Employee Retention Tax Credit Kapitus Small Business Lending accounting

Are You Still Eligible for Employee Tax Credits?

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Thousands of small businesses are checking to see if they are still eligible for the popular Employee Retention Tax Credit (ERTC). While the sun set for the ERTC in September 2021, there is still a chance to retroactively claim that tax credit in 2022, albeit through a somewhat lengthy tax filing process. If your small business didn’t take advantage of this tax credit at the height of the pandemic, you could still be eligible for free money.

Is Your Business Still Eligible?

According to the IRS, if you operated a small business in 2020 and 2021 you must demonstrate that your business suffered a significant loss of business or was forced to temporarily close due to COVID-19 and COVID-related government shutdowns, yet you still retained your employees (at least on a part-time basis), to still be eligible for the ERTC. 

You should have a conversation with your accountant to see if you still qualify for the ERTC, but generally, to satisfy IRS requirements:

  1. You need to still have your gross receipts from 2020 and 2021. Your receipts from 2020 and 2021 should show that your gross income was at least 50% below what it was in 2019, or
  2. Under the Consolidated Appropriations Act (CAA) of 2021, businesses (including nonprofits, hospitals, educational institutions and 501c organizations) that were affected by closures and government-mandated quarantines and experienced a 20% drop in gross receipts in 2020 and 2021 compared to 2019 are still eligible.
  3. Under the American Rescue Plan (ARP) of 2021, businesses can be eligible for the ERTC if their receipts reveal a 50% loss in gross income in 2020 in the quarter immediately following the quarter in 2019 – not just to the corresponding quarter in 2019.
  4. The CAA also extended the dates for eligibility for the ERTC. The legislation stated that small businesses can still use wages paid through Q3 and Q4 of 2021 to claim a refundable tax credit of up to 70% of the qualifying wages, with a maximum of $7,000 per employee per quarter. 
  5. The Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 originally did not allow for small businesses that received a Paycheck Protection Program loan to claim ERTCs, but the CAA changed that. Employees that received a PPP loan can still retroactively claim the ERTX for past quarters by filing Form 941-X from the IRS.

How do I go About Applying for the ERTC?

Eligible Small business owners should speak to their accountants first, and then can still claim the ERTC when filing quarterly taxes using Form 941 Employer’s Quarterly Tax Return for applicable periods. If an employer does not have sufficient funds to cover the credit (because Social Security and Medicare taxes must be paid in order to be eligible), they can receive an advance payment from the government by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19 to the IRS.

Don’t Throw Away Free Money!

Economic times continue to be uncertain for small businesses, even in the waning days of the COVID-19 crisis, so you can’t afford to give up chances for free money. Talk to your accountant to see if your business may still be eligible for the ERTC. You could get up to 7,000 well-deserved dollars per employee for doing your part to keep people employed during the height of the pandemic.

The Importance of Separating Business and Personal Expenses

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Overpaying on your taxes or getting audited by the IRS aren’t fun prospects for you or your small business, but those are two scenarios you could face if you don’t have the discipline to separate your business and personal expenses. 

While separating these expenses sounds easy enough, it can get complicated, especially if you operate a pass-through business such as a sole proprietorship, limited liability Corp. (LLC), partnership or S corporation and are taxed as an individual rather than a corporation.

Commingling your business and personal assets could also get you into trouble if your business is sued, and you may face personal asset exposure in such a scenario. The IRS also demands stringent records of business expenses at tax time, so if you’re keeping your business receipts in a shoe box, you could face tax penalties at the end of the year or end up missing out on tax deductions because you paid for business expenses from your personal account and forgot about them.

The good news is that with some planning and discipline, there are definitive steps you can and should take throughout the year to separate those expenses so you won’t be facing major headaches at tax time.

#1 Get Your Paperwork in Order

If you haven’t done so already, declare the type of business you are with the IRS, be it a sole proprietor, LLC partnership or an S Corp. Doing so will affect how you pay taxes, your legal and personal liability, and your ability to raise capital. Becoming an LLC or an S corp. gives your business a distinct legal identity and separates you from your business’ shareholders, if you have any.

Additionally, create an Employee Identification Number (EIN). Much like a Social Security number, this is a unique, nine-digit identification number that allows you to conduct tax-related business and open bank accounts in your business’ name, thus making it easier to separate business and personal expenses. 

#2 What’s the Difference?

Before you even start, you need to understand what a business expense is and when the best time is to take a deduction on that expense. Like with most things, the IRS is not very helpful in identifying a business expense. 

“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business,” according to the IRS’ website.

While many business expenses are obvious, such as the costs of business travel and office equipment, you should consult with an accountant or attorney on other expenses of which you may not be sure. For example, if you set up a home office in addition to your place of business, or if you buy your best client an expensive birthday gift, you may need to be creative in justifying those as business expenses. 

#3 Get Payment and Expense System Software

Business personal expenses lending small business Kapitus

Software such as Expensify can help you easily separate business and personal expenses.

You can create a business expense system on a spreadsheet program such as MS Excel or Google Sheets. However, If you have a number of employees that are all filing business expenses, you might want to turn to expense tracking software that can make the job fairly easy. Some of the most popular software packages out there include Intuit QuickBooks, Emburse Abacus and Expensify. 

Most of these software packages make it easy to identify expenses as business and personal, and most will allow you to process payments directly into accounts that you’ve set up specifically for your business and will make it easy to amortize payments and expenses (spread them out over multiple years) if you and your accountant deem it beneficial to do so. Of course, it’s crucial that you maintain the discipline to record your expenses as soon as you can so that you don’t forget to do so.

No matter what program you are using, whenever you record a business expense, you need to note the date and time of the expense, separate the cost of the expense from the tax you paid on it, and file the receipt. Most importantly, you need to explicitly state how the expense relates to your business. 

#4 Open Business Accounts

Once you’ve received your EIN, you should open a checking and savings account in the name of your business. Doing so will create an efficient way to separate your personal and business expenses by having them in two separate accounts. Having accounts in your business’ name will allow for transparency in business activities and expenditures, as well as make it easier to file taxes at the end of the year and check on your business’ financial health.

