In recent years, the financial landscape has seen tremendous shifts, with rising participation in the gig economy and increased online sales activities. Accompanying these changes is the heightened need for transparent income reporting. One tool designed to aid in this pursuit is Form 1099-K, which has become a crucial part of tax documentation for many individuals and businesses. This article explores the origins, purposes, and applications of Form 1099-K, and explains what taxpayers need to know when handling this form in various financial situations.

Why Form 1099-K Was Created: Form 1099-K was introduced as part of the Housing Assistance Tax Act of 2008. The U.S. government aimed to ensure accurate income reporting by providing a formal method of documenting transactions made via payment card processors (like credit and debit cards) and third-party networks (such as PayPal or Venmo). Prior to this form’s introduction, much of the income generated through these channels went unreported, creating an environment ripe for tax evasion. By mandating third-party reporting, the IRS increased transparency in the self-reporting of such income, thus reducing the tax gap and encouraging compliance.

Understanding the Purpose of Form 1099-K:

1.    Income Verification: Form 1099-K provides the IRS with data enabling more effective verification of income reported by taxpayers. This is particularly important for those engaging in cashless transactions who might otherwise underreport or misclassify earnings.

2.    Transparency in Transactions: With economies globally moving towards digitalization, there’s a burgeoning necessity for systems that clearly track digital financial exchanges. The data collected via Form 1099-K helps ensure that income derived from digital or card-based payments isn’t overlooked.

3.    Encouraging Voluntary Compliance: By laying out clear reporting structures, Form 1099-K serves as a reminder and prompt for taxpayers to self-report accurately.

What It Means for Income Reporting: Form 1099-K reports the gross amount of all reportable payment transactions: the total, unadjusted dollar amount received by a taxpayer for goods or services. It doesn’t account for refunds, chargebacks, or any fees deducted from payments, so businesses need to reconcile these totals when filing tax returns to ensure they don’t overstate their taxable income.

Cash Income: The IRS has been vigilant in its efforts to ensure comprehensive reporting of income, particularly focusing on the potential underreporting of cash income. A significant tool in this enforcement strategy is Form 1099-K, which captures payment transactions conducted through third-party networks such as credit card processors and digital payment platforms. When businesses predominantly dealing in cash report only the amounts specified in 1099-Ks as their sole income source, it signals to the IRS a potential red flag for unreported cash earnings. Such discrepancies are especially apparent in industries where cash transactions are commonplace, such as restaurants or small retail operations. By cross-referencing reported 1099-K amounts with typical income patterns in these sectors, the IRS can identify anomalies that may indicate underreporting, thereby improve compliance and ensure all income, including cash, is properly reported and taxed.

Application in Various Situations:

1.    Selling Personal Items – For individuals casually selling personal items online, the receipt of Form 1099-K can be surprising. Luckily, selling a personal item at a loss (for less than it was purchased) typically isn’t taxable; however, selling for a profit introduces a potential tax liability. The receipt of a 1099-K necessitates documenting the sales to differentiate taxable gains from non-taxable sales.

Accurate records of original purchase amounts help ensure proper reporting if the IRS questions income claimed by a taxpayer to be non-taxable due to personal sales.

2.    Side Hustles and Gig Economy – The gig economy’s rapid growth has led many to engage in side hustles. These individuals, ranging from ride-share drivers to freelance artists, often receive earnings through third-party networks, leading to a Form 1099-K being filed with the IRS and a copy to the income earner.

Individuals must report all related income, not just the amount shown on a 1099-K, and then can deduct legitimate business expenses. Such deductions might include phone usage, mileage, or home office expenses, which can significantly reduce taxable income.

3.    Business Operations – Businesses receiving credit and debit card payments will see those transactions reflected on a Form 1099-K. Typically, these amounts will already be incorporated into their internal sales records. Nonetheless, reconciling the total from a 1099-K with booked revenue is crucial; discrepancies may prompt IRS scrutiny.

Common Challenges and Solutions:

1.    Recordkeeping – Meticulous recordkeeping is essential. Taxpayers should maintain detailed accounts of all transactions, documentation of sales, receipts, and relevant deductions. Digital recordkeeping solutions or accounting services can simplify this process.

2.    Preventing Double Income Reporting – Given that Form 1099-K reports gross transaction amounts, taxpayers must ensure these amounts aren’t double-counted. For businesses, it’s important that revenues aren’t counted as both part of other cash incomes and through the form.

