Smart payroll management is a key component of running a successful, cost-efficient small business. So here are a few best practices for building a strong payroll foundation that can save you money in the long run.
Smart payroll management is a key component of running a successful, cost-efficient small business. So here are a few best practices for building a strong payroll foundation that can save you money in the long run.
According to statistics compiled by the Small Business Administration, about half of small businesses close within five years. Of the reasons cited, insufficient cash flow and debt are among those commonly listed. Clearly, for small business owners struggling to survive and stay financially afloat, getting rid of debt should be a top priority.
But the question is how? Although the economy has been gaining considerable momentum since the dark days of the recession, there are still many business owners who are suffering the aftereffects of having taken out loans during that period to pay their bills or increase their cash flow.
The following are five suggestions courtesy of Debt.org., an Orlando, Florida-based site that offers people information on relieving debt. These takeaways should help small business owners eliminate or significantly reduce their financial burdens.
1. Do a monthly budget
This will help you calculate just how much money you need for your business and how much can be earmarked for paying off your debts.
2. Cut costs
Sometimes just trimming excess expenses from an operating budget is enough to get a business through troubled times. Are there membership fees to groups and organizations that you no longer need? Cancel them so the money isn’t coming out of your account every month or quarter. If there is equipment that your business no longer uses consider selling it. If you do need it down the line, it might be more cost efficient to lease or rent it.
If you owe them considerable money for past services rendered, try to speak to them about arranging to increase your credit line, reduce monthly interest rates, or restructure your repayment options.
4. Consolidate loans
Dealing with one creditor rather than several can lighten your financial burden and save time. Research loan consolidation companies that can help you navigate the process without tacking on additional fees.
5. Offer marked down items to customers
Not only can this elevate your profile within your community and attract customers, both new and regular, to your business (you can promote a big sale or discount at your store through print/digital media as well as word of mouth), but it might be a good way of generating extra income that can allow you to stay on top of bills.
Nick Kaptain admits he didn’t know the difference between a bookkeeper and an accountant in 2009 when he launched Adlava, a web design, video production, and digital marketing firm based in Las Vegas. He hired a part-time bookkeeper and assumed that was all he needed.
“It was hard enough to focus on getting business and staying afloat,” Kaptain says. “Here was someone I could pay for 30 minutes or an hour a week to manage all my transactions.”
But as the tax year ended, Kaptain realized he had made some poor financial choices, such as not spending money on expenses that would have been tax-deductible. The company wound up with a large tax bill as a result. Kaptain realized his bookkeeper wasn’t equipped to offer the kind of long-term financial planning he needed.
His takeaway from the experience: “Definitely hire a CPA. They know more about tax strategies and can help prepare you over the course of the year.”
The difference between bookkeepers and accountants
The bookkeeper and the accountant have complementary roles, but they are not interchangeable. A bookkeeper deals with transactions – entering account data, paying invoices, and balancing the books. An accountant will use that data to run more sophisticated analysis of your business’s financial situation and outlook, and help with tax planning. Online tools such as QuickBooks and Bill.com make it easier for these professionals to share information in real time when they’re not in the same location. As Kaptain says, “The bookkeeper knows what the accountant wants to see.”
After starting up and operating a small chain of wine shops in Brooklyn, New York, Jason Richelson created ShopKeep, a point-of-sales system for small businesses that funnels data into online bookkeeping software. Retail businesses in particular have a lot of cash transactions that need to be entered daily, Richelson says. That’s the job of a bookkeeper, he says – to handle the data entry that’s time-consuming for the business owner.
When Richelson was running his wine company, the Green Grape, it grew from one to three stores quickly. And the company’s bookkeeping needs grew as well. “We were used to getting one or two deliveries of inventory a day, and then it was 20,” Richelson says. The growth also meant more employees and more paychecks to cut, which meant more work for the bookkeeper.
Using an accountant from the beginning
For the most part, a bookkeeper can’t offer guidance on taxes, acquisitions, or exit strategies. Issues like these require the expertise of an accountant. The question then becomes: when do you need an ongoing relationship with an accountant for your small business? And how often should you meet?
Tax accountant Andrew Poulos, principal of Poulos Accounting & Consulting in Atlanta, says an accountant can be useful from the beginning in an advisory capacity. They can help entrepreneurs choose the right kind of structure and entity for their business, and can advise whether to classify workers as employees or contractors. Poulos says many business owners make early mistakes in these areas that are easy to avoid with the proper guidance.
“The one place you don’t want to cut corners is the accounting aspect,” Poulos says. “Unfortunately, we live in a day and age where tax laws are complex, and it doesn’t take much to get it wrong.”
A business owner may discover that it makes sense to incorporate as an LLC or an S Corp because it’s more favorable than paying the self-employment tax rate. Poulos says it’s also helpful to have an accountant set up payroll tax withholding– a task that many business owners fumble.
An accountant can also help a business set up its initial metrics, says Michael Paull, a CPA who has served as advisory chief financial officer to companies in multiple industries. “A lot of business owners like to grow into the need for an accountant,” Paull says. “But there’s certainly a benefit to starting with one.”
Growing into the need
Some business owners are comfortable checking in with an accountant a few times a year. Poulos recommends two to four consultations a year at minimum in order to stay on top of your tax situation. “If you come to me once the year is closed, I can’t do any tax planning for you,” he says.
Accountants also have the analytical skills that can help improve operations or identify growth opportunities, Paull says. For instance, a business owner may have a good sense of which products sell quickly and which move slowly. But he or she may not realize what’s happening with inventory in the middle. An accountant could recommend products to drop or to bundle, or suggest price adjustments.
“A good accountant is a thought partner. They can bring best practices to your business,” Paull says. “An accountant is in a good catbird seat to have a handle on costs and the market. They may see an opportunity that a business owner wouldn’t.”
It’s also important for business owners to see that accounting needs are dynamic, not static, says George Malina, partner-in-charge of the accounting services practice for Sikich LLP, a professional services firm specializing in accounting, technology, investment banking and advisory services, based in Naperville, Illinois. Certain occasions call for more hands-on involvement, Malina says, such as when a merger or acquisition is being considered, or when the business is being passed on to the founder’s children.
A worthwhile expense
Small business owners with limited cash flow may hesitate to pay for more than a couple hours of bookkeeping a month. But accountants say their time is a small investment with the potential to save big money in the long run.
Accounting mistakes can be expensive, Poulos notes. Compare the expense of meeting with a financial adviser a few times a year – maybe at $100 an hour – to the cost of a tax audit, which can average $3,000 in accountant’s fees alone.
Malina says business owners who try to handle their finances alone are also giving up the opportunity to generate income. “Just do a simple calculation,” Malina advises. “If you’re spending 10 hours a week on bookkeeping and accounting, and you’re not even sure it’s right, what could you do with that time that would be more valuable?”
Finding a good fit
The business owner and the accountant should have a close working relationship. So it’s important to find someone who’s not only trustworthy but also compatible with you. Start by asking fellow entrepreneurs for recommendations on both bookkeepers and accountants, and consider whether hiring an individual or a service is a better fit. Poulos advises using only a licensed professional: either a CPA or tax accountant who, like Poulos, is an enrolled agent licensed by the U.S. Treasury.
Kaptain agrees that hiring professionals helps you look professional, too. He values the input he gets from both his bookkeeper and his accountant. Just as importantly, he’s comfortable with them.
“I ask my bookkeeper and my accountant for advice on all types of things. It’s nice to have strong relationship for that,” Kaptain says.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.
Professional tax preparers for small businesses are already hard at work for the fast-approaching April 15 deadline. S corporations, which almost always follow a calendar tax year, are even shorter on time with a March 15 deadline.
