Be Aware of the Tax Consequences

Author: Keith Huggett

If you allow employees to telecommute, be sure to consider the potential tax implications. Hiring someone in another state, for example, might create sufficient nexus to expose your company to that state’s income, sales and use, franchise, withholding, or unemployment taxes.

And the employee might be subject to double taxation if both states attempt to tax his or her income — the recent Supreme Court ruling in Comptroller of the State of Maryland v. Wynne addressed a similar issue, although in that case the taxpayers weren’t telecommuters but owners of an S corporation that earned income in other states.

The rules vary by state and also by type of tax — and become even more complicated for international telecommuters. So it’s a good idea to review the rules before you approve a cross-border telecommuting arrangement. If you’re considering hiring employees to telecommute from outside your state, we can help you assess the potential tax impact. Contact us with your questions.

Learn the Difference NOW!

Author: Keith Huggett

Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why is this important? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses are deductible only against passive income, with the excess being carried forward.

To qualify as a real estate professional, you must annually perform:

• More than 50% of your personal services in real property trades or businesses in which you materially participate, and
• More than 750 hours of service in these businesses during the year.

Each year stands on its own, and there are other nuances. If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider increasing your hours so you’ll meet the test. (Special rules for spouses may help.) Also be aware that the IRS has successfully challenged claims of real estate professional status in instances where the taxpayer didn’t keep adequate records of time spent.

If you’re not sure whether you qualify as a real estate professional, please contact us. We can help you make this determination and guide you on how to properly document your hours.

Toss Out the To-Do List!

Author: Keith Huggett

When it comes to running a business, building as much efficiency as possible into your operations is the key to keeping things running smoothly and freeing up your own time to focus on the big picture. While employing the right team and the right technology are integral to boosting efficiency, so is having the right mindset when it comes to how you approach day-to-day tasks.

You may be surprised to learn that the traditional to-do list can actually hamper your ability to improve the efficiency of your business—and your own productivity. So what is the alternative for those of us who “Live by the list?” According to entrepreneurial efficiency and business experts, the key is to make sure that your to-do list is not just a vehicle for checking off mundane items, but instead that it remains a tool for helping you do the things that will have the greatest benefit to your business first.

Think in terms of priorities, not tasks.

Entrepreneur and author Mike Michalowicz writes, “The problem with a to-do list is that every entry has the same value.” Instead, he suggests business owners should use a priority list that has the following three symbols (you can substitute alternative symbols if you like), to help prioritize activities: The dollar sign ($), which is assigned to any task that generates revenue in the next 60 days; a smiley face, which is assigned to any task that pleases a current client; and a ∞ symbol for any task that creates a system—something that can run itself thereafter ∞.

The key to this type of priority list is that you can assign more than one value to each activity—or you can assign nothing to an activity, which means you may want to consider dropping it completely from your list. When you use your priority list the items with the most symbols should be addressed first. Those tasks without symbols are your lowest priority.

Another way to make a priority list is to divide your tasks into the following four categories based on Stephen Covey’s iconic Important/Urgent grid: Important and urgent, Not urgent but important, Not important but urgent, Not important or urgent. Using this convention, you would prioritize tasks falling in the “important and urgent” category first and perhaps reduce or eliminate tasks in the “Not important or urgent” category.

Use your list to organize action, not delay it

Many business owners do find that lists are an essential way to track the numerous things they need to accomplish on a daily basis. Whether you toss your traditional to-do list for one of the alternatives mentioned here, or keep it, be sure that the process you are using to create lists actually enhances your ability to take action efficiently—rather than being an end in and of itself.

Avoid These 4 Business Mistakes

Author: Keith Huggett

When you started your business you may have had concerns about staying flush with money.  As time progressed, your company funds have become sporadic and unreliable.  Some months you are performing great, others not so much.  You work hard, try and save every penny you can (and still run your business), but funds are getting tighter and tighter. Business owners often make mistakes with their funds, under the impression that "things will get better" or "we can pay it later." Here are four top mistakes that new business owners make with their funds:

Bookkeeping Problems - Let's face it. No one likes doing their bookkeeping. It brings the truth of your situation too close to home.  It's very time consuming. Sometimes it's really difficult to get a handle on the software.  Either way, bookkeeping is one of those tasks that business owners HATE. A lot of companies try and handle their bookkeeping in house to save money.  This is not the solution. Often you are hiring someone who isn't really qualified for they job or you are trying to do it all yourself.

