Tag: business owner

Now Is the Time for Business Succession Planning

According to several national surveys of closely held business owners, approximately three in five do not have any business succession plan in place.

At KRS, we specialize in advising owners of family and closely held businesses and our observations are consistent with the survey results.Now is the time for business succession planning

I am working with Joe, the owner of a profitable $75 million company, and we have been talking about succession planning for several years.  Joe is in his mid-sixties, in good health, and has no plan to retire in the foreseeable future.   Are you surprised that Joe has no succession plan for his business? Like many business owners, Joe can’t get his arms around the fact that having a plan doesn’t make retirement mandatory; it only protects the business (which is Joe’s most valuable asset) if he does.   Although we frequently discuss the importance of succession planning, Joe doesn’t seem to want to face the tough decisions involved.

Employee and customer concerns

Joe’s employees have been concerned about succession plans for quite a while.  When I met with him recently, Joe shared the fact that several of his major customers have also asked about his plans for the company.  Joe said that the customers don’t want to see the plan and don’t care about the financial arrangements, but they just want to know that the company will continue if something happens to Joe.  They want to know who will run the company if Joe can’t.  This is understandable, especially since the company is a major supplier for several customers.  The customers don’t want to risk interruption in product supply and they may reduce this risk by diversifying purchases among several suppliers if they don’t get answers, resulting in decreased revenue and profitability for Joe’s company.

Plan succession before it’s too late

Joe is the sole owner of his company, but succession planning is equally important in multiple owner companies.  In all cases, it is best to execute a plan while everyone is healthy and getting along.  When a triggering event occurs, it is usually too late.  If you are a business owner, review your succession plan today, and if you don’t have a plan, contact your attorney and CPA to start working on one.

Time to Send Out Those 1099-Misc Forms

Time to Send Out Those 1099-Misc FormsWith tax season right around the corner, it’s time to start thinking about closing your books out for the year and preparing all your tax documents.

One of the required tax documents you may need to send out is the 1099-Misc. While this can be a tedious task, especially if you haven’t kept good records on your independent contractors, it is necessary to avoid penalties by the IRS. To help simplify things, here are the basics:

As a general rule, you must issue a Form 1099-Misc to each person to whom you have paid at least $600 in rents, services (included parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099-Misc for payments made for personal purposes.  You are required to issue 1099-Misc to report payments you made in the course of your trade or business. You’ll send this form to any individual, partnership, Limited Liability Company, Limited Partnership, or estate.

Some 1099 exceptions

There is a lengthy list of exceptions, but the most common one is payments to corporation. All payments made to a corporation do not typically require a 1099-Misc.  This means that if you make payments to a company that is incorporated or to an LLC that elects to be treated as a C-Corporation or S-Corporation, then this would not be reported on a 1099-Misc.  Unfortunately, this exception doesn’t apply to payments you made to an attorney.

Another exception is payments to vendors using a credit card or through a third-party payment network. You are not required to send a 1099-Misc for amounts paid electronically.  Instead, the credit card companies and payment companies will handle any required reporting.  Those electronic payment providers are required under certain circumstances to send out a different version of the 1099-Misc, called the 1099-K, instead.

Get those W-9s from vendors

To make the 1099 process easier, it is best practice for business owners to request a Form W-9 from any vendor you expect to pay more than $600 before you pay them.  Form W-9 will give you the vendor’s mailing information, Tax ID number, and also require the vendor to indicate if it is a corporation or not.  Having a completed W-9 will give you all the information to complete the 1099-Misc and save you a lot of headaches during tax season.

For the current year’s payments, businesses must send 1099-MISC to the recipients by January 31 of the following year.  Businesses also must send copies of each 1099-MISC sent to recipients to the IRS.  The deadline to the IRS is January 31.  This deadline applies to Form 1099-MISC when reporting non-employee compensation payment in Box 7.  Otherwise, paper filings must be filed with the IRS by February 28 and electronic filing by March 31. Also depending on the state law, businesses may also have to file the 1099s with the state.

