If you operate a business and hired an individual (like an independent contractor) who is not an “employee” and you paid him or her $600 or more for the 2015 calendar year, you are required to issue him or her a Form 1099 at the end of the year to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit – or at the very latest, February 1, 2016.
That is, the due date for mailing the recipient his or her copy of the 1099 that reports 2015 payments is February 1, 2016, while the copy that goes to the IRS is due at the end of February.
It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual needed to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward.
IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the data required to file 1099s for your vendors. It also provides you with verification that you complied with the law in case the vendor gave you incorrect information. We highly recommend that you have a potential vendor complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS.
The penalties for failure to file the required informational returns have been doubled this year and are $250 per informational return. The penalty is reduced to $50 if a correct but late information return is filed not later than the 30th day after the February 29, 2016, required filing date, or it is reduced to $100 for returns filed after the 30th day but no later than August 1, 2016. If you are required to file 250 or more information returns, you must file them electronically.
In order to avoid a penalty, copies of the 1099s you’ve issued for 2015 need to be sent to the IRS by February 29, 2016. They must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s for submission to the IRS. This service provides recipient copies and file copies for your records. Use the 1099 worksheet (http://images.client-sites.com/1099-Worksheet.pdf) to provide Dagley & Co. with the information needed to prepare your 1099s.
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Alright small business owner. Let’s talk about balance sheets.
The best way for small business owners to stay aware of their company’s financial status is to have an accurate, up-to-date balance sheet. By keeping this information up to date every quarter, you can help yourself avoid a lot of problems and surprises down the road.
A balance sheet provides you with an at-a-glance summary of your company’s financial health as of a specific day. It is broken down into what the business’s assets are, what the business’s liabilities are, and the amount of owner or shareholder equity. The balance sheet gets its name from the fact that the assets must be balanced by and equal to the liabilities plus the equity. Some business owners have found current balance sheets so helpful that they update them every month.
Understanding the Asset Portion of the Balance Sheet
When entering assets onto the balance sheet, the business owner needs to include everything that is owned by the business, whether current or liquid assets, fixed assets (http://www.investopedia.com/terms/f/fixedasset.asp), or some other type of asset. Current or liquid assets include:
- Cash that is immediately available
- Money that is owed to you (Accounts Receivable)
- Products currently in stock (Inventory)
- Expenses paid in advance, such as insurance premiums
- Money-market accounts, investments and other securities
- Additional monies owed to you
Fixed assets are items that can’t be easily sold or moved, including equipment and furnishings, buildings, land and vehicles. In most cases these assets depreciate, or decrease in value. Beyond current and fixed assets, items that are intangible, such as goodwill, copyrights and patents, are also considered assets on a balance sheet. It is important to note that money that is owed to you that you expect will not be paid is classified as a Reserve for Bad Debts, which decreases the amount of the Accounts Receivable on the balance sheet.
Understanding the Liability Portion of the Balance Sheet
When entering liabilities onto the balance sheet, the business owner needs to include all of the business’s debts, both current and long term. Current liabilities include accounts payable, sales and payroll taxes, payments on short-term business loans such as a line of credit, and income taxes. Long-term liabilities are those that are paid over a longer period of time, generally over more than a year. These include mortgages and leases, future employee benefits, deferred taxes and long-term loans.
Understanding the Equity Portion of the Balance Sheet
When entering information onto the equity portion of the balance sheet, you should include the value of any capital stock that has been issued, any additional payments or capital from investors beyond the par value of the stock, and the net income that has been kept by the business rather than distributed to owners and shareholders.
In order to be sure that all of the information on the balance sheet is correct, you can double-check your numbers by subtracting assets from liabilities – the result should equal the equity amount. For more information on how to structure a balance sheet, check out this website: “http://www.accountingcoach.com/balance-sheet/explanation/4″>sample balance sheet</a>.
