The medical and moving standard mileage rate was also increased from 19 to 23½ per mile.

The standard mileage rate for services to charitable organizations remains unchanged (14 cents per mile).

This is a good time to make sure you are keeping mileage records up to date.  For our clients who claim mileage, come tax time next year we will be asking you to break down the mileage before and after July 1, 2011.

Convincing small business owners of the importance of good record keeping is a constant conundrum for accountants.  Would you try to drive your car with a blindfold on?  That’s what it’s like trying to run your business without good financial records.  And yet many small business owners try to skimp by doing the bookkeeping themselves, or hiring an unskilled person to do it for them.

Let’s use a typical problem as an example:  how to solve a cash flow shortage.  Should you advertise to bring in more business, cut back on staff, or reduce operating expenses?  Should you borrow money, reduce your own compensation, or invest some of your own cash reserves in the business?  Making the wrong choice could spell doom for your business.

If your margins are poor or non-existent, bringing in new business could make your cash flow worse, and the money you borrow or invest will simply go up in smoke.

If you have good gross margin with poor cash flow, you need to look at increasing efficiency, reducing staff, or cutting expenses.

What if you are making a profit, but are always short on cash?  Excess debt or too much owner compensation could be the culprit.

If your business is showing growth trends, you may just need to invest your own resources for another year or two before the profits come.  But excess borrowing will drain cash flow even further.

What if you don’t know your gross margin, profit margin, or growth trends?  Incorrect bookkeeping practices will obscure and distort this vital financial data and make it practically impossible for you to make effective decisions.  That’s why we urge you to take the Bookkeeping Quiz!

(You may also want to read about common bookkeeping errors.)

The IRS wants you to make a payment with your automatic extension for what you think you will owe.  They will gladly refund any over payment after you file your return, but if you under pay, you will be assessed a failure-to-pay penalty.

The failure-to-pay penalty is 0.5% per month up to 25% of the late tax.  As an example, if you owe $1,000 with your 2010 individual tax return, the failure-to-pay penalty would be $5 per month, assessed from April 18, 2011 until you file your return.

How do you know if you owe?

Of course, since the tax return has not been prepared yet, you don’t know if you owe.  Generally, if your income, deductions and withholdings were roughly the same in 2010 as 2009, and you received a refund last year, you probably won’t owe for 2010.  But you may owe if:

• You were required to make quarterly payments in 2010 but did not make all the payments.
• You (or your spouse if filing jointly) earned substantially more wages in 2010, especially if you did not increase your withholding allowances.
• You received a lump-sum retirement distribution in 2010, especially if you are under age 59 ½.
• You had new or one-time income sources in 2010, such as a second job,  a new business, etc — especially if you did not have tax withheld from the payments.
• You had capital gains from the sale of business property, investments or real estate.
• You made a profit from self-employment or a business in 2010, and did not make quarterly estimated tax payments.  (If you did not make a profit, don’t worry about this one.)
• You have a child that turned 17 in 2010 (because the child tax credit goes away).
• You have fewer dependents in 2010.

Yes, I think I will owe taxes for 2010.

Columbia CPA Group clients may contact our office for help in calculating a payment to send with the extension.

Or you may estimate the amount yourself as follows:

• Multiply your extra income by your marginal tax rate.  (If our firm prepared your taxes last year your marginal tax rate can be found on either of two worksheets found in the client copy of your tax return; just turn to either the Tax History Report or the Two-Year Comparison worksheet.)
• If your extra income will be subject to self-employment tax multiply that amount by 13.3%.  Clergy housing allowance may also be subject to self-employment tax.
• Don’t forget Missouri.  For your MO extension payment simply multiply your extra income by six percent (6%).  The MO-60 must be filed to send a payment to Missouri.  Otherwise, Missouri accepts the Federal extension.

If your bank balance is a limiting factor, you can simply choose an amount that you can afford to pay to minimize the potential failure-to-pay penalty.

More information

For more information, view the IRS instructions for Form 4868 http://www.irs.gov/pub/irs-pdf/f4868.pdf.

The IRS treats canceled debt as income, but has made provisions for an insolvency exclusion.  Most cases of canceled debt involves taxpayers who are struggling to make ends meet.  Make sure to look into the exclusion so you don’t pay unnecessary income tax.

We can help!

IRS withholding tables have also been updated for 2011 payroll.

Be sure to run updates for payroll software so changes take effect before processing 2011 payroll.

In summary, the total FICA tax in 2011, as a percentage of gross wages, is as follows:

Also,  make sure your 2011 State Unemployment Tax (SUTA) rate is updated in your payroll software as well.  Missouri sent out notices to business owners with their new 2011 rates.

As always, Columbia CPA Group payroll clients are encouraged to call our office if you need help.

