Advice, Preparation . . . Results™

Accounting

It’s time for a midyear checkup!

Time flies when you’re busy running a business. But it’s important to occasionally pause and assess interim performance — otherwise you’re likely to be surprised by the year-end results. When reviewing midyear financial reports, however, recognize their potential shortcomings. These reports might not be as reliable as year-end financials, unless a CPA prepares them or performs agreed-upon procedures on specific accounts.

Diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that were struggling at the end of 2017.

For example, you might compare year-to-date revenue for 2018 against 1) the same time period for 2017, or 2) your annual budget for 2018. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing.

You can also review your gross margin [(revenue – cost of sales) ÷ revenue]. If your margin is slipping compared to 2017 or industry benchmarks, find out what’s going wrong — and take corrective actions.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. Or, if your company is drawing heavily on its line of credit, operations might not be generating sufficient cash flow.

Potential shortcomings

When interim financials seem out of whack, don’t panic. Some anomalies may not be caused by problems in your daily business operations. Instead, they might be caused by informal accounting practices that are common midyear (but are corrected by your CPA at year end).

For example, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. Interim financial statements, therefore, generally paint a rosier picture of a company’s performance than its year-end report potentially may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, the controller’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked controllers may lack time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Proceed with caution

Contact the experienced team at P&R for help interpreting your midyear results, as well as detecting and correcting potential problems. Unlike year-end financials, interim reports are seldom subject to external audit or rigorous internal accounting scrutiny. We can remedy any shortcomings by performing additional testing procedures on your interim financials — or preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles. Reach us at Office@CPAsite.com or 904-396-5400.

© 2018

Florida Pursues Reputation of ‘Most Veteran-Friendly’ State with New Law

Florida governor Rick Scott recently signed into law Senate Bill 100, “Taxes and Fees for Veterans and Low-income Persons,” which eliminates the local business tax for Veteran small business owners.

Effective July 1, 2018, the law creates an exemption from local business taxes and fees for honorably discharged Veterans and their spouses. The Veteran must own a business with fewer than 100 employees.

The exemption also applies to widows/widowers of honorably discharged Veterans if they’re not remarried, as well as to the spouses of Active Duty members who relocate to Florida pursuant to a permanent change of station order.

To receive the exemption, the Veteran business owner must complete and sign a Request for Fee Exemption and provide documentation to support the request. The local governing authority provides the forms.

SB100 also eliminates the $1 or $2 fee previously charged to display the word “Veteran” on an ID card or driver’s license. Additionally, Veterans will no longer be charged the $6.25 service fee for obtaining a driver’s license if they present documented proof of their status.

We say, not a moment too soon! Patrick & Raines CPAs, an Army Veteran-founded accounting firm, appreciates Active Duty and Veteran members of the military and their service to all of us.

Whether they stormed the beaches of Normandy, fought to a truce in Korea, managed guerilla warfare in the Vietnam jungles, survived the sandy battles of Iraq, traversed the hazardous mountains of Afghanistan, or served in top-secret locations we’ll never know about, our Service members stood the watch, consistently defending our national security.

Here’s to our Soldiers, Sailors, Marines, Airmen and Coast Guardsmen…and the state of Florida for recognizing their service.

Since 1982, P&R has assisted small business owners with a variety of business consulting, bookkeeping, tax, and assurance needs. Contact us if we can help:  Office@CPAsite.com or 904-396-5400.

Are my workers employees or independent contractors?

A good bookkeeper knows a key tenet of limiting potential problems with the Internal Revenue Service is categorizing employees properly to pay them correctly.

Sometimes areas of uncertainty surround a worker’s status. The employer determines the degree of control he or she maintains over a worker (or the degree of independence provided the worker). The general rule established by the IRS states an individual is an independent contractor if the payer controls or directs only the result of the work; not what or how it gets done.

Unfortunately, no explicit rules exist to define “directing only the result of the work,” so consider the following factors:

  • Does the employer hold “behavioral control” over the worker?
    • Employers usually decide how, when, and where employees’ work will be done, while independent contractors usually exercise more flexibility.
    • A worker needing little or no instruction may be an independent contractor.
    • Independent contractors are usually responsible for their own training, while an employer is normally responsible for an employee’s.
    • The ability to hire assistance may suggest an independent contractor.
  • How are expenses and compensation paid?
    • A significant investment by the worker (such as purchase of tools or equipment) may indicate he or she is an independent contractor.
    • Unreimbursed expenses may suggest the worker is an independent contractor.
    • Independent contractors frequently charge flat fees and can make a profit or loss on the job.
    • An employee’s services are available to the employer, while an independent contractor’s services are available to the market.
    • The payment method (credit card, direct deposit payroll, etc.) is a factor in determining whether the worker is an employee or independent contractor.
  • What type of legal relationship exists between the payer and worker?
    • A contract for services or employment could be a determining factor.
    • If benefits are provided, the recipient is most likely an employee.
    • A temporary relationship often indicates an independent contractor, while something more permanent may be held by an employee.
    • An independent contractor will most likely advertise in the marketplace, while an employee may post availability only on job search websites.

IRS Publication 1779 and Publication 15-A give additional guidelines. If you’re still unclear you can submit a request for the IRS to determine the status of your worker.  Be aware, though, the IRS could take up to six months to answer your inquiry.

Still confused? Patrick & Raines CPAs, which offers independent contractor CFO and bookkeeping services, employs a tested team of experienced accountants who can help.

Contact us at Office@CPAsite.com or 904-396-5400.

