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The Top 7 Tips I Learned in my 1st Year as a Small Business Owner
This past Halloween marked the anniversary of my firm’s first full-year in business. A year later, I’m happy to say that starting my own business was one of the best decisions I have ever made! I have been able to help more people and small businesses than I could have ever imagined. Amidst the fun and excitement there have been some trying times and I wanted to share the top lessons I learned after running my business for a full year.
#1 Don’t be afraid to ask questions (or for help)
Starting a business is intimidating, especially if you do it by yourself. Be sure you ask as many questions as you feel necessary to figure things out. Seek out a mentor that you can run ideas past, and call on when faced with uncertainty or new challenges. You should also consider creating partnerships with your vendors so you can reach them easier if you run into an issue with a product or service. Having some humility and accepting that you do not know everything will help you find your way faster and make you a better business person in the long run.
#2 Be persistent & stay positive
You will be faced with some trying days, especially in the beginning. I was constantly told by peers and seasoned pros in my field that it would take three years for me to build a sustainable business that I could confidently rely upon for income. It hasn’t been three years but I feel like I’m well ahead of schedule. Even if you strike gold in the first few months of operation you need to remain persistent to bring in new business and stay positive when setbacks arise or business is slow. Think of successfully running a business as being the last man standing and you’ll do just fine.
#3 You can’t do everything yourself
Take it from a guy who has written about delegating tasks and responsibilities over and over again. Unless you are a freelancer, or have an ultra-rare lucrative passive income stream, you really can’t do everything by yourself. Consider hiring contractors that can help you get through tough projects or assist with administrative work so you don’t find yourself working 80 hour work weeks, missing important deadlines, or compromising on the quality of your goods or services. Businesses grow by scaling, and hiring people is one of the most common ways to do just that.
#4 If it’s not broke, don’t fix it…
As your business grows and you progress in your journey, you’ll be tempted to try new things or sell new products and services. Some of those that work will become cornerstones to your business. Eventually, you may be tempted to make changes (probably several times). My advice here is that if something works, then let it be. There is no point in disrupting a great marketing plan, a steadily selling product or service, or highly engaging customer-service experience. Even if everyone else is jumping into something else, do so with caution until you know a change is necessary.
#5 …but if it doesn’t work, adapt to change
All that being said, if something isn’t working, scrap it. This includes your business altogether. Time and money are too precious in the early years of your business to let things drag on. If you implement an idea then give it a pre-determined amount of time and measure the performance. If it does well then keep it, but if it’s flat or faltering then end it and move on to something else. Think about it, if an idea isn’t taking off and you’re investing time and money into it you might be better off doing nothing at all. Even if the measurable results show some success, if it’s not to the extent you desired it may not be worth all the effort. Be open to change and adapt when you feel the circumstances are right.
#6 Read & listen to others
Starting and running a new small business is hard but finding inspiration and motivation can be harder. Read a book from time to time and even consider listening to podcasts or attending seminars. Some of my best ideas from this past year came from a seminar I attended. I realized some obvious things I should have been doing but it took getting into a room of my peers and having it choked down my throat for a full day to take action. I also picked up some new tricks from that seminar which offered me a little competitive edge. Like me, you might just stumble upon a nugget of information your competition has never thought of that could benefit you immensely.
#7 Pay your taxes!
Last but not least, pay your taxes! Business taxes can be extremely complicated to understand and first year business owners commonly fail to seek out the proper knowledge. Not because they are lazy or don’t want to, but because they don’t know they should have done so until it is too late. In your first year invest in a great accountant that will take the time to guide you through small business ownership. Their service won’t be free but I promise you that the mistakes you will never make because of their guidance will more than pay for their fees.
There you have it, my top 7 tips from my first year running my business. I hope you found them insightful. Be sure to follow my Firm on social media for more posts like this.
Are you getting the most from your accountant? The top 6 services that bad accountants fail to deliver to small business clients from day one
Since starting my firm almost a year ago I have had the opportunity to meet and work with so many amazing small business owners. Helping people achieve their goals and live out their dreams is one of the best parts about what I do. To help me help others I have created a routine series of questions I ask new small business clients when interviewing them. Among my questionnaire I specifically ask what they like and dislike about their current accountant (if they have one) or what they hope to achieve by hiring an accountant to help them on a monthly basis. For the purposes of this article, I’m going to use the term accountant in reference to a bookkeeper, degreed accountant, tax preparer, or CPA. Although the term is used interchangeably among most people in business, it’s important to note that each title brings a different level of experience and caliber of service to the table. In my opinion, all accountants should be versed in everything from taxes to bookkeeping, and be able to provide general advice on these subjects or point people in the right direction. Unfortunately, that’s not always the case. Below are the top 6 things your accountant should be doing to help you to grow your small business.
#1 Connecting Throughout the Year
This is the top complaint I hear from new clients. “My accountant never calls me” or “I only hear from my accountant once per year”. For all my peers in the industry, this just simply won’t do anymore. Clients deserve and expect to hear from their accountant more than one time per year. If you have retained an individual or firm to work with you throughout the year, they should be reaching out to you regularly to check in and see how business is going and offering to help however they can. They should also encourage an “open door” policy where you can reach out with “quick questions” without fear of being billed for a 10 minute conversation or simple e-mail reply. Be mindful not to overstep your contractual terms with whoever you work with and expect to be billed for additional services that may fall outside of what you are paying for. If you are unsure if what you need will be additional then try reading through your contract or asking your accountant if what you need is already billed in your current service plan.