3.    Reporting Thresholds – Prior to passage of the One Big Beautiful Bill (OBBBA) in July of 2025, the threshold at which transactions had to be reported on Form 1099-K was going to be $600. The OBBBA retroactively repeals the American Rescue Plan Act’s lower reporting threshold by restoring the previous threshold for third-party settlement organizations (TPSOs) (payment apps and online marketplaces) so that they need report payments on Form 1099-K only when the total amount of payments an individual receives for goods or services through the platform in a year exceeds $20,000 in more than 200 transactions. This change is effective for tax years beginning in 2022 and nullifies the lower, phased-in thresholds for 2024 and 2025.However, for credit card issuers, all payment card transactions are reportable regardless of amount or number of transactions.

Steps for Compliance:

1.    Reconcile Early and Often – Begin reconciling 1099-K figures with internal records as soon as possible. This helps ensure accuracy and provides ample time to address any discrepancies or missing information before filing season.

2.    Seek Professional Guidance – Given potential complexities, engaging a tax professional—particularly for new or expanded business operations—is often wise. Tax experts can navigate the nuances of Form 1099-K and advise on optimal practices for deduction and reporting.

3.    Maintain Clear Communication with Processors – Ensure open channels with payment processors to address or clarify any figures or discrepancies on the provided 1099-K. Updating contact and business information can prevent errors or confusion regarding transaction reporting.

Conclusion: Form 1099-K has become an integral part of the tax landscape for digital and card-based transactions. Its creation stems from the need for more transparent and equitable tax reporting, which benefits both the IRS and taxpayers by creating a standardized process for reporting income.

As more taxpayers receive this form, understanding its implications becomes crucial. By recognizing its purpose, resolving common challenges, and adhering to best practices for compliance, taxpayers can ensure they meet their obligations without unnecessary errors or liabilities. In a rapidly evolving economy that increasingly emphasizes digital transactions, informed handling of Form 1099-K is paramount in maintaining transparency and accountability in income reporting.

For tailored tax assistance to ensure your compliance with 1099-K reporting requirements, contact this office for assistance. 

The post Received a 1099-K? What You Should Be Concerned About first appeared on Wellman Tax & Business Advisors, Inc..

Early in the year is when most business owners promise themselves that this will be the year their finances are finally organized. The chaos of last year is behind them, new revenue goals are on the calendar, and there’s a fresh start waiting inside QuickBooks.

But in reality, this is also when many businesses realize something uncomfortable: their books aren’t as clean as they thought.

QuickBooks doesn’t reset itself when the calendar turns. If transactions were miscategorized, bank feeds duplicated, payroll recorded incorrectly, or invoices left unreconciled in December, those problems roll right into the new year, and they only get harder to fix once tax season is underway.

That’s why right now is the best month to clean up QuickBooks. It gives you the cleanest possible starting line for the year ahead.

Your Opening Balances Set the Tone for the Entire Year

When January 1 hits, QuickBooks creates a snapshot of your business: cash balances, credit cards, loans, accounts receivable, inventory, and owner equity all carry forward from December 31.

If anything was wrong last year, those mistakes now become your “opening balances.”

That means:

• If income was overstated last year, this year starts with inflated equity
• If expenses were miscategorized, your tax return may be wrong
• If loans were entered incorrectly, QuickBooks may think you’re richer or poorer than you really are

Fixing these errors in March or April requires going back into a closed tax year, which is messy and often expensive. Fixing them in January is much simpler.

February Is When Bank Feeds Are the Cleanest

Most businesses rely on QuickBooks bank feeds to pull in transactions automatically. By February, all of last year’s activity has undoubtedly cleared the bank, making reconciliation easier.

Waiting too long means:

• Bank rules may apply to old transactions incorrectly
• Duplicate transactions may sneak in
• Unmatched deposits and payments pile up

A late January or early February reconciliation lets you start the year knowing your cash balances are real.

Your Accountant Needs Clean Books — Not a Guessing Game

Every tax season, accountants and tax professionals like this office spend valuable time cleaning up QuickBooks files that should have been ready for review. That cleanup time is billed, and it delays your tax return.

When your books are accurate before you file:

• Your tax return is prepared faster
• You reduce the risk of amended returns
• You avoid IRS notices caused by mismatches
• You get better tax planning advice

QuickBooks isn’t just a bookkeeping tool. It’s the foundation of your tax return.