We have your back

Rather than guessing at the IRS rules and requirements, why not let the KRS CPAs tax experts help? We will help you organize Form 1099 MISC recipient data and prepare all the necessary forms for you to submit. Contact Kelley DaCunha at [email protected] to get started.

Using Financial Reports to Manage Your Business

Your financial reports can be far more useful than just a report on the state of your business.

You can use these reports to manage your business, diagnosis what’s going right and wrong, and set goals for how to grow and add to your bottom line.

What are financial reports?

Financial reports are issued at set intervals and go to shareholders, partners, investors, and potential lenders.Using Financial Reports to Manage Your Business They describe your company’s financial strengths and weaknesses and typically contain the following:

  • Balance sheet: includes statement of liabilities, assets, and business capital
  • Income statement: reports on a company’s financial performance, how it gets revenue, and how and incurs expenses
  • Cash flow statement: shows how the changes in the balance sheet affect cash and cash equivalents that flow in and out of the company

Clearly, these financial statements are essential to run your company on financial fact, not hopes and prayers. Keeping these records thoroughly is the first step in running a successful business, being prepared at tax time to pay the IRS, and accurately valuing your company should you decide to sell. Any lender or investor will want to see your financial report before deciding whether they want to hitch their money to your star.

Why GAAP is a smart move

Although some companies generate their own financial statements, many turn to their accountant to formalize their statements according to GAAP, Generally Accepted Accounting Principles. It’s a smart move; here’s why:

  • Accountants can present your numbers so they are easy to read and understand.
  • If you’re a public company, accountants can provide audited financials that are certified by an independent entity.
  • Accountants can professionally format your numbers, give the statement a fancy cover, and state that an independent accountant has accepted your numbers.

Hidden gold in financial statements

Financial statements are a great tool to help you answer questions about your company and to manage money and priorities. At a glance, these statements can help you determine critical expenses as well as evaluate whether your financial position is getting better or worse, whether your staff is contributing enough to the bottom line, and whether you’re meeting set benchmarks.

We’ve got your back

We can help you compile and analyze your financial statements. Rather than guessing at financial statements, why not let the experts at KRS CPAs help? Contact us at 201.655.7411 for a complimentary initial consultation.

How to Handle Bad Debt and Taxes

When can you use bad debt to reduce business income?

How to Handle Bad Debt and Taxes Even when you take the customer to court and you still don’t get your money, there’s a way to make lemonade from this lemon of a customer.

If your business has already shown this amount as income for tax purposes, you may be able to reduce your business income by the amount of the bad debt. Look at bad debt as an uncollectible account—a receivable owed by a customer, client or patient that you are not able to collect.

Bad debt may be written off at the end of the year if it is determined that the debt is in fact uncollectible.

According to the IRS, bad debt includes:

  • Loans to clients and suppliers
  • Credit sales to customers
  • Business loan guarantees

How do you write off bad debt?

Your business uses the accrual accounting method, showing income when you have billed it, not when you collect it.

If your business operates on a cash accounting basis, you can’t deduct bad debt because you don’t record income until you’ve received the payment. If you don’t get the money, there’s no tax benefit to recording bad debt. You only record the sale when you receive the money from the customer.

Under accrual accounting, manually take the bad debt out of your sales records before you prepare your business tax return.

You must wait until the end of the year, just in case someone pays.

  • Prepare an accounts receivable aging report, which shows all the money owed to you by all your customers, how much is owed and how long the amount has been outstanding.
  • Total all bad debt for the year, listing all customers who have not paid during the year. Only make this determination at the end of the year and only if you’ve made every effort to collect the money owed to your business.
  • Include the bad debt total on your business tax return. If you file business taxes on Schedule C, you can deduct the amount of all bad debt. Each type of business tax return has a place to enter bad debt expenses.

It makes sense in any kind of business—no income recorded, no bad debt.

Collection efforts are important

A business bad debt often originates as a result of credit sales to customers for goods sold or services provided. The best documentation is likely to be a detailed record of collection efforts, indicating you made every effort a reasonable person would in order to collect a debt.