#2 Asking Questions
It may seem silly but your accountant should be asking questions of you each time you interact. The questions should be probing for information so that your accountant may advise you to better operate your business. If all they are doing is putting your books together each month and collecting a fee then you need to seriously consider if you are working with the best person for the job. A strong partner will comment on results and ask clients their motivations behind decisions as well as challenge them to set goals to hold them accountable for results. Even having the ability to reach out to your accountant from time to time (see #1 above) is helpful to keep you on track and your accountant in the know for big decisions.
#3 Proper Accounting
Small business owners typically hire an accountant because they don’t trust themselves to keep up with their books or don’t want to do the books themselves anymore. Most business owners interview a few candidates and assume that because they have a degree or license they know exactly what they are doing. Based on some of the work I have seen from other “professionals”, I can personally attest that not everyone may know what they are doing. Despite hiring someone to do the books, business owners need to remain actively engaged in reviewing their financial information each month and asking for clarification when and where necessary. Some key indicators that business owners should review in their accounting software include:
- Excessive non-accrual adjusting entries – this can be an indicator of poor training or misunderstanding of accounting principles or accounting software platforms
- Unreconciled accounts – this can lead to incorrect information in the general ledger causing inaccurate accounting information and ultimately inaccurate tax reporting
- Negative general ledger account balances – this is usually indicative of an inaccurate account balance and can be caused by a poor understanding of accounting principles, and again, result in inaccurate tax and accounting reporting
If you find that even one of these key indicators are triggered consistently without a reasonable explanation from your accountant then you should be concerned. I would recommend you have your accountant review your books and make necessary corrections or start searching for a replacement ASAP!
#4 Educating You (the Client)
Educating clients is by far the one thing I enjoy most about what I do. It allows me to strengthen the trust clients have in me while also helping them understand the “why” behind the decisions they are encouraged to make. There is nothing more rewarding than when a client has that light bulb moment of clarity and it all just clicks for them. Many accountants are trained with a “one size fits all” mentality but just because something works for the majority of clients that doesn’t mean it is the best decision for you. Your accountant should be taking time to walk you through the “why” behind their recommendations. If yours is not willing to give you that courtesy then you should evaluate how solid your relationship is and consider moving on to someone who is more patient, able, and willing to help you.
#5 Understanding of Tax
Did you know that not all accountants prepare tax returns? In fact, many prefer not to. That doesn’t absolve them from understanding the tax implications of making certain decisions. If you have a bookkeeper who does your books and a CPA that prepares your taxes then your bookkeeper should be able to follow your CPA’s recommendations. Both parties should work directly with one another to ensure the books are prepared correctly. If your bookkeeper falls short of understanding even the most basic tax elections and strategies (including certain safe-harbor elections) then you may want to ask them if they plan to learn tax rules or simply find a more informed bookkeeper. You might find that you can get your books and tax work done for the same the same or less fees if you’re diligent in recruiting the right firm.
#6 Keeping up with Current Trends & Technologies
Technology is revolutionizing the accounting industry from top to bottom. Your accountant should be keeping up with current trends and new technologies that they can learn and recommend to make your life easier and ultimately more profitable. If your accountant is constantly focused on “paper-based” strategies or defaults to the SALY “same-as-last-year” mentality then it may be worth interviewing someone new. Progressive accountants are willing to coach clients into adopting new technologies and turn them on to leading trends relevant to their industry. Automation and mechanization will become paramount to success in the future and you want to be on the front of the wave rather than playing catch-up after they become necessary tools in business ownership.
In a world of options you no longer need to settle for the same rinse and repeat mentality that so many accountants love. You’re likely paying a considerable fee to have your accounting work done and nothing drives me crazier than when a new client comes along and I have to fix years of poor work for high fees. If, however, you find that you love your accountant and you have an amazing relationship with them, then there is no need to change that. Ideally you will develop a longer lasting relationship rather than changing firms every so often just to freshen things up.
Feel free to comment below or reach out directly to me via e-mail at jared@eliseocpa.com. You can also follow the firm on social media for future posts like this one!
When Reinvesting Profits in Your Business May Still be Taxable
Over the summer I have had several consultations with small business clients and a constant theme that I have come across is that these small business owners have been “reinvesting” their profits into their businesses. I thought it was time to dispel the “reinvestment” mantra. Whatever your passion or business pursuit, you’re likely going to want to grow your business as big as possible, but part of being a small business owners is knowing when you're investing and when you're spending. This week I’m going to attempt to break down the difference between an investment in a business and a straight-up expense. Note for the purposes of this blog, I am specifically excluding the rules related to C corporations, and will focus only on pass-through entities.
What is an Investment?
First, let’s talk about making the initial investment. To do this we’ll use an example. I’m going to assume that my fictitious entity is a newly minted consulting firm known as ConsultCo, LLC “CC”. It doesn’t really matter what kind of consulting services CC provides, just that it is taxed like every other disregarded LLC. The owner decides on day one that she wants to invest $10,000 into CC. So let’s break that $10k investment down a little further. If all she did was deposit the funds into the business’s checking account, then she would have done nothing more than make an investment in her business. Just because she opened a business and transferred her personal funds into a business bank account doesn’t mean that she gets to deduct that amount on her tax return. In fact, in this very simple example, there is no taxable event.
