Tax season is a reminder of the importance to check Federal and State withholding allowances at least once a year. The last thing we want is our clients being surprised by a tax bill that could have easily been resolved by adjusting allowances. The payroll withholding system is straight forward for the taxpayer who files single, with the standard deduction, and only has one job. For those that do not fit in this category it is likely withholding allowance should be something to pay close attention to. Life changes such as marriage, divorce, loss of a dependent, birth of a child, and selling or purchasing a primary residence can all affect what withholding allowances should be.

In addition to life changes affecting withholding allowances being a part of a dual income household introduces other complications.  Couples who both work are surprised when they were single taxpayers receiving significant refunds and now married barely breaking even or owing taxes. Employers withhold based on the tax bracket they expect taxpayers to be in based on salary. The combination of a couples’ income can push them into higher tax brackets that taxes are not being withheld for. We recommend checking the “Married, but withhold at higher Single rate” box on the Federal Form W-4 for couples who are both working if underpayment is a concern.

With the new tax law changes for North Carolina all employers should have reached out regarding adjusting allowances using the new worksheets. With the introduction of new penalties for underpayment we are telling our clients when in doubt claim 0. We can always reassess after 2014 taxes are filed whether this should be adjusted.

In an average year most employers will not remind you as an employee to revisit your withholding allowances for Federal and State taxes. Taking the time to contact your employer or the human resources department could save a lot of stress at tax time. Below are the withholding forms and worksheets. As always we are happy to help with any questions!

Federal Form W-4

http://www.irs.gov/pub/irs-pdf/fw4.pdf

North Carolina Form NC-4

http://www.dornc.com/taxes/wh_tax/newnc4.pdf

Over the past several months we have received a common question that comes from our entrepreneurial clients: do I need to form a LLC (Limited Liability Company)? Here are some thoughts:

Legal Perspective:

LLCs are used by small business owners to keep their businesses and business assets separate from their personal financial assets. When there is the possibility for liability from your business activities it can be important to keep the two separate. The costs for setting up a LLC with the state of North Carolina include a $125 filing fee for the Articles of Organization. We recommend working with an attorney to get these documents filed and including an Operating Agreement if there is going to be more than one owner. We do not give legal advice.

Tax Perspective:

Forming an LLC where you will be the sole member does not change anything from a tax perspective. We do suggest you choose the name carefully since it will be used on all formal tax documents for the business. If another individual is listed on the organization documents (spouses are common examples) a partnership has been created. This requires a separate tax return to be filed. The benefits of forming a LLC is that if you decide to make an S Corporation election for tax benefits it can be as simple as filing a one page form and submitting to the IRS. The scope of the S Corporation benefits goes beyond this blog post, but if interested contact us for more information.

Beware the Incorporation:

First, we suggest consulting your tax advisor before making any decision regarding entity formation. We have heard business owners use the term, “I want to Incorporate myself”. Incorporating your business without any other elections automatically results in you becoming a C Corporation. Unless there is a specific business purpose this is usually not the formation we recommend to our small business clients. C Corporations are subject to higher income tax brackets at lower income levels as well as double taxation. However, if you have incorporated yourself all is not lost. You can make an election to become a S Corporation after incorporating. This typically should be done within 2 months and 15 days of incorporating which is again why we recommend discussing options with your tax advisor.

There are plenty of options available to business owners regarding entity formation. We work with our clients to direct them towards the most tax efficient options that will assist in a successful business.

Successful entrepreneurs know that cash flow can make or break a business. There is a saying: “revenue is vanity, profit is sanity, but cash is king.” This saying summarizes how imperative it is to have a good handle on the cash flow of a business. A common surprise as accountants is seeing businesses that do hundreds of thousands of dollars in revenue each year miss one crucial step in cash flow management: performing monthly bank reconciliations.

