In business it aint always what it seems to be regarding taxes, deductions and perception. 10 things to watch!

1. Big tax refunds Good or Bad?
We all are greedy and are enticed by riches. Sometimes preparers inflate deductions and the taxpayer claims they were not fully aware? If IRS comes a calling you are responsible for the additional tax not the preparer. Additionally you are allowing IRS to use your capital preventing it from being used for other activities. Personally I am ok with owing them money and keeping my money in 401k and other investments that have an upside.

2. Inflated returns – PONZI Schemes
I have known several people who have lost money in these. They are all not the size of Madoff nor get the national attention. Two of the folks are accountants go figure. The amounts ranged from 10k to 100k. How well do you know the company offering this and is it using sound business principles. Most of these offer returns are well above market which should raise a flag immediately. Too good to be true normally is.

3. Tax credits – Can we use them?
Tax credits are great when applicable. Recently I have had clients invest in solar which produced big tax credits last year. Most credits though are not refundable though. I have had Business owners spend money acquiring enterprise zone credits but could never use them as the business did not pay tax. Some of the refundable credits are excess social security, health coverage and the American Opportunity credit (education) partially at 40%.

A big one for manufacturers is the Research and Experimentation credit but we must pay tax to use. Changes were made recently to alternative minimum tax which used to limit this credit frequently. Be on the look out for this one as it is missed frequently.

4. Financial accuracy when a business is looking to sell?
Many businesses do not have strong accounting and do not pay taxes. When thoughts come of selling the business the owner realizes the game must change. Be careful here to get professional help and be skeptical. A cash basis taxpayer can make their business look stronger by stopping to pay its bills. So dig, dig and dig some more. Financials can be deceiving and manipulated so be careful and take the emotion out and be willing to walk away.

5. Equipment leases less can be more
Leasing Equipment can be a consideration for a business. There is many times low or no down payment and seemingly an ease of transaction. Many times the pain comes on the exit side. Notification periods and other language that if missed can be costly. Leasing is usually a more expensive option due to interest rate. There are also early termination fees present so if needs change your lease payment could still be a cost.

6) Projections – Fact or fiction?
Beware as I have seen a few bad projections or resumes for that matter. Optimism is usually rampant and none of us are perfected predicting the future. My feeling these normally present the best case and should be adjusted downward significantly to bring reality into play. Especially for a new business that does not have a track record to go by. Projections are a great internal tool to financial model but be cautious if you are buying off them!

7. Interest free credit cards
Some businesses use these for financing and get skilled at changing them over to avoid paying interest. I personally found out the hard way you must only use the card for that purpose or you can interest on all other balances until paid off. If you use a card for this purpose you more less shut down its use until the balance is paid. Also you normally pay a fee to transfer the balance so this is interest so things are not always as they appear.

8. Bank credit lines – Here today and gone tomorrow?
I have seen over the past few years several business owners pay down or off lines to have them reduced substantially or closed altogether. We have counseled some owners to draw on their lines to avert this. Credit has become a complicated issue and it does not appear to be changing anytime soon. Try to get multiple year agreements to avoid this and term out old lines that cannot be paid and try to get a new one for short term needs.

9. Tax Planning – Is paying no tax the right choice?
Many people would brag I do not pay taxes and are sure this is a good thing. Rate maximization is the goal to tax planning and 15% is the best rate unless we can get zero but that is hard to do unless we have large deductions. Profit will eventually need taxes to be paid. Paying tax at favorable rates can exceed paying none now and higher rates in future years. I always say it takes years to measure the merits of any decision.

10. More sales versus less sales at better margins?
Sales are down for many business owners the past few years. Margins are also down. It is very tempting to lower margins to try and stimulate sales. A business with a 30% margin not bad in today’s world would need sales to increase 50% to make up for a 10% drop in margin. We all have a limited capacity to do work (hours in the day), machine capacity etc so why not max this out and be careful if we take too much lower margin work, along comes high margin work and we have no capacity to take it on.

Author: Stephen Williams, CPA, Partner

Paying workers as contractors 1099s versus wages employees is an age old problem IRS (federal) and EDD (the state) have been chasing for years. EDD seems to have been more aggressive than IRS performing several audits and assessing many companies. Collecting assessments is one of the issues these agencies face. IRS has created a methodology to deal with this called the voluntary classification settlement program. It is not clear cut who is an independent contractor. Simply if you tell a worker what to do and when to do it they are likely employees. Having their own equipment versus using yours having their own insurance and multiple sources of revenue are all factors looked at.