What is an Expense?
Every business has typical operating costs. Expenses for everything from postage & shipping, to business meals, are deductible. The list of deductible items is extensive so I won’t go into much detail but qualified expenses are truly tax-deductible items. Businesses usually also have start-up costs associated with forming the entity, which can be deducted in full (up to $5,000); after that the excess is capitalized over 15 years. But what about when the company starts gaining traction and the owner decides to “reinvest” the profits, how does that work
Reinvesting Profits
To understand how reinvestment works we have to understand a little more about how the math works. It's also important to understand that cash usually must change hands for a taxable event to occur. This is key. Even if a business owner has future plans for that cash, there typically has to be some movement of money to receive any tax benefit.
So let's work with another example. If the entity above, CC, provides services and earns $1,000 in consulting fees, and immediately uses those funds to purchase a new computer, then the profits have truly been reinvested. In this example, CC exchanged cash for an asset, and with the proper guidance on how to navigate her tax return efficiently, the owner can make that asset purchases fully deductible at the time of purchase. But if CC instead takes that money and decides to put it in the business bank account for future use, well then she has taxable income. You see, the profits were not actually used for anything else, but were instead set aside for future-use. In this case, the business owner would actually have to pay income taxes on the amount put in reserve. Even if the business owner used profits to purchase assets and not elect to fully deduct them at the time of purchase, that event would also likely create taxable income.
When it comes to taxes, it’s usually all about the cash…
Investment vs. Expense
Some owners find themselves continually feeding funds into their business accounts to keep their business afloat. In theory, as they do this, they should be incurring expenses, or at the very least purchasing business assets, both of which are deductible. But what about when the business becomes profitable, and the owner decides to withdraw cash? This is where it becomes important to track equity contributions and withdrawals, as well as revenues and expenses. It is only with this information that an accountant or CPA would be able to successfully determine to what extent there is truly net income vs. withdrawals and how much of each is taxable. In the majority of pass-through entities this irrelevant because all profits are taxable whether or not they remain in the business. But when it comes to tracking cash-flow (the only thing that really matters), a business owner will want to know how much out-of-pocket cash has gone into their operations and how much is coming out (before and after tax).
I hope you found this brief overview insightful. It’s great to reinvest your profits into your business but keep in mind that your net income is still taxable and setting enough cash aside to cover your year-end tax liability is critical. Just because you are leaving some money in the business does not mean you won’t have to pay taxes on the business net income so be mindful when planning your quarterly tax bills.
Have a question or comment? Feel free to post it below, I’d love to hear from you!
Is Your Small Business Failing on its Sales Tax Obligations?
This is a question I have been asked almost daily lately. Whether it’s a new business owner approaching me, or owners of existing businesses, I am regularly asked the simple, but sometimes complicated question, “should my business be collecting sales tax”? It may seem simple to answer, but in reality, there is no hard and fast answer anymore. Many factors dictate whether a business is required to collect. In this week’s post I’ll do my best to walk business owners through their responsibility and requirements when it comes to sales tax.
But first, a note to readers. Every state and local jurisdiction has different rules regarding sales tax. Rules can differ from amount to collect to how often a business owner must remit payment. I can’t stress enough the importance of consulting with a local expert or the taxing authorities directly for more information on requirements specific to where your business operates.
What is Sales Tax and Who Sets the Rates?
If you have ever bought anything you know the advertised price and the price you pay are never the same. The difference is most likely due to sales tax. Sales tax is considered a consumption based tax and is only imposed when goods are purchased by the end user. Taxing authorities often impose sales tax as a way to finance various projects such as public use facilities (think of public hospitals) or to cover operating costs of state and local governments as well as public services such as emergency services. In some cases, these taxes may also be used to expand roadways and public use streets. These are just a few examples of where sales tax revenues may be used. The tax rate itself is typically a combination of a state base rate plus a county rate, which may vary from county to county. The rates are consistent with the budgets established to meet the needs of the public
Who Must Pay Sales Tax?
Who pays sales tax depends primarily on the purchaser’s intent of the goods being purchased. In most cases, the end user is responsible for paying sales tax. Business-to-business (B2B) transactions are more commonly sales tax exempt because businesses may or may not be the end user of a good. A business that is not the end user and is not responsible for paying sales tax may present a sales tax exemption certificate, a state provided certificate basically stating to the seller that they will not being using the goods, but instead selling them back to someone else who may be the end user.
Who Must Collect Sales Tax?
For every payer of sales tax there is a collector and the collection responsibility falls on business owners. If end users are required to pay sales tax, then business that sell to consumers (B2C) must collect sales tax. This seems pretty straight forward when you think about it but when we start to dissect what products and transactions are subject to sales tax it can become complicated. For example, in Georgia, sales tax is not only collected on the sales of most goods, but is also collected on some labor performed. This recently enacted legislation has been a struggle for business owners to grasp given the unique nature of imposing sales tax on a service. Again, every state is different but it remains the responsibility of every business owner to determine which items and transactions are taxable and which are not. Business owners should also keep clear documentation for tax collected and not collected in case of an audit.
How Does Sales Tax Collection Work?
