Archive for July, 2009
Random Audacity
Here's lookin' at you...
The only approach for business taxes is to report all income and to declare only those deductions which actually apply. While all income must be reported, there is no penalty for under-reporting deductions. However, unlike losses, deductions do not carryover to the next tax year (topic for another day).
The IRS believes taxes due are grossly under reported. In that vein, the service has been randomly auditing S-corporations (tax year 2008) for non-compliance in a few general areas (compliance apparently bores them). One area of ongoing concern is owners withdrawing profits as dividends to avoid payroll taxes. DO NOT engage in this slight of hand; you will get stung. Penalties can be harsh.
Other areas of IRS interest for random audits in 2008 include: the manner in which tools and supplies are expensed, motor vehicle expenses, travel expenses, S-corporation status and “meals and entertainment”.
The latter deduction is a perennial favorite on the IRS hit list. It seems that it is routinely abused. The rules in this area are well established with little, if any, “wiggle room”. Learn the rules and follow them.
On the one hand, all of these costs can be legitimate business expenses; on the other, each is tempting to abuse. Understanding and applying the rules is not rocket science. Business expenses are legit deductions; personal expenses generally are not. Fore-thought, intention and documentation (more than just a receipt) may be required to justify what appears to be a personal expense (the CEO’s birthday party, for example) as an acceptable business deduction.
If confusion reigns, ask questions and get organized. Help is available: call JACS. When you need an outside professional, you can be pointed in the right direction.
Bank Interruptcy…
With all the recent hoopla surrounding banks (bailouts, sub prime financing, poor security practices, over paid executives, for examples) and the consumer chastisement that followed, readers do not need this writer to tell them “Banks are not your friends.” So, why should the banker legacy matter here? Easy answer.
Most small business persons frequently make the mistake of being mono-denominational in their banking. That may be convenient, but is not a sound business practice. If one reads the fine print in their banking terms and conditions received when opening the accounts, he would know that when tendering his money to the bank, it is “in effect” now the bank’s money. Granted one has a credit, but not the dollars.
What was, isn't.
Hence, should one of the accounts, let us say the business account in the bank de choix, have a problem, the bank can ding one’s personal account for cash to secure their position. If that happens on a Friday, notice of the bank action could take three calendar days, or more.
Busy people, like today’s entrepreneurs, are likely to quickly amass multiple problems when money is not where it was to be. Because the funds are moved (legally, pursuant to prior consent at the opening the account) without notice, fees are sure to follow. (The subject of reasonable fees, charges and assessments is beyond the scope of this posting.)
Simple Solution: Always, yes always, do your business banking at a different bank (not a merely a branch office, a different institution) than where you do personal banking. By organizing in this manner, it is guaranteed that no unannounced cross-account transfers of money will occur. Hence, no chance for subsequent unscrupulous banks fees.
When doing business, always operate from the position that offers the most control over your efforts and the results. If you are struggling with that, call JACS.
Are Tax Forms Enough?
In response to the article, “Stumbling Past April 30…“, that appeared in the June 2009 issue of another Two Cents, a re-occurring question has surfaced.
another Two Cents | Vol 3 Issue 6
To comply with most states’ statutory corporate reporting requirements, as discussed in that article (annual financials must be disclosed to shareholders), it seems many are operating under the assumption, or erroneous advice, that by tendering a copy of the current 1120s, the S-corporation’s functional equivalent to the famous 1040 federal income tax form, to current shareholders is sufficient compliance. It is not.
The 1120s is deficient in a variety of ways because it only reveals a skeleton version of net profit or loss. It lacks all the substantive information stockholders in a corporation need to understand and are entitled to know. To name a few: what assets exist, what obligations are due, what debt was retired or incurred, who holds what corporate position, what was the year’s business like and what are the business plans for next year. A number, profit or loss, no matter how it is calculated or presented says too little to comply.
The S-corporation offers strong benefits to its owners. With those perks comes certain responsibilities. Among them is keeping shareholders advised, in writing, of the company’s business and financial outlook. They are, after all, the owners of the company.
Your S-corporation will serve you well if you take care of the foundation on which it is built. If you need help with annual financial reporting or other S-corporation issues, contact JACS.
