Many small business owners are great at doing what they love. In fact, they’re so good at it that it turns into a full-time business. This provides challenges as the business owner focuses on hiring staff and ramping up production capabilities. One aspect of a growing company that can easily get overlooked is bookkeeping.
Many business owners have accountants that help prepare their taxes each year and stay on top of estimated quarterly tax payments. But many owners are at a loss when it comes to keeping their books in order on a daily basis. They often see this when it’s time to hand everything over to their accountant. That’s when they start to realize that the “shoebox” filing method for receipts and other important papers may not be the most efficient.
It’s easy to confuse accounting and bookkeeping. After all, numbers are numbers, right? To those focused on running a business, it may seem like accounting and bookkeeping fall into the same camp. And because many accountants also help clients with light bookkeeping, it gets even more confusing. But the two are very different.
Accounting is the process of tallying up income and expenses for the year, along with other financials, that are summarized, analyzed, and reported to the IRS. These numbers paint a picture of the business’s yearly and long-term health and are used in filling out tax forms when it’s time to compute and pay income taxes owed to the IRS.
Bookkeeping is the process of keeping track of documents and other information that pertains to daily business operations. Expense receipts and mileage logs fall into the realm of bookkeeping, as do bank statements and company credit cards.
Generally speaking, a bookkeeper helps manage day-to-day expenses, banking transactions, receipts, accounts payable, and accounts receivable. They may also assist with audits when needed. A competent bookkeeper will also flag issues that look questionable or need attention from the business owner or office manager. Many bookkeepers work under the guidance of an accountant.
An accountant generates financial reports for the company, approves expenses and purchases, and oversees company data storage and management. Accountants also stay up-to-date on government regulations and industry standards. In many companies, accountants manage the bookkeepers.
While some accountants also help with bookkeeping, the reverse is not usually true. Bookkeepers typically limit themselves to bookkeeping functions. There is no formal certification for either position, although accountants usually have an accounting degree.
Many accountants are Certified Public Accountants, also known as CPAs. This designation is only earned through extensive education, specific work requirements, and the passing of a rigorous exam. Not all accountants are CPAs.
Rich Adams at Adams Accounting Solutions is a CPA who specializes in the needs of small businesses in the Kansas City area. He’s also an IRS-registered tax preparer, as well as a Certified QuickBooks ProAdvisor. He helps businesses set up bookkeeping systems they can manage on their own or with his help. He helps companies prepare for tax time.
Give Rich a call at 913-888-9100 for answers to your questions about bookkeeping and accounting issues. He’ll help clear up the confusion.
With COVID-19 shutting down or significantly reducing the number of employees allowed inside office buildings, many employees are now getting a taste of what it’s like to be full-time work-at-home employees. It’s been an adjustment for many — in both good ways and bad. As employees try to work around kids’ schedules and spouses who are also working from home, many are looking forward to the home office tax deductions they’re planning on taking at tax time.
But not so fast!
According to the IRS, employees working from home for their employer — meaning they get a W-2 from their employer — are not eligible to claim deductions for home office-related expenses. These employees may ask employers to reimburse costs such as internet service, cell phone service, and office supplies. Some employers will comply, but they’re not obligated to do so. This means that many company employees working from home because of the pandemic are out of luck.
In 2017, deductions for most business-related expenses not reimbursed by an employer were eliminated from an individual’s tax return. Further cuts were made in 2018 when the Tax Cuts and Jobs Act suspended write-offs for miscellaneous deductions that were formerly subject to the 2%-of-AGI rule. Since these most recent cuts extend into 2025, employees working from home cannot deduct home office expenses for 2020 under current tax laws.
Of course, that was then. This is now. Now we’re in the middle of a pandemic with nearly 43% of the workforce being required to work from home because offices are shut down. Many workers have had to incur expenses to set up their home office and computer systems to comply with employers’ business practices. A situation that was anticipated to last a month or two has gone on for nearly a year.