Once a business has successfully established itself as a legal operating entity and has determined it is indeed required to collect and remit sales tax it must first register with the appropriate state(s) for a sales tax withholding ID number. A withholding ID number is typically required in every state that a business has a liability in, although some states participate in the Streamlined Sales and Use Tax Agreement. As for collecting, that's quite simple; as sales are made, the final sales price is marked-up by the combined sales tax rates, which is collected and held by the business owner until they are required to make a payment to the taxing authorities. It’s important to track sales by state, county, and local levels (where applicable) to ensure appropriate allocation when remitting sales tax. Everyone is going to want their fair share.
Something to note here is that sales tax is a liability to every business and should not be deducted as an expense. I see this very often and have spent countless hours educating my clients about the difference between including it on the P&L versus the Balance Sheet. Regardless of where it is reported on the financial statements, the cash received for every sale related to sales tax should not be used by the business for operating purposes. Businesses that use cash from sales taxes they collect tend to find themselves in hot water pretty quickly because they are often short when it comes time to pay the taxing authorities or they become too cash-strapped to run their business. The proper accounting system established from the onset of business will dramatically reduce the likelihood of this from happening.
How Often Must a Business Make Sales Tax Payments?
How often a business is required to pay the taxing authorities is dependent on the rules set by each respective state. In most cases, states set the collection rules so rarely will you find an instance where a county requires monthly payments and the state requires quarterly payments or vice versa. The payment frequency is also usually provided by the state when a business applies for a sales tax withholding ID number. It’s best to follow the instructions provided by the taxing authorities for tax payments, especially if they change. Payments are also usually made to just one party for the full amount via a sales tax return, which breaks-out payments by county and local levels so the taxing authorities know how to allocate the funds.
What Happens If a Business Fails to Collect or Pay?
If a business is required to collect and remit sales tax and fails to do either or both, the business could be in a world of trouble. Messing with state and county sales tax can get a business shut down. State revenue officials can easily come to your place of business and pull your license to operate. No matter who approaches me about this or their opinion on the matter, I always explain that it can single-handedly be what shuts a business down or temporarily halts operations. There is harsher enforcement that may be taken by but this is in the realm of worst case scenarios.
I covered a lot of technical material this week and it's only the tip of the iceberg. Given that this topic that has been red hot in my firm over the past couple of months I felt it was time to spread awareness. Contact me for a consult or follow-up with your state’s revenue department if you’re unsure of whether your business should be collecting and remitting sales tax. Whatever you do, don’t ignore the issue. It’s better to come clean and catch-up than to continue to disregard your responsibility as a business owner.
Have tips on how to ease the burden of collecting or paying sales tax, or maybe a story to share? Leave it in the comments below.
Why You Shouldn't Always DIY
In today’s connected world it’s easier than ever to learn how to do almost anything or “do-it-yourself” (DIY). Sometimes it can be fun and exciting to challenge yourself to do something you couldn't previously do and it is oftentimes quite rewarding when you are successful. But there are things that, despite having a basic or conceptual understanding of, should be left to the professionals. This week I’m writing about why sometimes it makes sense to not DIY. To keep it relevant for readers, I’ll tie my advice back into accounting related areas.
Opportunity Cost
Opportunity cost is best defined by Investopedia as a benefit that a person could have received, but gave up, to take another course of action. For example, if you chose to spend your time doing bookkeeping for your small business then you might find you’re giving up the opportunity to pursue new sales prospects or allow yourself some much needed downtime to recharge. Yes, anyone can teach themselves how to do almost anything, but is your time really worth spent doing everything yourself? Not to mention that we as human beings cannot really master everything and will inevitably encounter something we can’t handle, or will unknowingly do something wrong. In short, is your time really worth doing things you can hire others to do the right way the first time? Sometimes hiring a professional first may be a better use of time in the long-run.
How Much Could It Possibly Save?
Above I mentioned you’ll spend your time in lieu of paying someone to do something for you. But consider this, how much could you possibly save for a certain task? Think of your taxes, if you do them yourself you still have to buy software and then you have to enter the info and follow directions. The Q&A style software packages that are available are not designed to “think” but instead guide you to a reasonable answer. It might tell you that rental property is depreciable and guide you to receive the appropriate deductions, but does it also tell you that by itemizing each rental property asset you can receive a greater tax deduction? Do you see the difference here? In addition, you are the one preparing your taxes which likely takes even the most prepared person a couple of hours. So now not only have you paid for a program to guide you (at best), but you also just spent a couple of hours of your life all to save yourself a couple hundred bucks from a tax preparer. I can promise you this, the best professionals, no matter what you need done, will save you time and money, and will deliver a quality product that a non-professional can't even get close to.
Jack of all Trades, Master of None
You simply cannot be a master of everything in life. Our brains are not wired to retain that much information and I have to imagine someone who is a “know-it-all” probably does not lead a very exciting life and is probably not fun to be around. I have always followed the guidance to do what you love. Pick a few things that really interest you and hone those skills. Get well-trained in them, I mean ridiculously trained, and then help others using those skills. If you have a genuine interest in something, you’re far more likely to excel at it than if you’re learning something out of necessity. For things that you find less interesting, find someone who performs amazingly well at them and bring them on your team to help out. You’ll be happier if you only ever have to do the things you love rather than the things you need to do.