This program will invite companies to change the status of contractors to employees. The calculation is to determine what the payroll taxes would be on the subject wages and then pay 10% of this amount saving 90% of the actual tax. Some reasons IRS would consider this:

1. Full payment could bankrupt some companies
2. IRS incurs large administrative costs to enforce back payroll tax compliance
3. They feel compliance will increase once the change is made
4. IRS has had success with other programs such as the voluntary foreign bank disclosure program

There are certain requirements to be eligible for this program. They must have consistently treated employees as contractors. The company must have filed 1099s for the past three years. They must not currently be under audit by the IRS.

While the IRS is making it easier to change worker classification the state is increasing penalties. California law has increased penalties to range between 5000-15000 per employee and 10000-25000 for those showing a pattern and practice of misclassification. Professionals who advise companies may also now face scrutiny from the state. These new laws seem to undermine the IRS program The state may align with the Federal in time but again sometimes differences exist forever.

Why do folks misclassify workers? Some of it may be lack of knowledge but primarily cost is the driving factor. Payroll taxes are added to wages approximately 10% between federal and state and then insurances like liability and workers compensation are added. I also think small business owners do not like continual touch with the IRS and EDD.

News flash the state of California is in need of money and has long targeted this area more than IRS. It is ironic while IRS is making it easier to reclassify workers the state is doing the exact opposite with their increased costs and with these new developments companies will need to closely evaluate this area. I have known businesses who have faced this tax audit and the result was quite devastating. The business that does pay contractors this way should be sure to issue 1099s as this is a requirement to qualify for the federal program and also encourages the recipient to file a tax return and report the income. If not you may be liable for the income taxes also as upon audit they assess this too and are willing to back out the anyone who they can prove filed and paid the tax.

In closing the IRS wants the new form filed 60 days before you elect to reclassify your subcontractors. Their instructions use August 1st 2012 which seems to encourage to wait on compliance until October 2012 the start of the last quarter of the calendar year. Personally I like the approach to get companies in the system which means they hopefully will continue for many years to come. Since they have a hard time collecting big assessments why not get something now and much more go forward. I do not frequently compliment the IRS, but my hats is off to them on this one and hopefully we will see many more businesses seek compliance which will give them peace of mind and our economies more revenue to support our budgets.

Author: Stephen Williams, CPA, Partner

There is not a yes or no answer to this question. Based on a recent estimate, 17 percent of taxes went unpaid, totaling $450 billion according to a recent IRS study released. This data actually dates back to 2006, but I doubt it has changed much since then. This amount exceeded the federal deficit at that time. And you and I were concerned that time we forgot to mail a check.

There are calls for lawmakers to reform the tax code and calls to recover these overdue funds. Neither of these challenges is simple for sure. While this is only a one year figure, the IRS estimates that they were owed $2.7 trillion as of 2006.

The W2 program works fairly well with compliance high. The IRS estimates the bulk of this shortfall comes from small businesses, renters, and businesses selling property. Conversely, the 1099 program does not function as effectively as many do not know who to issue them to or just do not do it. If a homeowner has someone do work on their yard, do they really understand how to issue a 1099? Apparently not. “Offer and Compromise” is designed for taxpayers to short pay their obligation with an agreement to stay current on taxes for the next seven years or risk having the compromised taxes being added back to the taxpayers account. This program does not seem to have a high success rate and there are several reasons for this. There are complex rules for how much the IRS will accept and many factors are taken into account. There are IRS programs to deal with this, the primary one being the offer and compromise program.

One significant reason is likely untrained taxpayers trying to submit offers that do not qualify per their guidelines. This makes choosing the right CPA to evaluate your financial books so crucial. It can cost several thousand dollars for a tax attorney to determine what the minimum offer should be. The submission process can take multiple times with no guarantee of acceptance. The translation is IRS does not have to accept an offer that meets their guidelines. Comparatively, would any of us accept less than 100 percent on a deal if you were not absolutely sure you could get more? Likely not, so the IRS is no different. Age, prior earnings history, health, and industry trends are all taken into account. Additionally, net assets in place at the time are also added to expected future cash flows from earnings. If you own an asset that can be sold for $100, they want this added to the equation for the minimum offer. Now we know there is much disparity between FMV and a quick sale, and this is some of the work an experienced person will assist with.

We utilize a tax attorney for our clients considering this direction, as this is all he does and has the experience needed and his knowledge increases the chance for success. Better to be old and destitute, versus young and able to create earnings over a long time period for this task. For a business, payroll taxes are also eligible for this, so virtually all taxes are game for this.