Some tax experts are starting to make noise about this issue. An article in the Kansas City Business Journal suggests that perhaps a special work-from-home tax deduction is in order for employees who fall into this category. Another article on MarketWatch.com posits that Congress may grant additional COVID-19-related tax relief in future legislation. Neither of these ideas has caught on with legislators yet, but given the state of flux in the status of PPP loans and forgiveness issues, it’s not unreasonable to think that tax laws could be changed to give employees who are forced to work from home some relief.
For now, keep up with your bookkeeping and filing of receipts. If you need help getting your taxes together for 2020 or have questions about how the pandemic has impacted you and your business, give Adams Accounting Solutions a call at 913-888-9100. We’re always here to help!
The confusion continues for some businesses that took advantage of PPP loans to get through the COVID-19 pandemic this year. The pandemic is lasting longer than anyone believed it would. Now companies that have made it this far may have another hurdle to clear before gaining forgiveness of their PPP loan balance.
On August 10, the SBA officially opened its loan forgiveness portal. Many companies that took out PPP loans have been collecting the required documentation for forgiveness and have already submitted the forms needed to get their PPP loans forgiven as promised by the government. A few firms have already received confirmation from their lenders that their loan has been forgiven. These are the lucky ones.
In May, following public backlash over large corporations’ receipt of PPP funding, the SBA made it clear that they would audit PPP loans over $2M for compliance to the rules of the program. However, the SBA is now seeking approval from the Office of Management and Budget (OMB) to send “loan necessity” questionnaires to businesses that received over $2M in PPP funding. This adds yet another layer of complexity – and scrutiny – to a program that has been filled with twists and turns from its inception.
While many agree that transparency is necessary in financial transactions such as these, the catch here is in the content of these questionnaires. When the PPP rolled out in April, businesses only had to prove that they were being negatively impacted by the pandemic at that time. This new questionnaire seems to ask for significant documentation on how the company has fared during the pandemic. This isn’t that alarming unless one considers that the SBA may use the answers to this questionnaire to determine forgiveness eligibility for these companies, something that wasn’t on the radar when these companies applied for PPP loans.
Says Tenley Carp, PPP expert and partner at law firm Arnall Golden Gregory LLP, in an article in the Kansas City Business Journal, “It is currently unclear whether SBA plans to use these loan necessity questionnaires to deny PPP loan forgiveness and/or investigate companies for fraud. But one thing is very clear: It would be incredibly unfair if SBA used these questionnaires to do either of those things.” The SBA has yet to clarify how these questionnaires will be used.
Businesses have until November 25 to weigh in with comments or feedback on these forms. If approved, the questionnaires will be sent to PPP recipients’ lenders to distribute for completion within ten days. Failure to comply may result in the SBA’s determination that the business was not eligible for the PPP, the loan amount, or forgiveness of the loan.
Adams Accounting Solutions stays on top of the latest PPP news so that you don’t have to. We specialize in small business accounting and tax preparation and help our clients plan for the future. If you have questions about the PPP forgiveness process and how it affects you, give us a call at 913-888-9100.
With the end of 2020 fast approaching, it’s not a bad idea to start preparing for your year-end reporting needs. Preparing year-end financial statements not only satisfies your accountant; the process also provides you with a picture of what this year has been like from a financial standpoint. For many, that picture may be a little out of focus. But putting together year-end financials helps you see where the gaps are and where you need to go next year.
Keeping financial records in order is critical to the success of your business. Here are a few things you can start on now to get ready for the end of the year accounting process.
Reconcile your bank and credit card statements. If you’re the type who doesn’t reconcile anything until forced to, you might want to start gathering bank and credit card statements now. Categorize all your expenditures, and review all statements to make sure there are no unauthorized purchases or withdrawals. This can be a time-consuming task, and starting on it now will give you plenty of time to get it done by the end of the year.
Gather W-9s from vendors and contractors. You’ll need to send 1099s to all your vendors and contractors next January. To do that, you’ll need to have a W-9 on file for everyone to whom you’ve paid $600 or more. If you don’t already have W-9s on file for everyone – or you’re missing a few – reach out to vendors and contractors now; it may take them a while to get back to you. Your accountant will need these W-9s so that he or she can send 1099s out early next year. You may be liable for penalties if you skip this step.