Knowledge, Training, and Experience
Finally, we arrive at the defining trait; experience. Anyone can gain the knowledge of how to do something. Most can even receive some sort of training (formal or informal). But nothing will ever substitute experience. I don’t care if you know exactly how to do your books down to the penny and you’ve seen a hundred Balance Sheets & P&Ls in your time, if you’ve never prepared one or handled a general ledger system, you will mess it up. Even if you ran one successful business 10 years ago your thinking may be so outdated and irrelevant at this point that it doesn’t matter. If you truly want to DIY, consider shadowing a true professional in what it is you want to learn. Offer your time for free for a while in exchange to learn a skill. Most professionals would likely welcome the free labor and be happy to teach someone with a genuine interest to learn what they know. By learning from a master, you will not only save yourself endless hours of learning things the hard way, but you will have less errors in your work, dramatically improving the quality.
I hear it over and over again from my clients that they’ll take care of certain things themselves only to get the unfortunate news from me that things have been prepared or performed incorrectly, or worse, that they’re out of compliance on items. It’s usually only after it’s too late that my clients approach me to clean things up and do the work going forward. My challenge to anyone reading this is to consider that path from day one rather than as a backup plan. Don't leave it to chance that things will be okay. Instead, ensure that you’re receiving the best service and quality of product you can instead of burning yourself out trying to learn something simply to save a few bucks. In the world of business, it only takes one error to set you back all the money you "saved".
I’ll leave you with one final example. This is a real life example of a conversation I had with a client. My client approached me for a tax consult early one year after he received his 1099-MISC from one of his largest clients and explained that he had an LLC setup to be taxed as an S Corporation but the 1099-MISC was written to him personally (it had his name and SSN on it). I explained that since he had personally received payment all year, and the 1099-MISC was addressed to him, that it would unfortunately have to be reported on his personal tax return. I further explained that if he had been set up with his client for them to write checks and issue tax documents to his LLC, that he could have potentially saved thousands of dollars under certain allowable corporate tax deductions. Although we agreed that it would be time-consuming and costly to try to amend and correct everything that had happened, he was able to apply this newly found knowledge to future years. My point here is that if had obtained a tax consult from the beginning, he could have saved himself thousands of dollars from day one.
Any interesting DIY stories or mishaps in your past? Any questions? Comment below and let us know!
How to Handle Tax Notices
Now that summer is officially here taxpayers have likely started receiving notices from the IRS (and states) for regarding issues with their most recent tax year’s filings. Some of these notices include recalculation of tax bills, failure to file (and pay) notices, and even the dreaded audit notice! As alarming as these may seem, and some of them may be, a more common reason a taxpayer receives a notice is a request for additional information. Long story short, most inquiries can be handled easily with a written response to the notifying party through the mail.
What to Do
If you find yourself in a position of having received a notice there are a few things you should do. First off, do not ignore the notice! I can’t stress this enough. As with most things in life, by ignoring the notice, you’re just going to make the matter worse. Even if you don’t think you can resolve the issue on your own, you’re better off hiring a tax professional to act on your behalf. The right individual (or firm) will be able to explain the notice to you and prepare any supporting schedules or correspondence on your behalf. If necessary, you can even complete a Power of Attorney to grant them authority to speak and act on your behalf. If you ignore the notice though, penalties, fines, and interest (as well as levies) can accrue quickly. I have heard several cases recently of garnishments being imposed among taxpayers at both the federal and state levels; all because those taxpayers ignored the notices they received.
Regardless of if you choose to retain someone to help guide you or go it alone, you’ll need to locate the documentation regarding the tax year you received a notice for. Notices typically indicate the year, issue, any recalculations made, and a response due date, as well as directions on how to respond. Make note of the due date since missing it carries its own consequences.
Formally Respond
When reviewing your notice you will be presented with options. You usually have the opportunity to comply (and pay any difference due) or disagree and explain your side. In the event that you find the notice is correct and you owe more in tax, your best course is likely to pay the amount due and move on. If the amount is large and you can’t pay it in one lump sum you should be able to enter into an installment agreement to pay it over time. If you disagree though, then it is worth your time to review your supporting documentation and draft a well-written response stating the facts as you have them and citing why you feel your position is justified. When drafting your response it is best practice to indicate all of the header information from the original notice as reference for the receiving party. Be sure to include your social security number and sign your response. If you are married and filed jointly with your spouse then you should include your spouse’s social security number on the response and have them sign the notice as well. Note that any unsigned written correspondence will not be valid.
Business Tax Notices
If you are a business owner then the scope of notices you might receive is different. In addition to receiving a notice related to income taxes, you may also receive a notice regarding sales taxes or payroll withholding taxes. Most commonly, notices for either of these types of taxes arise out of a failure to file the correct forms. If that is the case, you should file any missing forms and remit the associated taxes immediately. Since sales taxes are controlled by the states, you are playing with fire if you fail to file and pay on time. The states have the authority to close your business until all back taxes have been paid. This is clearly not a problem you want to have. You can treat payroll taxes with the same urgency (if not as a higher priority) because those cases you will likely have the feds and state looking to be paid.
I hope you found this brief read helpful. It’s hard to give specific advice because all notices are different as is every taxpayer's situation. As unexciting of a topic as it is, the information is handy to have nonetheless. Taxpayers should take time to think through their options if they receive a notice, but they certainly should not wait too long to act or ignore them either. If you have questions you should reach out to a professional or contact the notifying party for guidance in resolving the matter. Individuals will find it hard to live their lives if garnishments and levies are imposed upon them, and similarly, business owners can have their operations halted if they do not comply with the notices.
Have a tale to tell? Leave your comments below!
