The Top 7 Tips I Learned in my 1st Year as a Small Business Owner

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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.

When do you need to pay taxes from gambling winnings?

I’m writing this week’s post on a flight to Las Vegas, NV which is also my inspiration for my post. The running joke among family and friends has been that if I win big I’ll have to pay taxes on my winnings. Sadly, they’re right (and I know it) so I’m sharing my knowledge on how I plan to reduce my winnings.

What is considered gambling winnings?

Gambling winnings are any monies earned as a result of wagering in a casino or gambling establishment. Illegally earned money from gambling is also taxable but I’m not going to cover that in this article. Winnings can include money earned as well as the fair market value of prizes such as cars, houses, and trips. You know all the prizes people win on game shows? The fair market value is taxable to each winner.

Let me bring in an example. Let’s say you’re rolling the dice at the hottest craps table on the strip and you’re up big, $10k, those earnings are technically taxable. Most casinos traditionally do not complete issue form W-2G for earnings from table games. What’s better yet is that you can walk away from the table with all of your chips and redeem chips as you wish rather than all at once to prevent the casinos from having to report a large transaction. Remember, despite how you win or how much, it’s all subject to tax.

But let’s say instead you win your money from an electronic game such as a slot machine or keno. Well, then the rules are a little different for reporting purposes.

What is form W-2G?

Typically form W-2G is issued to taxpayers that win any amounts as follows:

1. $600 or more in earnings;
2. $1,200 or more in earnings from bingo or slot machines;
3. $1,500 or more in earnings from keno; OR
4. Any gambling winnings subject to federal income tax withholding.

The last one is where gamblers might get tripped up. You see, casinos have the authority to dictate whether they should issue form W-2G if a patron earns an amount that should have federal income taxes withheld. It’s safe to assume that somewhere around $10k (per transaction) is the limit where a casino will issue a W-2G regardless of how you won your money. However, this is only on redeemed amounts. So if you win $10k at a table, go catch some sleep, and come back and lose back $8k hours later, you’re now only up $2k and would potentially receive a W-2G on that amount only (if at all). If instead you cashed in the $10k first and completed the paperwork necessary to receive a W-2G, and then subsequently lost $8k back to the casino, you’d then receive a W-2G for $10k.

Can I deduct my losses?

Great question! If you find yourself losing your shirt on your next trip out to Sin City then you’re out of luck. You can only deduct gambling losses up to the extent of gambling winnings in the same tax year. Gambling losses are also subject to the miscellaneous itemized deductions limit of 2% of AGI so you may not even receive the full benefit of all of your losses depending on your filing situation. So if we refer back to my earlier examples, in the first instance a W-2G would have been issued for $2k at most which is simple enough to cover taxes on. But in the second example the gambler received a W-2G for $10k with $8k in losses to write-off which will undoubtedly give them less than $8k in a tax deduction because of the 2% of AGI rule.

Expense such as airfare, hotel stays, meals, and transportation cannot be considered “losses” for tax deduction purposes. Only professional gamblers would have the luxury of writing off any of their expenses to generate income as a gambler, and even then, receiving such recognition from the IRS would be a feat in itself. Unless you’re a world famous poker player, there probably isn’t much luck for you.

What records should I keep for my deductions?

In order to deduct any losses you will want to be very detailed in your record-keeping. Unless you religiously use a player’s club card to help track your cash in / cash out, and receive a report from the gaming establishment, it can be very challenging for casinos to accurately monitor cash activity for every player. A handwritten notebook that can be supported by bank statement activity and ATM or withdrawal receipts would be extremely useful for tracking your gambled cash in to deduct losses against any earnings you may have. Remember, just because you don’t receive form W-2G doesn’t mean your earnings aren’t taxable. All gambling winnings should be reported when preparing your taxes.

I hope you found this week’s read interesting. I post about every two weeks so make sure you follow me on social media and share with others!

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Is Your Financial Future at Risk from President Trump’s Latest Tax Proposal?

It’s been about 9 months since President Trump took office and no matter your political opinions and views, I think we can all agree he seems determined to make changes while he’s in office. Whether those are for the better or worse remains a mystery. As of the writing of this post, he’s already attempted to repeal healthcare, and subsequently reform it healthcare, neither of which have had much success. His next target is tax reform, rather, the largest tax reform seen in the United States in about 30 years. If he is successful, this could dramatically change how millions of Americans are taxed each year. It also stresses the importance of tax planning, especially for this year and next year.

Late last year I wrote about Trump’s first tax reform proposal. You can read that here and see how it stacks up against his new plan. Below are the top 10 highlights from his new proposal that are likely to have an impact in some way on every taxpayer.

#1 – Adjust tax brackets (revised from last year’s proposal)

Trump’s latest proposal would collapse the current seven brackets into three. The new tax brackets (slightly higher than last year’s proposal) would be adjusted to 12%, 25%, and 35%. Most married couples filing jointly with income less than $225k would likely remain unaffected, or have a reduced tax bill.

#2 – Increase standard deductions & eliminate personal exemptions (consistent with last year’s proposal)

One of the few items unchanged from last year’s proposal. Trump is proposing to double the standard deduction and eliminate personal exemptions which would likely result in a slight increase in tax deductions for most taxpayers. However, this change could serve as a blow for families of larger sizes since the number of dependents claimed would not necessarily yield any additional tax benefits.

