or penalties it collects from tax cheaters. With information widely available and verifiable on the internet and social media, any suspect activities can now be easily uncovered.
  4. You’re extremely charitable. When giving small items to Goodwill or thrift stores, report the estimated resale value, not the original value. And make sure you keep track of when donations are made and hold on to receipts. It also doesn’t hurt to take photos of the donated items for your records. Be realistic on the value of the items and don’t over-inflate the worth of donations.
  5. You didn’t file your taxes. If you’re required to file a return and you don’t, the IRS will hunt you down.
  6. You own a business. The IRS tends to look extra closely at taxpayers reporting businesses on Schedule C forms because there’s more room for fudging. Make sure your records are up-to-date and organized. You may also want to think about incorporation for your business instead of filing as a sole proprietorship.
  7. You’ve been audited before. If you have been audited once, your chances are much higher of being audited again. Better to play it extremely safe for the first three years following an audit since the IRS will be monitoring you extra during this period.
  8. You have a home office. Deducting a home office can always be a red flag, because many taxpayers consider any part of the house where they do work to be an office — even if they do other things, like watch TV or cook, in that same area. To qualify for a home office deduction, you must use the office exclusively for work and it must be your primary place of business — not one of several offices. If this is the case, make sure you document expenses like housekeeping, alarm systems and other items you plan to claim — down to the share of utilities you use in just the office itself — in case the IRS decides to check it out.
  9. You’re rich. Being rich isn’t always a good thing. Your chances of being audited increase dramatically the more income you report. The more income you have, the more important it is to make sure you have a qualified tax professional handling your return.
  10. You have foreign assets. Foreign bank accounts have been a huge focus for the IRS in recent years. In an effort to reel in taxpayers with illegal overseas accounts, the agency has launched initiatives that waive certain penalties for taxpayers who come clean. This year, the IRS introduced a program that gives taxpayers a reduction in penalties — and no jail time — if they fess up to any undisclosed overseas accounts for an indefinite window of time.
  11. You guess on investments. The IRS is now getting data directly from brokers. If the information on your return doesn’t match, there will be an issue. Be sure to report your exact purchase dates and prices.

Business Vehicle Deduction Reminders

Posted on by William A Olson, CPA

From time to time, it’s nice to recap IRS requirements and ensure our record keeping methods are up to date in the event of IRS review. One of the areas often looked at by the IRS is the deduction of business related car and truck expenses. In order to deduct car and truck expenses, the IRS states “a taxpayer must have ordinary and necessary costs related to one or more of the following”:

  • Traveling from one work location to another within the taxpayer’s tax home area. (Generally, the tax home is the entire city or general area where the taxpayer’s main place of business is located, regardless of where he or she resides.)
  • Visiting customers.
  • Attending a business meeting away from the regular workplace.
  • Getting from home to a temporary workplace when the taxpayer has one or more regular places of work. (These temporary workplaces can be either within or outside taxpayer’s tax home area.)

It’s important to remember that expenses related to travel between a person’s home and regular place of work are commuting expenses and not deductible.

Once you have determined whether or not your auto expenses are business related, you have two options for determining your allowable business deduction: Standard Mileage Rate or Actual Expenses.

Standard Mileage Rate

The standard mileage rate can be used in place of actual expenses. The standard mileage rate is adjusted annually by the IRS to reflect changes in the cost of operating a vehicle. If a taxpayer wishes to use the standard mileage rate for a leased vehicle, it must be used for the entire lease period. In other words, a taxpayer must use the standard mileage rate for the first year a vehicle is available for business use in order to use the standard mileage rate in subsequent years.

Record keeping note – To claim the standard mileage rate, appropriate records would include documentation identifying the vehicle and proving ownership or a lease and a daily log showing miles traveled, destination and business purpose.

Actual Expenses

Actual car or truck expenses include:

  • Depreciation
  • Lease payments
  • Registration fees
  • Licenses
  • Gas
  • Insurance
  • Repairs
  • Oil
  • Garage rent
  • Tires
  • Tolls
  • Parking fees

If the vehicle is not used 100% for business use, then the total expenses must be prorated between business and personal.

Record keeping note – For actual expenses, a mileage log helps establish business use percentage. Taxpayers should also retain receipts, invoices and other documentation to show cost and establish the identity of the vehicle for which the expense was incurred. For depreciation purposes they need to show the original cost of the vehicle and any improvements as well as the date it was placed in service.

The data for this article and more detailed information can be found at the IRS website.