Take some solace by claiming a bad business debt deduction on your tax return. Not exactly a guarantee because you need to show that the debt is worthless, but it’s good to know there may be some relief.

We’ve got your back

The tax experts at KRS can help you with important accounting issues such as bad debt. Contact us today at 201.655.7411. And did you know that KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources? Check it out today!

The Importance of Working Capital for Staffing Companies

A snapshot of short-term liquidity

Working capital is a key financial concept for business owners when evaluating the overall health of operations. It reveals a snapshot of the company’s short-term liquidity position.

The working capital computation is relatively simple:

Current Assets – Current Liabilities = Working CapitalThe Importance of Working Capital for Staffing Companies

Current assets represent the most liquid items on the company’s balance sheet. They consist mostly of cash, accounts receivable, and inventory.

Current liabilities represent debts the company will need to satisfy within 12 months or less.

How much working capital do owners need?

A company should have sufficient working capital on hand to pay all its bills for a year. The amount of working capital informs owners if they have the necessary resources to expand internally or they will need to turn to banks or outside services to raise capital to reach sufficient working capital levels. Having a large positive working capital balance allows the company to grow using funds that were generated internally instead of being liable to outside investors or banks.

One of the main advantages of looking at the working capital position of a company is being able to foresee potential financial difficulties that might arise. If there is insufficient working capital the Company may need to secure financing to meet its current financial obligations. For staffing companies, having positive working capital is imperative for the business to succeed.

Staffing companies and working capital

Staffing companies also need to look into the business cycle of the company to fully understand the importance of working capital. The operating cycle analyzes the accounts receivable, inventory, and accounts payable cycles in terms of days. In other words, accounts receivable is analyzed by the average number of days it takes to collect an account. Accounts payable are analyzed by the average number of days it takes to pay a supplier invoice.

The main goal for staffing companies is to have a high accounts receivable turnover ratio, which is net credit sales divided by average accounts receivable. Divide 365 by your ratio and that will reflect the number of days, on average, to collect receivables. A higher ratio and lower number of days means the company is efficient in collecting receivables. A strong performance ratio for staffing companies range from 11.4 to 16.0, with the number of days to collect balances between 23-32 days.

If receivables are not being collected in a timely manner then the agency has to generate the cash to fund payroll, employee benefits, and payroll taxes not only for placements but for its own employees as well.

Working capital has a direct impact on cash flow in a staffing agency. Since cash flow is the name of the game for all business owners, a good understanding of working capital is imperative to make s business venture successful.

We’ve got your back

At KRS, our CPAs can help you review your staffing company’s working capital and put together a plan for improving your company’s financial situation. Give us a call at 201.655.7411 or email Sean at [email protected]

Understanding Family Business Dynamics

The Family Business – It’s Not Easy!

Managing a family business presents unique challenges not faced by businesses owned and operated by unrelated individuals.  If not addressed, family issues can divide the family and damage or destroy the business.  The larger the family, the more difficult it is to address the challenges. Ignoring the problems is Understanding Family Business Dynamicsnot a solution because they will not go away.

Statistics show that only 10 to 15 percent of family businesses make it to the third generation and only three to five percent make it to the fourth generation.

Typically, the business is started by the first generation and the founder’s children go to work in the business.  While the founder is alive and well, he or she takes the lion’s share of the compensation and profits and, most of the time, everyone appears to get along.  After the founder is gone, the second generation may continue to get along, but in many cases, it becomes a competition to see who can take the most and work the least. This puts a great deal of financial stress on the business because it now may have to support two, three or more families at the level that it previously supported one.

If the business does make it to the third generation, there are many more children involved and the problem grows exponentially, which almost always leads to its demise.

Compensating family members fairly

When it comes to family business, fair is not equal.  Although the business may be owned by many family members, the ones that actually work in the business must receive fair compensation for the jobs they do.  If one family member is the company’s top salesperson and her older brother is a part time worker, they should not receive equal compensation.  For a family business to succeed over multiple generations, there can be no entitlement.  The top performers can get a job anywhere; they do not have to stay in the family business.  If the performers leave, the entitled people are in trouble.