#3 – Eliminate itemized deductions (revised from last year’s proposal)

This is different from last year’s proposal in that Trump previously wanted to cap itemized deductions for single and married filers. The itemized deduction elimination would still allow for taxpayers to itemize deductions for mortgage interest and charitable contributions. However, the changes could have significant repercussions for taxpayers when you take into account #4 below. It may also cause a ripple effect on the economy, for example, the housing market may cool off as many taxpayers would not be likely to itemize their deductions going forward and therefore would have less incentive to buy real estate.

#4 – Eliminate the deduction for state & local taxes (new from last year’s proposal)

An item not noted in Trump’s previous tax reform proposal is the elimination of the state and local tax deduction. Most taxpayers rely on the combination of state & local taxes, real estate taxes, and mortgage interest paid on their home to itemize their deductions. By removing the deduction for state and local taxes, it will become ever challenging for most American households to itemize their deductions going forward. This will make tax planning crucial to ensure that any lost tax benefits can be recovered elsewhere from other available strategies.

#5 – Eliminate the Alternative Minimum Taxes (new from last year’s proposal)

Again, not noted in the previous proposal, but one that I support, eliminating the Alternative Minimum Tax (AMT). This is a separate tax that is assessed when “high income earners” suddenly find themselves deducting a disproportionate amount of items against their income. The AMT kicks in to ensure that taxpayers don’t take advantage of excessive deduction. The problem with AMT is that it went silently by the wayside for years and was not increased to keep in line with inflation and increasing wages. As such, many taxpayers today find that they are subject to AMT and consequently paying more in taxes because of an out-of-date tax law. With itemizing deductions becoming harder to do (under the proposed plan) there will not be much need for the AMT so eliminating it only makes sense.

#6 – Increases the Child Tax Credit (new from last year’s proposal)

Another item not noted in the previous proposal, the child tax credit would actually be increased for taxpayers with children. Unfortunately, that amount has not yet been made clear. However, the phase-out for claiming the credit would be $250k for single filers and $500k for joint filers. These limits are much higher than the current limits of $75k and $110k, respectively.

#7 – Lower the maximum corporate tax rate (revised from last year’s proposal)

This applies only to C Corporations. The previous plan called for a reduction to 15% but the revised rate of 20% is still significantly lower than the current tax rate of 35%.

#8 – Lower the maximum tax rate for small businesses to 25 percent (new from last year’s proposal)

This applies to other business entity structures such as partnerships & S Corporations. Unfortunately, unless a business earns excessive profits, this will not likely have a meaningful impact on most small businesses.

#9 – Allow to fully deduct the cost of depreciable assets (consistent with last year’s proposal)

This is relatively consistent with the previous proposal. Businesses would be allowed to fully deduct depreciable assets in the year of purchase. It’s the equivalent of allowing taxpayers to use IRC Section 179 on everything they buy rather than deducting assets over time. My presumption is also that there would be no recapture rules, but the proposal isn’t clear on the surface about that. Physical structures would be excluded from this change meaning you can’t buy a building or warehouse and take a full deduction in the first year.

#10 - C corporations would no longer be able to deduct interest expense (new from last year’s proposal)

This is not an item that was seen in the previous proposal but it certainly would reduce the number of C Corporations borrowing money to fuel growth. Instead, a change like this would likely stimulate private equity investments and possibly increase IPOs to raise capital.

There has been much speculation around the likelihood of the proposed plan passing but regardless taxpayers should not make any major tax changes until new rules are passed and become effective. I’m not sure how I professionally feel about these changes. In some cases it simplifies the tax code, which is great for taxpayers. Preferably, I would rather see small bite size changes occur over time rather than such a massive overhaul all at once. My primary concern in all of this is the economic fallout that may arise from such major changes.

If you do nothing else this coming tax season, pay attention to what’s happening with these proposed changes. The end of this year could bring some surprises that might make you wish you had a year-end planning session with your tax advisor.

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!

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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!

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6 Things You Can Do To Protect Yourself from the Recent Equifax Hack

It’s happened once again. On Thursday, September 7, 2017 Equifax reported that they had fallen victim to a cyber-attack. Headlines were plastered with the news of customer information being compromised. An estimated 143 million people may have been affected as result. You can read more about the details of this specific attack here. To find out if you have been impacted you can check here. Understand that if you take any offers from Equifax you may waive your rights in the future to pursue them for damages that may arise from this situation.

How does this affect the average person?

For starters, personal information may now be available to criminals or publicly exposed for the world to see. That personal information may be sold on underground markets and can include names, addresses, phone numbers, and even social security numbers. Just a few pieces of the right information would be enough for anyone to open credit cards, utility accounts, bank accounts, or even allow someone to steal your physical identity. In short, if you receive a notice that you’ve been affected, take the news seriously.

What can be done?

It’s hard to imagine that your personal information might be exposed. Not only that, but it’s scary to think of what might happen after the fact. There are a few things you can do immediately to help prevent any ill-fated effects of compromised information. Here are some tips about what you can do to combat any issues:

#1

Consider setting up credit monitoring with all three of the credit bureaus. The three bureaus are TransUnion, Experian, and Equifax (coincidentally enough). These three bureaus keep a close eye on your credit and are likely to have any credit-related activity reported to them including opening and closing of accounts as well as delinquent, late, or defaulted payments for liabilities. Once credit monitoring is setup you can breathe a little easier knowing you’ll be notified of any activity. Note that these services may or may not be free of charge, and personally I’m not sure I’d recommend anything Equifax has to offer (since they are the reason I’m even writing about this topic). There are also third party identity theft monitoring services such as LifeLock that can monitor your credit and other identity related activities.

