“The great thing about working with ADP is our firm’s ability to capitalize on one of the best payroll systems available while having the control needed to give our client the unparalleled services they have always enjoyed from our firm”. – Fred Daus

Lower Payroll Costs
Since Fredrick James has such a large client base in and around Clearwater, the firm was able to negotiate price and service levels from ADP that would not normally be available to individual business owners. In keeping with the Fredrick James philosophy of “saving you money”, these savings are passed through to clients.

More Payroll Service Options
Fredrick James clients will now be able to choose the Payroll Service Package that fits their business model. ADP has systems that will allow clients to add on their payroll packages as their businesses grow and expand. Services such as Secure Web Control Access, Health Care, Retirement Benefits, Human Resource Management and Pay As You Go Workers Comp can be added as-needed. In addition, clients who choose to use the ADP system will receive the same great service they are accustomed to in the Fredrick James family of Accounting, Tax, Payroll and Consulting services.

Human Resource Options
The Human Resource Feature offers another dimension for our clients that would not be available to small businesses. The Human Resource Feature includes background checks for prospective employees, State and Federal Compliance Database (summary of employment laws), and unlimited access to a team of HR professionals.

Fredrick James is excited to be able to offer clients this opportunity. Visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

How will this affect Small Business? The report indicates what you should already know: the IRS knows that corporations with a sole owner or a small group of shareholders provide opportunities for abuse of the system to understate tax liabilities. It also indicates that they’re going to be looking harder for these violations using every tool at their disposal. Of course, this means that if you’re a small business owner, you really want to do everything you can to ensure that you don’t get audited! And if you do get audited, you want to be sure you’re following all of the rules and regulations to the best of your ability to minimize your risk.

Several changes to audit procedures are scheduled for implementation in March 2012, just in time for the 2011 tax season. The most significant of these changes have to do with how returns are selected for audit and how that audit is initially researched and processed.

How will returns be selected for an IRS audit? The IRS has a variety of criteria for audit selection. A major source is the Discriminate Index Function (DIF). The DIF is an automated system that assigns scoring to returns. Once the DIF score of a return hits a certain threshold the return will be selected for audit. The higher the score, the more potential for a material tax change. The current version of DIF program dates back to 1988. Using results from a recent National Research Program study, DIF formulas are being updated for 2012. The IRS expects the revised DIF program to identify 2,500 Tax Year 2010 returns with assets of less than $250,000 for examination.

What will the IRS look for in an audit? Once a return is selected for audit the IRS examiner makes sure all prior and subsequent tax returns have been filed, as well as employment tax returns, information returns, international forms, and related tax documentation. Some of the areas that were identified as requiring increased scrutiny by auditors are:

• Significant differences between the amount of labor costs deducted in the corporate return and the amounts reported on employment tax returns
• Verification of proper filing of Form 1099 series forms
• Thorough investigation of Large, Unusual, or Questionable (LUQ) items
• Use of basic Integrated Data Retrieval procedures for online access to business returns, information reports and nationwide tax return data

Additionally, an IRS audit will always look for the following:

1. Large, Unusual, or Questionable items
2. Compliance with all Federal Tax filing requirements
3. Verification of reporting requirements for commissions, labor costs (cost of goods sold), subcontract, royalties, management fee, and consultant fees
4. Determine if the income from the related business entity was included on the shareholder/ partner’s individual return
5. Ensure that any loans to or from shareholders were not distributions of earnings, dividend income, or another form of taxable income
6. Potential for unreported revenue
7. International features and associated reporting requirements
8. Decrease in assets during the year
9. Correct classification of inventory

In closing, the IRS aims raise additional revenue through these procedural changes implemented in March 2012. The small corporate returns that will be selected for audit will undergo stickier guidelines and procedures for compliance. As a small business owner or shareholder, you should make sure that you are paying yourself a reasonable salary for your profession. Also, ensure that proper taxes are being withheld and remitted to the IRS on a timely basis. If you have any concerns at all about the risk of your Small Business being audited, Contact Fredrick James accounting immediately. We can help!

You can visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

Part of the law that gives us this tax cut is a “recapture” provision to help the government get some of that money back from those who earn more than $110,100 per year. Since this only applies to the first two months of the year, that is prorated to $18,350. If you earn more than $18,350 during the first two months of 2012, you’ll have to repay that 2% in the form of an income tax increase on income earned during that period when you pay your 2012 federal income tax.

If that didn’t click, read it again. What it means is that if you pay yourself $9,000 per month during the months of January and February, you’ll save about $360 in Social Security tax and avoid the recapture that would require you to pay it back. So, if you normally pay yourself more than that, it would benefit you to be sure to pay yourself less for that period. And if you normally pay yourself less than that, you’d get the benefit by paying yourself more for that period. How much you pay yourself for the remainder of the year will not have an affect on this.