Now that the reporting year has ended, most options to optimize a small business tax return lie in the deductions and credits you choose to claim, or in deciding to file for an extension. The estimated 85 percent of small business owners who file taxes as individuals should also review their returns for any claims that could raise suspicions with the IRS.
Home office deduction changes
Small business tax expert Barbara Weltman says the first thing to do is learn about changes in the tax code that affect entrepreneurs, especially those who work out of their homes.
“The good news is there is a new, simplified home-office deduction, since 52 percent of all small businesses are home-based,” says Weltman, author of J.K. Lasser’s Small Business Taxes.
Up until this year, most entrepreneurs working out of a home office had to make some complicated calculations about the percentage of their home’s square footage that they used for business, the portion of utilities and Internet that went to business use, and so on. Now, a home-based business can deduct $5 per square foot up to a limit of $1,500.
The original calculation method is still available, too. Which one should you take? Weltman advises business owners to compare the flat rate to the deduction they claimed in years past. “If you have a space that’s larger than 300 square feet, you might consider calculating it the old way. That’s the maximum you can have on the simplified method,” she says. The IRS also has an online comparison.
Use your time wisely
If you’ve been keeping good records throughout the year, tax time will be a lot less painful. But it’s also important to give yourself time to go over your paperwork and make sure you have everything you need to complete your return, says Chris Whitcomb, tax counsel for the National Federation of Independent Business.
Give your accountant or tax preparer enough time to complete your return and let you review it, Whitcomb says. Among NFIB’s 350-plus members, Whitcomb says nine out of 10 use an outside tax preparer, tax software, or both.
For sole proprietors, independent contractors, and home-based businesses, doing your own taxes isn’t out of the question. The Small Business Administration notes that tax preparation software is a good option, with one caveat: many free products don’t support business tax filers with necessary forms such as Schedule C. Check to make sure your software has everything you need.
Whitcomb adds that getting organized early also helps you find out if you owe money, and to plan accordingly. “You don’t have to file until April 15. You can plan for that cash flow ahead of time if you have to pay,” he says.
Weltman says tax time is your opportunity to make smart elections. One example is the Section 179 deduction, which allows business owners to write off the entire cost of new equipment in one year rather than taking depreciation over multiple years. Eligible items include machinery, computers, certain software, and furniture. Or, a business can take bonus depreciation, which allows half the cost of qualifying equipment to be deducted this year, with remaining depreciation amortized over the item’s lifetime.
“Depending on your tax picture, you should sit down with your tax advisor to figure out the best depreciation strategy for your business,” Weltman says.
Enjoy these deductions while you can. They’re two of 55 tax breaks that Congress allowed to expire at the end of 2013. Congress could retroactively reinstate them, but for now Weltman says that makes 2014 tax planning difficult. For 2013, a business can write off up to $500,000 under Section 179. That number drops to $25,000 next year, and bonus depreciation is on track to be eliminated altogether.
If you laid the groundwork for a business in 2013, some startup expenses can be deducted, such as money spent on product and market analysis and visiting potential business sites. For more small business expenses and deductions, check out the SBA’s guide.
Finally, some states also have special incentives for businesses that aren’t available from the federal government, Weltman adds. Check the rules and deadlines in your state before you finalize your return.
The SBA advises business owners to avoid these common audit triggers:
Where Weltman parts ways with the SBA, however, is over the home-office deduction. SBA repeats the long-held belief that having a home office increases your odds of being audited. “Is it a red flag? My opinion is no, because look at how many people work from home today,” Weltman says.
Just make sure you qualify for the deduction, she adds. If your business has a commercial address and you work from home occasionally, that doesn’t pass the test.
And if you’re doing really well, expect extra scrutiny. Those who report $200,000 or more in income automatically fall into a high audit risk category, Weltman says. This year, there is also an additional 0.9 percent Medicare tax on earned income and 3.8 percent tax on net investment income for single filers making $200,000 and married couples filing jointly who make $250,000.
Need more time?
You can file for an extension if April 15 is coming too fast. NFIB’s Whitcomb says it’s better to get your return right than to rush through it just to meet the deadline, especially if you’re missing key supporting documents.
If approved, an extension will give you five to six extra months to prep your return. But remember, you don’t get extra time to pay. Estimate what you owe and send the payment when you file Form 7004 to request the extension. If you’ve already made quarterly payments, furnish that information to the IRS as well. If you owe money but don’t pay, the IRS could reject your application, and interest and penalties will kick in.
When wrapping up your 2013 return, remember that it’s also time for the first payment of quarterly estimated taxes for 2014, Weltman says. Stay on top of your cash flow projections so you have enough on hand when these payments come due.
Although the expiring tax breaks make for a lot of moving targets, she says it’s best to peg your 2014 tax liability to your 2013 tax obligation. “No matter how much you ultimately owe, at least you won’t have underpayment penalties,” she says.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.
With the proliferation of DIY tax software programs such as TurboTax flooding the market, it can be tempting for financially pinched small business owners to forgo the services of an accountant when filing their taxes. But according to several experts, that could be a serious mistake. Following are some reasons why a small business owner should, at least, have a tax accountant review their returns before filing.
Computers are not infallible
Believe it or not, there are several salient items that even the most deftly assembled software program can miss. Unlike an accountant who deals with thousands of returns over a career, software programs are not designed to detect oversights.
“They're all highly simplified,” says Eric Levenhagen, an Iowa-based CPA who runs his own firm ProWise Tax & Accounting, which specializes in small businesses. “They don't catch everything.”
To prove his point, Levenhagen, who launched his business four years ago, says he is frequently contacted by small business clients who use software programs to file their taxes. In one instance, his client, a sole proprietor, didn't understand that business and personal returns are filed together. The software missed this.
“He had already filed his personal returns and he came to me and said, 'I'm going to file my business return and I want a second opinion on the figures that I'm going to plug in,'” he recalls. “I said we need to go back and change that.”
Financial pros know what to look for
An accountant with years of experience working with small businesses will have likely encountered any tax situation you present. Sure, it might end up costing more than the investment in a tax software program, but the short-term pain of parting with a few dollars compensates for an outcome that could be dire to your bottom line.
“Tax professionals will know additional things to watch out for like audit red flags,” says Levenhagen. “For example, you get people who have too many round numbers on their returns because they're just guessing or estimating their expenses. And there'll be a lot of numbers that end in zeros. That's not a good situation.” Levenhagen explains that such facile approximations could raise the suspicions of the IRS.
Second opinions are valuable only if provided by competent professionals
Make sure that the tax professional you're consulting has a solid reputation as someone who is knowledgeable, reliable and well informed when it comes to current tax laws and trends. Ask trusted colleagues or associates for referrals. Don't pick the first name in a Google search result without doing your due diligence.
Linda de Marlor, president of Tax-Masters, an accounting firm in Rockville, Maryland whose client base is also heavily comprised of small businesses, agrees wholeheartedly. She recalls an example of small business owner client who came to her after dealing with an inept CPA.
“He was a successful real estate broker who was married and had twin sons with asthma,” she explains. “Their previous accountant never informed them that they qualified for a medical reimbursement plan. [If the accountant had done that], it would have saved them at least $5,000 in taxes a year for the 10 years since the twins were born.”
Tim Kerin, who with his wife Tracey, owns several businesses including a commercial construction firm, learned a very difficult lesson when he and his wife visited an ineffectual CPA several years ago to get a second opinion.
“He did not explain the returns to us nor did he go over how we used expenses,” recalls Kerin. “He just took our numbers and did the return. We should have questioned every line and understood it before signing the return.”
What ensued was a business owner's nightmare—an IRS audit. Kerin says that he and his wife have paid $95,000 in legal and accounting fees, and that the ordeal has been a financial drain on the couple's business operations. Although they did not lose their various businesses, Kerin notes they did have to lay off several employees, sell two company vehicles, and close a storage unit.