#2

In lieu of (or in addition to) setting up credit monitoring you may also want to pull a credit report from each agency. It is a best practice to monitor your credit report on a continuous basis regardless but in times of heightened risk it might be a good idea to grab a copy and make sure there is nothing questionable on your report. If you do find something you disagree with then you can start the process to resolve issues immediately. By continuously monitoring your credit it should reduce the impact from issues in the future. Keep in mind that any unfavorable credit report effects due to a recent compromise of information may take months (or even years) to show up since your information may not be used immediately after the attack.

#3

Alert any banks, credit card companies, investment firms, accountants, and any other third party financial service providers that your information has been compromised. This is helpful in enforcing safeguards to validate your identity when attempting to make transactions or do business with these parties so that they can ensure only you are the party being dealt with.

#4

Consider changing passwords (and login IDs) to sensitive websites. This seems to go without saying, but whenever there is a breach of information it’s always a good idea to change your password to prevent unauthorized use of your information.

#5

Monitor your bank accounts and credit card activity more closely. You can do this by downloading the smartphone apps offered by your bank and credit card company and/or setting up spending notifications by text/e-mail. By setting automated alerts you’ll at least see activity for large transactions and can react very quickly to recover any lost money. Check out my blog about using credit vs. debit at checkout to further reduce the risk of financial compromise.

#6

Last but not least, make sure you file your taxes on time. With the information that may have been stolen anyone could file a tax return for you. It is easy for criminals to craft fictitious tax returns in the hopes that they will receive a refund check, leaving you holding the bag at tax time for any money paid out. There are safeguards set in place at the IRS and state levels to ensure proper handling of all tax returns, but there is always the risk that something slips through the cracks. In the perfect storm of identity theft a criminal may have everything they need to file a legitimate tax return for you and direct any refunds to their accounts. If you do fall victim to fraudulent tax reporting then you should consult with your tax advisor (or find one if you are a self-preparer) to help you address the issue. Even if you don’t meet the minimum requirements to file you should still file a tax return annually.

Criminals are becoming more sophisticated with how they steal from others. The above steps are a starting point; however, they may not be all encompassing since everybody’s situation is different).  I would urge anyone who feels they have fallen victim to a data breach to do what they can to protect themselves. Feel free to post any other tips in the comments section below!

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Cancelled Debt and How It May Affect You

Sometimes things happen in life that are outside of our control. Medical bills, job loss, and catastrophic uninsured damage to a home are just a few things that could happen to each and every one of us. When unwelcome events like these happen it may make paying bills harder and can ultimately lead to losing a car or house in exchange for debt forgiveness. Although you would be relieved of your obligation to pay back your debt, there is another party waiting in the distance to collect; the IRS.

What is Cancelled Debt and How is it Reported?

Cancellation of Debt "COD" income, as the IRS defines it, is any debt for which you are personally liable, which is forgiven or discharged for less than the full amount owed. The debt is considered canceled in whatever amount remains unpaid. Creditors are responsible for reporting cancelled debt to taxpayers for amounts $600 or greater on form 1099-C. Taxpayers who receive COD income (regardless of whether or not they receive a 1099-C) must report the cancelled debt on their income tax return and pay income tax for the amount forgiven.

What to Do if You Receive COD Income

Like anything else tax related, don’t ignore any tax forms you receive, including a 1099-C. Remember, anytime you receive a tax document from a third party, there is a very high likelihood that the IRS has also received a copy. The IRS is expecting that you will report all tax information, and if you don’t, they’ll correct your return for you and throw on some penalties & interest for their trouble. Even if you don’t receive a 1099-C, you are still responsible for claiming any COD income on your return.

There are however some exceptions and exclusions as to when COD income is taxable (listed below). Visit the IRS website for more information about each.

Exceptions (do not reduce tax attributes)
1) Gifts, Bequests, Devises, and Inheritances
2) Student Loans
3) Deductible Debt
4) Price Reduced After Purchase
5) Home Affordable Modification Program

Exclusions (may reduce tax attributes)
1) Bankruptcy
2) Insolvency
3) Qualified Farm Indebtedness
4) Qualified Real Property Business Indebtedness
5) Qualified Principal Residence Indebtedness

Before you get too excited, it’s important to understand that the exceptions and exclusions listed above exist in a very narrow set of circumstances and the rules have changed numerous times over the last decade. Discuss any tax ramifications with your tax advisor if you have any COD income. I will go into more detail on two of the most common types of COD income in the next section.

Mortgage Relief and Consumer Credit

The most common types of COD income include Qualified Principal Residence Indebtedness and consumer credit. For taxpayers whose primary homes are foreclosed or sold in a short sale, they are required to report COD income, but may not be responsible for paying income tax on the COD income they receive (effective through December 31, 2016 as of the time of this writing). This is thanks to the Mortgage Forgiveness Debt Relief Act of 2007. The good news here is that there is talk (as of the time of this writing) to extend the Qualified Principal Residence Indebtedness relief permanently for all future years.

For consumer credit (such as credit cards), taxpayers can almost always expect to pay income tax on any COD income they receive, unless one of the exceptions or exclusions from the above section apply. In instances where a car or boat is repossessed and a loan is forgiven there may also be tax consequence. These are common examples of when taxpayers are blindsided. Remember this if you ever need to negotiate with your credit card company to reduce an amount due.

