Every new business needs a record system

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Many small start-up businesses are off and running before any record system has been set up. There is money deposited into the new business checking account, some from invested funds and some from sales. Money has been paid out for equipment and supplies, some by check and some by cash out of pocket or from sales receipts.

This informal method of cash receipts and disbursements needs to be formalized. The bookkeeping system does not need to be complicated. In most cases, you can continue to operate much as you have. You just need to do it in a way that leaves a few more tracks.

For example, make all purchases by check. The small miscellaneous cash paid-outs from your pocket (or the petty cash box) are reimbursed by a check with a listing of the expense codes. All your cash receipts are deposited into the bank. No more taking cash from the till for lunches, supplies, etc.

If all the money received by the business is deposited into the bank and all expenses are paid by a company check, the proper journal entries are easy to create from the bank statement.

If you are starting a new business, don’t wait until the end of the year and surprise your accountant with a box of miscellaneous receipts. That is the most expensive and least effective use of your accounting information. In addition to setting up the proper record system, your accountant will provide you with guidance on other business, tax, and financial matters.

Hiring family in the family business can cut taxes

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As the summertime school vacation season approaches, young family members may be looking for a job – and having a hard time finding one. Hire them in your family business, and you get a double benefit: helping the kids gain valuable experience and garnering tax breaks for your company.

Here’s what you need to know.

Whether your sole proprietorship business operates around the kitchen table or in the fields of your farm, wages you pay your under-age-18 children are not subject to social security, Medicare, or federal unemployment taxes. Note: You’ll have to pay social security and Medicare taxes when your children are age 18 or older. They’re exempt from federal unemployment taxes until they reach age 21.

Wages you pay your children are deductible from your business income, meaning potential savings for the business on self-employment tax and federal and state income tax.

The wages must be paid for legitimate work at a reasonable rate. Be aware of nontax issues too, such as your state’s youth employment rules, which can be more stringent than federal labor laws. If your business is a family farm, keep apprised of newly proposed regulations that may limit the parental exemption for employing young farm workers.

Wages do not impact “kiddie tax” calculations. In addition, your child can earn up to $6,200 of income during 2014 before owing federal income tax.

The payroll tax exemption is different from the self-employment rules, and applies to wages you report on Form W-2 at year-end. Income earned as contract labor, which is generally reported on Form 1099-MISC, is subject to self-employment tax.

Call us if you have questions about the tax consequences of employing family members.

Study reveals retirement concerns

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A recent study conducted by Harris Interactive of 1,000 middle class individuals aged 25 to 75 revealed some interesting statistics about retirement attitudes.

Among the survey’s findings:

* 37% of respondents say they don’t expect to retire; instead they expect to work until they are too sick or die.

* 59% said retirement is not their top priority; their priority is paying day-to-day bills.

* 34% felt they would have to continue working until age 80 or beyond because they won’t have saved enough to retire.

* 31% in the 40 to 59 age category say they have a retirement plan; 69% say they have no plan.

* Those who say they have a written plan say they have saved a median of $63,000 for retirement, which represents 32% of their retirement savings goal of $200,000. Those without a written plan say they have saved $20,000 or 10% of their goal.

* A third of those surveyed said that social security would be their primary source of income in retirement.

* 40% said a large unexpected health care expense was their greatest retirement fear; 37% said lower or no social security benefits was their biggest fear.

Emergency savings: How much is enough?

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We all need an emergency fund, but what’s considered “an emergency?” Any unexpected hit to your finances, including layoffs, unanticipated illnesses, and natural disasters. Car insurance premiums and regular home maintenance are (or should be) anticipated, so they’re not emergencies. The same is true of credit card bills for vacations and visits to the dentist’s office. An emergency fund is designed to keep your life intact during temporary setbacks and to help you avoid unnecessary debt.

How much emergency savings is enough? In general, your emergency fund should cover three to six months of expenses. How much you’ll need will vary based on your financial situation, including the vulnerability of your income. For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks. So the one-earner family generally should set aside more for emergencies. Or if you don’t have disability insurance, you might consider setting aside a bigger balance in an emergency account. Some companies provide payment for accrued vacation and/or sick leave to laid off employees. If your company provides such benefits and you maintain significant balances in these accounts, you may not need as much in an emergency fund (at least to help you weather an unexpected layoff).

Another factor to consider is your ongoing debt payments. Putting excess cash toward high interest credit card balances might make more sense than funding a savings account that earns four percent interest. Also, in a true emergency some spending can be reduced and postponed, such as retirement plan contributions, vacations, and entertainment. Ask yourself, “How much will I need to cover my minimum monthly expenses without resorting to credit cards or lines of credit?” That’s a good starting point for determining how much to set aside in an emergency fund.