Having business accounts, however, does not mean you can stop itemizing your business expenses, as you will still need to explain to the IRS how those expenses relate to your business. Additionally, having business accounts will require you to be disciplined with your personal finances as well, as it may be tempting to withdraw funds from your business account if you suddenly find yourself with a large personal expense, such as unexpected medical bills or home repair projects. It’s important to talk to your accountant about the process you need to go through and the tax implications if you need to withdraw money from your business account for personal reasons.

#5 Get a Business Credit Card

Small business credit card lending Kapitus

A small business credit card can help you separate business and personal expenses, as well as prevent you from maxing out your personal credit cards.

Most small business owners need a tolerable amount of debt to operate, and there are expenses such as purchasing small pieces of office equipment and paying for business meals that can be conveniently financed with a business credit card. Having a business credit card will not only allow you to more easily separate business and personal expenses, it will also prevent you from maxing out your personal credit cards on your business, thus eliminating the risk of hurting your personal credit score if your business expenses pile up. 

Business credit cards sometimes carry lower interest rates than personal ones depending on your credit score, and many offer perks like travel rewards. Some even carry no annual fee. Before you apply for one, you should shop around for the best possible rates and rewards.

#6 Pay Yourself!

How you pay yourself as a small business owner can have both personal and business tax implications. Even if you’re a pass-through business, you may want to put yourself on the payroll if you have more than one employee and have a payroll system already setup. When you put yourself through your company payroll, personal income tax will automatically be deducted from your paycheck, saving you a headache when you file your year-end taxes. If your company has an especially strong year, you can pay yourself (and perhaps your employees) an annual or quarterly bonus to make sure that you are rewarded.

The one factor to be wary of when paying yourself as an employee is the IRS’ Reasonable Compensation rule, which states that an owner must be paid a salary comparable to others in the same industry and with the same job. 

You can also pay yourself via an owner’s draw, in which you withdraw money from your company’s profits on an as-needed basis throughout the year. This type of salary will probably give you more immediate cash throughout the year, but you will have to pay taxes on those withdrawals at the end of the year.

Should you File Separately? 

The question of whether you should separately file your business and personal taxes depends on what type of business you own. The IRS views pass-through businesses, such as LLCs, and their owners as a single entity, so in most cases, you wouldn’t need to file separately. Some multi-employee pass-through businesses, such as S corporations, partnerships and C corporations, do require separate filings, so it’s important to speak with your accountant on which action would be best for you. 

Be Careful!

Separating business and personal expenses throughout the year requires discipline and attention to detail. You may want to invest in a small filing cabinet and separate your business receipts into categories, as well as find time to properly record them. Taking these steps while consulting with your accountant or financial advisor throughout the year will save you a very complicated headache at the end of the year, and prevent you from overpaying on taxes because you missed out on business deductions.

Congress M&A Small Business Bill

Small Business M&A Act Could Make Things Easier for Main Street Businesses

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Small Main Street businesses may find it easier to engage in crucial M&A activity if Congress can get its act together this year. A remarkably bi-partisan bill was reintroduced in January that would allow small business M&A advisors who are not registered as “broker-dealers” with the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA) to advise small business owners seeking to purchase or sell their businesses.

Less Expensive M&A Advice

Small, non-complex businesses such as auto mechanic shops or plumbing operations who are seeking to expand through acquisition or mergers have long complained about having to pay exorbitant fees to SEC- and FINRA-certified brokers who are probably over-qualified to advise on such small transactions. 

Why the Bill Matters

This bill would allow smaller broker-dealers who specialize in analyzing local markets to advise small businesses, rather than forcing Main Street businesses to seek advice from expensive, large financial institutions that may not even consider small business deals to be lucrative enough to spend time on.

Both a broker-dealer and M&A advisor will take a percentage of a deal’s total value as a fee. The M&A advisor, however, typically charges additional fees for more in-depth research such as finding out the national deal size per industry or global accounting methods that can be used to valuate the deal. These are services, however, that an auto body shop seeking to buy its competitor across town most likely doesn’t need. A broker, however, will research the local area and come up with a list of acquisition targets and a deal valuation that fits the local market. 

Additionally, registering with the SEC and FINRA is a long, costly process, especially for smaller broker-dealers, who would have to pass that cost onto its clients. 

“Whether they want to buy new ventures, sell their businesses or retire, small business owners depend on M&A brokers to help them navigate these changes,” said Kennedy in a public statement. “We need to ensure that Main Street entrepreneurs have consistent access to financial services so that America’s small businesses—and the jobs that depend on them—can continue to thrive.”  

Bi-Partisan Support

Senator John Kennedy (R-LA) introduced the Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act, a bill that is nearly identical to the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act, a bi-partisan bill that was introduced in the House in 2019 by Reps. Bill Huizenga (R-MI) and Brian Higgins (D-NY). 

The latter bill was rare in that it received 100% bi-partisan support – the bill passed the House in 2018 with a 426-0 vote but was never voted upon in the Senate. Later in the session, the House attached the bill to the Jobs and Investor Confidence Act of 2018. Neither bill was ever voted upon by the Senate, which was wrestling with the Tax Cuts and Jobs Act of 2018 (which was eventually passed) and other partisan battles at the time.

The bill is currently being debated in the Senate Finance Committee. Once again, however, Congress is in the midst of debating partisan issues and bills, including President Biden’s highly contested Build Back Better Act, and it remains to be seen whether the M&A bill will get lost in the shuffle before the current 117th session of Congress ends at the beginning of 2023.

M&A Activity Continuing to Increase

The bill, if passed, would affect millions of small business owners seeking to sell their business or acquire another. It’s no secret that the COVID-19 pandemic has forced small business owners to rethink their operations. Hiring and retaining good employees, remote work becoming the norm, spikes in inflation and supply chain disruptions have threatened the very survival of many small businesses (9.4 million small businesses were forced to close in 2020).