One more note of caution. Although there are exceptions and exclusions at the federal level, some states may still require that income tax be paid on COD incomeregardless of the federal exclusion. Again, consult with your tax advisor to whether this pertains to your situation or not.

How Much Will I Owe?

If you find yourself faced with a situation where you know you’ll have to pay tax on COD income then it might be wise to plan ahead. COD income is taxed at your marginal income tax rate. So for example, a taxpayer with COD income of $10k in a 15% tax bracket (plus state) will face at least $1,500 in additional income tax related to the COD income. In a separate example, if you had a car with a $20k note on it and you returned the vehicle worth $18k and were forgiven for your debt, only the $2k difference would be taxable at your marginal tax rate. What these examples tell us is if you’re going to attempt to have debt cancelled or forgiven, it would be ideal to do it as early in the year as possible to afford you more time to save up to pay your tax bill.

Debt forgiveness has more than just an income tax effect. It can also impact your credit score. Sometimes it may make more sense to get out from under a loan rather than try to endure the hardship of paying it back. In those cases, COD income and lower credit scores may be worth the trade-off. However, given all of the adverse consequences of debt forgiveness, taxpayers should consider debt forgiveness as a strategy only as a last resort.

I hope this was informative to readers. It’s not common that taxpayers receive COD income but it is a growing trend and more people are finding themselves faced with the issue. Feel free to leave comments or questions below!

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The Difference Between Selecting Credit vs. Debit at Checkout

Self-check, Fast Lane, or Register 4? Insert or Swipe? Credit or Debit? All of these questions play a role in our shopping experiences each day. We don’t think about them much but as times change and technology continues to advance we will continuously be faced with new payment options and methods as consumers. This week I’d like to reflect on how these split second decisions can affect our shopping experience and what you should know about the consequences of each decision.

Breaking Down the Options

There are three questions I mentioned above that aren’t just rhetorical. The first deals with time. Do you want to put in the effort yourself, bag your own groceries, and possibly save time in the long run? Or do you want someone to do that work for you while you stand in line behind people with full carts? What is your time worth and what are you trying to get out of the shopping experience?

The second deals with security. Many large retailers have updated their systems with the chip technology (reference the Target and Home Depot credit card hacks a few years ago). Chip technology? You know, that annoying new process, where you insert your card at checkout instead of swiping it? Unfortunately there are also quite a few retailers where chip technology isn't setup yet. Luckily this doesn’t have much impact on consumers, minus those awkward moments where you swiped instead of inserted your card, or vice versa.

The third and final question from above affects your security, your future spending, and your time. Credit or Debit? Which are you supposed to choose? You probably have both types of cards in your wallet, possibly with the intention to use each for certain purposes. Or maybe you only have a debit card, but you know the machines and the cashiers still ask you how you wish to use your card. What's really the difference? Let me explain.

Credit vs. Debit

The major difference between choosing credit vs. debit is how the money is taken out of your account. A debit card is linked directly to your bank account; therefore, as soon as you make a purchase it is only a matter of hours before the charge is deducted from your account. When you pay with a credit card you decide when you wish to make the actual payment on your card, usually when your bill comes due in a few weeks. MasterCard explains it in the following way: "When you use a debit card ... the transaction is completed in real time ... you authorize the purchase ... and the money is immediately transferred from your bank account. With a credit card, or using a debit card as credit, it's an offline transaction." The difference is that an offline transaction on a debit card means that the funds are not transferred for up to 2-3 days which gives customers time to confirm that the balance is present in one's account. In addition, once you enter your PIN number for a debit card transaction, all of your banking information is available for someone to steal and use.

Prevention of Overcharge Fees

If your card information is compromised, and you paid with a debit card at checkout, there is a high possibility that you could be looking at significant insufficient funds fees. According to an article posted by CNN "under federal law, your personal liability for fraudulent charges on a credit card can't exceed $50. But if a fraudster uses your debit card, you could be liable for $500 or more." In addition to the fees you may need to pay, it could take longer to receive credit for the money that you did not authorize to be spent if your debit card is the one compromised. CNN goes on to say "If a crook uses your debit card, not only can they drain your account, but it can take up to two weeks for the bank to investigate the fraudulent charges and reimburse your account." But, "if someone uses your credit card, the charge is often credited back to your account immediately after it's reported.” The use of a credit card gives you ample time to check your statement charges and determine if each transaction was made by you prior to owing the money on questionable charges. You have more time to report the fraud and need less time to make up for it.

What if I Don't Have a Credit Card?

As a general rule, when given the option, try to sign instead of providing your PIN number at registers and ATMs, and if a machine looks questionable, do not use it! Use ATMs only from reputable banks to avoid the risk of third party theft. Additionally, scan your account activity on a regular basis and report any unauthorized to your bank right away so that you have ample time to take action and protect yourself from any future problems! Finally, if you must use the debit option, try to keep as little cash as possible in your checking account. This may help mitigate how much cash may be stolen from your account in the event fraud does occur.

Have an experience or story to share about your debit or credit card being compromised? Or maybe you have additional tips & tricks you’d like to share. Feel free to post them below!

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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!

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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.

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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!

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Best Tips on How You Can be the Top Dog on Craigslist (Like Founder Craig Newmark Himself)

One of my favorite ways to pick up a little cash on the side is by reselling old stuff online. This week I’m sharing some tips I’ve picked up along the way for making the best deals on Craigslist. Some of these tips can also be used when working on other online marketplaces such as  eBay, Facebook Marketplace, Next Door, and Letgo (to name a few).