I have seen certain scenarios that seem to lead towards owing the IRS large sums. A taxpayer that has an unusually large year ends up having more income taxed at higher rates and the event does not repeat. With this windfall, the owner normally wants to build an infrastructure to allow future earnings to occur. There may be a home to purchase, which also may not leave room to fully pay all taxes. The intent to catch up is normally there, but this may never occur. The other scenario is the business that is not profitable and does not have access to credit. The unpaid payroll taxes become the credit line that has unlimited capacity to increase with no current payments needing to be made. An IRS audit over several years may also result in a large tax balance all at once, and income now may not be the same as when the audit adjustments occurred resulting in not having enough to pay the IRS. While they are flexible on payments if the balance is large enough, catching up can be daunting with interest and penalties mounting.

Once large tax balances occur, many taxpayers get good in becoming elusive to the IRS by working under the table, having relatives or friends own assets, and not showing any noticeable wealth. Many taxpayers who live in a cash world never report all income, thus substantially understating taxes due. Taxes seem to bring the worst out in many people and cause extreme actions. Just a little glance into the unpaid tax world. Final advice, seek help as fighting the IRS is tough without the right team.

Avoiding an IRS Audit
May Not Be So Easy For Top Earners

There are things that make us more likely to be audited by the IRS. Apparently being a millionaire is one of them. 12 % of these returns were audited for 2011 up 50 % from 5-7 % from 2004-2009. This percentage goes down to 4 % for those returns between 250,000 and one million and below 1 % for those below 200,000. I was relatively surprised by these increases but do see the logic. The higher the income the greater desire to take financial risks on things that may be a deduction.

The type of entity also has an impact on who gets audited. A taxpayer who files a Sch C has a 4 times higher chance than a wage earner of the dreaded tax audit. This increases as the gross income goes up. Some of our clients have formed partnerships with spouses to avoid filing a Sch C and avoiding the increased chance of audit. Once selected now recordkeeping and presentation becomes the game. This is not a strong trait for many taxpayers.

Believe it or not most taxpayers estimate a great deal when filing their returns.This does not mean the IRS will accept this so here the work starts. Luckily certain items can be reconstructed. Automotive use is a prime example of this. Unless you do your own maintenance mechanics or dealerships will log your miles at each service. Taking a sample at various times of the year gives us a way to determine mileage. Now that this is documented we can turn to gas. We can determine miles per gallon and the average price paid for gas giving us another number. Insurance can normally be requested from an agent. Entertainment is another area ripe for reconstruction. A log is all needed here. Expenses under 75 do not even require a receipt. We do need to record date, time, location and purpose of the entertainment. Most other areas need the documentation and DO NOT as lend well to reconstruction. Other things that lend to being audited are large losses, gambling winnings, employee business expenses, high expense to income ratios and in essence anything else they want to see. The interesting thing is opposite to a court of law where we are innocent until proven guilty IRS is the exact opposite. We are guilty until proven innocent. Everything must be proven. There are no national averages or allowed expenses with IRS.

There are rules designed to avoid repeat tax audits on the same issues within a two year period. Unfortunately these are not always followed. I now have a case where they are insisting on the audit although two years before the same issue was audited and a no change occurred. The taxpayer is frustrated and I do not blame him. We can respectfully disagree with IRS. The normal method to do this is through the appeals process after attempts are made with the original auditor. This allows a new person on the case and their goal is avoiding tax court so they normally are more reasonable and are willing to deal. If a resolution is not achieved here tax court is the next step. Usually a tax attorney is needed at this stage as most CPAs are not able to do this.

To add to the fun the IRS is also now doing correspondence audits through the mail. I have found them very frustrating as it is hard to have several one sided discussions and get anywhere. Long gaps also take place due to handling several cases and IRS is normally one of the slowest organizations you will ever experience anyway. I got so frustrated recently I took a case to appeals and did not even charge the client and got a no change. Ironically this is the same taxpayer they are insisting on the repeat audit; amazing.

While it is allowed for someone to represent themselves at audit I do not encourage this. You do not likely speak their language and cannot really advocate positions as forcefully as someone versed in the law. A bigger reason is you have to answer all their questions. I can truthfully say we will get back to you allowing us to see the direction and hopefully develop a response superior to off the cuff responses. Any of us would normally like to be able to think about our response versus being interrogated.