According to Bloomberg research, US M&A activity hit a record of nearly $5 trillion in 2021. Many small business owners have sought to merge or acquire a competing or complementary business to survive, or looked to sell their business and retire. Also, financing a merger or acquisition has been less expensive due to a historically low federal funds overnight rate, but that could change as the Federal Reserve has openly said it will seek to hike the overnight rate to fight inflation. 

Other Legislation – Bill Watch 2022

There are dozens of pieces of legislation on the table in this session of Congress, such as the 7(a) Loan Agent Transparency Act and the Small Business Development Center Cyber Training Act that could dramatically affect the way small businesses operate and gain financing. Kapitus will examine which pieces of legislation could affect you the most in future articles. 

Picture of Accountant at Computer Balancing Budget

How Predictive Accounting Can Help Your Business

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It’s no secret that many small businesses suffered from negative cash flow thanks to the crushing effects of the COVID-19 pandemic in 2020. In fact, the 2020 cash flow hiccup could still have harsh consequences, as it may affect small business’ ability to borrow money, plan for a new product launch or create an effective, forward-looking business plan.

As your business recovers from the pandemic, now may be a good time to implement a little-known accounting technique called predictive accounting. Predictive accounting typically utilizes AI software to analyze the ebbs and flows of your company’s past cash flows to reasonably predict how your company will financially perform in the future. 

“Cash flow-based lending using predictive analytics is becoming more popular as technology improves and predictive cash flow data becomes more readily acceptable,” said Nick Chandi, CEO and co-founder of ForwardAI, a financial technology company for small businesses. “After all, in addition to a business owner’s credit score, shouldn’t a primary concern be their continued ability to service loan payments? A loan application that includes a cash flow forecast and a prepared plan for what to do with the funding they receive will impress any small-time lender.” 

Why is Predictive Accounting Important?

Predictive accounting can be used to help your business in a variety of ways. First, it can make your business operate more efficiently. By analyzing your past cash flows and reasonably predicting future results, it can help you create a more sophisticated future business plan for your company. 

Predictive accounting can assist you in identifying

  • Future cash situations.
  • Upcoming business challenges, including cash flow gaps.
  • Potential monthly cash inflow/outflow.
  • Financial trends, and
  • Automated accounting and banking data comparison.

“Predictive accounting is based on the observation of how much managerial work can be repeatable,” said Stephen Curry, CEO of eSignature company CoCo Sign. “Also, it projects future financial performance utilizing a significant statistical understanding of your company’s processes. It mainly allows for management assessments in terms of accounting-oriented characteristics.”

Curry also emphasized that predictive accounting can reasonably predict which areas of your company you will need to focus more heavily in the years to come based on your company’s past financial performance.

“The key to predictive accounting in creating a 3-year business plan is to focus management on the future instead of the past,” he added. “Using this, you will be capable of pulling details from various systems, and it can improve forecasting, which means you can create a better long-term plan, which directly impacts the customer response time, experience, revenue, and faster decision-making.”

Predictive Accounting can Help in Financing

Today, traditional and alternative lenders have to make judgement calls on whether to do business with SMBs, since many suffered from negative cash flows in 2020. Some lenders may want to see a three-year revenue history to make sure that 2020 was just a financial anomaly, but some may want to get an idea of how your business will do going forward to determine your company’s ability to pay back a loan. 

This is where forward-looking accounting using sophisticated AI software can help you. With it, lenders can get a good idea of what your cash flow may look like in the future, based on historical accounting data, thus strengthening your case when you’re seeking financing.

“Future financial health is a crucial data point for lenders to understand how likely it is that a borrower will successfully complete their loan,” said Chandi. “Since cash flow is the strongest indication of a company’s continuing viability, it makes sense that projected cash flow would be an important metric for anyone interested in small business loans. 

“While account statements and tax returns show you the past, predictive cash flow gives you critical insight into a prospective borrower. It’s not guesswork, either. Cash flow forecasting technology is a methodical invention built with innovative technology.”

Organize Your Business for Years to Come

You can use predictive accounting to divide your business into different categories and year blocks and then separate all the cash and other resources available to your business over the next X amount of years. This can give you an idea of how much of your resources you should be allocated  to each segment of your business in the coming years. 

Put simply, when you, the SMB owner, decide what areas of your business to spend money on in the coming years, your decision shouldn’t be based solely on historical data, rather, it should be based on rolling financial forecasts. 

“You might decide that half your resources will be used up in building a new factory for producing widgets,” said Lynda Fairly, cofounder of Numlooker, a New York-based small business specializing in providing reverse phone number lookups. “You might decide another quarter will be used on marketing your product line. 

“And another quarter on developing new products and improving existing ones, etc. Once you have determined precisely how much money is available for each area in each year, you can then determine how much profit will be generated.”

“Again, using a process of predictive financial modeling, you can develop a sales forecast and profit forecast for the next three years. Once you know what your surplus cash will be in each of the next three years, you can then allocate this surplus to specific projects by breaking it down into smaller chunks.”

I’m Not an Accountant – How Can I Use Predictive Accounting?

If your small business uses an accountant, he or she should be able to provide predictive accounting as a service and be able to advise you on how best to use it in planning your business going forward or to get financing. If you do not have an accountant, you probably should consult with one. There are also plenty of affordable accounting software packages that may be able to help you.

Powerful accounting software such as Oracle’s Netsuite can help guide you through predictive accounting.

Some of the most popular accounting software packages are Sage Intacct, Oracle NetSuite, FinancialForce and Epicore Financial Management. Whichever one you choose, however, you must understand that predictive accounting is a complex process. It may be in your best interest to at least get advice from an accountant to see how it works and how it can help you.

LLC operation agreement

Why You Want to be an LLC and How to Create One

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If you are the sole proprietor of your small business, and – heaven forbid – your business gets sued or must file for bankruptcy, are your personal assets, such as your house or your car, at risk? If this question keeps you up at night, now may be the time to consider converting your business into a limited liability company (LLC). 

An LLC literally does what its name implies – limits your personal liability in the event that creditors or the IRS comes after your company, plus it simplifies taxes. It is a relatively new type of business entity that provides the legal protections of a corporation with fewer tax and financial hurdles. You can form an LLC for nearly any business. 