Payroll Errors Don’t Disappear at Year-End

This time of year is when W-2s and 1099s are issued, and that’s when payroll problems finally surface.

Common QuickBooks payroll issues include:

• Employees classified incorrectly
• Benefits taxed improperly
• State withholding errors
• Missed payroll tax deposits

If these issues aren’t corrected early, they can trigger penalties and audits later in the year.

A Clean QuickBooks File Helps You Make Better Decisions

When your books are accurate, QuickBooks becomes a powerful business tool.

You can see:

• True profitability
• Cash flow trends
• Whether you can afford new hires
• How much you should set aside for taxes
• Where money is being wasted

Without clean data, QuickBooks is just a digital shoebox.

What Business Owners Should Do Right Now

Here’s the smartest way to start the year:

1. Have your QuickBooks file reviewed by our firm – we’re here to help!
2. Reconcile all bank and credit card accounts
3. Verify your chart of accounts matches your tax return
4. Fix misclassified income and expenses
5. Confirm payroll and tax settings
6. Lock last year once everything is correct

Doing this now saves time, money, and stress all year long. A clean file means fewer surprises, lower accounting bills, and better financial decisions. It also makes your business more valuable because buyers, lenders, and investors all look at your books.

If QuickBooks has felt confusing, overwhelming, or unreliable, this is your chance to change that.

The post Now Is the Time to Fix Your QuickBooks File — Here’s Why first appeared on Wellman Tax & Business Advisors, Inc..

Unlike the prior loan program, this round will truly be limited to small businesses that incurred revenue losses.

Eligibility is limited to businesses

• with 300 or fewer employees per physical location; 
  
• that had previously received a PPP loan; and 
  
• that can demonstrate that they sustained at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Businesses submitting an application on or after Jan. 1, 2021, are eligible to utilize the gross receipts from the fourth quarter of 2020.

Eligible Entities – The eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Churches and religious organizations are eligible for loans if they otherwise meet the requirements, and the legislation prevents future administrations from making them ineligible.

Loan Terms – The legislation establishes a maximum loan size of 2.5 times the average monthly payroll costs in the one year prior to the loan, or the calendar year, up to $2 million. There is an exception for borrowers in the hospitality or food services industries, who may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.

Loan Forgiveness – Like the first PPP loan, full loan forgiveness is available if the borrower spends at least 60% of the second draw on payroll costs (this time including additional group insurance payments, including vision, dental, disability and life insurance), with allowable nonpayroll costs of 40%.

The allowable non-payroll expense category – which was originally limited to rent, mortgage interest, and utilities – has been expanded to include the following:

• Operational costs – Payment for any business software or cloud-computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses, human resources, sales, and billing functions; or accounting or tracking of supplies, inventory, records, and expenses. 
  
• Property damage costs – Include costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation. 
  
• Supplier costs – Costs from existing contracts that are essential to the recipient’s operations, including the cost of perishable goods at any time. 
  
• Protective materials and facility modifications – An operating or a capital expenditure made to facilitate the adaptation of an entity’s business activities to comply with requirements established or guidance issued by federal, state, and local governments during the period beginning on March 1, 2020, and ending on the date when the national emergency related to COVID-19 declared by the president expires.

A borrower may choose either an 8-week or a 24-week covered period.

Forgiveness Reduction – The rule reducing loan forgiveness for a borrower who reduced the number of employees retained and reduced employees’ salaries by more than 25% continues to apply.

Simplified Loan Forgiveness – The loan-forgiveness process is simplified for borrowers with PPP loans of $150,000 or less. This means another version of the SBA’s loan-forgiveness application form will be forthcoming. Congress has specified that it be a one-page certification that includes a description of the number of employees whom the eligible recipient was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. Because borrowers using the simplified application form will be certifying that they meet the requirements for forgiveness and will be subject to penalties if they are found not to qualify, it may be a good idea for applicants to fill out a “draft” of the longer version of the form to substantiate their certification as well as retain it with the business’s employment and expense records. The legislation requires employment records to be kept for 4 years and for other records to be kept for 3 years after the date when the forgiveness request is submitted.

Deductibility of Expenses – The IRS recently issued a ruling essentially saying that because businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses paid from the forgiven loan aren’t deductible. However, Congress members have been saying all along that this was not the Congressional intent in the original PPP legislation.