If after everyone receives fair compensation for their services, profits can be distributed to all owners, but only in an amount that will leave the business with enough cash to continue operations.  The business should never make the mistake of borrowing to make distributions.

To succeed in the end, business decisions must be right for the business and family decisions must be right for the family.  All of the children may not be interested in the business, or your youngest daughter may have more to contribute than your oldest son.  When it comes to the business, each family member should be evaluated based on what they bring to the table, not who their parents are or the order in which they were born.

We’ve got your back

At KRS CPAs, we know business is personal for you and your family. Learn more about our services for family-run businesses and contact me at 201.655.7411 or [email protected] to discuss your situation.

 

How to Read and Understand the Balance Sheet

How to Read and Understand the Balance SheetDetermine the health of a business by analyzing its Balance Sheet

The balance sheet is a standard financial report that is often included with a business’ financial statements.

It is easy for business owners to understand the profit and loss statement (P&L), which provides business revenues and expenses for a given period. The balance sheet, however, provides a snapshot of a company’s accounts, specifically assets, liabilities and equity, at a given time.

So why is understanding your balance sheet so important?

First, as mentioned above, it includes the company’s assets at a specific point in time (i.e., month-end, year-end, etc.). A classified balance sheet will list the assets by liquidity and show what can and should be converted to cash quickly to pay for liabilities, operating expenses, or to invest in new ventures. Conversely, the non-liquid assets will also be listed and tell readers what the company owns long-term.

The liabilities section of the balance will show any upcoming amounts due in the short-term as well as any long-term balances. Usually, a liability is considered short-term if it is due within 12 months of the balance sheet date.

When reviewing a company’s balance sheet, the reader will review current liabilities as well as the current assets and determine if the company has sufficient current assets to settle short-term liabilities.

If current liabilities exceed current assets, the reader may conclude that the company may not be able to settle current liabilities as they come due.

Long term assets and liabilities

The long-term assets and liabilities also tell a story about the company’s future. Long-term assets such as notes receivable will advise the reader that the company will convert the assets to cash in the future. The long-term liabilities will advise of the future commitments the company has and its ability to settle those future commitments.

Analyzing a company’s balance sheet from one period to another will also provide information regarding the business health. For example, reviewing the trend in accounts receivable from one period to another can identify issues such as slow collections and uncollectible debts.

The equity section of the balance sheet is made up of the initial investment in the company and any accumulated profits or losses retained in the business at the balance sheet date. This balance is what the owners would expect if the company was liquidated. If equity is negative, the company would not have sufficient assets to settle its debts if the assets were liquidated at the balance sheet value.

For the balance sheet to be an effective tool for business owners in analyzing the strengths of their business, it should be kept on the accrual basis. In fact, financial statements prepared on the GAAP basis (Generally Accepted Accounting Principles) are usually accrual basis. An accrual basis balance sheet will include all accounts receivables and accounts payables, thus providing an accurate snap shot of the company’s assets and liabilities at a specific date.

Conversely, cash basis balance sheets will not include the receivables and payables and, if these items are material to the business, the reader will not know what collections are expected in the short-term and what liabilities will need cash in the immediate future.

If you are a small business owner take a moment to review your balance sheet. Understanding how to improve specific account balances can help you grow a financially secure business.

We’ve got your back

At KRS, our CPAs can help you review your balance sheet and put together a plan for improving your company’s financial situation. Give us a call at 201.655.7411 or email me at [email protected]

 

Tax Cuts & Jobs Act and Section 199A

Tax Cuts & Jobs Act and Section 199AFor taxable years beginning after December 31, 2017 and before January 1, 2026, non-corporate taxpayers (individuals, trusts, and estates) may take a deduction equal to 20 percent of Qualified Business Income (QBI) from partnerships, S corporations, and sole proprietorships.

QBI includes the net domestic business taxable income, gain, deduction, and loss with respect to any qualified trade or business.