Once you have a savings goal in mind, don’t wait. You can start small and increase contributions as you receive pay increases or windfalls. The money should be liquid – easy to get at – so don’t put it in investments with withdrawal penalties. A savings or money market account is a great place to set aside cash for a rainy day.

Then post a sign on the account: “Use only in case of emergency.”

Want to lower your 2013 tax bill? The time for action is running out. Read more.

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Want to lower your 2013 tax bill? The time for action is running out, so consider these tax-savers now.

* You can choose to deduct sales taxes instead of local and state income taxes. If you’re planning big ticket purchases (like a car or a boat), buy before year-end to beef up your deductible amount of sales tax.

* If you’re a teacher, don’t overlook the deduction for up to $250 for classroom supplies you purchase in 2013.

* Consider prepaying college tuition you’ll owe for the first semester of 2014. This year you can deduct up to $4,000 for higher education expenses. Income limits apply.

* Max out your retirement plan contributions. You can set aside $5,500 in an IRA ($6,500 if you’re 50 or older), $12,000 in a SIMPLE ($14,500 if you’re 50 or older), or $17,500 in a 401(k) plan ($23,000 if you’re 50 or older).

* Establish a pension plan for your small business. You may qualify for a tax credit of up to $500 in each of the plan’s first three years.

* Need equipment for your business? Buy and place it in service by year-end to qualify for up to $500,000 of first-year expensing or 50% bonus depreciation.

* Review your investments and make your year-end sell decisions, whether to rebalance your portfolio at the lowest tax cost or to offset gains and losses.

* If you’re charity-minded, consider giving appreciated stock that you’ve owned for over a year. You can generally deduct the fair market value and pay no capital gains tax on the appreciation.

* Another charitable possibility for those over 70½: Make a direct donation of up to $100,000 from your IRA to a charity. The donation counts as part of your required minimum distribution but isn’t included in your taxable income.

* Install energy-saving improvements (such as insulation, doors, and windows) in your home, and you might qualify for a tax credit of up to $500.

These possibilities for cutting your taxes are just the starting point. Contact us now for a review of your 2013 tax situation and tax-saving suggestions that will work best in your individual circumstances.

Three Percent Withholding Repeal

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On November 21, 2011, President Obama signed the “Three Percent Withholding Repeal and Job Creation Act” into law. This new law repeals three percent withholding on certain payments to government contractors.

Great News for all small government contractors.

“Other” business expenses is the generic term you see on your tax form. Just what are the other expenses you can legitimately deduct? Read more.

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What “other” business expenses are deductible? The generic term you see on your tax form may leave you scratching your head. Just what other expenses can you legitimately deduct?

While there’s no hard and fast rule, examples include insurance premiums, legal and professional fees, supplies you use in your business, utilities, auto expenses, and the deduction for certain energy-efficient commercial building property.

Here’s a guide for less obvious items.

* Like all costs you incur in your business, “other” expenses must be ordinary and necessary in order to be deductible.  In tax law, “ordinary” means normal, usual, or customary in the context of your business.

For example, if you’re a commercial fisherman, boat insurance is an ordinary expense. Other business owners may have a harder time justifying a deduction for boat expenses.

* An expense is necessary if it is appropriate and helpful to the operation of your business.

* Some expenses are only partially deductible. For instance, the cost of meals and entertainment must have a direct business purpose before you can claim a deduction. Even then, your deduction is generally limited to 50% of your cost.

* Certain expenses are specifically identified as nondeductible. Personal, living, or family expenses fit into this category, as do fines, penalties, political contributions, commuting to and from your job, and most lobbying costs.

Contact us any time you have a question about the deductibility of a business expense. We’ll help you get the greatest tax benefit.

Woman-Owned Small Businesses are BIG Business

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If you are a woman-owned enterprise, take heart that you are not alone! There are nearly 6.5 million women-owned businesses generating a reported $940 billion in revenue, according to the 2009 U.S. Census report. For many women entering the small business ownership ranks, the reasons are as varied as the women themselves. Small business ventures like Mary Kay Cosmetics which recently posted a $2.5 billion in lipstick, eyeshadow and other beauty sales in 2010 even in this two-and-a-half year long recession. Large corporate businesses like Jill Blashack’s Tastefully Simple are also making a significant mark on the business world. One way to further highlight your small business enterprise is to undergo a woman-owned certification process. There are pros and cons to certification and depending on your business type and commitment level, you may want to weigh your options before you decide to certify.