The ordeal inspired the Kerins to launch Learning Lessons in Business, a two-year old consulting firm designed to educate business owners on various challenges. Kerin's negative experience with the CPA notwithstanding, he does feel that small business owners who do their own taxes are taking unnecessary chances.
“As much as you may not like to have a professional prepare your taxes, [you should do this] at least once every three years,” he advises. “That way you can probably get some tips from your tax preparer on things that you should have been doing, such as categorizing expenses correctly based on your business activity code (which classifies a business type) and the round number syndrome. And if there are mistakes that the preparer finds by going through your records, then you can see if that same mistake exists in the past.”
Small business owners looking to save money by preparing their own tax returns may be doing themselves—and their companies—a serious disservice. With tax laws continually changing, there may be deductions or other items that you, as a busy entrepreneur, simply can’t keep up with. Even if you feel confident about the reliability of your software program and your gift for numbers, always seek out the opinion of a tax professional who is trained to file returns just to make sure you’re not missing anything. It may be the best money you ever spend.
Congress waited until the early hours of January 1, 2013 to pass the American Taxpayer Relief Act of 2012, which the president signed the next day. Although this was not the first piece of legislation approved at the last minute, it underscores how daunting it can be for small businesses to do any kind of tax planning while they wait to find out what laws and provisions will be enacted. Still, by looking carefully at their returns, entrepreneurs can use their tax situation to help manage their finances and make sound business decisions in the year ahead. We checked with three experts to get their perspective on how small business owners can gain tax advantages.
Pick the right structure
One of the first things a small business can do to manage their tax bill is to examine their business structure to see if it gives them the best tax advantages. "The first tip I would give to almost anybody who has income besides W-2 wages is to form a corporation or a limited liability company (or an LLC)," says Aaron Young, CEO of Laughlin Associates, a Nevada-based company that specializes in helping entrepreneurs find the right business structure. "Right away, you're going to see your taxes go down for the investment of a few hundred dollars."
For example, a sole proprietorship is subject to self-employment tax, but a corporation or an LLC is exempt. An S corporation allows you to take part of your salary in dividends, which further reduces the tax bite. "Small business owners, including very small operators, don't realize that they can benefit from this just like a big company," Young says.
Corporations exist to reduce the risk to business owners and to get every advantage that the government allows, Young says. For example, while a home-based sole proprietor would not be able to write off a home gym, a corporation could turn their spare bedroom into an exercise facility and deduct 100 percent of the cost as part of a wellness plan.
Still, Young warns that sole proprietors should think carefully before incorporating because each business structure has its own legal and tax consequences. For example, depending on who will own the company and whether it will seek outside financing will help determine the best way to incorporate. "It's not good for a husband and wife to own a limited liability company because the government looks at them as one person," Young says. "If you're going to bring in outside equity, then you're going to want to be a C corporation. They have lower tax rates than individual tax rates."
Another factor to consider when incorporating is different attributes of each business structure. For example, shareholders of an S corporation are taxed at their individual income tax rate. In contrast, profits from a C corporation are taxed twice—at the corporate level and then again at the individual level when the profits are distributed as dividends.
Document and deduct
Studies from different sources, including the General Accounting Office, show that many small businesses overpay their taxes. It is clear that many entrepreneurs are not aware of all the deductions that they are legally entitled to.
"I have found that there are two reasons people miss deductions. One is that they don't know what they don't know," says Sandy Botkin, CEO of the Tax Reduction Institute and author of Lower Your Taxes Big Time. "For example, if you talk business with a client in person and then go out to the theater with them, you can deduct 50 percent of the cost of the tickets. You can write off any meals that you have with that client."
The second reason that small business owners miss out on deductions is because they do not properly document their expenses. For example, to document a local business appointment by car, you should record the mileage, the date and explanation of the trip, and the beginning and ending addresses. "If you don't have something triggering you to write down the types of things you need for a deduction, you're not going to do it," Botkin says. He recommends getting software that does the work for you. There are different expense tracker apps on the market—including Botkin's own application Taxbot—that supply everything you need for documentation.
Overnight business trips have their own requirements, but small business owners can still reap a handsome amount of deductions. "For every day you're doing business, you can deduct your road expenses, including 50 percent of your food and 100 percent of your lodging. You can even deduct 100 percent of the dry cleaning bill for the clothes you wore while away,” Botkin says.
In looking for an accountant, Botkin recommends choosing a CPA, tax attorney, former IRS attorney or Enrolled Agent who is "honest but aggressive. Someone who tells you to take every deduction you may be legitimately entitled to with the right documentation and who specializes in your industry."
Review with a pro
Small business owners should set aside time with their accountant to do some serious tax planning, but not at the height of tax season.
"I always suggest to people that they get together with their tax professional in, say, midsummer once tax season is over and the accountant is rested to go forward with some tax planning," says Bonnie Lee, an Enrolled Agent and founder of California-based Taxpertise. "They can pull up a comparative profit and loss statement from the prior year to see if your net profit or sales have increased or decreased and then you can go from there."
Tax issues are rarely a favorite topic among small business owners and the details can seem overwhelming at times. But the evidence is clear that taking the time to review your taxes with a qualified professional could put your business on firmer financial footing.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.
Few would argue that being a small business owner can be enormously demanding. Whether it's dealing with vendors, managing staff, or serving customers, finding the right balance for these tasks can be a formidable challenge. While some try to handle the time management dilemma by working overtime every day, this kind of solution can often lead to burnout. How then can business owners successfully manage their time without sacrificing their health and personal lives?
Following are time management tips from several small business owners who have faced this challenge:
1. Don't be afraid of shutting down technology to complete a project.
Because technology allows us to instantaneously access information via an unending assortment of mobile or wireless devices, it can be tempting to constantly check for e-mails or alerts—and then just as quickly respond to them. Try to avoid this trap. Unless you are waiting for a time-sensitive response from a client, your time is probably better spent attending to other aspects of your business.
Diana Ennen, president of Virtual Word Publishing, an online PR/marketing firm that handles book authors, wholeheartedly agrees.
“You absolutely need to focus and turn off all notifications when working on projects,” she urges. “That means turn off your cell phone, social media, Skype, or e-mail notifications. Log out of Outlook so that way you won't see new e-mails coming in. If it helps, set a timer and work for several hours.”
To prove her point, Ennen, who works with four subcontractors regularly, says she often does this when writing press releases and articles for clients. As a result, she can complete the job easily. “It's so much better because I've committed to it and am fully focused,” she says.
2. Carve out a block of time to complete jobs.
If you want to use your time productively, schedule in your calendar a block of time to work on a key job or project. This way you will be able to concentrate on what needs to be done without scattering your energies or letting your attention wander to a host of other things.
Dana Manciagli, a Bellevue, Washington-based career consultant with her own business, says this is an imperative.
“Schedule your important work as an appointment to yourself,” advises Manciagli, who previously worked at Microsoft as a worldwide sales manager. “If you need to write proposals that you are not getting to, open your calendar and make an appointment with yourself for it. If you need to remind yourself which ones to work on, put more details in the body of the invitation.”
3. Master the art of saying no.
Cultivating potential customers and associates at meetings or networking events is good for business. But if your attendance prevents you from planning your monthly budget or training new personnel, you might have to decline the invitation to focus on the task on hand. Be strategic when weighing the pros and cons of invitations as well as favors that others may ask of you.
“Learn how to say no,” insists Manciagli. “I made a lot of mistakes in my first year [as a small business professional] and this is one of them. Ask yourself: Which line item of my P&L will benefit immediately if I attend this event? Cost-Savings? And within revenue, be more specific with yourself. Will new clients be there? Will I get leads? If not, say ‘no, thank you.’”