Review your profit and loss statements. Although the year isn’t quite over, it’s still a good time to review your profit and loss statements to see where you stand. Look for variances in income or expenses that may need more research. Now is the time to start on that. You can also extrapolate the numbers to get a good idea of where the business will end up for the year. If the numbers don’t look good, there may not be much you can do at this point, but at least everything will be in order by year-end, and you’ll be prepared at tax time.
Review accounts payable, accounts receivable, and aging invoices. How much money do you owe others? And how much do others owe you? Do you have any invoices that appear to be uncollectible? And have you invoiced everyone for all products or services? This is the time to make sure nothing has fallen through the cracks during the year.
Review estimated tax payments. Go over your estimated tax payments so that you know how much you’ve paid to date. Will you need to make adjustments for the last payment of the year? Your accountant can help you figure this out.
When you’re working on year-end planning, it’s always a good idea to get professionals involved. Adams Accounting Solutions specializes in small business tax preparation and year-end accounting. Give us a call today for help getting your financials in order for 2020.
The notion of paying quarterly estimated tax payments is daunting for many small business owners. The self-employed are particularly nervous when each new quarter rolls around; do they need to make a quarterly payment or not? Estimated tax payments aren’t as scary as they may seem. Let’s take a closer look.
The IRS likes to have tax dollars rolling in throughout the year as taxpayers earn income throughout the year. In many cases, this is done through regular tax withholdings from paychecks. The idea behind these tax withholdings is that each taxpayer will have just the right amount taken out so that at the end of the year, tax withholdings equal taxes due. Of course, this perfect match is difficult, which is why some people owe money at tax time while others get refunds.
For some taxpayers, there’s no tax withholding coming out through the payroll process. This is where estimated tax payments come into play. They allow these wage earners to make quarterly payments based on their estimated income throughout the year. This lessens the burden at tax time and keeps the IRS happy.
The IRS requires some individuals and entities to pay quarterly estimated tax payments. Self-employed individuals, including sole proprietors, partners, and S corporation shareholders typically have to make estimated tax payments if they expect to owe $1,000 or more at tax time. Corporations have to make estimated tax payments if they expect to owe more than $500 at tax time. In some cases, landlords and rental property owners may also be subject to estimated tax payments.
Those wage earners who work for a larger company that takes taxes out of their paychecks don’t have to make separate estimated payments; in essence, they’re already making tax payments through their withholdings. Also, taxpayers who meet all three of the criteria below do not have to make estimated payments.
If you fall into one of the categories of people who should be making estimated tax payments during the year, you could be penalized for not doing so. You may also be penalized for underestimating the tax amount during the year, resulting in an underpayment of estimated taxes.
You can make your estimated tax payments by filing Form 1040-ES. Instructions on how to calculate and file your estimated quarterly tax payments can be found in IRS Publication 505, Tax Withholding and Estimated Tax. Estimated tax payments are due according to the schedule below:
At Adams Accounting Solutions, we help take the confusion out of figuring out and filing estimated tax payments. We specialize in tax preparation for small businesses and the self-employed. Give us a call today at 913-888-9100 for help in estimating and submitting your estimated tax payments.
Many small businesses saw the CARES Act – especially the Paycheck Protection Program or PPP – as a gift. With the implementation of this program, there was suddenly a way to keep the business going in the face of a global pandemic, layoffs, and plunging bottom lines. Business owners took full advantage of the PPP, applying for the funding needed to keep business operations running at the most mission-critical level. While many companies kept only the minimum number of employees necessary to keep the virtual doors open, those people still needed to be paid. PPP loans gave business owners the means to do that, even when sales and revenues were going south.
But every silver lining seems to have a cloud these days, and now business owners who used PPP loans for payroll costs are faced with the prospect of a big tax bill at some point in the future.
The PPP was rolled out so quickly that it seems no one really thought this through. Borrowers signed up for the program under the impression that PPP funding would not be taxable once the loan was forgiven. However, lawmakers did not specify whether the expenses that were paid with PPP funding would still be deductible or not.
On April 30, the IRS weighed in with their version of the truth – after more than three million small businesses had already received PPP loans. They decided to follow the policy already in place for untaxed funds, meaning that expenses paid with nontaxable income are not deductible.