What is certification?

Certifying a business as woman- or minority-owned can provide additional opportunities for growth that may not otherwise be available through more traditional business channels. If your business would benefit from access to large national suppliers or government contracts certification may be in your future.

With the signing of Executive Order 13360, an increase in federal contracting and subcontracting opportunities were made available for both veteran service-disabled and woman-owned businesses. Many government contracts have a portion of their work earmarked for this population of business owners and even give preference to this smaller subset when contracted dollars are allocated. That means that there are many government contract dollars just waiting for your small business to fill a need. In order to qualify for these contracts, a woman-owned enterprise must complete several steps including an application and government contract training course. These steps help to ensure that you and your business are ready to manage the work required including the substantial paperwork that comes with a government contract.

Mounds of Paperwork

With any government contract also comes the ‘bureaucratic red tape’ associated with government work. The process can be intimidating at first, so collect your resources, attend the government sponsored courses and then evaluate if government contract work is a good fit for your small business.

Steps to Certification

Like any reward, the process to achieving success is often a difficult one. Obtaining woman-owned certification is also a lengthy process, but can be highly rewarding in the end. Here’s a brief list of what is required:

 

  • · Business must be woman-owned and led. The owner must be female and hold at least 51 percent interest in the company.
  • · The woman-owner must be active in the daily operation of the business. This ensures that a man doesn’t put his wife on the masthead only to be left to running the company himself. You can demonstrate involvement by providing documentation with regard to the daily operation, hiring, firing and community duties of the business.
  • · The woman-owner must be a U.S. citizen and in business for a minimum of six months. The longer the business is in operation the better for consideration (usually several years with a solid track record).

It’s a marathon, not a sprint.

If your business can clear the first three bullet points, you’re in a good position to start the certification process. The entire application from start to approval can take several months to up to a year to complete and receive approval. Stay organized and keep a duplicate set of all records so that you know where you are in the process and can readily work on open issues and documentation. As a safety precaution, store your second set of documents off-site, so you’re covered in the event of a workplace catastrophe.

What are the types of certification?

Women Business Enterprise Certification (WBE) – A national certification awarded by the Woman’s Business Enterprise National Council (WBENC). This is a lengthy application process requiring the woman business owner to not only demonstrate 51 percent or greater ownership in the business, but also a full set of business financial statements (prepared by a third party accountant), copies of rental agreements, equipment rental or purchases, real estate holdings and even records like bank signature cards. There is a $300 application fee.

HUB Zone – The SBA’s Historically Underutilized Business 8(a) program called the HUB Zone program, is based on the geographic location of the business’ primary site. The mission of the program is to serve economically disadvantaged and challenged communities. Each state has a hand in running the program, so check with your state’s Minority Business Development center through the SBA to find details.

State and Local Programs

Again, each state runs their own version of the national woman-owned program. Details for application and levels of certification can be found on the individual states’ web sites. Using the state-level application can be cost-effective and far less time consuming if you’re only looking to expand your business opportunities within your state. For businesses in large states like New York, Texas and California, this is often a great option and way for a small business to explore contracting on a more limited scale.

Additional resources:

WomenBiz.gov – The hub for learning the ins and outs of navigating government contracting. Start here to learn the basics and see if certification is right for you.

NAICS – Obtain the North American Industry Classification System (NAICS) for your small business’ industry or service type. Once you have these numbers, you can then apply to Dun & Bradstreet for a DUNS number.

Central Contractor Registration – Primary database for becoming a registered U.S. Federal Contractor and for government contractors to search for qualified subcontractors like you. Note: You can also obtain your DUNS number here.

Defense Contractor – If your small business is seeking work with U.S. Department of Defense contracts, you’ll need to register ith the On-line Representations and Certifications Agency (ORCA). This new online registry will gain your business access to contracts and awards from the DOD. Data can be entered here once for eligibility to all government contracts.

Federal Business Opportunities (FBO) – This site gives you access to the Procurement Technical Assistance Program, which is a resource at no or low cost that provides assistance to businesses in marketing products and services to federal, state and local governments.

There are many ways a woman or minority-owned small business can expand their markets and explore government contracts. First and foremost on the list is to have well organized, accurate and timely small business finances so you can prove your business is a good risk that is ready and capable of the work. Talk with a us to see if your small business is ready for the challenge.

Copyright Information 2011 Professional Association of Small Business Accountants
Presented By: David Bradsher, CPA , a PASBA member accountant, located in Falls Church, VA