What is an LLC?

An LLC gives your business its own legal identity. It is a legal status granted to a business that relieves owners of personal responsibility for the company’s debts and liabilities and establishes the business as an official legal entity. In a sole proprietorship, you must file your business’ net income or losses on your personal balance sheet. This makes you personally liable if your company is sued or must file for bankruptcy. In such a case, creditors or the government can – and most likely will – come after your personal assets such as your home, car and personal bank accounts. 

Take note, however, that you can still be sued personally with an LLC, depending on the circumstances. For example, if you’re a masseuse and you accidentally hurt a customer’s back, that customer can still sue you personally. You should still consider taking out a business insurance policy for this reason. 

Unlike a sole proprietorship, you and your business would be separate under a LLC. Once you’ve established your business as a LLC, you can open a checking and savings account in the name of your business. Also, LLCs can be taxed as either a sole proprietorship or as an LLC, and can take on business partners or be a single member LLC.

What are the Benefits of an LLC?

There are distinct advantages and disadvantages to converting to a LLC as opposed to a sole proprietorship. The first advantage is that single member LLCs are typically taxed as sole proprietorships, and the tax liability passes through to the owner’s personal tax return (hence the term, “pass-through” business). 

Second, since a single member LLC is treated as a pass-through business, that means that the single member can still qualify for the 20% qualified business income tax deduction, created by the 2018 Tax Cuts and Jobs Act, and yet, as previously mentioned, enjoy limited personal liability from lawsuits filed against the business and bankruptcy. You can choose to be taxed either once or twice (both as a corporation and a sole proprietor) – whichever option minimizes taxes. 

While an LLC itself doesn’t pay taxes, co-owned LLCs (LLCs that have more than one owner) must file the U.S. Return of Partnership Income  Form 1065 with the IRS each year. Each partner in the LLC must file this form separately, which the IRS reviews to make sure each LLC partner correctly reports their income. Single members must fill out form 1040 Schedule C with the IRS that will report your operating results, including profits or losses. You also have the flexibility to be taxed as a corporation, which, in some cases, can mean even more tax savings. You should speak with your accountant to determine which is best for tax reasons. 

Third is that you don’t have to deal with the red tape and bureaucracy of an S or a C corporation. For example, in an LLC, you don’t have to form a board of directors or have attorneys make sure you are in compliance with federal securities regulations and keep track of board meetings. 

Potential Drawbacks

The biggest drawbacks of an LLC is that you cannot sell shares of your company or go public – the company is solely owned by you and/or your members. You also will not be recognized globally, which means that if you operate or gain sales in another country, you may be taxed as a corporation. 

Other potential disadvantages are that LLCs differ from corporations in that they do not have specific roles, such as directors, managers, etc., which could lead to confusion as to who among the members is in charge. Additionally, in some states, LLCs may legally cease to exist if a member drops out. 

Forming an LLC

There are distinctive steps to forming or converting your existing business into an LLC, but the first thing you may want to do before doing so is to hire an attorney that is familiar with the laws in your state, because each state has different rules and fees when it comes to creating an LLC. Regardless of the state you are in, the basic process is:

Choose a Name for Your LLC

This sounds very straightforward, but the advantage of choosing a name for your LLC is that it will be unique to your business, as no other business will be able to use your name. Most states require your business’ name to end in LLC, and in most states you can reserve your name for 6-12 months for a small fee. Some states, such as New York, will not allow you to use certain words in your LLC’s name, such as “bank,” “Academy” or “Assurance.”

File Articles of Organization

Articles of organization is a document that outlines the initial statements required to form an LLC. Some states, such as New Hampshire and New Jersey, call them “Certificate of Formation.” While creating such a document sounds complicated, most states do make it easy – a form is available on the websites of most states’ Secretary of State that is typically simple to fill out. These forms will require you to name the members of your LLC, the physical address of your company and how it will be managed. All states charge a small fee, usually around $100, to file this document. 

Choose a Registered Agent

Every state requires an LLC to have a registered agent – an individual or company that agrees to accept legal papers on behalf of the LLC in the event that it is sued. The registered agent must have a physical address in the state in which the LLC is registered, and most states, such as California, provide a list of commercial registered agents that will act as an agent for an annual fee. In most states, an LLC member can also act as a the registered agent. You may want to hire an attorney to advise in choosing an agent.

Create an LLC Operating Agreement

Some states – but not most – require that you file an operating agreement. This is an internal document establishing how your LLC will be managed. While most states do not require one, you should create one in the event that one of the LLC’s members takes legal action against the LLC. You should work with an attorney when creating an operating agreement. Additionally, if you do not have an operating agreement, your state may dictate how your LLC operates. 

Comply with Your States’ Tax and Regulatory Requirements

This will require several steps that you should do in consultation with your attorney and/or accountant. 

  • First, you must create an Employer Identification Number (EIN) with the IRS if your LLC has more than one member. If the only managing member is you, you can elect to have your business taxed as a corporation rather than a sole proprietorship. As previously mentioned, your business will be able to keep its pass-through status in the event that you do. 

Get Ready to File Annual Reports

Some states will require your LLC to file an annual report every year – a document stating the yearly, detailed financial results of your business. While the task may sound daunting, you should work with your accountant or attorney on creating one.

While creating an LLC may be an arduous process, it will go a long way in legitimizing your business and cutting down on legal liability. Your business will have its own identity and be more organized for future growth.

Couple sitting in beach chairs facing the water and sunrise.

Preparing Your Small Business for Retirement

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Thinking about an exit strategy may be the last item on your priority list as you work hard to successfully run your small business. But no matter how young you are or how new your business is, life moves fast. It’s never too early to think about retirement, because being old and broke is the last place you want to be in a few decades (or a few years) from now. 

To prepare for retirement, the first item on your agenda should be to determine what you want to do with your business when it’s your turn to ride off into the sunset. Do you want to sell your business and use the proceeds to fund part of your retirement, or do you dream of passing along your business to your children or other close relatives? 