Start Getting Your 2013 Tax Return in Shape

Posted on by William A Olson, CPA

“Procrastination is like a credit card: it’s a lot of fun until you get the bill.”
~ Christopher Parker

We may have barely made it past the 2011 filing deadline, but taxpayers should already be doing a few quick checks to make sure their current year financial information is in order. A little bit of planning and organization now can help prevent headaches, not to mention saving valuable time and money in 2013. Here are a few tips from the IRS on things taxpayers can do to be proactive:

  1. Adjust your withholding Why wait another year for a big refund? Now is a good time to review your withholding and make adjustments for next year, especially if you’d prefer more money in each paycheck this year. If you owed at tax time, perhaps you’d like next year’s tax payment to be smaller. Use IRS’s Withholding Calculator at www.irs.gov or Publication 919, How Do I Adjust My Tax Withholding?
  2. Store your return in a safe place Put your 2011 tax return and supporting documents somewhere secure so you’ll know exactly where to find them if you receive an IRS notice and need to refer to your return. If it is easy to find, you can also use it as a helpful guide for next year’s return.
  3. Organize your recordkeeping Establish a central location where everyone in your household can put tax-related records all year long. Anything from a shoebox to a file cabinet works. Just be consistent to avoid a scramble for misplaced mileage logs or charity receipts come tax time.
  4. Review your paycheck Make sure your employer is properly withholding and reporting retirement account contributions, health insurance payments, charitable payroll deductions and other items. These payroll adjustments can make a big difference on your bottom line. Fixing an error in your paycheck now gets you back on track before it becomes a huge hassle.
  5. Shop for a tax professional early If you use a tax professional to help you strategize, plan and make financial decisions throughout the year, then search now. You’ll have more time when you’re not up against a deadline or anxious for your refund. Choose a tax professional wisely. You are ultimately responsible for the accuracy of your own return regardless of who prepares it. Find tips for choosing a preparer at www.irs.gov.
  6. Prepare to itemize deductions If your expenses typically fall just below the amount to make itemizing advantageous, a bit of planning to bundle deductions into 2012 may pay off. An early or extra mortgage payment, pre-deadline property tax payments, planned donations or strategically paid medical bills could equal some tax savings. See the Schedule A instructions for expenses you can deduct if you’re itemizing and then prepare an approach that works best for you.
  7. Strategize tuition payments The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires. For more information, see IRS Publication 970, Tax Benefits for Education.
  8. Keep up with changes Find out about tax law changes, helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through www.irs.gov or IRS2Go, the mobile app from the IRS. The IRS issues tips regularly during summer and tax season. Special Edition tips are sent periodically with other timely updates.

Tips listed are from the IRS Special Edition Tax Tip 2012-07, April 30, 2012.

Year End Checklist for Closing Your Books

Posted on by William A Olson, CPA

As a business owner, it’s imperative to maintain accurate accounting records in order to substantiate all the items of income and expense on your tax return. A vital piece of the accounting process is the year end (or month end) closing process. Here’s a quick checklist for closing your accounting records at the end of the year:

1. Verify that you have W-9 forms for each of your independent contractors or at least have their Tax Identification Number on file. You will need this information in order to prepare 1099 forms in January. Going forward, it’s a good practice to obtain a completed W-9 form from each new vendor before you pay them. Here’s a link to form W-9: http://www.irs.gov/pub/irs-pdf/fw9.pdf

2. Review your Accounts Receivable. Are all of them collectible? If you have any bona fide bad debts on your hands, it is time to write them off before year-end. You should also review your receivables to reconcile them against your customer accounts, confirming the balance of each.

3. Review your Accounts Payable. Wherever possible, you should reconcile your vendor accounts against a statement from that vendor.

4. Reconcile all of your bank accounts using the year-end bank statements. When reconciling your bank account, be careful to review any “Uncleared” transactions, as they may be duplicate entries, checks that were lost in the mail, or simply entries that should have been deleted.

5. Reconcile all of your credit card accounts, lines of credit and outstanding loans.

6. If you carry inventory, it’s time to do a physical count of your inventory and reconcile it against the inventory reported on your balance sheet. Take this opportunity to adjust your inventory for shrinkage, spoilage, or obsolescence.

7. Make a list of all new equipment and other fixed assets acquired during the year, including the purchase date, amount and description. If you’ve disposed of any old equipment, whether by selling it or by putting it in the dumpster out back, make a note of that, too.

8. Review your payroll liability balances (941, Michigan Withholding, unemployment, etc.) and adjust if necessary. Also double-check that all payroll tax forms have been filed as necessary. Similarly, review your sales tax liability balance and confirm that your sales tax filings are up-to-date.

9. For paper records, prepare to archive any records that you need to retain. For any records considered vital, make a copy that can be kept off-site.

10. Finally, make a backup of your QuickBooks file or accounting records file to be kept off-site (if possible).