Solution - Hire a professional to keep track of your books for you. Keep your accounts separate - no comingling of business and personal funds. Keep a strict account of your income and expenses.

Adequate Budgeting - Your business plan should have included a working business budget.  As is common with most businesses, that business plan has hidden itself away.  If you do not have an adequate budget, both monthly and yearly, you may find yourself dipping into other areas to provide funds for what your need.

Solution - Create a two-tiered budget, one as a guideline for the entire year and the other a monthly version of your annual budget that takes into account everyday business realities. List all of your anticipated expenses, such as materials, land and equipment, et cetera.  Stick to the budget!

Uncontrolled Spending - "Bright and Shiny Disease" can strike at any time.  Something is brand new on the market and you have to have it because it will make running your business easier.  What you need to consider is this: Is there anything wrong with what you are currently using? Does it do the job? If you do not have a strong need to purchase something new and unbudgeted for, consider waiting until a later date.

Solution - If an item is not strictly budgeted for don't make the purchase.  Stick to your budget and plan ahead for such purchases in your next year's budget.

Princing Strategies - Often times people focus on price.  Underbidding your service can cause you money problems later on. While you may have successfully gained a new client, that client isn't necessarily paying you what you are worth. 

Solution -  Weigh the costs of your service honestly. If your prices are too low, you may shoot yourself in the foot by creating doubt in the quality of your services.  If you aim too high, you may fall into a pit of "promising too much".  Having a smart price strategy in place is your goal.

If you would like to discuss any questions this article may bring up, The Tax Office, Inc. can provide you with the bookkeeping, budgeting, and business consulting answers you may need. Contact us today.

Cloud Technology Has Business Advantages

Author: Keith Huggett

Any change in business operations should come with a careful analysis of how it will affect the company, both financially and culturally. This is particularly true for crucial financial functions like bookkeeping and accounting, as changes in these systems can have a larger impact. Switching to a new system is always daunting, but the benefits are often well worth the effort.

Consider the ways that cloud-based accounting can improve your business:

• Lower costs: Cloud-based systems are generally less expensive than purchasing accounting software, especially when you factor in lower IT costs, software and license renewals and time saved.
• Improved security: If you have all of your financial data stored on one desktop or laptop computer, you could be in for a devastating surprise if it is lost, stolen or damaged. Even with regular backups, key financial information could be compromised. With cloud-based accounting, all of your data is stored on remote servers, so even if hardware is damaged, your financial information is always protected.
• Flexible access: Cloud-based accounting systems give you the ability to access your information from anywhere, including your mobile device. It is also easy to add multiple users with customized permissions so key personnel can readily access the reports they need, when they need them, without waiting for another person to do it.
• Better business processes: Financial data entered into a cloud-based accounting system is automatically updated so that every user has access to the same information in real-time. This means less travel for your CPA, more accurate reporting and the ability to make faster decisions.
• More time: Improvements in efficiency will allow you and your employees to focus on more strategic efforts, rather than the mundane details of bookkeeping. Your IT staff will also have more time to dedicate to larger organizational issues.

If you are ready to make the switch to cloud-based accounting, let The Tax Office Inc. guide you through the process. We'll help you select the right package and set up your back office support system so you can free up more time to manage your business, not your bookkeeping. Contact us here for any cloud-based accounting questions.

Keeping Proper Books is a Must

Author: Keith Huggett

When you are just starting out with a new business or building up a new purchase it pays to have a good set of books.  The problem is not everyone is good at, or likes doing the bookkeeping.  This can be a problem in many ways.  Sometimes it's just a factor of being too busy doing other things to get to the books or sometimes it's dreading the task, but either way the bookkeeping gets sidelined until it become a huge undertaking that is often more problematic than doing it regularly would have been.  Here are some reasons why keeping your bookkeeping on track is a good idea.