Planning For Retirement

No matter what you plan to do with your business once you’re ready to retire, saving money for retirement throughout your career is still your best bet. To do this, you’ll need to ask yourself some important retirement lifestyle questions, including:

  • What will your source of retirement income be?
  • How much money will you need to retire? 
  • What age do you want to retire, and how much will you need to save each month to make it happen?

Easily determine how much you need to save for retirement with the help of free online retirement calculators.

Online retirement calculators, such as this one from Bankrate, can be used for free online. If there is a place where you dream of spending your golden years, try to get an idea of what the cost of living is there. Also factor into the equation that as you get older, medical bills may pile up. If necessary, speak to a financial advisor about these factors. You can find a financial advisor online for free on various personal financial websites, such as SmartAsset.com. 

If You’re Starting Late

If you’re a bit late in the game when it comes to saving for retirement, not to worry. According to a great article from the American Association of Retired People (AARP), there are steps you can take, such as refining your personal budget to eliminate any excesses; setting up automatic savings deposits; maxing out contributions to any individual retirement account (IRA) you may have, and working as long as you can. The fact is, even if you’re starting to save in your 40s or 50s, you can still save enough to retire. 

Saving vs. Selling For Retirement

Selling your business to fund your retirement is an extremely risky proposition because small business owners tend to overestimate the value of their business and often mistakenly believe that selling it will bring in enough income to comfortably retire. Don’t count on it. A business is only worth what a buyer is willing to pay for it, and if you own a mom-and-pop shop with relatively low profit margins, chances are that selling your business will not pull in enough funds for you to retire.

The answer is to save early and often for retirement by setting up a retirement plan for yourself and your employees. Whether you have two or 20 employees, there is a retirement investment plan out there for your business. 

Retirement Investments

You can open a simple IRA which allows employees to contribute money to the plan. Another option is a SEP IRA, in which only the owners can make contributions. You can also fund a solo 401(k), which covers a business owner with no employees, or a 401(k) plan for small businesses.

You may want to seek help from a financial advisor to choose your investment options. The advisor can help you build a diversified investment portfolio that will automatically adjust the financial risk of your portfolio accordingly as you get older, and keep your retirement assets safe and allow them to grow.

Most retirement investment vehicles – be it a 401(k) plan or an IRA – allow you to contribute pre-tax dollars and will not charge you capital gains taxes until you retire or if you take an early withdrawal from it. Even saving just $100 pre-tax dollars per paycheck can add up over the years, so start saving early.

Always Know How Much Your Business is Worth

If you plan to sell your business to fund at least part of your retirement, you should always have a rough idea of what your business is worth. Finding out is a bit of a complicated process, so you may want to work with your accountant or an M&A advisor that specializes in small- to medium-size businesses (SMBs). 

  • The first step is to determine your cash flow by calculating your assets and deducting your liabilities from them. Your assets include current and outstanding invoices, equipment and inventory. If you own the land that your business resides on, that’s an asset as well. Then, subtract any outstanding debt and expenses you have from that figure. This is your cash flow and will at least give you a good starting point in determining the value of your business. 
  • Second, determine how much gross annual earnings your business makes through sales. This is often referred to by large corporations as earnings before interest, taxes, depreciation and amortization (EBIDTA). A company’s rough value is often calculated by a multiple of gross annual sales or cash flow. 
  • Third, consult with an M&A advisor or accountant on what multiples are used in your specific industry and location. For example, if you own a small tool manufacturing and supply shop in a wealthy location such as New York City, the average multiple of earnings that your business may sell for in the area could be five. Therefore, if your business’ gross annual sales are $500,000, it could sell for $2.5 million. 
  • Fourth, consider your client base. If you’re an accounting or law firm or an independent medical practice and have a base of long-time clients or patients, that should be a negotiating point when you go to sell your business. Typically, companies with long-time clients fetch higher multiples than smaller businesses such a retail store or restaurant. 

Now that you have a rough idea of the value of your business, you should factor that into the amount you are saving and investing for retirement, especially if you are planning to sell your business to fund your retirement.

Passing Your Business to Your Heirs

If you’ve saved enough for retirement and want your child or another close relative to inherit your business, there are several logistical and financial considerations you need to examine:

  • First, make sure your child is properly educated, trained and willing to run your business. It is probably best to introduce your child to the business as early as possible.
  • Second, if you have more than one child and they all want to inherit a piece of your business, make sure you speak with your accountant and your kids about how they will divvy up your business and what tax consequences, if any, each of them will face once you decide to retire.
  • Work with your accountant to avoid paying the gift tax. The gift tax taxes the transfer of property from one person to another. The property does include a business, and this tax applies while you are still alive (this is not to be confused with the inheritance tax, which is what your heirs will owe to the IRS on whatever property you leave to them after you are deceased). 
  • Keep in mind that there is a $15,000 annual exclusion from the gift tax in 2020 and 2021, and a $11.7  million lifetime exclusion. If the amount you are giving to your heirs stays below those amounts, you can avoid having to pay the gift tax altogether..

When it comes to planning your retirement, do not listen to the old Rolling Stones song, “Time is on my Side” (notice that Mick Jagger and Keith Richards haven’t retired yet!). Start saving early, because you do not want to be financially struggling in your golden years, and you certainly want your children to be fully prepared for the day when they take over your business. The earlier you start, the better off you will be.

Tax implications of the American Jobs Act

Key Tax Issues Small Businesses Should Watch For in 2021

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As if taxes weren’t confusing enough for small businesses: Shifting tax proposals under the Biden administration’s proposed American Families Plan and American Jobs Act, as well as new business paradigms created by the COVID-19 pandemic, are keeping small businesses on their toes when it comes to managing taxes and expenses. 

While uncertainty looms regarding how proposed legislation will play out, one thing is certain: if you’re a small business, you need to keep in close contact with your accountant to make sure you are not missing out on tax breaks due to changing regulations. You need to also talk to your accountant on how to best prepare for new, upcoming tax rules. 