Since payroll taxes are usually a deductible expense, business owners who paid their employees with PPP funds are now likely to face larger tax bills than usual next year. While lawmakers are working to overturn this position, small businesses should start preparing now to manage their way through this next challenge.
Preparing your taxes can be complicated – especially when there are out-of-the-norm items such as pandemics and PPP loans to deal with. Getting ready for tax season shouldn’t be something you do the month before everything is due. Let Adams Accounting Solutions help you start preparing now for next year’s tax burden. We monitor what’s going with PPP loans, and we can help you navigate through it. Give us a call today!
This has been an interesting year for income taxes. With the tax filing deadline for personal and corporate income taxes moved out to July 15, 2020, due to the coronavirus pandemic, many taxpayers let their guard down. As the traditional April 15 deadline came and went without a whimper, taxpayers relaxed even more, knowing that the July 15 filing deadline gave them plenty of time to get their taxes done.
However, July 15 also came and went. Now the extension deadline of October 15 looms on the horizon. Just slightly more than a month away, those procrastinating taxpayers will now be on the hook for filing their personal income taxes. For real. And if it’s not done this time, they’ll be paying penalties and interest. They’ll also need to pay any remaining tax that’s due (the majority of their tax liability – at least 90% – should have been paid by July 15).
It’s important to note that filing an extension gave taxpayers extra time to prepare and file their taxes. It did not give them extra time to pay their taxes.
Businesses that requested a filing extension back in July need to be prepared for the September 15 deadline. There is no possibility of extension this time. And this deadline applies only to those entities that requested an extension through official means. Partnerships, S corps, and C corps should have filed Form 7004 on or before July 15, 2020.
If corporate taxes are not filed on or before September 15, the IRS will consider you a very late filer, and additional penalties and interest may apply.
Adams Accounting Solutions specializes in personal and small business tax preparation and consulting. We can help you stay out of trouble with the IRS by getting your tax returns filed by the appropriate deadline. If you’ve been procrastinating, now is the time to give us a call. You’re quickly running out of time!
By now, you’ve probably received your 2020 stimulus check from Uncle Sam. We’re referring here to the checks that were mailed earlier this year and started arriving in mailboxes and checking accounts back in April. This stimulus check – a “Recovery Rebate” that varied in the amount based on the recipient’s eligibility – was a “gift” from the government to help people get through the COVID-19 pandemic a little more gracefully. Most people gratefully accepted the help.
However, some more suspicious types did their research and discovered the phrase “advance on future tax refunds” somewhere in the U.S. Tax Code, and that’s raised the question: Is this check just an advance on next year’s tax refund?
The short answer is no. These stimulus checks are one-time payments to help U.S. citizens weather the economic impacts of a pandemic. They will not impact 2020 tax returns. That’s great news!
Here’s why people are confused. These stimulus checks fall under the category of special tax credit for the 2020 tax year. Tax credits, in general, are designed to reduce your overall federal tax liability; the more tax credits you qualify for and claim, the less tax you’ll owe. Some tax credits – such as the Earned Income Tax Credit – are refundable. This means that if you don’t owe any federal income taxes, the government returns this money to you in the form of a check.
In the case of the stimulus payment, it is designated as a fully refundable tax credit. But rather than having to wait until you file your 2020 taxes next year to receive this benefit, you get it this year when it’s most useful. This does make it an advanced payment of sorts – but not against your anticipated 2020 tax refund.
Next year, when you file your 2020 tax return, you’ll claim the tax credit for the stimulus check, but you won’t receive any money, because you got it this year. It’s essentially a wash and has no impact on your taxes or income for 2020.
Did you catch that? That’s the other good news. Stimulus checks are not considered taxable income. They will not increase your adjusted gross income, nor will they push you into a higher tax bracket.
At Adams Accounting Solutions, there’s nothing we like more than delivering good news to our clients. We’re happy to talk you through the impacts of the stimulus check and answer any other tax questions you have. Just give us a call at 913-888-9100.