The Standard vs. Actual Deduction Methods (Vehicles)
Every year at tax time self-employed taxpayers are faced with a dilemma; how to deduct their business related vehicle expenses. The IRS allows for a choice between two methods, the standard & actual method. I’m writing to explain the difference and limitations between each method as they relate to business use of personal vehicles.
Vehicle Expenses
As mentioned, the IRS allows for a choice between two methods. The first method, the standard deduction, allows for a set rate per business mile driven of a personal vehicle. For tax year 2016 the rate was $0.54 per business mile driven and for tax year 2017 the rate is $0.535 per business mile driven. These rates change every year but are usually pretty close year-over-year.
Although the rate per mile under the standard method is generous, the rate was established to cover all of the maintenance on a personal vehicle (including but not limited to):
• Fuel
• Oil
• Repairs & maintenance
• Deprecation
• License & registration fees
• Parking fees & tolls*
• Tires
• Insurance
• Vehicle cleaning expenses
• Towing charges (for repairs only)
• Auto club dues / roadside assistance service fees
• Lease payments
Expenses can add up fast depending on the type of vehicle and how much it is used. For taxpayers that choose the actual method, they would be allowed to deduct the expenses incurred for each of the items above (plus any other vehicle-related expenses that might not be listed). Of course there is limitation to the extent the vehicle is used for business purposes. To easily determine the business-use portion of expenses, a taxpayer should track total miles and business miles driven to create a percentage allocation.
*Note that parking fees & tolls are deductible regardless of method used.
Which Should You Choose?
The majority of taxpayers elect the standard deduction because it is simply easier and cuts down on the amount of recordkeeping. It may not always be the most favorable election though. If you don’t rack up miles throughout the year, drive an expensive vehicle, or drive one that has unusually high maintenance costs, you may benefit more from the actual method.
The only way to know which is more favorable is to track both methods each year and do the math. Typically, most taxpayers would find the calculations to be very close to one another. For those circumstances where one significantly outweighs the other, it might be worth changing methods. A pitfall here is that if you elect the actual method in the first year the vehicle is available for business use, then you are permanently locked in until that vehicle is retired. Choose wisely and consider electing the standard method in the first year so you can have the flexibility to switch back and forth between the methods (subject to some limitations).
Recordkeeping Requirements
When choosing the standard method, taxpayers will want to maintain a driving log of business-related miles they drove. This log should include the date, miles driven, the reason for the trip, individuals involved, and starting & ending addresses. Taxpayers can keep a paper written log in their vehicle for easy access and recording or they can create a spreadsheet to track trips. There are also apps such as MileIQ that will track miles automatically. This information will be necessary to accurately calculate business mileage at the end of the year and in case it is ever requested to support a mileage deduction.
If using the actual method, taxpayers should keep receipts for all vehicle expenses. This practice is consistent with that of any other business-related expense and can be tracked on the business’s books the same way. Since the majority of the receipts will be paper copy they can be scanned onto a computer or into the cloud for safe keeping and quick access if they are ever requested. Another idea is to keep them in a folder somewhere in the related vehicle for quick access. This is also beneficial for when the car is sold to prove maintenance history of the vehicle.
Leased Vehicles
A note about leased vehicles. Lease payments can only be deducted when using the actual method. Additionally, if a taxpayer chooses the standard method in the first year of the vehicle’s lease, they are locked into the standard method for the entire life of vehicle’s lease period (including extended terms). The type of vehicle and expected number of miles driven over the life of the lease will play a large part in choosing the most favorable method.
BONUS: Medical & Charitable Service
In addition to the standard mileage rate for business miles, the IRS also allows a standard rate (only) for medical purposes and charitable service. The rates are much lower for each ($0.17 for medical & $0.14 for charity in 2017), but are often overlooked by taxpayers and can add deductions for those that itemize. Note that charitable service includes the miles driven to deliver donated goods or perform services to benefit a 501(c)(3). This is only true if the entire trip is for charitable service only. Any personal stops along the way to or from could disallow the deductible miles in full for that trip.
I hope you enjoyed this write-up on vehicle expenses. They are common deductions that most self-employed taxpayers incur, but are still overlooked. Leave your comments or questions below!
10 Step Guide to Organizing a Business - Part 1
Lately, I have received numerous questions about how to formally organize a business. The inquiries have ranged from what is required to organize, to what products or services people should sell. I can help answer the former but if I had the answer to the latter, then I would be doing that myself :)
To keep this post easier to read I am splitting it into two parts. I did my best to write this in a logical order for first time business owners to better understand, but some may argue that the steps outlined can be performed in a different order. Your order may vary as requirements will differ from county-to-county and state-to-state.
Of course, I want to disclaim up front that I’m not a lawyer and I’m not giving any legal advice here, just basic information on the typical procedures to organize a business entity. You wouldn’t start a crazy diet or exercise routine without seeking medical clearance first, would you? I didn’t think so. Be smart on this matter and seek a licensed professional attorney before starting any business or organization process.
Below are the first 5 steps that any entrepreneur will want to know and understand before starting a business.
#1 Decide what you want to do or sell – Cost $0
This is probably the most critical component of any business. You can’t have a business if you don’t have a product or service to sell. Maybe you are phenomenal at underwater basket weaving and want to sell your baskets online. Or more practically, maybe you’re a killer golfer and want to offer training services. Either way, you need to decide what you want to sell. Every business is unique and will need to follow different rules in order to be compliant and successful.