The IRS is using the matching letter more effectively. This usually involves a list of things they do not see on the return matching their records. Remember many things get sent to IRS ie mortgage interest, stock proceeds, interest and dividend income, and many more. It may just be a location issue but now must be addressed. I have many taxpayers inquire about large differences in years causing an audit? The IRS does not have a way to compare years outside of audit so this is not a factor. All returns filed are graded by the IRS computers and those that grade high are kicked out for a manual review. No one knows the formula. Now individuals decide the returns that will be chosen for audit. The IRS does continue to improve their compliance methods. One simple thing they did years ago is require social security numbers from dependents. 7 million fewer were claimed the following year. Childcare ID numbers are also now required likely greatly reducing this area. The latest area to garner their attention is stock basis a long time area for question. They knew the sell side but not the buy. Now requirements are being made on the purchase side. In summary the IRS appetite is increasing and the taxpayer must be educated to avoid their wrath.

There is normally an energy when new team members join a company. No baggage and a fresh perspective. There is also the excitement of the unknown and unrealized potential. Most of us are quick to hire and slow to fire, when likely the opposite is best. We usually know fairly soon if a new team member will work. Since none of us like change many times marginal performers stay until they choose to leave. I frequently hear business owners say I wish I would have acted quicker or deeper. It takes guts to pull the trigger and make changes.

In today’s world companies that are quick to react to change are usually the ones that recover losses or create profits at a quicker pace. Some companies use personality tests to determine fit and likelihood of success. We have not used these tools but I can see the logic. Background checks are a tool we use and was a recent factor in not making a hire. It was not what turned up on the report but the judgment used to not disclose. This made us focus on other judgment issues on the resume. Morale is impacted every time we add or lose a teammate. We have lost team members that at the time seemed challenging that today with hindsight turned out for the good. I now know we are all replaceable and do not sweat the departure. Personally I will take commitment over talent in most cases. Unrealized talent is quite common while commitment normally produces a consistent result.

These concepts relate to owners also. We recently had an owner leave that did not share the long term vision of the majority of owners. This caused discomfort for his complete stay and ultimately stunted our growth. While we were profitable it was not worth the experience. While it may be harder to remove owners it also can be more damaging to have the wrong mix. Employees that get a mixed message do not know which direction to go and thus are stuck. We have not hired several team members that did not have the right attitude. It is easier to teach skills than attitude. Value systems are equally important. What do you reward and encourage? This will likely dictate what we get.

Do we do it by ourselves or get assistance and bring in a headhunter? We have done both and both can work. Networking is a great way to build a team. We have had several team members come back for a second stint which is rewarding. We have even found people thru direct mail. We have also paid employees to bring us team members if they are hired in challenging markets. We do have a policy regarding not hiring relatives and find this works for us.

Getting the right clients on board can be just as important as the right team members. It feels good to let someone know they do not fit your target client. Knowing what we are makes business easier. No different when we try a pair of shoes that is too large or tight we can immediately tell the fit is not right. The saying an ounce of prevention is worth a pound of cure holds true. Act quickly and keep shuffling until you find the right fit. Lastly your Accounting firm is no different it needs to fit and work too.

Visit us at www.gyldecauwer.com or Call us at: 909/948-9990.

We all like to start a New Year with a clean slate. While not always possible it does feel good. There is a saying  to make room for the new we must get rid of the old.  How many old tales are you chasing versus making  room for new opportunities? We chose settlement as a way to get rid of the old in our company this year. We settled with two former partners this year allowing us to quit having to look back so we can put all of our energy into our future. Neither of these agreements were financial home runs but, they both had great emotional energy.

Credit is a good subject to target as the year closes. Many credit vehicles have mandatory dry periods that must be met as the year ends. Some clients that choose to voluntarily pay off lines sometimes find them reduced or closed all together. Terming out credit lines seems to be the new normal for many banks. There may be instances where not paying the line makes the most sense. Getting new credit is quite challenging in today’s world. Evaluating our options and developing a game plan is key in this area and especially in this credit environment we should focus on this. Credit is provided by more than just banks. Our own customers/suppliers routinely provide and use our credit. Sources such as SBA, factoring and private equity all play a role. Now is actually a good time to obtain credit as rates are historically low so do not look past a review. Sometimes strong companies have outdated credit that needs a fresh look.

Setting business accounting goals for the start of a year makes good sense. Goals that are precise are better than those too general. IE I want to make more money in 2012 can be improved by putting a dollar value and date by the goal. I will make 200k for the period ended Dec 31^st 2012. Budgets are another item to consider for your 2012 resolutions. These give us a good measurement tool for our financial progress. There is no magic here. Take a look at the prior year to start. What changes have occurred or one time expenses in the next year that will not repeat. Will income rise, decline or stay stagnant? The real key to the process is the measurement ongoing not really the original document. None of us are fortune tellers so adjustments are continuously needed. It does raise financial awareness and make us look beyond our day to day. There is a saying I like called failure to implement. It does not matter how good the idea is if it stays hidden. Budgeting is a great resolution to make for any year, why not start now?