This year has thus far been a year marked with unprecedented job losses and unemployment claims. Many who never imagined having to file for unemployment have been forced to do just that as businesses shut down – either temporarily or permanently – and the job market gets squeezed to nearly nothing.
For those wondering how to pay their rent or mortgage payment, unemployment income is a blessing; it’s often all that stands between them and financial ruin. For others – especially those who work at low-paying jobs, like restaurant waiters and bartenders – it’s more like a panacea. Many of these workers are making more now on unemployment than they were when they were working full time. Free money with no effort. Pretty exciting, right?
Not so fast! When an income stream is interrupted, whether through a pandemic, regular layoffs, or reductions in force, it’s helpful to have at least a percentage of your income available so that you can still put food on the table and keep up with payments on your residence, cars, and other bills. This is the purpose of unemployment income. But it’s important to emphasize the word income here and keep in mind that most unemployment income is taxable, just as regular income is.
It’s also good to know that taxes are not withheld from unemployment checks. This means that you’ll be responsible for setting aside enough money to pay taxes on this income next year at tax time. For some, this may be a stretch. Or a nasty surprise.
Unemployment benefits are also temporary. They were created to help bridge the gap from one job to another for those who become suddenly unemployed through no fault of their own. The original intent was to help employees make ends meet until they found another job. In today’s economy, with few other jobs on the horizon, unemployment benefits are helping tide workers over until the company they work for recovers from the COVID-19 pandemic.
Unemployment benefits were always intended as short-term compensation, even if the term is extended or the pool of eligible candidates has expanded due to extenuating circumstances.
Adams Accounting Solutions specializes in helping individuals and small businesses figure out their tax liability and plan for it. If you’re currently receiving unemployment compensation, we can help you estimate what you need to set aside so that you’re not short next year at tax time. There are several ways to do this, and we’ll help you choose the one that’s best for you. Give us a call at 913-888-9100 with your questions about unemployment compensation and taxes. We’re here to help!
Personal finance is not something we learn in school. Many entrepreneurs don’t understand the impact of their personal financial situation on their business, but the truth is that they’re solidly entwined. If you’re thinking of starting a new business, it’s essential that you maintain good personal financial habits, especially during the start-up phase.
Smart business owners learn from the mistakes of others. Keep your personal finances in tip-top shape, and that will reflect well on your business. Let your personal financial situation fall apart, and it often means the demise of the business as well.
Here are a few personal finance mistakes to avoid. They can easily sink the ship if you’re not paying attention.
You don’t have to worry about your personal credit score, because that’s separate from your business, right? Wrong! Most entrepreneurs operate as a sole proprietor or an LLC. In either case, the owner’s credit score has a direct impact on the company’s ability to meet the financial needs of daily operations. Business loans, personal loans, company credit cards, and sometimes even insurance rates are all dependent to some extent on the owner’s credit score. The higher the score, the easier it is to get low-interest loans and the best insurance rates. This saves money over the long haul. A low credit score, on the other hand, may cripple the business with high interest rates and an inability to access more capital when needed.
Owners who start a business with no emergency fund are asking for trouble. Entrepreneurship is risky in the best of times, and having funds set aside to handle an unexpected situation gives you a little breathing room when things get tight. This foresight could mean the difference between the success and failure of the business. It’s best to set aside three to six months of operating expenses to hold you over in a crisis. That’s usually enough time to get the business back on its feet.
One of the most common mistakes entrepreneurs make is not separating business income from personal funds. While many business owners have to use personal funds to get the business up and running, once revenues start flowing in, they should be deposited in a separate business account. If the company’s revenue is put in the same account that you’re paying the mortgage, utilities, and the kids’ college expenses from, you’re setting yourself up for potential accounting nightmares in the future.
One of the best ways to ensure that your new business gets started on the right foot is to have the help of accounting professionals. Adams Accounting Solutions specializes in small business accounting. We can help you establish good financial practices – both business and personal – from the very beginning. We’re invested in your success as much as you are. Give us a call today to schedule an appointment to learn more.
Richard Adams is a graduate of Benedictine College in Atchison, Kansas, with dual majors in Accounting and Business Administration. He is also a graduate of Wentworth Military Academy in Lexington, Missouri.