4. Get up early.
It might be a platitude but the old saying, “Early to bed and early to rise makes a man, healthy, wealthy and wise,” might have some validity for business owners seeking to better manage their time. Drew Stevens, owner of Stevens Consulting Group, which helps small struggling healthcare professionals improve their revenue, endorses this takeaway as a great way to get things done.
With the extra time, Stevens says small business owners can review a perplexing client issue or look over notes or PowerPoint slides for an upcoming board meeting. “I remember getting up at 5 a.m. to get my master’s work done before I commuted to work,” he says. “And if you do commute, do some work on the train rather than read a book or sleep.”
5. Create a to-do list.
Sometimes scheduling time to complete a project is not enough. You might need to actually write out a to-do list on a regular basis. Then once you're finished with each task, just cross it off until you get to the next job. It might sound like an obvious time management solution for small business owners, but not too many do it, says Essen. However, if you don't adhere to this simple best practice, you might be subjecting yourself to a lot of all-nighters.
“To feel more in control, make this a habit—even on your busiest days,” she advises. “It takes away the feeling of being overwhelmed and the fear of forgetting something. For me, it has been instrumental as well in completing larger projects, such as redoing my website. It's amazing how freeing it is to take large projects a chunk at a time. And if they don t get done, put it on the list for tomorrow.”
6. Learn to delegate.
As a small business owner, it is not incumbent upon you to do everything yourself. Lighten your load by learning to assign some duties to your staff or others who can help you.
Says Stevens: “There is no reason to be involved in everything. For example, I operate a very busy coaching business and recognize I cannot do it all. To that end, I hire freelancers for my graphics, my invoicing, my collections and even printing. This allows me to focus on my most vital aspect—clients.”
Small business owners who call upon their accountants only when it's time to prepare taxes are doing themselves a disservice. Sure, accountants can fill out the necessary paperwork to keep your business in compliance with the tax authorities, but that's just one function they perform. Many accountants offer a wide range of overlooked services that can accelerate the progress of your small business.
Small businesses that want to get the most out of their relationship with their accountant can begin by communicating candidly. "People are almost embarrassed to ask questions. They think they're the only one with that question or that it's too silly," says Helena Swyter, owner of Chicago-based SweeterCPA. "But an accountant can be a good helper. It's easier for both of us if the small business owner asks questions going forward."
One issue that Swyter runs into repeatedly is how to categorize funds. Some businesses commingle business and personal funds and do not clearly categorize what is deductible. Others do not keep accurate records about business and personal expenditures—such as cash purchases or cell phone usage—making it hard to know what is fully deductible. A good accountant can set up an efficient bookkeeping system when a business is first starting out or review a system that is already in place. "I tell people that the best bookkeeping system is the one that they're going to use regularly," Swyter says.
Accountants can also offer a much needed perspective before major decisions, such as selling or acquiring a business, taking on a partner, or hiring a first employee. Swyter points out that there is considerable gray area when it comes to hiring an employee versus an independent contractor, and even something as simple as knowing whether to buy a piece of equipment in December or January can be fraught with tax consequences that an accountant can unravel. "I tell all my clients that the best thing they can do for me is to ask me questions whenever they have them," Swyter says.
Leverage their network
Because accountants are exposed to different types of small businesses, they can usually offer general advice on a variety of concerns. But in addition to what they know, accountants can help small business owners by who they know.
"Accountants get to be very well networked with other trustworthy professionals, whether it be bankers or attorneys or insurance agents or financial advisers," says Josh Dubrow, a CPA and senior manager at Nussbaum Yates Berg Klein and Wolpow, a New York-based accounting firm. "So if it's not something in the accountant's area of expertise, they typically know somebody that they can direct a small business owner to."
For example, Dubrow is guiding one of his high tech clients through the maze of proposals to raise capital. He is helping them put together a sound business plan, forecasts, and budget. "This is something that I enjoy doing—actively working with my clients to give them a solid foundation in this situation," Dubrow says.
While most CPAs can service a wide variety of businesses, Dubrow concedes that small business owners should interview accounting firms to see if they have expertise in their particular niche before settling on a firm. "You want to know that your accountant has other clients or experience in your industry or has the knowledge base to navigate you in that industry," Dubrow says.
Like Swyter, Dubrow would like to see more small businesses keep an open line of communication with their accountant throughout the year on key business decisions—including those that are not related to accounting—such as entering into a major contract or buying a new facility. Sometimes the accountant can uncover opportunities in the negotiations that the business owner might overlook. "Far too often you hear about these things after the fact, which eliminates tax planning considerations because the year is over or the transaction is done," Dubrow says. "If these [transactions] were structured slightly differently, maybe there could be some sort of tax efficiency [for the small business owner]."
Keep in touch
Besides these major transactions, accountants can handle smaller, day-to-day functions like bookkeeping in some cases. "We do this for a few companies where we are their accounting department, handling everything from paying bills and invoices all the way up to the financials and preparing tax returns," says Kevin McCoy, a St. Louis, Missouri-based CPA.
Some small business owners are not well versed in the financials of their operation, which can lead to costly problems, McCoy says. For example, after he showed one of his clients that the cost of their workers' compensation coverage was alarmingly high, the client is considering negotiating a new arrangement. Regular communication between an accountant and a small business owner is vital to avoid these kinds of mistakes. "I call or email my clients every quarter and encourage them to call me if they need anything in between," McCoy says. "Any farther out than that and you run into surprises that nobody likes."
Case in point: one of his clients had bought stock in another company without realizing that the company was burdened by heavy tax liabilities that the new owner was obligated to pay. "If they would have come to me up front and told me they were interested in buying this company, we could have advised them about checking them out more thoroughly or going for just an asset purchase and not the whole company," McCoy says. "We like to hear from our clients on anything that's out of the ordinary or different from their day-to-day operations."
For most entrepreneurs, the first few years of a newly minted business are a mixture of excitement and fear. You’re on your own, doing what you love. But you’re also running an enterprise that requires a fair degree of financial know-how and bookkeeping discipline in order to stay afloat and grow.
Establishing—and following through with—good accounting and financial controls from the beginning is essential to creating a solid foundation for any small business, say the experts. We spoke with a few of them to identify some of the most common accounting mistakes—and how to avoid them.
1. Setting up the books incorrectly
Installing accounting software, such as QuickBooks, is a common first step for many small business owners when it comes time to set up their finances. But when it’s done incorrectly, the problems just multiply.
“I think QuickBooks is great and it has many of the features that a small business owner needs,” says Brian Germer, a CPA and partner with Parsons & Germer, an accounting firm based in Portland, Oregon. “But when numbers are entered incorrectly or a payment date is not right, you can wind up showing a negative balance and that throws everything off.”
If you’re not comfortable with setting up your accounting software in the beginning, hire someone to do it for you. “It’s money well spent,” says Christopher Gamble, a CPA and partner with Kroner Gamble & Co. based in Rochester, New York. “I’ve seen clients who have mixed income and expenses into one category and it’s a nightmare. If the categories and the data aren’t correct, there are going to be endless and costly mistakes.”
2. Not reconciling accounts each month
Whether you get your bank statements electronically or on paper, they can’t be ignored, or put off until you have more time.
“One of the biggest mistakes I see is when a business owner waits several months, or even until the end of the year to reconcile their bank statements with what they’ve put into their own systems,” says Gamble. If you’ve made an error in entering a bill or payment, or the bank has recorded a check amount incorrectly, the inconsistency can wreck havoc on your books if left unattended, he says.
Pamela Etzin, owner of An Eye for Detail, a wardrobe styling and consulting firm based in northern New Jersey, says she knew early on that bookkeeping was not her strong suit. “When it comes to my clients, their needs, and responding to them, I am prompt and conscientious,” she says. “But I just didn’t keep up with my bookkeeping and I knew that was going to be a problem as the business started to grow.”