The deduction is available without limitation to individuals as well as trusts and estates where taxable income is below $157,500 if single and $315,000 if married filing jointly. There is a phase-out when taxable income from all sources exceeds $157,500 to $207,500 for single filers and $315,000 to $415,000 if married filing jointly. The deduction is 20 percent of the qualified business income, further limited of 20 percent of taxable income.

For example: Amy is a small business owner and files a schedule C.

  • Amy made $100,000 net income from her business in 2018.
  • Amy files a single return and her taxable income is $70,000.
  • Amy’s Sec. 199A deduction is 20% of $70,000, or $14,000.

QBI is determined for each trade or business of the taxpayer. The determination of accepted trades takes into account these items only to the extent included or allowed in the taxable income for the year. This figure cannot be deducted on the business return. There are two different categories in which trades and business can classified, Specified Service and Qualified.

Specified service means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture, originally included as specified service trades or businesses, were omitted in the final version of the TCJA.

Qualified means any trade or business other than a specified service trade or business and other than the trade or business of being an employee. Industry types include manufacturing, distribution, real estate, construction, retail, food and restaurants, etc.

The Section 199A deduction for individuals above the taxable income threshold is limited to the greater of either:

  • 50 percent of the taxpayer’s allocable share of W-2 wages paid by the business, or
  • 25 percent of the taxpayer’s allocable share of W-2 wages paid by the business plus 2.5% of the taxpayer’s allocable share of the unadjusted basis immediately after acquisition of all qualified property

Taxpayers should run the numbers through both provisions to ensure they received the best possible deduction.

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different – so don’t go it alone! Contact Simon Filip at [email protected] or 201.655.7411 to discuss your situation.

New Rules for Deducting Business Meals and Entertainment Under Tax Reform

New Rules for Deducting Business Meals and Entertainment Under Tax Reform

Prior to the Tax Cuts and Job Acts, a business owner generally could deduct 50% of business related meals and entertainment expenses. Meals provided to an employee on the business premises for the convenience of the employer were generally 100% deductible.

These expenses are treated differently under the new tax law.

How will meals and entertainment expenses be affected?

Entertainment expenses are now completely nondeductible, regardless of whether they are directly related to, or associated with, the taxpayer’s business, unless an exception applies. One of those exceptions is for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees.”

Under the new tax law:

  • Office holiday parties remains fully deductible.
  • Expenses for entertaining clients (including tickets for sporting, concert, and other events) were 50% deductible. The 50% deduction included the event tickets up to face value. Beginning January 1, 2018, these expenses are nondeductible.
  • Business meals and employee travel meal expenses remain 50% deductible.
  • Expenses for meals provided for the convenience of the employer generally were 100% deductible. Beginning 1/1/2018, they are 50% deductible. After 2025, they are nondeductible.

What should a business owner do to prepare for this change?

Update your general ledger to segregate expenses into accounts earmarked as 100%, 50%, or nondeductible. Having the expenses categorized at the time they are incurred will save a lot of effort come tax time. This practice will also allow your tax preparer to clearly identify which expenses are deductible and avoid errors in your tax filing.

We’ve got your back

At KRS, we’ve been tracking tax reform legislation closely and are ready to assist you in your tax planning and preparation so that you’re in compliance under the reformed tax law. Don’t lose sleep wondering what impact the new tax rules will have on you, your family, or your business. Contact me at 201.655.7411 or [email protected].

IRS Form 5472: What Foreign-Owned Companies Need to Know to Avoid Penalties

Is your company doing business in the US market? If you’re not filing IRS Form 5472, you could face large penalties.

The United States continues to see more investment from foreign companies and individuals who want a business presence here. When a foreign company decides to conduct business in the U.S., not only must it decide what legal entity structure to use, but after the entity is established, it must comply with all applicable U.S. tax laws. Filing the right tax returns and informational forms is critical to avoiding penalties.

IRS Form 5472 for foreign owned companiesFor the purposes of this post, a foreigner is a corporation from outside the U.S. or an individual who is not a U.S. citizen or a resident. Generally, foreigners can use two types of legal entities in the US market to conduct business here: a limited liability company (LLC), or a C-corporation.