Be Sure You’re Maximizing Your Allowable Deductions

Are you preparing for your next business or corporate income tax return? As a business owner, your budget plan should include expenses that qualify as IRS allowable deductions from business income.

To meet the requirements under IRS regulations, a business expense must be considered both ordinary and necessary. What exactly defines ordinary and necessary expenses? In general, all reasonable expenses paid or incurred during the taxable year in operating your business. Specifically:

  • Ordinary business expenses: Costs and services commonly accepted in a particular trade or business. Some expenses might apply to any business: rent, insurance, advertising, the cost of employees, etc. Other expenses may be applicable only to certain industries: a lawn care service could easily justify the need for a chain saw, but this wouldn’t be an ordinary expense for a hair salon.
  • Necessary business expenses: Costs for items helpful or appropriate in operating your trade or business, although not necessarily indispensable. While not a critical asset to your business, a lawn service may be considered a necessary expense for many organizations: a pleasing façade reflects a prosperous company, while encouraging visits from clients and prospects.

Allowable Deductions:

  • Vehicle use may be an ordinary and necessary expense, but you must maintain good record keeping to claim the deduction. Personal mileage and expenses are never deductible as a business expense, so if your vehicle is used for personal trips as well as business, the expenses must be allocated between them. Deductible mileage includes miles driven from one job site to another or miles driven to meetings. Commuting to or from your office can’t be included.

Car expenses can be deducted either by using the “Actual Expenses” method (saving your receipts and allocating a percentage to business) or by the “Standard Mileage” method (an allowance per mile driven). Don’t take both!

  • Business travel deductions can be incurred only when you’re traveling away from your “tax home.” Meals eaten at restaurants in town don’t count. Even when you’re away from your local area, meals can’t be extravagant and deductions are limited to 50% of the meal expense.

The IRS offers two options for deducting business meals: save your receipts and use actual expenses or use the standard meal allowance.

IRS Publication 463 offers more specific guidance related to Travel, Entertainment, Gift, and Car Expenses. The Tax Cuts and Jobs Act (TCJA), however, made a significant difference in deductible entertainment expenses and, as of this writing, specific IRS guidelines have yet to be released.

  • Your Office in Home may be deducted only if used regularly and exclusively for business and as your principal place of business. Note that “exclusive” means exclusive! If you also use the room as your den/TV room, etc., it no longer qualifies as an office. The principal place of business criterion is a little more flexible: if you travel to client locations throughout the day but your administrative work takes place in your office, it counts as your principal place.

You can use one of two options for deducting home office expenses: the regular method requires tracking your actual expenses and multiplying by the percentage of your home that your office occupies. The simplified method allows you to take a deduction of $5 per square foot (up to 300 square feet).

Note that under TCJA, the home office deduction essentially becomes limited to self-employed taxpayers. Company employees who are expected to work from home, and would deduct those expenses as miscellaneous itemized deductions, no longer hold that option as those deductions were eliminated.

The IRS also offers resources for small businesses and self-employed taxpayers, including a nine-lesson video, The Virtual Workshop. You don’t need to watch all four hours; the video is divided into useful sections so you can pick and choose the areas specific to your business.

If you prefer to focus on your business and let a professional handle your tax accounting services, consider using the seasoned tax professionals at Patrick & Raines CPAs. Contact us at Office@CPAsite.com or 904-396-5400.

Board Members: Protect your Nonprofit’s Tax-Exempt Status

When was the last time you thanked the IRS? If you’re a board member of a nonprofit, responsible for its financial review and good budget planning, now you can!

Sometime over your tenure, you’ve likely seen potential issues surface that could jeopardize the tax exemption status of the charitable nonprofit you’ve been entrusted to oversee.

Now comes your thanks to the IRS: it recently made your oversight effort easier for you and your team of board associates by helping you better understand your organization’s tax issues.

Visit the IRS website, Stay Exempt, 24/7 to access the many different tax resources essential to your board’s tax and financial planning, including virtual training, official guidance, tax publications, educational resources, live training and workshops.

Even if you don’t hold an accounting degree, these resources offer opportunities for non-profit organizations and charities to understand fully how taxes work, and gain insight to confirm and maintain a tax-exempt status. This easy-to-use website provides learning tools regarding tax rules and regulations every board member should know.

On average, each course takes less than 30 minutes to complete, and the website even includes detailed instructions to guide you through the process. You’ll also find helpful courses covering requirements necessary to fully meet your annual nonprofit group’s filing obligations.

Along with 501(c)(3) information, you can find courses referencing other 501 organizations, including veterans’ organizations, social clubs, fraternal establishments or whichever category of nonprofit you serve. The courses cover a wide range of pertinent topics:

As a member of the board, your assistance to the paid staff in helping keep your tax-exempt status may prove crucial for the success of your charitable group. The convenient IRS online courses offer directors, board members and volunteers access to tools and helpful knowledge to continue preserving your organization’s valuable exempt status.

More information can be found on the Tax Information for Charities and Other Non-Profits page on IRS.gov. If you have an accounting question on behalf of your nonprofit, call (877) 829-5500, which is the Tax-Exempt and Government Entities toll-free line.

Listed below are some additional links which may be useful:

If you or your board colleagues need a proven tax accounting firm to assist with your not-for-profit organization’s tax-exempt status or money management, including financial forecasting, our CPA team at Patrick & Raines is here to assist you.

Contact us at Office@CPAsite.com or 904-396-5400.

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I am so much more comfortable with how our finances are now being handled. Thanks for your help!
Dr. Randy T. HodgesSenior Pastor HernandoChurch of the Nazarene

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