To avoid that hazard, Etzin hired a part-time bookkeeper to stay on top of bills, taxes, and invoices for clients. “I am a big believer in seeking out the experts in any field and the money I’m spending is well worth it,” she adds.
You didn’t get into your own business to become a bank for your customers. But that’s exactly what you’re doing if there’s a significant gap between the payment terms your vendors give you and the terms you offer your customers, says CPA Sarah Krom with accounting firm SKC & Co.
“I’ve seem small business owners want to pay off every bill as soon as it comes in because they don’t want to owe money,” says Krom. “If you do that, but your own customers have 30 or 45 days to pay you, you’re essentially financing your customers.”
A better strategy is to compare the terms you have with your vendors and the payment terms you give clients in order to see if they match. If they don’t—and you can’t or don’t want to renegotiate either side—consider speaking to your bank about opening a working line of credit, suggests Krom.
“This allows you to bridge that gap between the time you have to pay bills and when you’re getting paid and helps further establish your credit worthiness as you pay it back each month,” she says. Of course, the best time to apply for a line of credit is when you don’t need it, Krom adds, so don’t wait until you’re in a financial bind before having the conversation with your banker.
4. Financial controls given to one person
The financial cycle for any small business begins with the person who opens the mail and records the bills and checks coming in. That same person shouldn’t be the one to authorize or sign checks or make deposits, cautions Gamble.
“There needs to be a proper separation of duties for financial control so that you don’t wind up in situation where someone could potentially steal from you,” he explains. Hiring a bookkeeper or even a part-time CFO as the company grows, does not mean that an owner shouldn’t have a hand on the financial controls as well.
“Ideally, the owner should be the one signing the checks or at the very least, authorizing someone else to sign them but only after understanding what the money is for,” Gamble says.
Running and growing a business is a marathon, not a sprint. Don’t let simple accounting mistakes become the stumbling blocks along that journey.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA or other financial professional.
Currently under debate in Congress, the Marketplace Fairness Act, which, if passed into law, would require all online retailers to collect sales taxes for the sales where they ship goods. Such a law may have considerable ramifications for small businesses that have an online reach. But how much? Recently, business writer Iris Dorbian spoke to Gary Mllkwick, vice president of 1800Accountant.com, an accounting firm in New York City that works with small business clients nationwide. He also offers some tips on how small businesses should prepare themselves if the Marketplace Fairness Act is enacted into law.
ID: In light of the new Internet sales tax bill that may become law shortly, what should small business owners who have an online presence keep in mind? How will this affect them?
GM: The whole issue focuses on the relationship you have with a state to where the state has the jurisdiction to tax you. In the past, the laws have always been that if you have a physical presence (i.e. brick and mortar store) in a state and if you have employees in that state, then you, as a company, are responsible for collecting sales tax in those states where you have a physical presence.
However, when the laws were written 30 or 40 years ago, they weren’t anticipating the Internet. Now what this law is saying is that if you have more than $1 million in online sales a year, then you are responsible for collecting and remitting taxes to all states in which you are selling to—which is wherever the clients are purchasing or where the customers are located. That’s a big change. In the past, if you were operating an e-commerce business in California and you only had 15 employees there then all you had to do was collect sales tax on sales made to customers in California.
ID: Is this bill something that small business owners with an online presence should worry about?
GM: It depends on how big they are. For the mom-and-pop companies that maybe have $10,000, $20,000 or $100,000 a year in revenue, it’s not going to affect them. In one version of the bill that passed, the threshold that you would have to comply with the law is more than $1 million. My understanding is that some people in the House want to increase that to $10 million because even if you’re a business with a $1 million in revenue, that doesn’t mean you’re generating much profits. And if profits decline, [this bill could hit small businesses hard] due to collecting and remitting sales tax from different states. The people who are most worried right now are those who are in the $1-million to $10-million annual sales bracket.
ID: So the bill could actually benefit qualified small business owners?
GM: While it is true that the law does create some additional reporting requirements, it may actually make the scary process of collecting and paying sales taxes much easier than the business owners expect. The bill passed by the Senate and now being considered in the House includes a provision that states have to provide free software that calculates the sales tax on items sold in the state, and files the required reports for the business owner. There is also a safe-harbor provision in the law that protects small business owners from penalties if they collect the wrong sales tax amount because of a problem in the software they use.
Also, in the bill passed by the Senate [there’s a provision that] will force states to simplify their sales tax collection process. In particular, each state will only be allowed to have a single point of contact for sales tax. Right now, some states, such as Alabama, require separate payments in each county. So the law could reduce the number of sales tax jurisdictions from hundreds (maybe thousands) to just 50 (one for each state).
GM: Yes and we expect to get more calls as news stories about the law continue to appear. I think business owners are going to be quite relieved once they understand what the law actually says. The key is to be prepared for the change. The proposed legislation has broad bipartisan support and it's a pretty good bet that it will pass in some form. Business owners who are prepared can continue to profit from online sales, while those who wait until the last minute may have to scramble to comply.
ID: As a small business tax expert, do you see any problems with the bill?
GM: Not necessarily. I kind of see it from both sides. I think for our clients, they would like to see a higher threshold of $10 million to $50 million because that $1 million threshold is pretty low. The margins are so thin they’re not making very much profit on a million dollars in online sales.
ID: Based on your experience and insight, how should small business owners who have an online store or e-commerce site prepare themselves if this bill becomes law? What should they do and what should they not do?
GM: Make sure they have good reporting systems in place and they have a plan for being compliant. The worst thing is if they aren’t prepared and don’t begin collecting the sales tax. Then you run into serious penalties and interest. Figure out a way to be in compliance—whether that’s [small businesses] doing it internally or whether it’s hiring someone else to do it.
Disclaimer: The opinions expressed are solely those of the author and interviewees. Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.
No one likes to get ripped off. Some small business owners, though, are under the impression that their size makes them less of a target than large corporations. The numbers, however, tell a different story. According to a recent Guardian Analytics study, most small and medium-sized have not implemented effective fraud prevention practices for their online financial and merchant processing accounts. Guardian Analytics says 74 percent of businesses suffered losses due to fraudulent ACH, wire and other transactions. What's worse is they were only able to recover lost funds about 39 percent of the time.
"When you're a small organization, you're basically a handshake away from the customer," says Larry Ponemon, chairman and founder of the Ponemon Institute, a co-sponsor of the study. "Sometimes that's not good enough in today's world because the bad guys are focusing on the weakest link—and the weakest link is usually a small organization."
Enhance your security
Fraudsters seem to have an unlimited capacity for finding new ways to circumvent the system and steal. Ponemon reports that one type of payment fraud that a small business might be vulnerable to involves business logic abuse. Essentially, this is when a website is poorly designed, leaving flaws or openings for the criminal to exploit and cause harm.
For example, a criminal can buy a list of credit cards with personal information on the black market, go to your business website, and punch them in to see which numbers are active and which are closed. As the business owner, it's likely that you wouldn't know if this is a potentially criminal act, because some legitimate customers could have more than one credit card in their name.
Beefing up the security of your website is a necessary first step. At the very least, Ponemon says, make sure that any personal information entered on your site from the customer is encrypted using SSL, a security protocol for Internet communications. Another option is to use a third-party payment processor, such as CyberSource.
"You want to be careful and understand the reputation of the online payment companies," Ponemon says, noting that PayPal is the most commonly used, but that others, such as Google Wallet are emerging. Joining an association like the Merchant Risk Council—an advocate for e-commerce merchants—can add to your knowledge and awareness.