Online marketplaces have become wildly popular in recent years, and understandably so. We all have things we no longer want and now we can grab a few bucks by selling them to someone else. Craigslist is arguably one of the most well known sites, and since most business can be conducted there anonymously (no profile or personal information is usually needed) it’s even more attractive to buyers and sellers. Below are my tips for navigating Craigslist like a pro.

Safety

Let’s start with safety. I think we all know that there are some shady people roaming the Internet nowadays and because of that safety is critical when making deals in online marketplaces. My recommendation is to always conduct transactions during the daytime in public places (think mall or grocery store parking lots). I’ve also come to realize that there is safety in numbers so bring a buddy if possible. If you must sell something from your home or office, such as furniture or appliances, then make sure you aren’t alone to reduce the risk of an incident and allow only those that you feel comfortable with in to get what they're buying.

Privacy

If you value your privacy as much as I do then you’ll be willing to take these simple precautions to protect yourself. Start by doing yourself a huge favor and not linking your accounts to Facebook. On certain sites such as Facebook Marketplace and eBay, your identity will need to be verified and this can’t be avoided, but for other sites (like Craigslist) you can usually disclose as little as you’d like. For the other sites that don’t require too much ID verification, you can also use a junk e-mail account to conduct business. When I say “junk e-mail” I mean an account specifically for related to your online marketplace activities. My recommendation is Gmaill. Why Gmail? Not only is it the best e-mail provider (in my opinion) but you can also link a Google Voice phone number to it; which is my next privacy tip. With Google Voice you can obtain a local phone number to send and receive text messages and phone calls while still using your main phone without ever having to give out your personal number. The best part is that it’s free! What’s also reassuring is that if you find yourself interacting with a crazy person then you can just dump the number you gave them and get a new one! I highly recommend this for anyone who participates in online marketplace communities.

Responsibility

I know, there's a theme developing here, but I can’t stress enough how important it is to be responsible. When you sell your items it’s important to be honest about them. Do your best to take several high quality pictures (good staging helps immensely when selling) and describe the condition and any known issues or flaws in detail. Next, price your items competitively by comparing to other similar products online, and provide the easiest way for people to contact you. Finally, always reply to interested buyers, even if it is to decline an offer. This is polite and will likely keep anyone from badgering.

Bonus tip: If you’re selling used electronics be sure to wipe them clean of your personal information! Search online for guides on how to safely and securely reset electronics to factory condition. If possible, remove hard drives from computers and dispose of them properly.

If you’re a buyer you should always do your homework before buying goods online from another person. Research price based on condition, usage, and age, and ask sellers all questions you have before presenting a fair offer. Do not low-ball sellers; it’s offensive and annoying. Be sure to inspect items thoroughly before paying and if an item presents worse than a photo or description don’t be afraid to politely ask for a slight price reduction on the spot. Personally, I’d recommend hashing out money matters up front so everyone is on the same page. After all, we’re here to make money, not friends and those conversations can quickly get awkward in person.

Serious Inquires Only!

Buyers, this one is for you. Be serious when reaching out to sellers. It can be a huge undertaking to get an item listed properly online for sale, and nothing is more frustrating than receiving cryptic messages from buyers or hearing about flaky circumstances. If you contact someone with interest, and realize afterwards you’re not interested, then let them know! It takes no time to do so and is probably the nicest thing you can do. This is especially necessary when you ask someone to hold something for you. Treat others as you would like to be treated (with kindness) and these experiences can go so much smoother.

A note to sellers: in the world of online reselling, everyone wants a deal. Buyers expect to get a deal on everything. Simply put, if you’re a seller, always manage your expectations on your price and be prepared to come down, even if slightly. The market will always set the price for you, even if you’re selling solid gold bars. There are exceptions of course, but it’s best to be prepared to move your price. Buyers, to reiterate, be fair with your offers. Low-balling is rude and unnecessary. If you can’t make a deal then just move on!

Cash is King

Finally, we get to the money. When it comes time to make a deal, cash is king. Never take a check or money order. Stay away from those who want to ship goods or collect payment via PayPal. I’d even walk away from a credit card transaction or payment via Venmo, Google Wallet, Apple Pay, etc. Any transaction performed electronically can be recalled or cancelled after the fact. Do yourself a favor and only accept cash as payment & do not release goods until you have cash in your hands. If you can, try to meet people with a few bucks to make change (a couple $5s and a $10 usually does the trick). You’d be surprised how helpful this can be, especially when people claim all they have is a $50 and a $20 for a $60 item. Don't get hassled, bring a couple bucks to make change. I also recommend trying to price items in $20 increments as almost every ATM will distribute cash in that value and people can grab those bills on the spot if necessary.

One final tip: Always trust your gut! If a deal is “too good to be true” or “doesn’t feel right” then move on. Your safety and the possibility of saving or making a few bucks aren’t worth the risk.

Have tips to share or a story to tell? Do so in the comments below!

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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!
 

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7 Accounting Myths Debunked

Are you on the fence about hiring an accountant? Do you think accountants are only necessary during tax season? Well I’m writing this week to let you know that accountants can do more than you think. Below are seven myths that I’m debunking regarding accounting and accountants  to help you  make the best decision for your business and personal need.