In a rebuttal to the IRS, Congress has made it crystal clear in the recently passed legislation that taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This applies retroactively to the first round of PPP loans as well.

Funds Availability – The legislation requires the SBA to prepare regulations and implement the second-draw PPP within 10 days after the bill was signed into law (December 27, 2020) and for the program to continue through March 31, 2021.

The post Congress Has Authorized a Second Round of PPP Loans first appeared on Wellman Tax & Business Advisors, Inc..

• Standard Mileage Rates for 2018
• Business, Charitable and Medical Rates
• Important Considerations for 2018
• Switching Between the Actual Expense and Standard Mileage Rate Methods
• Employer Reimbursements
• Employee Deductions Suspended
• Special Allowances for SUVs

As it does every year, the Internal Revenue Service recently announced the inflation- adjusted 2018 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable or medical purposes.

Beginning on Jan. 1, 2018, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are:

• 54.5 cents per mile for business miles driven (including a 25-cent-per-mile allocation for depreciation). This is up from 53.5 cents in 2017;
• 18 cents per mile driven for medical purposes. This is up from 17 cents in 2017; and
• 14 cents per mile driven in service of charitable organizations.

The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for over 15 years.

Important Consideration: The 2018 rates are based on 2017 fuel costs. Based on the potential for substantially higher gas prices in 2018, it may be appropriate to consider switching to the actual expense method for 2018, or at least keeping track of the actual expenses, including fuel costs, repairs, maintenance, etc., so that the option is available for 2018.

Taxpayers always have the option of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to the potential for higher fuel prices, the extension and expansion of the bonus depreciation as well as increased depreciation limitations for passenger autos in the Tax Cuts and Jobs Act may make using the actual expense method worthwhile during the first year a vehicle is placed in business service. However, the standard mileage rates cannot be used if you have used the actual method (using Sec. 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously.

Employer Reimbursement – When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of employment-connected business travel.

The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, employees may no longer take a deduction on their federal returns for unreimbursed employment-related use of their autos, light trucks or vans.

Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) – Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the limit rules on luxury auto depreciation; taxpayers with these vehicles can utilize both the Section 179 expense deduction (up to a maximum of $25,000) and the bonus depreciation (the Section 179 deduction must be applied before the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class life property. If the taxpayer subsequently disposes of the vehicle before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to your income (SE income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered.

If you have questions related to the best methods of deducting the business use of your vehicle or the documentation required, please give this office a call.

The post 2018 Standard Mileage Rates Announced first appeared on Wellman Tax & Business Advisors, Inc..

• Depreciation
• Materials & Supplies
• De Minimis Safe Harbor Expensing
• Routine Maintenance
• Unlimited Expensing
• Bonus Depreciation
• Sec 179 Expensing
• Mixing Methods

From time to time, an owner of a small business will purchase equipment, office furnishings, vehicles, computer systems and other items for use in the business. How to deduct the cost for tax purposes is not always an easy decision because there are a number of options available, and the decision will depend upon whether a big deduction is needed for the acquisition year or more benefit can be obtained by deducting the expense over a number of years using depreciation. The following are the write-off options currently available.

• Depreciation – Depreciation is the normal accounting way of writing off business capital purchases by spreading the deduction of the cost over several years. The IRS regulations specify the number of years for the write-off based on established asset categories, and generally for small business purchases the categories include 3-, 5- or 7-year write-offs. The 5-year category includes autos, small trucks, computers, copiers, and certain technological and research equipment, while the 7-year category includes office fixtures, furniture and equipment.
• Material & Supply Expensing – IRS regulations allow certain materials and supplies that cost $200 or less, or that have a useful life of less than one year, to be expensed (deducted fully in one year) rather than depreciated.
• De Minimis Safe Harbor Expensing – IRS regulations also allow small businesses to expense up to $2,500 of equipment purchases. The limit applies per item or per invoice, providing a substantial leeway in expensing purchases. The $2,500 limit is increased to $5,000 for businesses that have an applicable financial statement, generally large businesses.
• Routine Maintenance – IRS regulations allow a deduction for expenditures used to keep a unit of property in operating condition where a business expects to perform the maintenance twice during the class life of the property. Class life is different than depreciable life.
  