Rising Tax Fears For All Business Owners

One of the biggest sources of angst for big and small businesses alike is that under the Biden administration’s proposed American Jobs Plan, the administration originally was looking to hike the corporate tax rate to 28% from the current 21%. Now it is proposing to scrap that idea and implement a 15% corporate minimum tax rate as a compromise with Congressional Republicans. The minimum corporate tax rate is currently 2%, which was established under the Tax Cuts and Jobs Plan Act (TCJA) in 2018.

Any corporate tax hike would likely only affect C corporations which, according to the Small Business Administration, comprise about 3% of the approximately 30 million small businesses in the US. However, Biden’s proposed personal income tax increase still can affect pass-throughs.

Pass-Throughs Not Out of the Woods Yet

If your business is a pass-through and makes over $400,000 per year, proposed income tax increases could still affect you. The Biden administration’s Jobs Plan proposes increasing the individual tax rate to those earning $400,000 or more to the original 39.6% from the 37% established in 2018’s Tax Cuts and Jobs Act (TCJA). If you are a pass-through business and your personal income is tied to your company’s income, that will spell a tax increase that you and your accountant should talk about and prepare for. 

Michael Hamelburger, CEO of tax consultant The Bottom Line Group, added “The $400,000 floor is also not yet well-defined, state and local taxes are also forecasted to increase, making this tax season even more difficult. Bear in mind that states and cities are cash-strapped due to the pandemic, so expect there’ll be more taxes in the coming months as we head into recovery with the prospect of vaccinating the majority of the population.”

Deferring Income a Possibility?

Steven Weil, president of small business specialist RMS Accounting in Ft. Lauderdale, FL, suggested that applicable small businesses and C corps. – if they can afford to do so – should talk to their accountants about whether it would make sense to defer income to future years in order to partially offset the expected upcoming tax increases. Deferring a portion of your income from 2022 to 2023 could lower your tax bill in 2022 since, on paper, you’re making less that year. 

“If Biden is able to pass what he wants to pass and we see those increases, we know that they’re going to be there at least two years,” said Weil. “The possible short-term planning would be to delay income and to take any expenses that you can now.

“If you believe that the tax increases are going to sneak into other places (besides corporate income), and it certainly appears that they probably will… you may want to pull additional income into this year.” 

Don’t Miss Out on Deductions

Weil pointed out that the American Rescue Plan Act (ARPA) clarified and improved several tax issues with regards to PPP loans that small business owners may not have been aware of, and that they should double-check with their accountants to see if they missed out on any deductions.

One example, he said, was that until ARPA was passed in March, small business owners were unable to receive the Employee Retention Tax Credit (ERTC) for 2020 if they also received a PPP loan in 2020. Under ARPA, they can. 

Another potential tax deduction that small business owners should consider is that they can now take tax deductions on business items purchased using PPP money. Until ARPA was passed, they could not. 

“I had many clients that I said you know the cost of doing your tax return is going up substantially this year, but I was able to find you an extra $5,000 or $25,000,” Weil said.

Other Breaks, Expenses

Other tax breaks, as well as expenses that small businesses should keep an eye on as the Biden Administration continues to hash out its tax plan include:

Permanent limit on deductions on business losses.

The administration is proposing to make permanent the limit on deducting business losses exceeding $250,000 ($500,000 for joint filers). This limit was created by the TCJA and was originally scheduled to be in effect from 2018 through 2026. It was suspended from 2018 through 2020, but is back in place for 2021 and scheduled to expire with the rest of TCJA’s individual provisions in 2027.

Paying COBRA benefits.

Under ARPA, employers are on the hook for fronting 100% COBRA premium payments to workers that were terminated or had hours reduced and lost their health insurance in 2020 as a result. The employer will advance the money for the premiums and be reimbursed by the government through a refundable payroll tax credit against the employer-side Medicare tax. The benefit will be available to laid-off or furloughed employees from the beginning of April through the end of September.

Barbara Weltman discusses tax implications

Florida-based small business guru Barbara Weltman calls changes to COBRA reimbursement is a “big deal” for small businesses.

“This is a big deal because it’s not only that the employers are paying the cost of coverage, but employers have to provide notice about the coverage and refund the employee if the employee paid premiums during this period,” said Weltman. “The bottom line is that you really need to work with your accountant on this,” she added. 

Business Meals are Fully Deductible.

One benefit for small businesses under the Biden administration is that under the Consolidated Appropriations Act of 2021, signed in April, the cost of business meals are now 100% deductible, provided that they are at a restaurant and that they are carefully itemized. That number is up from 50% under the TCJA.

Tax Implications of a Remote Working Environment.

As a result of the pandemic, many small businesses that operate from an office moved to a remote working environment, utilizing Zoom and other software to keep in contact with their employees as they work from home. As a result, a large number of businesses decided to make the remote working environment permanent in order to reap the benefits. 

There are, however, tax implications to doing this. According to a recent thought leadership paper published by accounting firm KPMG on the subject of moving to a remote working environment, employers must withhold local and state taxes in the jurisdiction of the full-time employee and possibly from the location of the company’s headquarters. While some states such as New York and New Jersey and the District of Columbia and Maryland do have reciprocity agreements in place, others do not, thus underscoring the need to keep in touch with your accountant. 

Expect More Audits

Small businesses aren’t audited by the IRS too often, but that could change under the Biden Administration, Weltman warned. Under the proposed American Families Plan, the administration is seeking to spend $80 billion over the next decade to fund audits of large corporations and high earners that may be seeking tax loopholes. While the proposal is intended to make large corporations, it will also likely affect pass-through companies and small limited partnership companies that report more than $400,000 in earnings per year. 

“Of course audits will be time and stress and aggravation, but there won’t be any change in your taxes if you’ve done things right,” Weltman said.

 

Optimize cash flow at your plumbing business

How Plumbers Can Optimize Cash Flow

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One of the main reasons small businesses fail is lack of cash. And it’s possible to have no cash even if your business is making a profit. That’s because assets, like accounts receivables, are not cash until you’re able to collect what’s owed to you by your customers. Profit, in this case, will not pay your bills. This is why it’s essential to keep an eye on cash flow at your plumbing business. Doing so will ensure that the amount of cash generated by your business is sufficient to pay your immediate operating expenses, such as business loans, payroll, and rent.