1. Legal Issues. If you need or want to bring in investors having a good set of books is a must.  It is illegal to have a set of books that provides different information from what is actually your true financial situation. You should be aware that most operating agreements contain ironclad consequences for bad bookkeeping, including dissolving or liquidating the company or handing over majority shares to a business partner or shareholders.
2. Audit. Being able to prove your income and expenses is a must when it comes to surviving an audit intact.  Without this proof, you are easy prey for IRS auditors.  If you cannot prove your income, you may find that you will be paying out fees, penalties, and interest in the future.
3. Cash Flow. Without knowing how much money you have available to you at any given time, it is impossible to know how much you can use to promote or invest in your business.  You are unable to purchase items that may need repair or replacement.  You are unable to hire employees that you may need and you may be forced to layoff necessary employees due to overspending. With a concise picture you will be able to decide where to allocate your resources for the biggest ROI.
4. Relationships. By not keeping control of your books, it can be difficult to keep control of your office relationships.  When you do not know if you can make payroll this month, you put a strain on the relations with your staff. Hiring the right people can be difficult enough without causing unecessary stress and strain. It is key to make sure that your staff is being paid on time and that the proper payroll tax withholdings are being accounted for.
5. Recovery. When you have a bad set of books, recovering from them is a timely task.  Why is this? As you try and correct your bookkeeping errors, more and more transactions accumulate, compounding the problem.  You end up with a monster bookkeeping project.  The best solution at this point may be to outsource your bookkeeping to a qualified bookkeeper.

Cloud-Based Accounting Has Many Advantages

Author: Keith Huggett

Still unclear on the concept of cloud-based -- or virtual -- accounting? It simply means sharing applications and data over the Internet.  Instead of residing on your PC's hard drive or network, your financial software and records are stored on remote servers maintained by your provider. This is also called hosting.

There are numerous advantages to managing your business accounts this way; here are the top three:

Virtual accounting allows access from anywhere, 24 hours a day.

Need to pull up some numbers while on a business trip? How about share real-time financial data with business partners and employees located across town or many miles away? Cloud-based solutions allow 24/7 remote access to your data by anyone with a web-enabled computer or supported mobile device and login credentials. Your CPA can perform analysis and reporting  for you without leaving his or her office.

Cloud computing is easily scalable.

The host company handles the physical infrastructure in virtual accounting systems, and can quickly allocate resources like storage and processing power as your business needs grow. Hardware issues are no longer a matter for your internal IT staff to handle, and it only takes a few clicks to add or remove users in a cloud-based software system.  Contrast this with the hours -- or even days -- it might take an inhouse IT professional to install the hardware and software needed to set up new users.

Data security and regular backups exist in the cloud.

A reputable cloud solution provider will use 128-bit data encryption and offer antivirus and firewall protection. It will also perform regular backups to ensure that data is fully recoverable in the event of a disaster. An added plus: Software upgrades are automatically handled by the vendor, and you don’t have to worry about maintenance.

Cloud computing can be a daunting subject at first glance. At The Tax Office, we will gladly take the time to explain how our virtual accounting solutions can mesh with your existing operation and allow you to focus on growing your business. Contact us today; we would love to work with you to design on an optimal solution for your company.

Before You Hand Over That Check...

Author: Keith Huggett

Investing in a startup venture is one of the most exciting things that you can do with your money. Many people feel good being an "angel investor" and helping someone else realize their dream. While you are doing something nice, you also have the potential to earn a return of hundreds or thousands of percent. However, you also have a very good chance to lose all of your money.

Most startup businesses eventually fail. Fifty percent of startups fail to make their fifth anniversary, and only 16 percent of startups stay open for a full 10 years. With this in mind, it is very likely that you will lose all of your money. Then again, if the business does succeed, you should make a very generous return.