#1 My accountant needs to be in the same state as me

Although some people may prefer face to face interaction, your accountant does not need to be located in the same state as you! With the increased use of secure technology to get work done, there are now endless ways for accountants to collaborate with their clients regardless of geography. Documents and information can easily be shared using cloud computing and financial accounting standards follow a uniform code recognized all over the US making the perfect storm for clients and accountants to work together all over the country. Even tax preparation and strategy has relatively few barriers since federal tax forms are the same for all US taxpayers and a strong accountant will be able to learn and help you navigate state specific tax rules to reap the best benefit. Your goal when searching for an accountant is to find someone who you are comfortable with and who you can trust with your financial information. Perform due diligence checks on professionals by ensuring the business is appropriately registered and licensed in the state they hail from. Licensed CPAs should be able to provide their license # upon request.

#2 Accountants only prepare taxes

Do you really think we only work one season per year? I wish! Outside of tax season accountants are heavily involved with their clients’  individual and business needs. This can include routine operational accounting functions such as bookkeeping and payroll services to higher caliber services like CFO or advisory services. Outside of routine accounting, financial auditors make up the vast majority of those employed in the public accounting field. Retaining an accountant year-round can help you save money  by making recommendations on ways to decrease costs and increase income. Financial management and advice to individuals and corporations is a huge part of an accountant's job and is most effective when performed throughout the year.

#3 Accounting isn't important or necessary

Hiring an accountant can save you stress and money over time. Many people view accountants as a cost, but really, we’re an investment. An accountant will help you organize your finances and with the right fine tuning will be empowered to help you thrive financially. That means you will have more time to spend doing what you want to do. The best trained accountants will bring signs of trouble to your attention far before things go downhill. We also follow your finances over the course of the year and come tax time assembling your return(s) is much less painful.

In addition to tax preparation, your accountant can also give your business monthly financial reports to help you stay on track or improve in various areas. They can tell you if your prices are where they need to be in comparison to the market and your expenses. Just because your business is busy doesn't mean that you're doing well. Hiring a trained professional to analyze the numbers can have a significant pay-off down the road.

#4 All accountants are boring

Remember Milton from Office Space? Wait, you’ve never seen Office Space?!?!?! Okay, finish reading this blog and then seriously go watch that movie. For those of you that have, all accountants don’t present like Milton. Many people view the job of an accountant as boring. Why? Because there may be boring aspects to our work? Name one job that doesn't include some less than exciting parts of doing it. You can't, can you? The fact that a job has some boring parts to it isn’t a strong argument to say that a group of people is boring.

Here are some examples of a few famous, not-so-boring, individuals. Mixed martial artist Chuck Liddell received a BA in Business and Accounting during his college years and a few other notable celebrities who studied accounting or were accountants include musicians Kenny G and Mick Jagger. I won’t even delve into the shenanigans that go on at the annual conferences of the globally recognized public accounting firms. Me personally, I enjoy competing in triathlons and am an avid homebrewer. I have more fun than that but those are a couple of my stress relievers that help me refresh. Yes, accountants of the past may have been boring but the rising talent of the field is much more than just a number cruncher.

#5 I can't afford an accountant

Yes, there are accountants that will cost you an arm and a leg, but that is true for any professional service. Have you had your hair done by a decent stylist lately? Last I checked they weren’t cheap. But you like to look good and you find value in the service so you’re willing to pay top dollar for the best pro in town. The key is to find the right firm or individual for you, who will provide the services you need within the budget that you can afford. We’re not magicians but any good accountant will work hard to at least find cost-savings equal to (more often greater than) their professional fee. It might not happen on day one but it usually happens in time. Working with a diligent accountant that will help you avoid making just one mistake can be worth thousands of dollars.

#6 Accounting is easy, I can do this myself, I have QuickBooks

So many people think that QuickBooks is a replacement for hiring an accountant. Although some people have the knowledge and expertise to use and understand the program, it doesn’t replace the fact that you need to understand accounting. You can’t expect a software package to condense four/five years of study into a tight little package. Sorry folks but we just we aren’t there yet. More often than not,  individuals open it up and become overwhelmed and confused fast. Hiring an accountant can be beneficial in that they can help you setup the software and educate you on how you can and should use it. They can check-in and make sure that everything is in order and fix problem areas that arise. QuickBooks may be able to help you keep information organized and make business decisions, but if the information is wrong what good is it? Familiar with the term “garbage-in, garbage, out”? Respect your own limitations and avoid doing it yourself when you know you should hire a professional. The benefits of having it done right the first time (even it does cost you) will far outweigh the cost of having someone fix mistakes down the road.

#7 All accountants work for the IRS

You’d be surprised how many people think that all accountants work for the IRS. While this isn’t exactly a myth, because there are accountants employed by the IRS, your tax preparer is not one of them. Accountants that are hired to prepare tax returns are usually well-versed in the tax code and can act as a liaison between a taxpayer and the IRS, but in no way, shape, or form do they work for the IRS. The accountants that work for the IRS are completely separate from the equation. So when I have to deliver the unfortunate news that a client owes on their taxes, that client is not paying me the tax due. We are simply the messengers. The best accountants deliver news and offer recommendations on how handle the situation rather than turn the client loose to pick up the pieces on their own. Even better, if you have someone working with you all along you can avoid getting into most messes with a simple conversation from time-to-time.

I hope that you learned something reading about these common myths. The accounting profession receives a lot of heat and criticism but at the end of the day our services are valuable and necessary. There is so much more bad press out there that I could have covered but I wanted to stick with the most common myths that I come across. Think you know of a myth related to accounting? Feel free to comment below.

Thanks for reading!