]]> http://columbiacpagroup.com/2011/01/reduction-in-payroll-tax-for-2011/feed/ 0 http://columbiacpagroup.com/2010/11/audit-review-or-compilation-what-do-you-need/ http://columbiacpagroup.com/2010/11/audit-review-or-compilation-what-do-you-need/#comments Tue, 23 Nov 2010 17:49:39 +0000 arod2634@gmail.com http://www.columbiacpagroup.com/?p=201 This is a brief, non-technical explanation of the differences in assurance engagements provided by Certified Public Accountants.  A Compilation is the most basic (cheapest) engagement to prepare financial statements, followed by a Review, which provides limited assurance (and is more expensive), and ending with an Audit, which provides the greatest level of assurance (at the greatest cost to the company).

Although a Compilation does not have the assurance level of a Review or Audit, a CPA would not sign the report if he or she became aware of any material errors in the financial statements.  Basically, the CPA takes the numbers from the company and puts (compiles) them in the form of financial statements.  Every compilation report contains this disclaimer:  “A compilation is limited to presenting in the form of financial statements information that is the representation of management.”

A Review provides limited assurance that the financial statements are in conformity with generally accepted accounting principles and significant errors have not been found.  The Review report, signed by the CPA, states that the financial statements are the responsibility of management and includes the following description of work performed:  “A review consists principally of inquiries of the Corporation’s personnel and analytical procedures applied to financial data.”  The report goes on to say that an audit has not been performed, and accordingly no opinion has been expressed.

An Audit is the most thorough examination of an organization’s books, providing an attest function to third parties such as banks, shareholders, and potential investors that the financial statements paint a fair picture of the organization.  All publicly traded companies must have annual audits.  The audit report and audited financial statements are presented in the annual report to shareholders.  An audit requires extensive understanding of internal controls, testing of accounting records, confirmation of ownership of assets, corroboration of evidential matter, etc.  The audit report assures the reader that the audit was “performed in accordance with generally accepted auditing standards,” and that the “financial statements present fairly the entity’s financial position and results of operations.”

Here is a short history of audits.  When business corporations gained prominence in America in the 1800s, more and more corporations were owned by absentee owners (shareholders who were not part of management, and who lived in another state).  To ensure that the financial statements produced by management were accurate, the need for Certified Public Accountants was born.  Initially, they provided outside assurance and attestation that the financial statements presented fairly the activity and financial position of the corporation.

In practice, many local, small businesses are required by their lenders (usually local banks) to engage a CPA to provide either a compilation or a review.  Many non-accountants refer to all assurance work performed by CPAs as audits, when the majority of the assurance work they actually need is either a compilation or a review, not the expensive audits required by publically traded companies.

The Tax Vortex can indeed feel like you are getting sucked into financial oblivion.

The Tax Vortex is commonly caused by a perfect storm of new or one-time taxable income sources paired with insufficient tax payments via withholding or quarterly estimated payments. Common culprits include:

• Early withdrawals from retirement savings
• Business start-ups
• Increased business or self-employment income
• Sale of stock, real estate or depreciated business assets
• Clergy housing allowance (which is exempt from income tax, but not self-employment taxes.)

If the taxpayer filed an automatic extension for time to file,  postponing the filing deadline to October 15, the current year may be almost over when the tax shortfall comes to light!  Also, the extension does not cover late payment, so additional penalties will be owed with the tax.

Taxpayers in this scenario often cannot afford to pay last year’s tax bill, much less pay extra estimated tax payments or increase withholding for the current year.  They are now in the center of the Tax Vortex!

If you already find yourself in the Tax Vortex, take heart.  It will be a long road, but you will eventually recover.  The IRS will normally allow you to set up installment payments for past due amounts by filing Form 9465, Installment Agreement Request.  Be sure to stay in touch with the IRS.  Non-communication will make your situation worse.  Also, make sure to set up a payment amount you can afford.  If you miss a payment the IRS can cancel the agreement.

Staying clear of the Tax Vortex takes vigilance and awareness.  Review the list of common culprits, above.  Generally speaking, if money is flowing in your direction for any reason, be pro-active and prepare for the tax consequences before you are pulled down into the Tax Vortex!

PFS, or Personal Financial Specialist, is the financial planning specialty credential issued by the American Institute of Certified Public Accountants (AICPA) exclusively to qualified CPA’s with proven expertise and experience in personal financial planning.  The AICPA is the premier professional association for CPAs in the U.S. and has more than 350,000 members.  You must be a CPA member in good standing of the AICPA before obtaining the PFS Credential.

Why is PFS a preferred choice among financial planning credentials?

A PFS Credential holder demonstrates a comprehensive knowledge of the core areas of financial planning; meets stringent requirements with professional work experience, education and training; and passed an examination that tests financial planning knowledge.  When you choose a CPA/PFS for your financial planning needs, you gain the advantage of expertise in related areas such as tax, accounting and business management.  This ensures that your needs are more fully met through an integrated, holistic approach.