If good cash flow management does not exist then business owners don’t know what they can afford or when they can afford it. This leads to missed opportunities and lost revenue. We encourage all our clients to reconcile their bank accounts at least monthly. The first step to getting on track with this is having a separate business bank account to track income and expenses. This may seem like a simple first step, but for sole proprietors it is not a requirement that a separate bank account exists. Once the monthly statement is received, business owners can begin the reconciliation process.

If you are set up in QuickBooks, Xero or other accounting software this should be as simple as marking transactions that have already been entered as clearing the bank. If accounting software is not being used, this is the time to summarize in Excel or a similar format the transactions that have taken place and compare to your check register. Reconciling accomplishes several important goals:

Helps Eliminate Errors

Reconciling each month will help discover data entry errors. If transactions are not being automatically imported to accounting software then it can be easy to transpose numbers when entering checks paid or deposits received. Reconciling will catch these errors. Reconciling will also ensure there are no missing transactions. Our fear as accountants is that clients could be missing tax deductions due to poor bookkeeping.

 

Creates Accurate Financial Statements

Reconciling your bank and credit card statements monthly confirms that all transactions have been entered, they are accurate, and that the financial statements are a true reflection of how the business is doing. Having confidence in the financial statements allows business owners to capture opportunities as they present themselves. They know at all times whether they can make a capital expenditure, which months of the year they are most profitable and have the ability to budget for futures years.

 

Makes Tax Time Effortless

Keeping monthly tabs on your bank, credit card and loan accounts makes tax time a lot easier on business owners. Business clients with clean, reconciled books helps eliminate the back and forth and reduces tax preparation fees. Most importantly, when business books are clean we can focus on tax planning to make sure business owners are being as tax efficient as possible.

If reconciling seems like a daunting task, reach out to your tax or accounting software professional. Taking the short amount of time to learn will save plenty of headaches down the road.

Wilmington, NC is a top tourist destination and we see a lot of clients with rental properties and a general desire to get involved in the real estate market. Buying and selling real estate may not have seemed like such a great idea a few years ago, but Business Insider magazine ranked Wilmington 13th in best housing markets for the next five years. There are many tax planning strategies available that business owners can use to help defer some of the taxable gain on properties that they buy and sell. One of these is a Section 1031 Deferred Like-Kind Exchange.

Section 1031 Deferred Like-Kind Exchange

Under Code Section 1031, gains on investments and business properties can be deferred in a like-kind exchange. This is set up as a tax deferral rather than a tax avoidance. One of the benefits of the 1031 exchange is to defer gains to future tax years when taxable income is lower. By deferring tax on gains clients have more money in their pockets now to invest. Section 1031 exchanges can be used by individuals, C Corporations, S Corporations, partnerships, LLCs and trusts.

What is like-kind property?

Both properties must be held for use in a trade or business or for investment. Quality or grade does not usually matter. Most real estate will be like-kind to other real estate.

If you receive cash, relief from debt, or property that is not like-kind you may trigger some taxable gain in the year of the exchange. It is recommended to use exchange facilitators to ensure all appropriate documents are drawn up.

Time Limits to Complete Section 1031 Deferred Like-Kind Exchange

–          You have 45 days from the date you sell the relinquished property to identify potential replacement properties. Identification must be in writing, signed by purchaser and delivered to someone involved in the exchange. This is usually the seller or qualified intermediary. Real estate agents, attorneys, and accountants are not sufficient.

–          Replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date with extensions of the income tax return for the tax year in which the relinquished property was sold. Whichever date is earlier applies.

Things to Remember

Using a qualified intermediary is the key to a successful like-kind exchange. Note that taxpayers cannot act as their own intermediary. Taking control of cash or other proceeds before the exchange is complete could result in all of the gain immediately taxable. If cash or other proceeds are received in an exchange they may be taxable but only to the extent that they are not like-kind property.