One of the reasons that many startups fail is that they lack adequate financial controls. To protect your investment, ask for a copy of the startup's financial statements and have professional bookkeepers and CPAs review them for you. Confirm that they have good cost controls in place and other sources of capital. If other entities are willing to invest in a start-up venture, it could indicate that you are in good company.

If the startup venture that you invest in does succeed, you may need to figure out an exit strategy. While startup investors had historically gotten taken out by IPOs, they have become much rarer. Between the cost of actually doing an IPO costs and the cost of complying with the Sarbanes-Oxley Act once the company is public, more and more companies are opting to stay private or to be acquired. Furthermore, if the company completes an IPO, you may not be allowed to sell your shares.

Within these risks lies great opportunity, though. Even in the face of these risks, open-eyed investors who fully understand the risks that they are taking can find diamonds in the rough. While investing in new venture carries great risk, the potential to fund the next Genentech, Apple Computer or Google makes startup investing potentially one of the most rewarding things that you can do with your money.

For any questions about startup ventures or investments, contact us here. We're here to help you resolve all your planning questions.

Business Plans Necessary In Early Stages of Operation

Author: Keith Huggett

Business plans are frequently created in the start-up stages of a company, then ignored after it is up and running. Your business plan should serve as a guideline for all of your business activities, whether you are in your first year or your tenth.

While the early months and years are often dedicated to setting up operations, finding new customers and marketing your products and services, there is still important work to be done after all the excitement dies down. You can use your business plan to help you make smart financial decisions that will allow your company to grow. Imagine how a well formed plan can help you make the following decisions:

• Buy or lease - Whether it is property, vehicles or office equipment, having a strong understanding of the financial health and direction of your company can help you decide whether to make these types of investments, or to save your cash for other business needs.
• Tax planning - Have you implemented the best retirement plan strategy? Does your company donate to charities? Do you take advantage of all the tax credits and tax-free benefits available? Smart tax planning can save your business a lot of money in the long run.
• Change of entity - The decisions you make now concerning your business structure can affect your tax liability in the future. Perhaps switching from a C Corporation to an S Corporation would make better financial sense for you and your shareholders.
• Hiring - Can you afford to hire new full- or part-time employees? Have you factored in all of the costs associated with a new hire?
• Investors - It's not only start-ups that require capital. Having a solid plan will make your business more appealing to investors, and may also make it easier for you to obtain a bank loan, if necessary. 
• Selling - A sale is a common exit strategy, and sometimes even the ultimate goal.

Retail Business Owner Can Expect A Visit

Author: Keith Huggett 

The State Board of Equalization has recently sent out a news release stating that their Statewide Compliance and Outreach Program will be sending out teams to visit retail businesses throughout the state. If you own a retail business you should be receiving a letter from the Board sometime soon.

The teams will only be going to specific zip codes throughout California at this time, although the Board intends to visit every retail establishment in the state, given enough time. Cities included in the current exam include Bakersfield (93301), Baldwin Park (91706), Boulder Creek (95006), Cambria (93428), Carpinteria (93013 and 93014), Culver City (90230 and 90231), North Hollywood (91601), San Jose (95134 and 95136), San Juan Capistrano (92675 and 92691), Sutter Creek (95685), and Volcano (95689). For more detailed information on this program, please take a look at our white paper The State Board of Equalization's Statewide Compliance & Outreach Program - Coming Soon. 

The main purpose of this program is to ensure compliance with our state's sales and use tax program.  The Board of Equalization collects more than $53.7 billion dollars annually in taxes and fees supporting state and local government services.  According to the BOE, under-reporting and non-compliance are responsible for more than $2 billion dollars in uncollected tax. By sending teams out to confirm that you are reporting accurately or correcting your reporting the Board is able to lessen the amount in uncollected tax.

If you feel any anxiety prior to your upcoming visit by the Board of Equalization, please feel free to contact us.  The specialists at the Tax Office, Inc., can assist you with your sales and use tax compliance before your scheduled meeting with the BOE, or after  your meeting to help make certain you are in compliance with the state requirements.