#2 Pick a business name – Cost $0
This may not seem like a critical step, but in reality it is. A name can carry so much weight with it. It can represent goodwill, present a professional image, or even become so catchy it becomes a household name (think Band-Aid). You can be as creative or generic as you choose. My personal opinion is to keep it simple in the beginning; you can always upgrade or expand in the future. There is a catch here though; the name you choose cannot be used by another entity. I won’t go into too much detail, but clearly you won’t be able to start a company called “Microsoft”, because not only is the name taken, I’m fairly confident it’s a registered trademark. Most states will not let you use a name that has already been taken (at least in that state). Although a name may be available in your home state, if for some reason it is trademarked, you’re likely to receive a letter one day asking you to stop using the name and/or likeness. You can do a more extensive name search nationwide, but that's usually not necessary in your early years.
#3 Choose a structure – Cost varies
Now that you have something to sell, and a business name to go with it, you will want to decide on a business structure. The most common business structures are:
1) Sole Proprietorships
2) Partnerships
3) Corporations
4) S Corporations
5) Limited Liability Company (LLC)
The IRS has done a fantastic job of explaining each different structure so I have provided the respective links for each structure for your reference. The type of business you own and operate will largely help decide what structure makes the most sense for your business. There is no one-size-fits all approach here and you will reap significant reward by consulting with a licensed attorney, as well as a licensed CPA, to discuss the legal & tax benefits and drawbacks to each structure.
Once you have determined your business structure, there will be some administrative paperwork to file. The amount of paperwork mostly depends on the structure you elect. I can’t stress enough the value and benefit of having a legal expert guide you through the process to ensure nothing is missed. Do-it-yourself services such as LegalZoom are perfect for those familiar and comfortable with the process. If this is your first time though, consider the expense of professional help as an investment in your learning and understanding of the business world.
#4 Register your business – Cost varies (usually about $25)
Next you will want to register your business with your local county. You will need to obtain a DBA or “Doing Business As”; aka “Certificate of Assumed Name” here in Georgia. This certificate allows you to legally represent yourself under your business name. It is a fairly simple process, but it differs slightly for every county and state so check with your local authorities regarding what you need to do to satisfy this requirement.
#5 Obtain a federal tax ID # - Cost $0
Are you starting to see the bigger picture yet? You have a product, a name, a corporate structure, you registered with your local authorities, and now, you are finally ready to register with the federal government. Let me be very clear, no matter what, YOU SHOULD OBTAIN A FEDERAL TAX ID # (also known as an EIN). Without this number you will not only potentially be handing out your social security number to everyone you do business with, but you will not be considered anything other than a Sole Proprietor. If you do nothing else, file an SS-4 for an EIN. It’s ridiculously easy and can be done online instantly here.
That’s all I’m sharing this week. Check back next week for the final 5 steps on how to organize a new business!
Did I miss something or ignore a critical step? Or was I immensely helpful and inspiring? Either way, leave your comments and questions below!
5 Mistakes Small Business Owners Make
Happy New Year everyone! I’m sure there are many aspiring entrepreneurs out there looking to start their own business in 2017. To help them get started, I am sharing five of the most common mistakes I have observed small business owners make.
#1 Improperly Organizing Their Business
Every business needs to be legally organized somehow, whether as a sole proprietorship, an LLC, a partnership, or some other way. My advice is to keep it simple, at least in the beginning. Consider what you are going into business to do. Are you a young guy mowing lawns on the side just to make a couple of extra bucks? Or are you a seasoned attorney looking to provide legal advice to clients? Every business is different and therefore would benefit from a different legal structure.
Often times, businesses benefit from keeping things simple in the beginning. Certain structures carry significant administrative requirements which can be time consuming and costly, outweighing the benefits they provide. Instead of picking an overkill option from day one, consider drawing out a one-year, two-year, and three-year plan so you know when it might make sense to have an elaborate business structure. You can always reorganize your business down the road without sacrificing what you have worked so hard to build. Spend the time and money to consult with a trusted attorney to help you evaluate all of your options and make the best decision.
#2 Doing Everything Themselves
All small business owners are guilty of this at some point, me included. They want complete control over everything and do everything themselves because they think no one else can do it as well; but that’s just not true. You should do as much as you can for as long as you can, but once you start to feel the pressure, you should consider hiring someone to help you out. Even using a virtual assistant or part-time administrative assistant can save you stressful hours of work that are not usually related to building your business or making you money. It’s also a wise decision to find a trusted attorney and CPA to assist you with your business, no matter how small your operation is. Face it, you don’t know everything and the more help you can get in the beginning the fewer mistakes you will make in the long-term.
#3 Not Setting Up Accounting From Day One
Not to be biased, but every small business needs an accounting system. Even if it’s just a spreadsheet in Google Sheets, it’s better than nothing at all. Preferably, every small business owner would use an accounting platform like QuickBooks Online or Wave. I commonly find that owners are too busy to even setup accounts with these services, let alone do the work. How can you make informed decisions if you don’t know the financial status of your company? You can’t. You will only get so far before you come to the realization that an accurate accounting of your business’s financial activity is a common theme of successfully run businesses. Do yourself a huge favor and start with an accounting platform from the first day. Spreadsheets are a good Band-Aid, but eventually you will need to upgrade.