               We work with our clients as they go through a multitude of life changes. Our goal is to develop long term relationships and be more than the once-a-year accountant. One of those very enjoyable life changes is children! Our office has been flooded with 2013 babies and brand new 2014 babies this past week and we love getting to meet them. Not only do children enrich your lives, but they may be able to save significant tax dollars too.

                An integral first step is to obtain a child’s social security number. Parents can apply for this at the hospital when requesting a birth certificate. The tax returns cannot be completed until each child’s social security number is present to avoid delayed refunds and possible fines. Also remember that parents can only claim an exemption for a child born or adopted in or before the tax year that is being filed. January and February 2014 babies will have to wait a whole year to provide tax benefit. However, for children born in the prior year the full exemption is taken no matter when the child was born during the year. For 2013, the exemption amount is $3,900 per individual. To put it in perspective, for a family of 3 in the 28% tax bracket that is a tax savings of $3,276!

                It is also important to note that if in the past the tax returns were filed as single, the birth of a child may qualify for the head of household status. Head of household filing status provides more favorable tax brackets as well as an increased standard deduction amount. For 2013, the single taxpayer’s standard deduction is $6,100 versus $8,950 for head of household filers. For married individuals, having a child will not change your filing status. Regardless of filing status the birth or adoption of a child is also a reminder to check Federal and state withholding allowances. Depending on each individual’s situation this may result in an increase in allowances producing more take home pay each pay period. Be sure to not arbitrarily increase allowances, but use the W-4 (Federal) and NC-4 (North Carolina) worksheets to help determine what withholding allowances should be.

                The vast majority of tax related items concerning children are all beneficial. However parents should be aware of the tax on a child’s investments income that is referred to as Kiddie Tax. If a child earns over $950 in interest, dividends, and other unearned income they will be required to file a tax return. For children that are under age 18 at the end of the year or a full-time student under the age of 24 who earn over $2,000 of the same type of income their earnings could be taxed at the parent’s tax rate instead of their own. These rules were originally put in place to prevent parents from sheltering investments in their children’s names purely for tax purposes. That is a simplification of the Kiddie Tax, but if you think your child may have a filing requirement contact your tax professional.

                Now back to the good news! While children can reduce your taxable income through exemptions and possibly increased standard deductions, they can also create various tax credits on the tax returns. In the next installment of this blog we will discuss the credits available to parents and how to ensure these credits are used to their full advantage.

As soon as the Form 1099s went out the door and the county property tax listings were mailed it is time to focus on the corporate tax deadlines. First year S Corporation and C Corporation owners can be surprised when they no longer have until April 15th for business tax filing. Below are the corporate tax deadlines you should be aware of:

March 17th, 2014

o   Form 1120S – U.S. Income Tax Return for an S Corporation

o   Form 1120 – U.S. Corporation Income Tax Return

Interestingly enough, for tax years beginning on or after January 1, 2008 North Carolina corporate tax returns are not due until April 15th, 2014 and are listed below:

o   Form CD-401S – North Carolina S Corporation Tax Return

o   Form CD-405 – North Carolina C Corporation Tax Return

Be sure to check with each state that you have a filing requirement to see what their deadlines are. If you need more time to file, the following forms can be used:

o   Form 7004 – Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns (6 month extension)

o   Form CD-419 – Application for Extension for Franchise and Corporate Income Tax (6 month extension)

Keep in mind that extensions are only an extension of time to file, not to pay. Any amounts owed with the Federal or Corporate income tax returns will need to be estimated and paid by the original filing deadline to avoid interest and penalties accruing on the unpaid balance.

Regardless of whether extensions are filed or not, be sure to stay in compliance with the North Carolina Secretary of State by filing your annual reports timely. An extension to file income tax returns is also an extension to file your annual report, however we recommend completing the annual report since it is an informational form that businesses can file electronically on their own. To make sure your business is in compliance and to file an annual report search here:

https://www.secretary.state.nc.us/corporations/CSearch.aspx

Most importantly, if you have not already, now is the time to contact your CPA to start the corporate income tax preparation process. Even if you believe you are missing documents necessary to file, having those initial conversations and planning for the deadline will help avoid the rush around March 17th. Rushing to gather information close to the deadline only increases the possibility of missed tax planning opportunities and savings. We are here to help if you have any questions!