Aside from this small quirk, employers need to implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31. For any Social Security tax over-withheld during January, employers should make an adjustment in workers’ pay as soon as possible but not later than March 31.

If you have any questions or need help with your personal or business taxes Contact us Today. We serve clients throughout the world through our virtual office. Read more about our Virtual Office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

What is a 1099-K and why am I receiving it?

The 1099-K is a new form for 2011 for reporting payments to the IRS that are received by a person or a business from a Merchant (Visa, Mastercard, American Express, Discover) and/or a Third Party Network, (PayPal, Google Checkout, etc.) when the total gross payments are greater than $20,000 and there have been greater than 200 transactions.

For those who exceed those criteria, the IRS now requires Merchants and Third Party Networks to report all gross amounts paid, defined as “the total dollar amount of aggregate reportable payment transactions for each participating payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts”. What does this mean you ask? This means all sales are reported on accounts which exceed $20,000 and 200 transactions.

This can get a little fuzzy in some cases. Like, if you charge a customer credit card for $500.00 for merchandise and the customer comes back and returns $100.00 of merchandise 3 days later, then “the total dollar amount of aggregate reportable payment transactions” is $500.00. The IRS is going to leave it up to you to keep good enough records to prove “adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts”. So, if this new requirement is likely to affect you, you need to be sure that you have an adequate record-keeping system.

So what do I do now that I have this Form 1099-K?

There won’t be a specific line on 2011 tax forms for recording 1099-K amounts, however, the IRS requires that the person or business report any income reported to you on Form 1099-K along with any other income on Line 1b (Form Sch C, Form 1120S, Form 1120, Form 1065 ). Reporting the “adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts” should be done on line 1d (Form Sch C, Form 1120S, Form 1120, Form 1065 ).

If you have any questions or need help with your personal or business taxes Contact us Today. We serve clients throughout the world through our virtual office. Read more about our Virtual Office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

Fred Daus, CEO of Fredrick James Accounting, Tax and Consulting stated: “In essence, this law would have required that a business or landlord send a 1099  to Best Buy for the purchase of a $649 laptop used for their business”.  “Imagine Best Buy’s response to a small business owners request for a W-9 so it can mail a 1099 to them for their purchases in 2011!”.  “Most business’s, big and small, had no idea how to deal with the new 1099 filing requirements”. “This is a big win for all of the Small Business’s and Mom and Pop Landlord’s who would have had to pay the tremendous costs of preparing the 1099’s”.  “We made our opinion heard, fought hard and our lawmakers listened to us!

Last week we went over the individual tax payer’s record keeping requirements, this week I want to discuss what business owners should be holding onto and for how long.

Obviously businesses have a more extensive list of record keeping requirements than individual do but it’s an important detail not to be overlooked as it will help you to avoid unpleasant surprises in an audit.

Businesses are all different, but in this case documentary evidence for business deductions, those that are reasonable and ordinary in the course of business, is generally the same for all types of business entities.

One big mistake a lot of smaller businesses make is not having a separate business checking account. This is a big “no-no”. Get your business checking account set up if you don’t have one and use it for all transaction to prove gross income and business expenses.  If faced with an audit, you can bet the auditor will probably reconcile this account and if any personal deposits or disbursements appear, you’d better have the paperwork to back that up.

What to keep for business deductions:

• Receipts
• Canceled checks
• Bills
• Petty cash slips
• Bank statements (bank statements are very important for electronic receipts)

Receipts should list the name and location of vendor, dates, itemized charges, number of people, and written explanation of the expense to prove its business purpose.  For entertainment expenses, you must document the business relationship of those attending.

Canceled checks are very important for proving amounts, but do not necessarily prove business purpose.

Business expenses should be recorded as close as possible to the actual time of the expense.

There are a few exceptions for Travel, Meals and Entertainment where documentation is relaxed:

1. Under an accountable employee reimbursement plan that adopts the per diem method, which is a fixed daily reimbursement amount
2. A travel expense (except for lodging) less than $75
3. A receipt for transportation is not available (e.g. taxi fare)

I would highly recommend NOT making estimates, they are rarely allowed (except in extraordinary situations where records are destroyed). This is especially true for Travel, Meals and Entertainment, and deductions related to listed property (items commonly used for personal use), all of which have very strict deductibility requirements.

Fred’s Fast Tax Tip: Records for business assets should be retained through the statute of limitations for the tax year in which the assets are disposed of. This is important for audits that investigate depreciation expense.

Employment records must be retained for 4 years after the tax is due or paid, whichever is later.