  Depreciable Item	Class Life	Depreciable Life
  Office Furnishings	10	7
  Information Systems	6	5
  Computers	6	5
  Autos & Taxis	3	5
  Light Trucks	4	5
  Heavy Trucks	6	5

  
  

• Unlimited Expensing – The Tax Cuts and Jobs Act passed in December 2017 ncludes a provision allowing 100% unlimited expensing of tangible business assets (except structures) acquired after September 27, 2017 and through 2022. Applies when a taxpayer first uses the asset (can be new or used property).
• Bonus Depreciation – The tax code provides for a first-year bonus depreciation that allows a business to deduct 50% of the cost of most new tangible property if it is placed in service during 2017. The remaining cost is deducted over the asset’s depreciable life. The 50% rate applies for new property placed in service prior to September 28, 2017 and, by election, to new or used property acquired and first put into use by the taxpayer after September 27, 2017 and before December 31, 2017.
• Sec 179 Expensing – Another option provided by the tax code is an expensing provision for small businesses that allows a certain amount of the cost of tangible equipment purchases to be expensed in the year the property is first placed into business service. This tax provision is commonly referred to as Sec. 179 expensing, named after the tax code section that sanctions it. The expensing is limited to an annual inflation adjusted amount, which is $510,000 for 2017 and $1 million for 2018. To ensure that this provision is limited to small businesses, whenever a business has purchases of property eligible for Sec 179 treatment that exceed the year’s investment limit ($2,030,000 for 2017 and $2.5 million for 2018), the annual expensing allowance is reduced by one dollar for each dollar the investment limit is exceeded.An undesirable consequence of using Sec. 179 expensing occurs when the item is disposed of before the end of its normal depreciable life. In that case, the difference between normal depreciation and the Sec. 179 deduction is recaptured and added to income in the year of disposition.
• Mixing Methods – A mixture of Sec. 179 expensing, bonus depreciation and regular depreciation can be used on a specific item, allowing just about any amount of write-off for the year for that asset.

For some individual taxpayers the alternative minimum tax (AMT) may be a concern. Bonus depreciation and Sec. 179 expensing are not preference items, and therefore their use will not trigger an AMT add-on tax. However, the difference between 200% MACRS depreciation, if claimed, and 150% MACRS depreciation is a preference item for AMT and could cause or add to the AMT tax.

The post How Small Businesses Write Off Equipment Purchases first appeared on Wellman Tax & Business Advisors, Inc..

Thus, it is generally better to trade in a vehicle that would result in a gain if it were sold and to sell a vehicle if doing so would result in a loss.

Let’s say a taxpayer sells a 100%-business-use vehicle for $12,000. The original purchase price was $32,000, and $17,000 is taken in depreciation. As illustrated below, the sale results in a loss, so it generally would be better to sell the vehicle and deduct the loss rather than trade in the vehicle.

On the other hand, had the business owner sold the vehicle for $16,000, the sale would result in a $1,000 taxable gain, and trading it in would be a better option.  Caution: Sales to the same dealer are treated as trade-ins.

If a vehicle is used for both business and personal purposes, the loss or gain must be prorated for the proportion of business use, as the personal portion of any loss is not deductible.
Since trade-in values are generally less than the sales value of the vehicle, the trade-in decision must also consider whether the tax benefits will exceed the additional money received from selling the old business vehicle. Of course, there is always the hassle of selling a car to be considered as well.

If you are considering trading a vehicle in, determine whether the tax benefits exceed the additional money received from selling the old business vehicle, as trade-in values are generally less than actual sales values. You should also consider the time and energy it will take to sell the vehicle on your own.

This concept can also be used when selling or disposing of other business assets. If you have questions about how this tax strategy might apply to your specific tax situation, please give us a call.

The post Better to Sell or Trade a Business Vehicle? first appeared on Wellman Tax & Business Advisors, Inc..

Because this is the first year for this requirement, the IRS has decided to provide first year (2015) filing relief for Forms 1095-B and 1095-C. The due dates for furnishing these forms are extended as follows:
The due date for providing the 2015 Form 1095-B and the 2015 Form 1095-C to the insured and employees is extended from February 1, 2016, to March 31, 2016.

The due date for health coverage providers and employers to furnish the 2015 Form 1094-B and the 2015 Form 1094-C to the IRS is extended from February 29, 2016, to May 31, 2016 if not filing electronically.

The due date for health coverage providers and employers electronically filing the 2015 Form 1094-B and the 2015 Form 1094-C with the IRS is extended from March 31, 2016, to June 30, 2016.
While the IRS is prepared to accept information reporting returns beginning in January 2016, employers and other coverage providers who can’t meet the original deadlines are encouraged to furnish statements and file the information returns as soon as they are ready.