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5 Online Security Habits You Should Adopt

Some of you may have heard about the phishing attack that was perpetrated through Google last week. In case you didn’t though, check it out here. I personally experienced an incident through my non-profit e-mail around the same time as the Google phishing incident. I received a suspicious e-mail from the President which appeared legit and written in a similar fashion as that of the President. In my case the sender’s address did not match our non-profit’s extension which was a huge red flag. The request was also odd in itself and so I validated the e-mail with the President and once we determined it was a fake I immediately reported it to Google (our e-mail provider) as well as the rest of our team.

In light of these incidents, I’m writing this week to discuss the importance of online security. It’s a topic that is very hot among CPAs because we are always working hard to protect the sensitive information that is passed to and from our clients. Encrypted e-mail, secure portals, and passwords are just a few of the ways CPAs protect client information from data breach and compromise. I will highlight some best practices that general computer and internet users should consider below.

A Quick Note

Before I get to the 5 online security habits users should adopt I want to tell the tale of an incident of identity theft.

This past tax season when attempting to file a client’s tax return I was notified that my client had already filed a tax return. The IRS has safeguards in place that prevent the same person from filing more than one return for a given tax year and any tax preparer would have received the same notice for this client. Upon further investigation, we were able to determine that the client’s identify had been compromised. The IRS was skeptical as well and had already flagged the return that was filed as fraudulent. The good news is that we were able to identify this with enough time to get the return filed on time, but unfortunately my client has had to clean up any messes the fraudster made.

The moral here is that nobody is safe...

Okay, on to the tips!

#1 Use Internet Security / Antivirus Software

Security software is a cheap insurance policy to help protect from malicious attacks. Although I don’t have many recommendations, my advice is to pick something and use it. Whether you choose Norton, McAfee, BitDefender, Kaspersky, or Avast, you need the protection of a trusted internet security provider. These services are particularly helpful in detecting and preventing threats. Whether those threats are firewall holes, bogus website phishing for your passwords, or viruses designed to compromise your system and private information, a trusted security software platform can save you from hours of headaches from a breach or attack and potentially your financial well-being.

#2 Securely Transmit Sensitive Information

I can’t stress this one enough but if you do nothing else you should be religious about this one. I have heard arguments about how your information is probably already “out there somewhere” but that doesn’t mean you shouldn’t be cautious. You really shouldn’t be e-mailing unsecured files to anyone. Instead, use third-party services like Dropbox or Google Drive to share files with others safely. This not only reduces the chances of an e-mail becoming intercepted but also helps maintain version control over your shared documents. You can also ensure that collaborators have the correct access they need to a file by allowing them to edit or read-only files you share with them. If you must send sensitive information via e-mail, find a way to encrypt the message between you and the sender.

#3 Use Trusted WiFi Spots

Remember the last time you went to Starbucks and hopped on their free Wi-Fi? Well, you might want to reconsider doing so. Whenever you access a public network your information becomes available for all on that network to see. Sadly, hackers have developed sophisticated attacks they can use to scam you just from being on the same network. If your computer is not secured properly you may also be exposing the contents of your entire computer for all to see. Research Virtual Private Networks (VPNs) to learn more about how you can protect yourself when using a public Wi-Fi connection.

#4 Never Give Out Passwords

Never give out your passwords, ever! To protect you, no reputable software, app, or internet product vendor will ever request your password. They can either already see what it is, or, they typically verify your account another way that doesn’t require surrendering your password. If ever asked, consider if the vendor is reputable and if there is another way you can validate your account with the requester. When in doubt, don’t give them up.

#5 Stay Vigilant

You have to stay on your toes nowadays. Some might say the Internet is a blessing and a curse (in more ways than one), but you definitely need to stay vigilant. It's still a relatively new technology so it still has a "wild west" feel to it. Resetting passwords as well as revisiting (and refreshing) your security protocols every few months is well advised to keep attackers guessing. Using keychain style programs such as LastPass to store all of your logins in one place is helpful, but can also be a single point of failure if the master key is compromised. The nice thing is that those vendors typically generate very powerful passwords for you without you having to think about it. Also, most internet security software will run in real-time and on a scheduled basis so you can constantly have the software monitoring your system for flaws. Evaluate your security situation and make necessary changes to get setup to help prevent problems. Remember, it’s better to be safe than sorry.

I could go on and on about all the things you should do to stay safe and the above tips are certainly just the tip of the iceberg; but I’ll spare the audience. These tips should be considered whether you are using a mobile device or computer. Stay safe out there and think about what you’re doing, where you’re doing it, and with whom you’re dealing with before you do anything. Feel free to share your tips & tricks to staying safe on the internet in the comments section below.

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A Post Office Alternative

I’m writing about an unusual topic this week; the post office. Last week I had a less than pleasant experience at my local post office which prompted me to do some research into how to streamline use of their services. What I came across was a noteworthy service that I am excited to try. Note that I am not affiliated with this service, or endorsing it, but I am encouraging anyone who must use the USPS to save their time and patience by finding an alternative to approaching the post office counter.

The Issue

I was out running errands last week, one of which was to mail copies of amended tax returns via certified mail to the IRS. When I arrived at the post office (in the middle of the afternoon) I was surprised to find a line of probably 20 people waiting to be helped. It looked as if people were lining up early for the next iPhone release.

Having made this my first stop of the day, I walked past the line of unhappy customers to fill out a few certified mail labels and then left for about a half an hour to run my other errands and come back. When I returned, to my amazement, the line had barely moved! There were different faces but the line was still as long! I had to mail the returns and at that point was stuck waiting in line for about 30 minutes to do so.