Here are some key steps every plumbing business owner should take in order to optimize their cash flow.   

Automate Invoices

Choosing to automate your invoices is beneficial to your plumbing business because you’ll get paid faster. This can be done easily by using accounting software, which can automate time and expense tracking, recurring invoices, late payment reminders, billing, appointment scheduling and more for your plumbing services. For instance, FreshBooks, an all-in-one accounting plumbing software solution, can manage all your bookkeeping needs — everything from creating invoices to managing cash flow and tracking employee time. 

Overall, the faster you receive payments, the better. Anything that can help you maintain a steady cash flow to pay your employees and cover your business expenses is something worth looking into.

Forecast Your Cash Flow

Be sure to draft a forecast of your cash flow to ensure you have enough money to pay all upcoming bills. This will allow you to plan a cash flow budget, which should include an estimate of all cash receipts and all cash expenditures that are expected to occur at your plumbing business during a specific time period. You can make these estimates on a monthly, bimonthly or quarterly basis. Your cash flow budget should show you when money is coming in, when it will go out and what money remains each month after you’ve paid your expenses and recorded your income. To help with this task, you can use a cash flow management software solution. Many of these solutions integrate with various accounting software platforms if needed. 

Outsource When Needed

Outsourcing allows you to leverage outside expertise for certain workflows, such as payroll, accounting, taxes, office cleaning, marketing and more, which can benefit your plumbing business in many ways. By choosing to outsource, you can save money by converting fixed costs into a variable expense. With outsourcing, you can decrease the labor costs of full-time employees, reduce overhead and increase plumbers cash flow. Outsourcing partners are essentially subject matter experts, so they will already have the tools and know-how for specific tasks. In turn, they can reduce the learning curve and improve workflow efficiency, saving you valuable time to focus on your core business. Additionally, outsourcing can help you grow your plumbing business by freeing-up capital to secure small business funding. 

Cut Operating Costs

There are several ways to reduce costs and increase cash flow without negatively affecting your core plumbing business. You may want to start with the following:

  •  Hire an accountant to prepare your taxes. An accountant can help you discover tax breaks and deductions to keep your business growing. 
  • Review your insurance policies to make sure deductibles, premiums and liability coverage are both affordable and appropriate for your current business needs. 
  • Further, evaluate your advertising campaigns to determine if they are effective enough to justify the cost. 
  • Decrease paper filing work and paper storage at your office by using free or low-cost cloud storage.

Overall, to optimize your cash flow, prioritize your needs and cut costs in places where you’re not finding value. 

Offer Flexible Payment Options

Flexible payment options – such as allowing clients to pay by cash, checks and credit cards – will make it easier for your customers to pay for your plumbing services. In addition to traditional payment methods, be sure to consider online payments or mobile payment options, which have become increasingly popular over recent years. Online payment options give your business an inexpensive, faster and reliable way to do business while offering your customers convenience and security.

There are also secure credit card payment processing solutions. EMSmobile, for instance, is specifically geared toward plumbers, roofers, electricians and other traveling business professionals. With this particular solution, you can accept payments right on the job.

Keep in mind, as with any payment method, there are advantages and disadvantages. However, to optimize your cash flow, you should offer your customers payment options that will work best for them. Doing so will allow you to get paid on time, every time.   

Stay on Top of Accounts Receivable

It’s imperative to keep up-to-date on your customers’ accounts and inquire about unpaid invoices in order to promote a positive cash flow. Do this by reviewing all of your accounts receivable on a regular basis. 

For customers paying for your plumbing services in installments, send reminders for payment when necessary. You can also try installment payment software to streamline this process. Installment payment software can facilitate your business’s ability to offer your customers the option to purchase an item over time through a set number of regular payments. You then have the choice to implement the software yourself or utilize a SaaS tool to provide installment payment capabilities. In those instances, the service will pay your business the full price of the item upfront and then remit the installment payments from the customer. This will help eliminate unnecessary strain on your cash flow. 

Stall Your Supplier Payments

Delaying payments to your suppliers when you are able to can help increase your cash flow.

In fact, many U.S. companies are holding back payments to their suppliers for longer than at any point in the past decade, according to The Wall Street Journal. This allows them to keep more cash on hand that otherwise would be tied up in their businesses.

To keep a good relationship with your supplier, it’s important to be sure that you’re not breaking any agreements before you decide to delay any payments. 

Request Deposits

Ask for a deposit when taking on a long-term contract to help maximize your cash flow. For instance, you can ask for a 10 percent deposit upfront, and after the job has begun, the remaining amounts can be paid per your agreement. This allows you to have some additional cash flow while waiting for, let’s say, the electrician or general contractor to finish up on items that they need to do in order to pass a plumbing rough-in inspection.

Raise Your Pricing

Raising your prices won’t necessarily affect your customer base, but it can make a big difference to your bottom line and cash flow. Play around with the numbers and try to predict what will happen if you raise your prices by 10 percent or 20 percent. Then, evaluate the market to ensure you remain competitive. You may even realize that you’re pricing your services too low to begin with.

By considering these cash flow tips, you’ll be on the right track to having the necessary cash to sustain or grow your plumbing business. Keep in mind, you can always work with your accountant to review how cash circulates through your business if you’re having trouble developing a solid system to track cash flow.

 

how to determine if you are going to get an irs audit

What Red Flags Will Trigger an IRS Audit, and How to Minimize Them

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Is there an IRS audit in your future? Don’t simply hope the answer is no. How you handle your small business’ finances – in the way you spend money and how you document those transactions – can increase or minimize whether you’ll face IRS scrutiny. Focusing on red flags that’ll trigger an audit will help protect you and your business more efficiently. What the IRS says about the “examination process” includes a hopeful prospect: “Some examinations result in a refund to the taxpayer or acceptance of the return without change.”

Don’t count on it. And, remember: An IRS audit can inflict pain even if you come out smelling like a rose. The process of pulling together every financial record you need could put a strain on you and your bookkeeping department.