The information provided to individuals on their copy of Form 1095-B or 1095-C is generally used to confirm that the individual had minimum essential coverage (and thus avoid the penalty that applies when not covered for the full year). However, with the extension of the filing dates for these forms, individuals may not have the forms in hand before filing their 2015 returns. For 2015 only, individuals who rely on other information received from their coverage providers about their coverage for purposes of filing their returns need not amend their returns once they receive Form 1095-B or Form 1095-C or any corrections, according to the IRS.

Likewise, individuals who, when filing their 2015 income tax returns, rely upon other information received from employers about their offers of coverage for purposes of determining eligibility for the premium tax credit need not amend their returns once they receive their Forms 1095-C or any corrected Forms 1095-C.

The post Affordable Care Act Reporting Relief for Employers first appeared on Wellman Tax & Business Advisors, Inc..

Choose the Right Entity

One of the first steps to forge a solid start includes selecting the right entity for your business. This legal structure will affect the amount of paperwork you need to do and the legal ramifications you will face.

The right entity will help you reduce your liability exposure and minimize your taxes. You need to ensure your business can be financed and run efficiently with a method that helps ensure the business operations will continue after the death of the owner. Along with making the startup process more organized in an official capacity for the company, the formalization process will also solidify the ownership of participants who are participating in the venture.

To choose your entity, you will first need to consider what personal level of risk you face from liabilities that could arise from your business. You will then need to consider what the best angle is for taxation, finding ways to avoid layers of taxation that can increase unnecessary expenses. Then, you will have to consider what kind of ability you have to attract investors and what ownership opportunities will need to be offered to key stakeholders. Finally, you will have to consider the overall costs of operating and maintaining whatever business entity you choose.

There isn’t necessarily only one entity that can fit your business. The key in this process is looking at how each entity will alter your business’s future to select the one that is right for you. You might choose a sole proprietor, corporation or limited liability company if you are a single owner. If your business is going to be owned by two or more individuals, then you might choose a corporation, limited liability, limited partnership, general partnership or a limited liability partnership.

Sole Proprietorship: The most common entity type where a single owner is personally liable for financial obligations. This is the easiest type of business entity to form and offers complete control to you as the managerial owner.

Partnership: When two or more people want to share the profits and losses of a business, they can benefit in a shared entity that does not pass along the tax burdens of their profits or benefits of the losses. In this entity form, however, both partners are personally liable for the financial obligations of the business.

Corporation: A corporation is an entity that is separated from the founders and handles the responsibilities of the organization for which it bears responsibility. The corporation can be taxed and held legally liable for its actions, just like a person. The corporate status allows you to avoid personal liability, but you will have to provide the funds to form a corporation and keep extensive records to keep the corporation status. Double taxation can also be seen as a downside to the corporate status, but a Subchapter corporation can avoid this situation by using individual tax returns to show profits and losses.

Limited Liability Company (LLC): This is a hybrid form of a partnership entity that allows owner to benefit from aspects of the corporation and partnership forms of the business. Both profits and losses can be passed to the owners without taxing the business and while shielding owners from the personal liability factor.

Plan for Growth

Even though the number one reason startups fail is due to the production of a product no one wants, you can’t just stop with a great product. As an entrepreneur, you have to know about every aspect of your business. Even if you are not an expert in the process of business and aspects of your company, failure in those areas can still cost you your success. You have to know enough to catch key problems in your company’s startup process.

Too segmented, and your company will struggle with gaps and overlap. If the CEO believes it is his or her job to lead, but not to market, then he or she may miss an important connection between target audience and company direction. If the marketer believes it is his or her job to market, but not to develop the website, then he or she might find the website design does not appeal to the right audience. Each individual needs to be both responsible and organic in their approach to helping the company move in the right direction.

While you want growth, you need to be prepared to sustain it. In order to get your venture capital secured, you need accelerated growth; grow too slow and you won’t be eligible for the funds you need to keep growing. Yet, your company will have to be equipped for that growth. The shifting size will alter your ability to work as an agile startup, will force you to reconsider a variety of your tools and may even make you update your physical headquarters. This is just one more reason your current company leaders and employees need to be flexible in the nature of their coverage and thorough in the application of their talents.