Small businesses need to be as resourceful and dogged in protecting their interests as criminals are in trying to undermine them. That should include employing both external and internal controls to slash risk.
Jack Craven of John F. Craven, CPA, a New York-based accounting firm, recommends the following steps that every small business should seriously consider adopting:
1. Limit the number of people authorized to sign checks.
2. Have the small business owner personally open the check statements from the bank to keep tabs on what is being paid.
3. Consider using an independent or outside CPA to reconcile any statements from the bank.
4. "In general, I think it's a good thing to have a budget in place at the beginning of the year and track [transactions] by month," Craven says. "If there's stuff going through that's inappropriate, it might stick out in the budget process."
5. Have a clear process in place to check out and approve the introduction of new vendors into the accounting system.
6. "There's something called positive pay, where you send a list of checks that were drawn by the company to the bank and they match them off against what the bank pays," Craven explains. "This is really a control against somebody who prints up a check that looks like an official company check. If it wasn't on the list, the bank wouldn't pay it."
7. Material for official signatures—both signature plates and stamps—should be kept locked up with only a limited number of people who can access them.
"Another important thing is separation of duties, where the person who writes the checks shouldn't be the person who's reconciling the bank account or preparing the checks or mailing out the checks," Craven says. "It's a good control to have different people involved in the process."
Take nothing for granted
It goes without saying that being the victim of a fraud is emotionally unsettling and financially perilous. While there are official law enforcement channels at your disposal, the reality is that the burden of going after stolen funds often rests heavily on the small business itself.
That was the case for Lifestyle Trimco Viaggio, a leading manufacturer of mannequins in the United States. The privately held, New York-based firm with 200 employees ran into trouble in May 2012 when the controller wasn't able to access their bank online to send out a wire transfer. The initial diagnosis was a computer virus, which was cleaned up the next day—or so it was thought.
"The controller printed out the activity of the prior day, which is normally done early morning. We found that $1.2 million had been siphoned out to different banking locations, both domestic and offshore," recalls Lloyd Keilson, Lifestyle's CEO.
Keilson's financial institution confirmed this. Retrieval notices were sent out immediately, and the domestic transfers were stopped. However, the transfers that went through a bank in China proved more troublesome. According to Keilson, it was only through his own contacts in China—not through the FBI or the government—that he was able to get a lead on his missing funds. The cyberthief's identity was never publicly established, though.
Eventually, he retrieved all but around $150,000 of the $1.2 million. "Ultimately, the FBI decided that the $1.2 million didn't merit their attention because it wasn't a sufficient sum," he says. "The retrieval came through the efforts we put out."
The company has since changed their security procedures, of which they understandably choose not to discuss specifics. "When you take the human element out of a transaction and you leave it to mechanisms, those mechanisms can be duplicated by people who are much smarter and much more clever than we are," Keilson warns. "There's nothing a small business owner can take for granted."
Many small business owners exhaled a collective sigh of relief after the 11th-hour passage of the American Taxpayer Relief Act of 2012. While most of the Bush era tax cuts have been extended or made permanent, uncertainty lingers around the potential impact of higher payroll taxes and surtaxes related to the Affordable Care Act (often referred to as ObamaCare). Small businesses owners are now scrambling to adjust their returns for 2012 to take advantage of retroactive deductions and implement tax strategies for 2013. And those that fall into the new higher income marginal rate will likely see their taxes rise this year and beyond.
While some provisions were made permanent, like marginal tax rates and alternative minimum tax (AMT) exemption amounts, estate and gift tax exemption levels, other deductions and credits have only been extended through this year. “I have a greater sense of certainty when it comes to tax planning for 2013,” notes Andrew Schrage, co-owner of Money Crashers Personal Finance. “I no longer have to guess, which makes for a more streamlined roadmap as I plan my finances throughout the year.”
Kent Reed, owner of franchised brokerage services company Murphy Business & Financial Corp. in Atlanta, Georgia, was disappointed with the final deal. He had hoped for more comprehensive tax reform, as Reed and the small and medium-sized businesses he consults regard the tax code as an obstacle when it comes to strategizing. “Before we can even adjust, they change it,” notes Reed. “It makes it very difficult to plan long term.” Reed decided to postpone filing for 2012 to see if there are any deductions he can take.
“For small business owners looking to put new assets into service or build out their space, it’s a good year to do it,” notes Claudia Lazzarato, tax manager at Pleasanton, California-based tax and accounting firm Sensiba San Filippo. Deductions set to expire or be reduced significantly were extended for 2013. Scheduled to drop to $25,000 before the fiscal cliff deal, limits for Section 179, which allows small businesses to deduct qualified equipment purchases, were increased from $125,000 in 2012 to $500,000 for companies with less than $2 million in qualified capital expenditures for 2013 and 2012, retroactively. Set to expire at the end of 2012, the deduction for 50-percent bonus depreciation was extended through the end of 2013 (2014 for certain types of property).
Alternative minimum tax exemption amounts have been permanently increased from $33,750 to $50,600 for single filers and from $45,000 to $78,750 for married couples filing jointly. “Now that these amounts are set, we know how hard our clients will be hit by AMT and whether there’s a way to avoid it,” Lazzarato points out.
Certain tax credits also remain in place through this year. The research and development (R&D) credit, which expired at the end of 2011, was extended through 2013 and made retroactive through 2012, as was the work opportunity credit for employers that hire veterans or those from groups that have faced barriers to employment.
Among the Bush era tax provisions made permanent are the six federal income tax brackets (10-35 percent), with the addition of a top bracket (39.6 percent) for higher income taxpayers ($400,000 individuals/$450,000 married couples filing jointly), and the 15-percent tax on capital gains and dividends (increased to 20 percent for income at or above that top bracket). “As most small businesses are structured so revenues flow through to their personal income, it’s an especially important planning point to try to stay below that higher income threshold,” explains Lazzarato. Scheduled to drop to $1 million, the estate and gift tax exemption has been made permanent at $5 million (indexed for inflation), along with the exclusion amount "portable" between spouses. “This is good news for family-owned businesses and small business owners gifting business stock,” notes Lazzarato.
Even those small business owners that remain below the higher income threshold, their taxes will rise to some extent, as Social Security payroll taxes have returned to their pre-2011 rate of 6.2 percent (up from 4.2 percent). “It makes it all the more important for small business owners to decide how to invest money coming in as a means of managing their taxable income,” explains Lazzarato. And the fiscal cliff deal did not postpone the implementation of the Affordable Care Act surtax of 0.9 percent on earned income above certain threshold ($200,000 for single filers; $250,000 married) and 3.8 percent on the lesser of net investment income or modified gross income over these amounts. For this reason, Reed has postponed adding new staff through at least the first quarter until the effects of these higher taxes can be measured.
To complicate matters, personal and dependency exemptions have been phased out for those in the higher income brackets (adjusted gross income $300,000 married filing jointly; $250,000 single), who may also be subject to limits on itemized deductions. Schrage has decided to hire an accountant for the first time. “Up until now, I’ve always used Turbo Tax,” notes Schrage. “But I just don’t feel comfortable filing my own returns this year.”
Reed expects to pay $4,000-$6,000 in additional taxes this year, depending on where the AMT hits. His accountant has recommended changing the structure of his business from an LLC to an S Corp, allowing profits to be split between salary and S corporation distributions. “Rather than being on a cash basis from year to year, we’d accrue and have some stock,” explains Reed. While his salary would be subject to payroll taxes, dividend distributions are not. “You want to put more money into goodwill and capital gains because you’re taxed at a lower rate.”