The Value of a Balance Sheet
At first glance a balance sheet may look like an incomprehensible collection of numbers, but once you understand all of the various components and how they relate to one another, they will provide you with the opportunity to detect trends and spot issues before they become problems. Your balance sheet can alert you to:
- Times when inventory is outpacing revenue, thus alerting you to a need for better management of your inventory and production process
- Cash flow problems and a shortage of cash reserves
- Inadequacies in your cash reserves that are making it difficult to invest in continued growth
- Problems with collecting accounts receivables
The most essential tools that are available to you as a small business owner for gauging your operation’s financial health are the balance sheet, the income statement and the cash flow statement. If you are unsure of how to prepare these documents for yourself or don’t have the time, then let a qualified professional at Dagley & Co. take over and provide the information that you need.
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Working for tips? You’ll need to report those soon. Image via public domain.
As we head into July, it’s important to keep some of these tax due dates for individuals in mind. Go here to read our list of July tax deadlines for business owners.
July 1 – Time for a Mid-Year Tax Check Up
Time to review your 2015 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.
July 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during June, you are required to report them to your employer on IRS Form 4070 no later than July 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
July 15 – Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in June.
You shouldn’t have to wrestle your customers for payments owed to you. Here are some tips for smooth invoicing. Image via public domain.
A wise businessman once said, “a sale isn’t a sale until you’ve collected payment — it’s just a loan.”
If you’ve been in business for any length of time, you know how true this quote is. Many small businesses that were profitable on paper have gone bankrupt waiting for payments from customers to arrive.
This makes accounts receivable (AR) collections one of the most important tasks for small business owners. Unfortunately, it’s also one of the most neglected. Here are eight strategies you can implement to help boost your AR collections and improve your cash flow:
- Make sure your invoices are clear and accurate. If invoices are vague, ambiguous or flat-out wrong, this is sure to delay customer payments as they call to try to get things straightened out. In short, you don’t want to give customers a reason not to pay your invoices quickly. We recommend QuickBooks to our clients for clear, accurate invoicing.
- Create an AR aging report. This report will track and list the current payment status of all your client accounts (e.g., 0-30 days, 30-60 days, 60-90 days, 90+ days). This will tell you which clients are current in their payments and which clients are past due so you know where to focus your collection efforts. To go on our earlier point, QuickBooks is great because it automatically does this for you.
- Give a bookkeeping employee responsibility for AR collections. If collecting accounts receivable isn’t the main responsibility of one specific employee, it will probably fall by the wayside as other tasks crowd it out. Therefore, make one of your bookkeeping employees primarily responsible for this task.
- Move quickly on past-due accounts. Don’t delay taking action once a client’s account reaches the past-due stage. Studies have revealed that the likelihood of collecting past-due receivables drops drastically the longer they go uncollected. Your designated bookkeeping employee should start making collections efforts the day after an account becomes past due.
- Plan your collections strategy carefully. Decide ahead of time how you will approach late-paying clients. For example, a friendly reminder call and/or email from your designated bookkeeping employee is probably a good first collection step. If this doesn’t get results, you can proceed to more aggressive steps such as sending past due notices and dunning letters.
- Consider offering a payment plan. Sometimes, customers have legitimate reasons why they can’t pay their invoices on time. Maybe the customer is having temporary cash flow problems and wants to pay you but simply can’t right now. In this scenario, you might consider working out a payment plan that allows the customer to pay the balance due over a period of time. The agreement should be made in writing and signed by both parties.
- Hire a collection agency. If all of these steps fail to resolve a collection problem, you might have to turn to a collection agency as a last resort. However, this is a serious step that should not be taken lightly, since it will probably jeopardize your relationship with the customer. Decide whether or not collecting the past-due amount is worth possibly losing the customer. Also keep in mind that the collection agency will keep a large percentage of the amount collected.
- Hire Dagley & Co. We are here to help if you have customers that are falling behind. Sometimes it’s best to have a third party go after late bills, and we can handle the correspondence in a way that is professional so that you can keep your personal relationship with your clients and customers upbeat.