Are there other reasons I should hire a CPA who holds a PFS Credential?

Studies by independent groups have repeatedly shown that CPAs are among the most trusted advisers to the public.  As such, CPAs have built a reputation as a profession that provides competent, ethical and trustworthy advice.  As a client, you can count on objective financial planning advice that will always meet your best interests.

The Pension Protection Act of 2006 initiated changes that require all tax-exempt organizations to file an annual return with the IRS, beginning in 2007.  Previously, organizations under a certain size were not required to file.

The Act also mandates that IRS revoke tax-exempt status of any organization failing to file for three consecutive years.  Many small organizations, which may have been unaware of the change in filing requirements, will lose their tax-exempt status for not having filed for 2007, 2008 and 2009.

Because of the large number of organizations in this situation, the IRS has provided relief by extending the 2009 filing deadline to October 15, 2010.

Columbia CPA Group is here to help.  If your organization is at risk of losing its tax-exempt status, please call for a complimentary initial meeting.  We would like to assess your situation and help you get your organization in compliance.  Please act now to avoid revocation of your organization’s tax exempt status!

More information is available at the IRS web site.

The following list is designed to help you avoid common bookkeeping errors:

1. Large expenditures such as equipment and vehicles: these are often incorrectly booked as expenses. Call your accountant for guidance when booking large purchases.  Items such as equipment and vehicles must be set up as assets and set up for depreciation.  Don’t make your accountant play hide & seek at the end of the year to hunt these down in your expense accounts!
2. Adding New Accounts: avoid adding new accounts to the General Ledger!   If you open a new bank account or credit card, or purchase assets (see #1 above), call your accountant for help in setting up the account properly.
3. Duplicate Vendors or Accounts: You know you pay Missouri Department of Revenue every month, but  QuickBooks is now asking you to add them as a new vendor. JUST SAY NO! Take the time to look through your vendor list – it’s probably in there with a different spelling, such as MO Dept of Revenue.  Same goes for duplicate accounts.
4. Sub-Accounts: use ‘em or lose ‘em.  Only set up sub-accounts when really needed.  Look at your drop-downs, and if sub-accounts exist for the account you need, choose one.  For example, you might have “Repairs & Maintenance” as an expense account, then “building repairs” and “grounds” and “maintenance” as sub-accounts.  If you do not choose a sub-account, it will show up as “Repairs & Maintenance – other” on the PL, and your accountant must spend time at year end to clean it up.
5. Reconcile Statements in QuickBooks: Always reconcile your bank and credit card statements.  If you have trouble, call for help.  We no longer accept QuickBooks files for tax preparation if they are not reconciled.
6. Loan & Credit Card Payments should NOT be booked as expenses!  First reconcile the loan or credit card statement, entering the interest and finance charges in the reconciliation screen.  Then enter a bill or  payment, and select the credit card or loan (liability) in the account field.  The only exception would be interest-only loans.
7. Payroll Processing is a common source for bookkeeping errors  Also, IRS penalties for missed payroll taxes can be severe.  If you process your own payroll, make sure you are fully instructed and call for help whenever you run into trouble.  The most common problems are caused by incorrect set-up of employees or payroll liabilities, and failure to use the Liability Payment window in the Payroll Center.
8. Donations can often be booked as advertising expense instead.  Is your business name listed in a program or on a team jersey?  Did your contribution allow you to attend an event where you can promote your business? Contact your accountant if you are not sure.
9. Health & Disability Insurance expenses for S-Corps and C-Corps: the shareholder portion of the expense should be split out with a special expense account.  You can memorize the transaction after you have set it up correctly.
10. Other Names List: On the QuickBooks menu bar, look at “lists/ Other Names List.”  There should be VERY FEW, if any, names on this list.  If you see a lot of names here, most of them are probably vendors and should be changed.  This is important for 1099 processing at the end of the year.
11. Loan proceeds: If you are taking out a new bank loan, there may be a tangled mass of capitalized expenses, transfers, and deposits.  Your best bet is to save all the paperwork until after the dust has settled, and and call your accountant to help you book it correctly.  We appreciate it if clients get this handled during the year, instead of dealing with it during tax preparation.
12. Owner Transactions: Fully document money transferred between personal and business accounts. (Do not deposit personal cash into a business account, as you will have difficulty proving to the IRS that it is not income.)

• Money moved between personal and business accounts should usually be booked to an equity account, not income and expense!
• A great way to give your accountant headaches is to use personal accounts for business expenses and business accounts for personal expenses.   It’s better to transfer funds where needed, then pay from the proper account.
• Since we’re on the subject, it’s good practice to have a plan for regular owner salary and/or draws, rather than handling this randomly.  In many cases, the business owner should be taking a minimum salary.