Another tax benefit for S Corps is the retroactive restoration of the shareholder basis rule for stock in S corporations that make charitable donations of appreciated assets for 2012 and 2013. “Under the temporary incentive, shareholders reduce their basis (or value) in the stock of the S corporation by their pro rata share of the adjusted basis (typically the smaller amount) of the contributed property, rather than by the fair market value (typically the larger amount) of the charitable contribution,” explains Lazzarato. “The lower basis reduction for charitable gifts benefits the shareholders because their value (basis) in the stock remains higher while reducing taxable income by the higher amount (fair market value).”
“You don’t want to base all your business decisions on taxes,” cautions Lazzarato. “But you should at least calculate them beforehand so you know what to expect at the end of the year.” While there seems to be less uncertainty now, many small business owners have a wait-and-see attitude about how the deal will affect their bottom line. Schrage would like to see all deductions/credits for small business made permanent, though he’s not holding his breath. “That would take a lot of the guesswork out of hiring.”
by Robert Lerose.
Every year brings new changes to the tax code that can have an impact on small businesses, and this year is no exception. For example, in 2013, new taxes on Medicare for earned and unearned income will come into play for the first time as part of President Obama's healthcare legislation. Amid the welter of changing regulations, there are some steps almost every business can take to ease the burden of tax planning and keep the cash flow moving in the year ahead.
Set aside a fix amount
Being responsible for your own taxes can be an unfamiliar and startling concept for those new to running a business. Some individuals who have been used to having taxes automatically deducted when they were salaried employees may not be prepared for paying quarterly taxes when they make the transition to business owner.
Perhaps the most common outcome of this circumstance for business owners is not putting money aside to pay estimated taxes every quarter. "I see this all the time," says Barbara Weltman of Big Ideas for Small Business and author of J.K. Lasser's Small Business Taxes 2013. "They get used to the idea that the money coming in is available to be spent," instead of dividing it accordingly.
Putting a fixed percentage of every dollar generated, such as 25 percent, in a separate account to meet ongoing tax obligations is a simple, practical solution. A business may also decide to incorporate to save on their taxes. Choosing the S corporation route lets shareholders pay tax at their personal income tax rate and sidestep the corporate rate.
Regardless of the structure a business chooses, keeping good records is essential. Weltman also recommends that small businesses get outside professional help for tax planning and preparation. In addition, small business owners who are knowledgeable themselves about changes in the tax code will be able to make informed decisions.
For example, Section 179—which covers deductions on new and used equipment—was expected to be reduced to $25,000 this year. However, due to the recently passed “fiscal cliff” deal—or, more formally, the American Taxpayer Relief Act—the limit was enhanced to $500,000 for both 2013 and, retroactively, for 2012. "There are certain tax provisions that many small business owners might want to take advantage of," Weltman explains. "For instance, if you're a contractor who needs cement mixers and expensive equipment, this might be the time to do it. Section 179 will go to $25,000 in 2014 unless Congress acts."
Know your business’s tax needs and opportunities
Getting referrals from trusted sources—such as bankers, attorneys, or other business owners—is a good first step in looking for a tax professional, Weltman says. As with any service provider, each advisor may offer different benefits. For example, John Beidle, the president of St. Louis-based 1040 Wealth Designs, represents taxpayers in front of the IRS. He also says he teaches business owners how to pay the least amount of tax legally possible.
Often his first step is to review past returns to understand the unique circumstances of a business before making suggestions. One problem he runs into often is when a business tries to do too many different things as a single business entity without realizing the various tax consequences for each activity.
"I run into Internet consultants and software people who might be publishing an ebook or selling an online membership—but they don't realize that they can categorize a percentage of that as passive income," he explains. "I find a lot of missed opportunities for business owners."
Besides looking for these hidden opportunities, small business owners can avail themselves of other ways to maximize their cash flow. "The best way is to situate yourself so you're getting paid immediately by taking cash, credit, PayPal, or any other payment form," Weltman says. If you have to invoice, try to get paid in increments as milestones in the transaction are reached. Finally, send invoices electronically and always follow up on late payers. "Accounts receivable are not fine wine," Weltman says. "They don't get better with age."
Tax accounting made simple
A little planning and a little discipline is all it takes to make tax planning just a regular part of running a business. Case in point: The Albany Distilling Company, a small micro-distillery that uses mostly New York State agriculture ingredients in the manufacture of its small-batch rum and whiskey products.
Founded in March of 2011, the two-man operation took prudent steps from the very beginning to deal with their tax requirements. "We have two accounts: our checking account and our money-to-pay-taxes account," says co-owner John Curtin. "Whenever we make a deposit or do a transaction, we make sure the taxes associated with that transaction immediately go to a separate account. We do not access it other than to pay taxes."
In addition to their standard corporate tax, Albany Distilling must also pay quarterly taxes to the federal and state government for the alcohol they produce, and sales tax for items sold in the retail section of their distilling operation—a total of four separate taxes.
"It's really important that we keep our tax money untouchable," Curtin explains. "We figure the taxes monthly and set the money aside and pay them when they're due." He and his partner use an accountant to handle their financial chores, freeing them to concentrate on producing product.
It's too early to predict sales for 2013, but Curtin hopes his start-up will hit at least $75,000 to $80,000 in revenue by year's end—enough to cover their expenses, including taxes, and a small stiped for living. “It's difficult for me to justify taking any sort of pay at this point because things are so tight." As for his company’s tax strategy, Curtin’s finds keeping it simple is the best approach: "I have no great advice about taxes, except just to pay them," Curtin says. Preferably followed by a stiff drink or two.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified financial planner and tax advisor.
The next big change for small business may be coming via the utility bill.
A surge in domestic natural-gas production is starting to alter some basic business equations across the country. From an office’s monthly overhead to fuels that power transportation fleets to the basic materials for an array of consumer products, a dramatic decrease in U.S. natural-gas prices has many decision-makers rethinking supply chains and the way they work. It has some small business owners starting to consider switching their operations over to natural gas to save money.
This shift follows new energy-extraction innovations that have brought previously unreachable U.S. supplies to market. Spots like the Marcellus Formation, which lies beneath New York, Pennsylvania, and Ohio, contain vast reserves, though estimates of the amount vary greatly. The most controversial of these methods, hydraulic fracturing, or “fracking,” involves pumping water, sand, and chemicals underground to extract gas embedded in the rock. Critics say the process harms underground water supplies, and threatens human and animal health and the environment.
Right or wrong, the amount of natural gas already pulled from the ground has been enough to lead to unprecedented drops in U.S. prices. The frenzy in drilling has caused the wholesale price of natural gas to plummet from $7 or $8 per unit to about $3 in just the past four years, making the fuel cheaper to burn than coal and slashing expenses for its heaviest users.
For businesses that own their own structures and heating systems, the draw is growing. While the cost of switching from a heating oil-fired system isn’t inexpensive—removing oil tanks, installing a new furnace and its controls can run into five figures, though rebates for energy-efficiencies soften the blow—the savings on monthly fuel bills may pay off that investment in a few years. (Prices vary in different regions of the U.S., but you can do the math on online calculators offered by utility companies, such as this one.)
“There are general economic incentives to do it, but the main incentive is saving money,” says Bruce McDowell, director of policy analysis for the American Gas Association, an industry group. “Industrial users have environmental standards to adhere to, so converting to gas from coal or oil means they can still expand while staying within requirements on emissions.”
The U.S. has numerous advantages when it comes to natural gas, asserts John Graves, who wrote a book about the hydraulic fracturing boom. In it he says the U.S. has a built-in infrastructure of pipelines, tankers, as well as a skilled workforce and home-grown technology, that other nations lack. Overseas, as much as 90 percent of drillable land is government-owned; here, Graves says, the higher rate of private land ownership allows for greater access.