The second major reason that companies fail is due to a shortage of funds. These companies run out of cash because their growth stalls. Stalling growth can kill a startup by making them lose to the competition, lose customers, lose employees and lose passion.

Growth Hack

Once you’ve gotten your business prepared for substantial growth at a very rapid pace, you will need to focus your attention on increasing that growth. A relatively new term, growth-hackers are professionals that are specifically focused on the rapid growth of startups. Since the second largest reason startups fail is directly related to money shortages (and indirectly related to growth), you will want to focus a lot of your initial attention on increasing growth in creative ways.

The growth hacker job is usually done by a professional who stands in the place of a marketer. The growth hacker has to understand your startup’s audience and how to appeal to them for faster growth. The growth hacker will also break your large end goal (increased growth at a rapid rate) into smaller, actionable and achievable tasks, like doubling your content creation, to reach that end goal.

Watch the Money

In order to help manage the funds that you do have, you will want to establish financial controls to provide your startup with a solid foundation. The internal controls will include accounting, auditing, damage control planning and cash flow. You will need to have disciplined controls to ensure solid growth and help you never run out of cash.

You will want to adjust and re-adjust your projections for cash flow, never allowing the cash to run dry. This also means you need to set maximum limits of purchasing authority to keep partners or employees from overspending. You will need to require all payments to be recorded on invoices to support audits and keep spending on track. Additionally, you will want to use an inventory control system and use an edit log to track changes made to your website. Don’t overlook your suppliers as sources of financing or assume that all shipments are accurate or in good condition. Ask for term discounts, pay on time and always create purchasing contracts to ensure your goods are delivered.

Measure Your Achievements

Key Performance Indicators (KPIs) are ways to measure the company’s success in achieving key business goals. You will want to establish KPIs on multiple levels in order to monitor your efforts on meeting your objectives.

You will want to use SMART KPIs that are Specific, Measurable, Attainable, Relevant and Timely. Goals that are too general, don’t have an end date and aren’t within your control are goals doomed to fail. To help your startup succeed, you need to discover the core objectives that will really improve your company status.

Work With Us

Finally, you need to spend more time growing your business than accounting for it. Remember, a misplacement of funds and lack of cash is the second biggest reason why startups fail.

Once you have a product that is worth taking to market and a plan in place to cultivate funding, you will be in a good place with your startup. Don’t let any of these points cause you to lose control of your business with a blind side hit that you could have prepared for.

The post 6 Steps to Get Your Business Startup on Track For Long Term Success first appeared on Wellman Tax & Business Advisors, Inc..

1. Get it right.

One legitimate reason for nonpayment is a confusing or inaccurate invoice. Make sure your invoices spell out in clear, plain English what was purchased, the price, the payment terms (or when payment is due), the customer’s PO number, when it was shipped, to where it was shipped, and any tracking number.

You may also want to tighten your sales process. Don’t start work without a formal PO from your business customers-many companies won’t pay against a verbal PO. When you receive a PO, make sure that it matches your quotation. Companies often put their payment terms on their paperwork, so if your customer tries to play this game, resolve any discrepancies before you start work.

Finally, make certain every shipment and invoice is 100% correct. Set up processes to assure the customer gets exactly what was ordered and that invoices are equally accurate.

2. Get it out.

See that four-day-old pile of shipping papers waiting to be invoiced? That’s a pile of cash you can’t collect.

Set a goal to issue all invoices within one working day of the ship date or completion of work. If your team struggles to meet this, give them the tools and/or manpower to make it happen. And if an invoice gets held up internally, make sure your supervision is immediately notified so the problem can be quickly resolved.

To further speed payments, try to invoice your customers by email. Some won’t accept emailed invoices, but getting even a portion of your billing done electronically will help overall cash flow.

3. Get it to the right person.

How many times has one of your employees called about a past-due payment and been told “we didn’t receive your invoice” or “that needs to be approved by the department manager”? It’s another game, one that can take weeks to play out. As part of getting an accurate customer PO, make sure your sales staff gets a valid address for invoicing.

Large sales deserve special attention. Where applicable, have your salesperson get the contact information for the customer employee that will approve payment. This might be a department or plant manager and maybe even the business owner. Also get the contact information for the customer’s finance-side people (accounting manager, accounts payable clerk), who will cut and approve the check. When your invoice goes out, make sure they all get a copy.

4. Get it sooner.

Offer a discount for early payment-for example, 2% off for payment within 10 days. Not all of your customers will take advantage of this, but it’s a great way to pull cash in.