Sometimes looking ahead goes beyond the next year. We may have expiring leases that need attention. We are now evaluating this with several clients. If you have not noticed rental rates are very low. Many tenants are sitting on bad leases. Many times landlords are willing to negotiate for various reasons, more time on the lease, fear of loss at the end of term etc. Something is better than nothing in most cases. Equipment leases also need our attention. Many leases have notification periods that need to be met to avoid termination fees. Equipment leases are tricky and personally I like acquisitions as I feel they are less complicated. This is not only true for tenants but owners also need to evaluate their options. We have clients currently getting out of SBA loans. Nothing easy or pretty here but possible.  I know companies that specialize in this area. It is amazing in this world if you look hard enough you can find almost anything.

There is the normal where folks will tell us it cannot be done which may be usually true and then there are the exceptions which is where the action is. Loan modification is an example. Many tried few prevailed but several clients did accomplish this. Each one likely had unique issues. Short sales are another financial option taking place at a consistent pace. Have had many clients do this over the past few years. Some of these clients were by no means financially destitute either. It became a financial decision  to stop throwing good money after bad. They were willing to take the credit hit and the bank was willing to take less for a non performing asset meaning they stopped paying. We have a client that recently gave back a seller carry back property. They did lose money but were continuing to lose and there was no end in sight. They chose to take the loss on sunk cost but make a stand for the future. The seller originally failed to negotiate and now will get a property back that has a diminished  resale due to location and the market. None of these actions just fell out of the sky. They all arose from analysis and looking at the numbers and reviewing options.  We call this process working on the business versus in it!

Let us help you plan for the future. Visit us at www.gyldecauwer.com or Call us at: 909/948-9990.

Tax planning time of course. In between the holidays for many businesses comes tax planning or loss planning to produce potential tax refunds. There are so many angles to this, it is hard to quantify but doing it before year end is much better than not. If you never do it you likely pay too much or do not take advantage of the losses incurred to the fullest. S Corp losses are one example where we need basis to deduct these. If a related entity funds this, it does not count as your basis meaning the loss may not be deductible by you. Taking a distribution from the funding entity and making the contribution yourself can solve this but many times is not realized until it is too late. Funding pensions, taking 179 depreciation and accelerating deductions are all potential discussion points. Taxes can be an outside the box discussion if you have the right advisor so evaluate and take action before year end .

Let us educate you on tax planning ideas to help you and/ or your business understand all the angles. Visit us at www.gyldecauwer.com or Call us at: 909/948-9990.

We all love to get discounts. As a business owner I do not get excited about providing them especially under duress as many are. There are cases when I do not mind which are a diminished likelihood of collection. In those cases something is much better than nothing. Discounting on a regular basis is not usually a healthy occurrence for a business. A brief example will show this concept. If your gross margin is 30% and you reduce your price by 10% you will need the sales volume to increase by 50% to maintain the same profit! Protect your margin and make discounting the exception versus the rule is a good formula for higher profits.

Let us show you how we can help you recognize cost versus benefit. Visit us at www.gyldecauwer.com or Call us at: 909/948-9990.

There are many opportunities in business and life to make choices about doing the right thing. Today a major university is facing scrutiny from a developing scandal that touches on this point. It appears not enough effort was expended to do this. Protecting the image and business seemed to win out over doing the right thing. Getting greedy or being lax in business can cause major consequences. Making these decisions inside our companies and lives are no different. The impact can be lifelong.  We all need boundaries and common sense to prevail over indecision or not taking a stand. Each day we are faced with many choices. Think long term and do the right thing and you have made your contribution and can rest at peace. Not all decisions are right but doing things right always is.

Contact us and we can show you how to get on the right path. To learn more, visit www.gyldecauwer.com or Call us at 909/948-9990

Many times it is hard to verify data to support value. Many owners never consider the end game throughout the years. This will likely hurt the sale process as no consistent data exists. Usually too many tax decisions and not enough book value decisions occur. Buyers want book value which supports consistent long term earnings. We have a client now going thru the process that has done it right. Quarterly financials, plus consistent book earnings, and they have a buyer who is very interested. We have taken away most obstacles to the equation and they expect to sell for several times EBIDA even in a down market as as they stand out ! Never forgo the long term as in the end it could cost you many times over.  Learn more, at www.gyldecauwerblog.com or Tel: 909/948-9990