Natural gas is also a commodity that’s coming at a fraction of the costs in Europe, Russia, China, and elsewhere, and the cheaper energy is already luring manufacturing back to the U.S. from overseas. States like Connecticut are pushing individuals and 75 percent of its businesses to convert to natural gas from oil in the next seven years. Regional transit agencies, port authorities and even Detroit are all in various stages of turning to natural gas.
Now small businesses are also starting to make a move, too.
Monarch Beverage, an Indianapolis-based wine and beer distributor, made the decision in December to switch 85 percent of its 100-truck fleet to compressed natural gas (CNG) and build an on-site fueling station, at a total cost of $7.6 million. The move will eliminate consumption of an estimated one million gallons of diesel per year, at a savings of 60 percent. It will also allow the company to step away from more volatile oil-market prices.
Phil Terry, chief executive of Monarch, says they’re a quarter of the way through the process and so far, so good. He says the idea for the project began after discussions with his VP of operations and their common frustrations with planning for diesel prices, which only seemed to go up for his rigs, which log some six million miles every year. “After Hurricane Katrina, here in the Midwest we really saw how fragile the oil and refinery supply system was,” Terry says. “It was hard to budget for diesel—it was always a gamble on long-term contracts.”
“And we were really good about picking the exact wrong time to lock in our prices,” he says, laughing.
Monarch became a beta test station for CNG-powered trucks from Cummins, a global engine manufacturer based down the road in Columbus, Ind., and their Canadian natural-gas engine unit, Cummins Westport. The initial worry was the engines wouldn’t be able to deliver the horsepower necessary to pull the beverage-laden vehicles, but Terry says the machinery worked perfectly. Drivers report the trucks are a little quieter and tank structures make turns a bit different, but otherwise it’s been a good transition, he says.
Other bonuses: an unexpected subsidy from the federal government for the switch, and an expected greenhouse-gas emissions reduction of 22 percent (Monarch’s dubbing their brews “Indiana’s Greenest Beer.”).
Terry says their local-delivery business model is ideal for the CNG fleet because they operate on a back-to-base system, with all trucks coming back to headquarters every day and making them independent from outside infrastructure to gas up. He says other good candidates might be trash haulers, mail and package delivery companies, bottlers, and other ventures with short-range routes. “For long hauls, the natural-gas fuel infrastructure just isn’t there yet,” explains Terry.
But that too could change soon, as the country looks to explore greater energy independence from overseas oil suppliers. While taxes vary from state to state and some utilities are locked into scheduled rate structures, lower natural gas prices will likely affect every level of commerce over the long term, Graves says.
“It’s going to affect every renter, every small consumer, every business, and will translate to huge savings, says Graves. “It’s going to be an extreme change.”
A year ago, John Fratrick, owner of J.F. Improvements, a small home repair business based in New Berlin, Wisconsin, had a problem. The rate of gaining new customers for his business, which he had been operating since 1992, had slowed to a mere trickle. And to generate leads, Fratrick was still relying on old-fashioned marketing standbys, such as postcard mailings and ads in the yellow pages. On the plus side, however, he was due to get a small business tax refund.
With business at a stalemate, Fratrick attended a webinar on how to increase sales with social media and soon after contacted the speaker, Sonny Ahuja, a web designer and the CEO and founder of an international online perfume retailer, GrandPerfumes.com, for tips on attracting clients.
“As I got to know about his business, I advised John to use the [incoming tax refund] to build a better website,” recalls Ahuja. He also suggested that Fratrick launch a Google Adwords campaign to rev up business for J.F. Improvements. (Google Adwords is a program that creates ads and keywords pertinent to your business).
Fratrick then asked Ahuja to redesign his site, which he did, charging less than his regular fee. Ahuja also set up the Google campaign, since, as he tells it “most people do it wrong therefore they lose a lot of money without generating any business.”
Fast-forward to October 2012. “John had to pause his campaign as he was completely booked until the end of February 2013 from the business he received as a result of his new site and Google Adwords campaign,” says Ahuja, who prefers to funnel his tax refunds into growing or marketing his business. “J.F. Improvements would be still struggling if John had not invested that money into a new approach of lead generation that he was not used to.”
Certainly, this example is a great case study on how a small business tax refund can be used smartly to boost business. But what are some other ways that a windfall from Uncle Sam can benefit small business owners?
Improve promotional/marketing copy
As a small business owner, you know that if you want to promote and grow your business, then marketing is essential. Without leveraging multi-channel resources at your disposal, whether it’s digital and word of mouth marketing, print ads, or TV/radio campaigns, customers and prospects may never learn of your company’s existence. However, if you have a limited budget, it’s imperative to get the most “bang out of your buck.”
Nash Haywood, managing partner of Netset Media, a five-year-old web marketing business in Baltimore, Maryland with many small businesses clients, suggests using your refund to hire a copywriter or designer to tweak website or document copy. Haywood says the potential payoff from this tactic, which could run anywhere from $100 to $300 an hour for a one-time fee, should not be underestimated.
“Many people get turned off if a business doesn't have a professional looking and sounding identity,” he explains.
Add video to your website
Another way of increasing a healthy stream of revenue and prospects to your company is investing in adding video to your website, says Alfred Poor, author of "Power Marketing for Small Business: How You Can Boost Sales with Low-Cost Video."
To bolster his point, Poor, who frequently speaks to small business owners about marketing, cites a 2011 study by video hosting platform Brightcove that found a video clip on a website is “53 times more likely to show up on the first page of a Google search.” Also, based on the same study, visitors will spend 344-percent more time on a site with video than one that’s video-free.
And for the budget-conscious small business owner, adding video can be a very cost-effective marketing tactic, one that can be covered by even a modest tax refund. “A professional short video can cost $500 or less,” Poor says, “and you don't even have to own a camera or a computer.”
Explore direct mail
Yes, this tried-and-true marketing strategy still has plenty of value, particularly if it’s part of an integrated marketing initiative, notes Ahuja.
“Many businesses can't afford direct mail anymore so there's less competition now,” he says. “Direct mail has become sexy again. Now the key is to do a multi-step campaign while making sure the ingredients of ‘higher opening rates’ are added.”
Start or fund a retirement plan
If you are enjoying a steady and healthy cash flow and have loyal, hard-working staff, then you may want to consider using your small business tax refund to create a new benefit that improves employee retention. Christopher Tasik, managing director of Tasik Financial, a certified financial planning firm based in Stamford, Connecticut that works with many small business owners, says one good use of a tax refund might be “to pay any start-up expenses that might be incurred by establishing a 401(k) plan.”
Tasik further adds that if the refund is large enough,“it could also help offset the matching contributions that [small business owners] might need to make if they did a safe harbor plan,” he says. (A safe harbor plan allows employees to contribute part of their salary to a retirement plan, while requiring the employer to contribute matching funds.) “In addition, under certain circumstances the IRS provides for a $500 tax credit (Form 8881, Credit for Small Employer Pension Plan Startup Costs) in each of the first three years of the plan as long as certain requirements are met.”
Streamline your accounts receivables
Why adhere to a regimen of sloppy bookkeeping when you can improve your paperwork by using state-of-the-art online accounting software? Haywood strongly advises using software like Freshbooks or Zoho, both of which he says are “perfect for many service-based businesses.” Each software system boasts automated features that can help small business owners “stay on top of cash flow and get paid quicker.” Not only that, but according to Nash, they’re fairly inexpensive, pricing at usually around $200 or so a year.
Pay down your debt
Of all the tips offered here, this is one that not only makes the most sense—but also is the most obvious. Start with bills that have the highest interest rate, suggests Tasik. At the same time, “the business owner should also work to develop a cash flow projection-based budget” to avoid paying bills now only to see the same debt appear again in the next few months.
For small business owners, getting a tax refund is always a pleasant windfall. But it can be even better if the money is leveraged effectively to improve your business.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified financial planner and tax advisor.
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