As important as proper record keeping is for successfully responding to tax audits, record keeping is just as important for effectively managing a business (small or large) in terms of cash flow, short-term working capital needs, and profitability over the long-run.

Record keeping and analysis of accounting reports ultimately reveal where a business needs improvement and where growth opportunities exist. So, you’ve got even more good reasons to keep on top of your business record-keeping! If it all gets to be too much, and you’re losing the battle then I would recommend you find a qualified bookkeeper to help you whip your books in shape. Then kick back, put your feet up on the desk and give yourself some much deserved praise for being such a savvy business owner!

Accrual Method or Cash Method Accounting?

It’s one of the first questions you’re usually asked when setting up your accounting software and it can be one of the most puzzling. This topic is complicated and often confuses a lot of people (you are not alone if you’re stumped). Whether it is for personal finances or business, this is an important decision that will have a big affect on your financial future.

So which is right for you? Well, that depends on your goals: are you interested in a quick fix and maintaining your financial status or would you like to get out of debt, grow your business and increase your personal financial status?

The Cash Method

The Cash Method of Accounting tracks income when it is received (money is collected) and expenses when they are actually paid (money is disbursed) in a given period.  This method does not match income to expenses in a given time period.  It is a strict cash in and cash out system.  The benefit of the Cash Method of Accounting is that it reports a better representation of cash flow than the accrual method.  The downside here is that it does not match income to the expenses that the income is associated to in the appropriate time period.

Basically, the cash method for either personal or business purposes is your absolute basic method of recording your finances to meet minimum government reporting requirements. It is a quick fix that will keep you apprised of how much you have in the bank at that moment in time. What it won’t do for you is alert you to any imminent issues like runaway debt or give you a full understanding of your financial situation. If unchecked, you could find your personal or business finances getting out of control leading you to bankruptcy and loss of your home and/or business.

The Accrual Method

The Accrual Method of Accounting reports income when earned (before the cash is received) and expenses as they occur (before the cash is paid out) in a given time period.  The Accrual Method of Accounting recognizes economic events at the time the transactions occurs thus matching revenues to expense which is often referred to as “The Matching Principle”.  This method’s strength is that it gives a more accurate picture of an entity’s current financial position. The downside is that it does not measure cash unless a Cash Flow Statement is included in the Financial Statement Presentation.

Accrual Method accounting takes more effort to use, and if you are self employed or own a small business you’ll definitely need a bookkeeper to help you stay on top of things, however the benefits far outweigh the expense and inconvenience. For self employed and business owners this method can alert you to growing trends of outstanding A/R that could sink you in a matter of months. It also helps you have a more accurate picture of the growth of your business. For personal purposes, this method will help you get off the treadmill of cash in/cash out and start you on a path to financial growth.

Fred’s Fast Track Tax Tip:

If you’re considering switching to the Accrual Method for your personal or business finances, be aware that there is a bit of a learning curve.  I generally steer my non-public business clients to a Modified Accrual Method which integrates the Cash Method and the Accrual Method because it adds a level of reporting on the Accrual side that should be taken into consideration.

I would suggest finding an accountant in your area and scheduling a one hour consultation. Your investment in professional advice will probably cost a few hundred dollars and several hours of your personal time to understand the Accrual Method, but you will be more likely to understand it, stick with it and get better reporting results (lower debt, more savings) if you do.

Doh! I forgot to file my taxes!

So, what about those slackers out there who waited too long, what can they expect to happen because they missed the deadline? No, the sky won’t fall and their first born won’t be taken hostage by the IRS—however, they CAN expect to be hit with some stiff penalties:

Form 1120S – If no tax is due, the late filing penalty for returns required to be filed after 2008 increased to $89 for each month or part of a month (up to 12 months) the return is late or does not include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation’s tax year. In addition, the minimum additional late filing penalty for returns required to be filed after 2008 that are more than 60 days late increased to $135 or the balance of the tax due on the return, whichever is smaller.

Form 1120 – A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $135. The penalty will not be imposed if the corporation can show that the failure to file on time was due to reasonable cause. Corporations that file late should attach a statement explaining the reasonable cause.

Form 1065 – The penalty is $90 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership’s tax year for which the return is due.

If you haven’t filed already, you’ll probably want to see your Accounting professional right away but don’t expect to get your return filed by the deadline; chances are your Accountant is dealing with quite a few other last minute filers who got in just ahead of you. So plan on paying at least the first month’s penalty but don’t let that deter you from getting your filing done because, if you put it off now, you’ll end up paying more and more fees as time goes on and that is not a good business strategy!

Care to share your experience with late filing of your business tax returns? Leave a note in the comments section!