Alternatives

I could have used the postal kiosk available at the front entrance of the post office but I have had issues with the kiosk in the past. I feel that it has not only charged me the incorrect postage, but I’m also not confident I have received the mail service I desired (certified mail). It may have been user error but I’m pretty good with technology so I’ll toot my own horn here and say that’s not likely. I’m less concerned about the prices I have been charged and the lack of usability with the kiosk and more concerned that my mail get where it needs to go correctly. Using the kiosk also requires me to go to the post office and the whole point of my blog this week is to alleviate that chore.

Another option is to use a private delivery service like UPS or FedEx, but because 99% of what I mail goes to the IRS, I feel it is imperative that I use their preferred method of delivering correspondence. It should also be noted that UPS and FedEx could cost upwards of 10x what the USPS charges and therefore is cost prohibitive most of the time. There is still the need to find a drop-off point or schedule pickup for items, which isn’t the end of the world, but not nearly as convenient as tossing outbound mail into any mailbox box for the carrier.

An employee could easily handle the mail for me as well, but the reality is that it would be a waste of their time as well and no one should have to stand in line as long as I did last week for a three minute transaction to mail something.

Finally, there is an online solution which I will discuss in detail below.

My Digital Discovery

Since most of what I mail is sent via certified mail it was really important to me that any online service I use be able to accommodate this service. Typically, certified mail must be handled at the post office in person but after some searching I came across a company called SimpleCertifiedMail.com. Their service will allow me to create an account, pre-fund a postal account (which is refunded if I cancel my account), create certified mailings when I need them, and pay a service charge only when I use the service (no monthly fees). The company even provides special envelopes to use that are compatible with their service and tracks everything digitally for me in one place! According to their website, once I purchase my postage and assemble my items to mail, I can drop everything in the nearest mailbox and move on with my day. Although I have yet to try this service, I am really excited for the prospective boost in productivity & efficiency that it will bring me by not having to make any more trips to the post office.

A Note to Readers

You might be wondering why I’m even writing this blog. Well, I like to share efficiency hacks whenever I stumble upon them and because I’m probably not the only person in the world with this dilemma I felt I should share this one. For those of you reading that send mail without the need of certified service, or those who send the occasional package, I would still encourage you to use whichever service you prefer (USPS, UPS, FedEx, etc.), but be sure to pay, print, and prepare everything for mailing at home or your office before you drop your item off for shipping. There is absolutely no reason to wait in the long tangled lines of the post office in today’s digital world (unless you have a truly unique situation). Most services even allow you to schedule a pickup time so you never have to go to their location to send anything.

I know I’m not the only who has been through this. Feel free to share other options I missed or your experiences with the USPS and the other private delivery services in the comments section below!

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Why It’s Important to File an Extension

With a little over a week to go for this tax season taxpayers are facing the critical decision to file an extension or work fast to get their returns filed by the deadline. If you need more time, it’s best to file for an extension. You’re better off taking a little extra time to complete your return accurately the first time around rather than risking a mistake and having to amend in the future.

What is an Extension?

An extension is exactly what it sounds like, an extension of time to file your tax return. Whether you are a taxpaying business or individual, the federal government (and states) allow for an extension of time to file your tax return. Extensions grant you six months from the original filing deadline to complete your return. For example, a calendar-year individual that files an extension by April 15th (typically the original due date) will be allowed an additional six months (until October 15th ) of that same year to file their return.

Not an Extension to Pay!

An extension to file a tax return is NOT an extension of time to actually pay your taxes. Most taxpayers think when they file an extension that they are also extending the time they have to pay their tax bill but that is not the case. At best, any ensuing penalties & interest may be reduced, but any taxpayer that files an extension without making an estimated payment will owe penalties & interest on the unpaid balance once they file.

Why You Should File an Extension (if you need one)

Filing an extension puts the government on notice that you are aware your return is due but that you have yet to prepare it. You don’t need to provide an explanation for extension; you just need to request one. Most everyone is granted an extension automatically at the federal level and almost every state honors the federal extension too. Bear in mind, the states usually follow the same practice as the fed and require an estimated payment at the time of filing or you’ll face penalties & interest. At the very least, you will be absolved of the “failure-to-file penalty” granted you file within the extension window.

How to File an Extension

There are several online services that will let you file for an extension for free. You should never pay to file for an extension. If a preparer requires a fee to file an extension make sure it will be treated as a deposit to your overall tax preparation fee before paying. If it’s not, consider seeking an alternative preparer or filing your own extension and hiring a preparer after you have done so to prepare your return.

Filing an extension requires basic information such as your name (and spouse’s name if married), address, social security number(s), and date(s) of birth. Some other general information may be required, especially if you are making an estimated payment with your extension. Although you have six months from the original deadline, once your extension is filed and approved, you should work diligently to prepare your return (or have it prepared) and file it as soon as possible. There is no need to wait until the extension deadline.

What if You Miss the Extended Deadline

If you miss the extended deadline then you will be in a tough spot, especially if you owe. You will be assessed penalties & interest all the way back to the original due date for any unpaid amounts. You would be better off filing and setting up a payment plan if you don’t have the resources to pay your bill immediately. Making an effort to rectify your tax bill is better than taking no action or ignoring your responsibility all together.

Are you going to be late to file this year? File an extension! Find a preparer that can help you or head over to the IRS website to access any of the online and desktop software vendors to do it yourself!

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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!
 

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