Very few small businesses can afford not to make AR collections a top priority. Following these eight steps will help you improve your collections — and these improvements will boost both your cash flow and your bottom line.
Though many businesses require office space, millions more are operated out of an entrepreneur’s home – and this can lead to a tax deduction. Taxpayers can elect to take a simplified deduction for the business use of the taxpayer’s home. The deduction is $5 per square foot, with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. Here are the details of this simplified method:
- Annual Election – A taxpayer may elect to take the safe-harbor method or the regular method on an annual basis. Thus, a taxpayer may freely switch between the methods each year. The election is made by choosing the method on a timely filed original return and is irrevocable for that year.
- Depreciation – When the taxpayer elects the safe-harbor method, no depreciation deduction for the home is allowed, and the depreciation for the year is deemed to be zero.
- Additional Office Expenses – Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the safe-harbor method is used.
- Home Interest and Taxes – Prorated home interest and taxes are not allowed as an office expense when using the safe-harbor method. Instead, 100% of the home interest and taxes are deductible as usual on Schedule A.
- Deduction Limited by Business Income – As is the case with the regular method, under the safe-harbor method the home office deduction is limited by the business income. For the safe harbor, the deduction cannot exceed the gross income derived from the qualified business use of the home for the taxable year reduced by the business deductions (deductions unrelated to the qualified business use of a home). However, unlike the regular method, any amount in excess of this gross income limitation is disallowed and may not be carried over and claimed as a deduction in any other taxable year.
- Home Office Carryover – This cannot be used in a year in which the safe-harbor method is used. The carryover continues to future years and can only be used when the regular method is used.
- Qualifications – A taxpayer must still meet the regular qualifications to use the safe-harbor method.
- Reimbursed Employee – The safe-harbor method cannot be used by an employee who receives advances, allowances, or reimbursements for expenses related to qualified business use of his or her home under a reimbursement or other expense allowance arrangement with the employer.
- Determining Square Footage – To determine the average square footage of the business, use these guidelines:
- Square Feet Maximum – Never use more than 300 square feet for any month, even if the taxpayer has multiple businesses. Where there are multiple businesses, use a reasonable method to allocate between businesses.
- Determining Average Square Feet for the Year – Use zero for months when there was no business use or when the business was not for a full year.
- 15-Day Minimum – Don’t count any month in which the business use is less than 15 days.
As an example, a taxpayer begins using 400 square feet of her home for business on July 20, 2015, and continues using the space as a home office through the end of the year. Her average monthly allowable square footage for 2015 is 125 square feet (300 x 5 months = 1500/12 = 125).
- Multiple Businesses – Where there are multiple businesses, only one method may be used for the year—either the regular or safe harbor.
- Mixed-Use Property – A taxpayer who has a qualified business use of a home and a rental use for purposes of § 280A(c)(3) of the same home cannot use the safe-harbor method for the rental use.
- Taxpayers Sharing a Home – Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe-harbor method but not for a qualified business use of the same portion of the home.
As an example, a husband and wife, if otherwise eligible and regardless of filing status, may each use the safe-harbor method for a qualified business use of the same home for up to 300 square feet of different portions of the home.
- Depreciation Rate When Switching Methods – When the safe-harbor method is used and the taxpayer subsequently switches back to the regular method, use the depreciation factor from the appropriate optional depreciation table as if the property had been depreciated all along.
When choosing between the methods, the following factors should be considered:
- There is no reduction in basis for depreciation or depreciation recapture when using the safe-harbor method.
- When using the regular method, the income limitation takes into account home interest, taxes, and other expenses before allowing the depreciation portion of the deduction. That is not true for the safe-harbor method as the interest, taxes, and other business-use-area expenses are not considered.
If you have questions related to this simplified method of claiming a deduction for the business use of your home, please get in touch with Dagley & Co.
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