Cloud based accounting software is a natural extension of the online world that businesses operate in. Two of the major players in the market are QuickBooks Online and Xero. FreshBooks and Kashoo are two additional systems that have many benefits as well. Regardless of the brand,the major advantages of a cloud based software over traditional desktop versions is that financials can be accessed anywhere that an internet connection is available. Multiple users can access the file simultaneously, updates and backups are automatic and direct connection to online banking and payment options are available.  From the perspective of a Certified Public Accountant, online accounting can improve the tax preparation and planning process due to its ease of use, accessibility and instant data sharing CPAs and client.

QuickBooks Online is one of the primary online accounting software options for small businesses and is the option the majority of our clients are using. It maintains most of the functions that QuickBooks desktop uses, which makes it an attractive upgrade option for users currently using the desktop version. Users should be aware however, that navigating the software can be difficult if they are used to the desktop version. Several features are not yet provided in the online version, but it provides the necessary accounting functions of double entry, reconciling and reporting capabilities to accomplish most small business needs. Invoice automation, bill pay, payroll and tracking inventory are some of the features available on the online version if users are willing to pay for the premium versions. Like the QuickBooks desktop version,a minimum level of accounting knowledge is still required to operate this software properly. This is one area that QuickBooks Online’s major competitor, Xero hopes to improve upon.

Xero is marketed as “beautiful accounting software” and its goal is to be a small business friendly software solution that users actually enjoy using. Xero customer support will help with the conversion over to their system and set up is a step-by-step, intuitive process that the software walks you through. The software focuses on the use of banking and credit card account import processes to drive all the accounting. Bank accounts are automatically reconciled and journal entries are not required. Xero has partnered with financial providers such as ADP, Bill.com, FreshBooks and PayPal to name a few so there are a lot of options for add-ons.The company is in the process of rolling out payroll functions as well, but inventory management is still unavailable. The other major limitation of Xero is that it is a New Zealand based company that has adapted its product for use in the United States. The company is still working out some issues of adapting the software to United States methods of accounting. However, they pride themselves on being responsive to requests from users and getting updates to the software as soon as possible.

As referenced above,accounting systems like Xero are creating alliances with other programs to provide customizable options to meet business needs. FreshBooks is a common resource we see businesses using for invoicing. It is easy to use and creates professional invoices that can be sent via regular or electronic mail. FreshBooks can accept electronic payment via PayPal and Authorize.net which also makes it an attractive option for business seeking to speed up their receivables. The reporting functions for receivables can help businesses plan for cash flow expectations and data can be imported or exported easily. The major issue with Freshbooks is that it advertises itself as an accounting software, but it is does not have double entry accounting which is necessary to create accurate financials. We recommend utilizing FreshBooks in conjunction with an accounting software that supports double entry, as opposed to as a standalone system.

The last software we have seen clients exploring is Kashoo. It is the accounting software for small businesses that have the most basic accounting needs. It can perform functions like its competitors with multiple user access, double entry accounting and banking and credit card downloading. The negatives of the software are that readily available technical support is not easily obtained like with QuickBooks Online and Xero, inventory management can be difficult and cash basis accounting is not currently available. Kashoo reports can only be run on an accrual basis which is limiting for most small businesses that are on a cash basis for tax reporting.

These are just several of the cloud based accounting systems on the market and can be customized to meet almost any business’ accounting needs. All of the mentioned software programs offer a free trial period so our suggestion is to try them out! Practice with and explore the different functions that are available with each. For the major competitors we also have professional resources that can provide training so reach out to us if you are considering making a change. Moving to the cloud is just another step in making accounting for your business easy and useful to becoming successful business owners!