#4 Misunderstanding Business Taxes
Business taxes and individual taxes are two different worlds. The rules are often completely different, and the IRS has done a stellar job at preventing taxpayers from being able to abuse the code in either world. There are circumstances where your business taxes may be just an extension of your personal taxes, but when they are not, you must file the appropriate forms on-time. Failing to file, or filing late, can bring very stiff penalties.
Regardless, the results of your business taxes are typically reported on your personal return somehow. If you ignore filing for your business you may find yourself having to amend previously filed individual returns just to report business income. In addition, many business owners get caught up with constantly trying to minimize their tax liability year-after-year and never plan, failing to consider the long-term effects of their decisions.
Questions about depreciating assets in full in their first year, reasonable salaries for the owners, and business tax credits for specific industries are just a few examples of how a tax professional can help you. Doing it yourself may not be the wisest choice and working with the right CPA may seem costly in the beginning, but if they are a true business partner, then the mistakes they prevent you from making will more than make up for their fees and likely save you more in the long run.
#5 Failing to Network/Market Properly
Networking is critical from a business development standpoint. If you fail to network or market your product or service effectively to the right audience, then you’re wasting your time and losing out on precious revenue. Take some time to read up on industry-related marketing strategies and listen to podcasts to gain insight on how you can best package and sell what you offer to the right audience. Learn from those who came before you to save time and money. Reach out to those you follow in your community for business advice. You can have a million dollar idea but if you’re in front of the wrong target audience it’ll never sell well. Remember, you are in business now and at the end of the day that also makes you a salesman. Perfect your pitch and make sure you’re spending the right amount of time with the right people.
I would love to hear what mistakes other business owners have made, or have heard about in the business community. Post your stories in the comments section below!
5 Apps for Entrepreneurs
As an entrepreneur it’s important to run your business cost and time efficiently (work hard not smart). You’re most likely a one-man, or woman, shop, and all business owners starting out know you’ve got better things to do than to pour endless hours into the mundane and administrative tasks of your business. Hiring someone can be expensive and in the beginning unpractical. That’s where apps come in.
Apps can act like micro workers. They can automate portions of your business and pick up the slack where you can’t, or don’t particularly want to. Most apps (and recurring monthly subscriptions) offer a free version or are very inexpensive. Considering the immense work output you gain from using apps, I highly recommend implementing them in your business. Even with the use of multiple apps, you can get all that you need for significantly less than the cost of hiring someone and you will save precious hours each month.
Here is a list of some of my favorite apps:
#1 QuickBooks Online
I use QuickBooks Online (QBO) for all my bookkeeping needs and prefer it among the competition. It handles all of my banking transactions, invoicing, and reporting. QBO can also handle payroll but I have found they are more expensive than other service providers. The mobile app let’s you see your business’s current financial condition and you can take pictures of your receipts and attach them right to the corresponding transaction for sound record keeping. The category recognition is pretty accurate and the reconciliation tool makes reconciling accounts fast and easy. QuickBooks is the most widely used accounting software in the world among small businesses and if you ever need help with it there is an extensive network of ProAdvisors in place to help you (like me). It’s the best you can get and you can’t go wrong.
#2 Google Applications Suite
Anything Google can be considered best-in-class. The Google Suite of Applications is like the lite version of all Microsoft Office applications. I wish I could replace my Microsoft Office software with Google's, but Google isn’t quite there yet. That being said, for any new entrepreneur, the free suite offered by Google is more than plenty. Unless you’re preparing overly complex spreadsheets, or really need to step up your presentations, it should suffice. In addition, Google Drive is the perfect cloud storage solution for all your files and the efficiency of being able to collaborate with others is truly amazing.
#3 Scanning App
I have no specific recommendations but any scanning app that can efficiently scan documents and upload them quickly to your cloud drives is a winner. You could even use the camera app pre-installed on any smartphone and that would be good enough. I use Office Lens, which is free, and scans up to 10 documents at once. I love the quality but it is not the fastest. Scanning apps often crop out background imagery that you don’t need (like the table you scan your documents on) and are typically clearer than the camera apps pre-installed on most smartphones. Whether in the office or on the road, you need a scanning app for efficient paperless document management.
#4 E-Signatures
In today’s technologically driven world we need to be able to get our work done from anywhere. Gone are the days of mailing documents back and forth or e-mailing, printing, signing, scanning, and e-mailing documents back and forth. Consider the use of apps such as Adobe DC or DocHub to get your documents signed (legally binding) fast, easily, and within compliance standards. Professionals all over the world swear by the efficiency you gain from using such platforms and regardless of which one you choose the cost will be well worth it.
#5 Zapier
Last but not least is one of my favorites, Zapier. This app lets you make Zaps. A Zap brings together two or more apps by triggering events. For example, if a client were to upload a file to my cloud directly, then I could setup Zapier to work between my cloud provider and my e-mail provider to send me an e-mail notification that a file had been uploaded. This is a very basic example of what Zapier can do. I have only scratched the surface of what it can do in my own business, but from what I have experienced, I know it can do so much more to keep my business humming along efficiently. I highly recommend looking into this app for anyone seeking to automate parts of their business.
Get Downloading!
This list is certainly not all encompassing, but rather some of the highlights of my favorite and recommended apps for any entrepreneur. Your time is valuable and these apps will help you make the most of it, especially in your early days. Check them all out by clicking on the links throughout the post. Most are available across platforms including iOS, Android, Mac, and PC.
What are some of your favorite apps for productivity and efficiency? I would love to hear them in the comments below!