5. Get friendly.

The best way to get paid on time is to build a positive working relationship with your customer before the money is due.

Have your salesperson call his or her customer contacts shortly after the invoice goes out. Confirm the product has been received or affirm that your assignment is now complete. Ask them if they’re satisfied with your work, what you can do better to improve, and if they’ve received your invoice. This communicates (in a nice way) that it’s time to start the payment process. If these calls uncover problems, it’s an opportunity to address them on the spot as opposed to when payment is past due.

Your employee responsible for collections should also make a call-in this case, to the customer’s finance-side people. Your employee should confirm the receipt of your invoice, remind them of any discounts for early payment, and check whether there are any administrative problems with the document. They should not ask for a payment date. If possible, they should also try to get to know their counterparts. A simple “How’s the weather where you are?” is a great opening that can lead to a long conversations about, well, everything. Your customer’s payables team can be your best friend later in the collections process, but it won’t happen if you have not built a working relationship.

There’s one other person who needs to get friendly: you, the business owner or general manager. As your company develops large customers make sure you get to know your customer counterparts. A phone call from you asking “How’s my team doing?” is a great way to initiate a conversation and assure customer satisfaction. For very large projects, make a face-to-face visit. It will pay off later. If the time comes when a payment problem needs to be escalated, you will have an established relationship on which to call.

6. Make it fun.

Some companies take the “get friendly” notion to the next level. From putting silly “Thank You!” notes on their invoices, to handing out promotional swag, to sending little stuffed animals for on-time payment, it’s amazing how these goofy gimmicks can change the atmosphere around the collection process.

You want your customer to smile and shake his head as he signs the check to pay your bill. And if the day comes when your customer needs to decide whom to pay and whom to put off, chances are he will pay you first.

In Closing

What about the actual collections process? Good companies contact their customers if a payment is more than five working days late. You should do the same.

What’s different is that you’ve laid the foundation for a successful endgame. Any excuses for non-payment have been addressed. Your people know whom to call, and you have working contacts who will give you straight answers. Above all, you’ve strengthened the relationship with your customer and have built a basis for future business.

The post Show Me the Money – Six Best Practices in Billings and Collections first appeared on Wellman Tax & Business Advisors, Inc..

• Reporting Sole Proprietorships On Your 1040
• Business Checking Account
• Local Business Licenses
• Resale Permits & Payroll Reporting
• Personal Liability

If you are considering starting a business, the simplest and least expensive form of business is a sole proprietorship. A sole proprietorship is a one-person business that reports its income directly on the individual’s personal tax return (Form 1040) using a Schedule C. There is no need to file a separate tax return as is required by a partnership or corporation (if the business is set up as an LLC with just one member, filing is still done on Schedule C, although an LLC return may also be required by the state). Generally, there are very few bureaucratic hoops to jump through to get started.

However, we strongly recommend that you open a checking account that is used solely for depositing business income and paying business expenses. You will also need to check and see if there is a need to register for a local government business license and permit (if required for your business).

If you are conducting a retail business, you will need to obtain a resale permit and collect and remit local and state sales taxes.

If you hire employees, you will need to set up payroll withholding and remit payroll taxes to the government. Before you can do that, however, you’ll need to apply to the IRS for an employer identification number (EIN) because you can’t just use your Social Security number for payroll tax purposes. An EIN can be obtained online at the IRS web site or by completing a paper Form SS-4 and submitting it to the IRS.

As a sole proprietor, you can also very simply set aside tax-deductible contributions for your retirement.

However, there is a big downside to conducting business as a sole proprietor, and that drawback is liability. Sole proprietors are 100% personally liable for all business debts and legal claims. As an example, in the case that a customer or vendor has an accident and is injured on your business property and then sues, you the owner are responsible for paying any resulting court award. Thus, all your assets, both business and personal, can be taken by a court order and sold to repay business debts and judgments. That would include your car, home, bank accounts and other personal assets.

Other forms of business, such as LLCs and corporations, can protect your personal assets from business liabilities. If you feel that your business is susceptible to lawsuits and would like to explore alternative forms of business, please give this office a call so we can discuss the tax ramifications of the various business entities with you. If you decide on something other than a sole proprietorship, you’ll need legal assistance to formally set up your new business.

The post Sole Proprietorship – Is The Risk Worth It? first appeared on Wellman Tax & Business Advisors, Inc..