                When it comes to accounting systems the vast majority of bookkeepers, accountants, and clients utilize the QuickBooks desktop version to manage their financial records. It is an Intuit developed accounting software that has been on the market since 1994. It is established, trusted and does everything that most small businesses need it to: print invoices, pay bills, track accounts receivable and payables and provides adequate reports to track financial activity. It also has integrated payroll options which make it a one-stop-shop for all your accounting needs. In addition to satisfying the basic accounting needs there is a large amount of support not only through training and help functions, but there are countless blogs dedicated to answering any and all questions you may have about operating QuickBooks.

                QuickBooks is compatible with both Microsoft Windows as well as Apple operating systems. Clients feel the use of QuickBooks is secure having it on their desktop computer away from the internet and possible security risks. QuickBooks can also accept credit card payments which is important for many business owners. Overall, QuickBooks is the standard, affordable option that business owners are still turning to for their bookkeeping needs. When it comes time to prepare taxes our clients simply make a back up copy of their file and upload it to our online portal. We have all of their accounting records in a workable format helping them reduce tax preparation fees as well as providing transparency for all information we need for the tax return. Once we make adjustments to the file we can send the client adjusting journal entries which are entered and the year is closed. This is how the process is designed to function.

                The reality and limitation of QuickBooks is that to operate it properly the user must possess basic to advanced accounting knowledge. As we mentioned in the previous post “Business owners start their businesses to pursue their passion,” setting up and maintaining an accurate QuickBooks file can be overwhelming without an accounting and bookkeeping background. In addition adjustments that tax professionals make to copies of QuickBooks files are not automatically updated in the client’s file causing changes to be lost or entered incorrectly. The margin for error increases when the process is not in real time. Combining the accounting knowledge needed as well as timing limitations of desktop software there is still one more factor to consider. In the mobile environment we live in who wants to be tied down to their desktop to process all their business activity? Small business owners need intuitive, accessible and responsive software that adapts to their business and tax needs. In next week’s blog we will discuss the future for small business owners: cloud accounting.

Everyone hates accounting! There are articles, websites, even clothing dedicated to the idea of hating accounting. This is a common theme among small business owners. Business owners start their businesses to pursue their passion and most do not have much, if any, accounting background. Recent studies by the U.S Small Business Administration are showing that 50% of businesses will fail in the first five years of operations. The U.S. Small Business Administration quotes the following reasons for small business failure:

  • Lack of experience
  • Insufficient capital
  • Poor location
  • Poor inventory management
  • Over-investment in fixed assets
  • Poor credit arrangement management
  • Personal use of business funds
  • Unexpected growth

As CPAs we would like to add one more: Lack of sufficient accounting records. Most business owners are getting the proper groundwork done: setting up a separate business bank account and tracking payables and receivables on at least a monthly basis. They see money coming in and going out and as long as that bank account is positive they believe the business is surviving. We realize taking the time to input income and expenses as a small business owner into even an Excel spreadsheet seems too time consuming when all effort needs to be dedicated to the business. However, with the right accounting system you can actually save time, have a grasp on the profitability of your business and be prepared for future growth.

With the use of an effective accounting system we witness clients having less stress at year end, being more efficient with their tax liability and saving money on tax preparation fees. Accounting systems are also very important for future growth. Most small business owners fund their business through their personal finances initially. When the time comes for additional capital (note that is number two on the reasons given by SBA.gov that most businesses fail) the first thing the bank will request are your financial statements. Being proactive with a solid accounting system makes this a seamless process.

The good news out there for business owners today is that you do not have to be an accountant to have a successful business accounting system. Over the next several weeks we will discuss some of the traditional and newer cloud based options on the market and how they can help develop an accounting system for small businesses. As always, we are here to help and have the resources to help get you started on an accounting system that will work for you!