Tax filing requirements for foreign-owned corporations

Generally, a corporation doing business in the United States is required to file applicable federal and state income tax returns following each annual tax period. A U.S. corporation with non-U.S. shareholders who own 25% or more of the corporation’s stock are generally required to file Form 5472, which has the long-winded title, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.”

Form 5472 is a separate filing requirement from the U.S. entity’s obligation to file income tax returns under the U.S. Internal Revenue Code (Code). This form must be attached to the reporting corporation’s federal income tax return. It requires certain information disclosures about the corporation’s foreign shareholders and any transactions between it and such shareholders during the tax year.

For example, two shareholders, one from the U.S. and one from Germany, form Reliant Panel, Inc., to manufacture industrial control panels in the U.S. They each own 50% of the company’s shares. Under the Code, Reliant Panel must file Form 5472.

Requirements for LLCs taxed as partnerships

In addition to filing Form 1065 (U.S. Return of Partnership Income), a partnership with foreign partners could be responsible for complying with other filing requirements such as Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), Partnership Withholding, and Nonresident Alien Withholding.

A partnership that has income effectively connected with a U.S. trade or business is required to pay a withholding tax on the effectively connected taxable income that is allocable to its foreign partners. A foreign partner is anyone who is not considered a U.S. person, which includes nonresident aliens, foreign partnerships, foreign corporations, and foreign trusts or estates.

The partnership must pay the withholding tax regardless of the foreign partner’s U.S. income tax liability for the year and even if there were no partnership distributions made during the year. Withholding tax must be paid on a quarterly basis.

Form 5472 for LLCs with a single foreign owner

When a U.S. LLC has a single owner (defined in U.S. law as a “member”), it is disregarded as an entity separate from its owner (“disregarded entity”). Newly issued regulations treat such disregarded entities as domestic corporations rather than as disregarded entities for the purpose of the foreign reporting requirements. Under these new rules, such disregarded entities are required to file Form 5472.

For example, Forco, Inc., a Polish corporation, forms Domeco LLC in New York, a wholly-owned LLC that is treated as a disregarded entity for income tax purposes. Under prior IRS rules, Domeco had no foreign reporting obligations. However, under the new regulations Domeco is required to file Form 5472.

Form 5472 requirements

Form 5472 requires the disclosure of the foreign shareholders’ names, address and country of citizenship, organization or incorporation, principal business activity, and the nature and amount of the reportable transaction(s) with each foreign shareholder.

Whether a reportable transaction has occurred is a complex determination. For example, a loan to a U.S. LLC by the foreign shareholder is considered a “reportable transaction” and requires the disclosure on Form 5472. In general, a reportable transaction is any exchange of money or property with the foreign shareholder, except for the payment of dividends.

Filing deadlines for Form 5472

Form 5472 is filed with the U.S. Corporation’s federal income tax return, including any extensions of time to file same.

Why is filing Form 5472 is so important?

Penalties for failure to file information returns are separate from payments relating to underpayment of income taxes. Under certain circumstances, the penalties for failure to file information returns can be significantly greater than the U.S. income tax liabilities. Failure to maintain the proper records, failure to file the correct Form 5472, or failure to file a required Form 5472 may result in a $10,000 penalty for each failure per tax year.

Additionally, if a failure to file continues for more than 90 days after notification of a failure to file by the IRS, an additional $10,000 may apply for each 30-day period, or fraction thereof, that the failure continues.

These fines can’t be appealed to the IRS! That is why foreigners doing business in the U.S. are strongly encouraged to consult with their tax advisors and ensure compliance with all U.S. tax and reporting obligations.

We’ve got your back

Whether you’re new to investing in U.S. companies or quite experienced, it is always important to have knowledgeable CPAs behind you to ensure that you are making the right moves when it comes to complying with the often confusing U.S. tax code. The experts at KRS CPAs are here to guide you through tax season and beyond. For more information or to speak to one of our partners, give us a call at 201.655.7411 or email me at [email protected].

 

Special thanks to attorney Jacek Cieszynski for his assistance in developing this post.