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida. Visit our website www.FredrickJames.com or call 727-474-0922 for more information.}

_{U.S. Treasury Department Circular 230 Disclosure: In accordance with applicable professional regulations, please understand that, unless specifically stated otherwise, any written advice contained in, forwarded with, or attached to this communication is not a tax opinion and is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed under the Internal Revenue code. The information provided on this blog is not intended to provide or be a substitute for specific individualized accounting, tax, legal, business, or investment planning advice. Where specific advice is necessary or appropriate, Fredrick James, LLC recommends consultation with a qualified Accountant, Tax Advisor, Lawyer, Financial Planner or Investment Manager. The information provided herein is for general informational purposes only and should not be considered an individualized recommendation, personalized investment advice or an endorsement by Fredrick James, LLC. The information presented is prepared for a general overview of subject matter; however, its accuracy, completeness or reliability cannot be guaranteed and therefore should not be relied upon as such. Fredrick James, LLC accepts no liability for any direct or consequential loss arising from any use of this information.}

Very few business owners start their company with the goal of becoming collection agents, so being put in that position can lead to avoidance. You have a personal relationship with your clients and it can become an emotional issue for many small business owners—who wants to add stress to people you know are already struggling? So let’s take the emotional baggage out of the equation by setting up some simple guidelines that communicate your expectations and provide more up to date information for your clients that will help them better budget their payments so you get to avoid being “the bad guy”.

No doubt about it, invoicing is tedious. But with a little tweaking, the process can be improved to make communication between you and your clients/customers more frequent and reduce accounts receivable aging.

Avoidance and lack of communication leads to misinformed or uninformed (and eventually very frustrated) clients, this is often the first mistake that starts you on the road to the A/R blues. Unappealing as it may seem, staying on top of your invoicing improves your cash flow, helps you identify problem clients more quickly, reduces invoice disputes since clients still have the transactions fresh in their heads, and improves client relations because it helps your customers manage their own cash flow.

Your new mantra: Invoice clients/customers promptly and more often!

So where do we begin? As with most things, having the right tools for the job can save you time, frustration and money. The invoicing process can be drastically simplified with commonly used accounting software packages like QuickBooks which will automate the invoicing process, producing professional looking invoices that can be mailed or e-mailed to your clients. The power behind most invoicing systems is that you can enter time, products and reimbursable expenses into the program’s customer center during work hours and invoice on a daily basis if needed. Yes, these systems can take some time to set up and often the use of a consultant to guide you through the installation process, however, the upfront investment of time and money significantly reduces the time and embarrassing mistakes that can ultimately show up on your invoices down the road.

How often you invoice is up to you, but ideally you’ll want to shoot for invoicing on a weekly basis or a biweekly basis. Invoicing on a daily basis any finished work is a great way to stay on top of your invoicing workload too. This invoicing schedule might seem somewhat overkill, and you may be worried about your client’s reaction to the change but think of it more like a marketing campaign than billing. “The squeaky wheel gets the grease” and the more often you correspond with the customers, the more likely your invoice will fall at the top of their list for prompt payment.

Okay, so you’ve got the “why” and you’re ready to get your accounting software setup, now let’s outline the steps to implement your plan of action:

1. Invoice your client and include that the amount was either deducted from their prepaid account or that the invoiced amount will be deducted from their payment account on file (Credit Card, ACH) within 3 business days of the invoice date. Always, always include an invitation to call you if they have any questions.
2. Prepaid accounts need to be notified of their balance and any additional payments needed to keep their account current in order for work to continue. If this prepaid account runs out, then work stops until additional prepayment funds are received.
3. The accounts are then paid within the 3 business days of the invoice date and either accepted or denied by the credit card merchant or bank.
4. Any denied accounts are promptly followed up on and any work on that account is stopped until the invoice payment is satisfied.
5. Clients who do not follow up on denied accounts are placed into the collection process (this will come later in our series).

This process is service-based but can be easily modified for retail business: Payment must be received in full prior to delivery. Better yet, never order product for the customer until the client has at least paid your costs on that product by requiring a non-refundable deposit.

Don’t allow yourself to be at the mercy of your clients; take your power back by implementing these simple and extremely effective processes! It’s not rocket science, but there are still companies that will not subscribe to these simple rules who will find themselves singin’ the A/R Blues and, sooner or later, out of business.

Be proactive with your client communication and be honest about your expectations; you’ll have happier clients, enjoy your business more and have the satisfaction of seeing it thrive.

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money and grow their income since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida with a focus on providing outstanding service, tax savings and financial growth to clients in the Tampa Bay area,  Nationwide and around the world. Visit our website www.FredrickJames.com or call 727-230-0716 for more information.}