IRS Audit Triggers

So, what triggers an audit? General factors, according to the IRS, include the following:

  • “Related examination.”

This means: If the IRS audits one of your customers or suppliers, and asks questions about your tax returns, you might be next in line for scrutiny.

  • Information matching.

If there’s a discrepancy between your bank reports for the IRS (and you) and the interest it paid you over the course of the tax year, and what you report in interest income, a bright red flag goes up. Keep in mind that credit card transaction processors are required to file a 1099-K form to the IRS summarizing total payments you received that way.

  • Local initiatives.

Sometimes, regional IRS offices decide to focus on particular business sectors because it has found a lot of abuse there. There’s not much you can do to reduce your changes of an audit in this scenario.

Also, all things being equal, the type of business that you are – whether you’re a C Corp, or a Sub S or sole proprietorship – can affect your odds of being audited. That’s because it’s easier to blur personal and business finances when your personal and business finances are combined in a single tax return.

Another factor is the size of your business. The larger the company, the more money there is to be reclaimed by the IRS in a typical audit scenario if there’s any abuse. So, you’re more likely to stay below the IRS’s radar if your revenue is $1 million than if your revenue is $10 million. Even so, that doesn’t mean that you shouldn’t grow your business merely to lower your chances of an IRS audit.

Automated Audit Trigger System

The heart of the IRS audit process is called the “discriminant function system,” or DIF. The IRS assigns varying DIF scores to taxpayers–individuals and businesses–based on numbers and ratios they report. Like Google, the IRS doesn’t reveal anything about the DIF. Still, there’s plenty of evidence of where it focuses.

A basic example is the ratio of your total claimed business expense deductions to your overall business income. Of course, you can operate at a loss from time to time. But if that happens often, the IRS will probably take a closer look. Still, you’ll be vindicated if all of your expenses are legitimate.

The DIF focuses on areas typically prone to abuse, such as business meal charges and travel. If you frequently expense for these reasons, keep detailed records and receipts. This goes for expenses of at least $75.

Since 2018, you’re required to separate your food and drink expenses from the entertainment portion. The cost of the entertainment portion (e.g. theater and sporting event tickets) isn’t deductible. As always, keep notes on the purpose of business meals, who attended, and your relationship to those individuals.

Here are some additional areas of IRS scrutiny for statistical anomalies when looking for audit candidates:

  • Independent contractor overload.

If you use a lot of support from freelancers to whom you issue a 1099 instead of a W-2, this might trigger the IRS. Be sure you classify freelancers appropriately.

  • Home office deductions.

Remember: You can’t deduct the cost of an entire room if you’re only using the corner. The time you spend working in that room compared to everything else you use it for, matters.

  • Business use of a personal automobile.

This is an abuse-prone area, too, like food, drink, and entertainment expenses.

  • Sloppy math.

You might think an error involving an inconsequential amount of money isn’t a big deal. To the IRS (and probably the DIF system), small errors can be an indication of larger errors also present and worthy of discovery.

  • Large cash transactions.

In the unlikely event you are paid $10,000 or more in cash in a single transaction–and fail to report it on IRS form 8300–you could be audited.

There’s no set way of escaping the possibility of an IRS audit. But, by paying attention to red flags and preparing to answer possible questions about your expenses, you’ll save yourself a lot of grief in the long run.

Know Your States -- and Their Sales Tax Laws

Know Your States — and Their Sales Tax Laws

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Walk around any neighborhood and on just about every front step you’ll see boxes containing merchandise that was purchased online. What you see has everything to do with sales tax laws.

Consumers consistently turn to online shopping.  It’s convenient and is often less costly than buying from a brick-and-mortar store. For years, sales tax laws didn’t cover online orders. Forty-five states collect sales taxes on in-person purchases but couldn’t apply them to online ones – until now. A 2018 U.S. Supreme Court ruling now gives states collection rights for online sales tax. This was the result after South Dakota sued the online retailer, Wayfair.

The court decision almost immediately filled states’ coffers. Twenty-three states saw a five percent increase in year-over-year sales tax during the third quarter of 2019, according to a study by the nonprofit Urban Institute. The study attributed most of that growth to the new online sales tax laws.

While a boon for state budgets, online sales taxes have stressed small business owners. The internet opens the door to customers beyond a business’ geographic reach. The varying rates and rules for each state’s online tax is, understandably so, a source of confusion and frustration.

Getting Caught in a Nexus

Before the Wayfair ruling, a state could only tax companies that had a physical presence within its borders. But now, economic activity in a state – the “economic nexus” – can trigger an online sales tax. This can happen even if the business has no physical presence there.

Many small business owners feel as if they’ve been sucked into a complicated nexus of varying rules and expectations. That’s because what is subject to the online tax and what is owed differs from state to state. Some states have uniform standards for companies to follow, but other states, usually the big ones, have their own rules to sort through. Further complicating things, Alabama and Louisiana are two of five states that let their municipalities administer their own taxes.

Many small businesses typically lack the staffing and insight to grasp it all. As The Wall Street Journal recently reported, while larger businesses have the people and technology to keep track of online sales in each state and what that means for taxes, small businesses don’t have the means to keep up.

“Small businesses are definitely the ones that are really adversely affected,” Clark Calhoun, a state and local tax attorney in Atlanta, told the Journal. “A bigger business is typically going to have more robust sales-tax software,” he said, and “a better sense of where their products are going and will be well over the sales thresholds every single year.”

You Need a Scorecard to Keep Up

About those online sales thresholds. Some states exempt out-of-state sellers from paying online taxes if they had $100,000 or less in sales or fewer than 200 transactions in the state per year. A few other states don’t have a transaction threshold but have one for total sales. Some states set a $200,000 minimum, while California, New York, Tennessee and Texas set a $500,000 minimum. Kansas doesn’t have one.

The Federation of Tax Administrators, a group that represents state taxing authorities, created a handy chart that outlines the expectations for remote sellers. FTA, however, urges business owners to always double-check with a state in case of any changes.

Small businesses could turn to a marketplace facilitator to handle the sale and the burden of collecting tax. As The Wall Street Journal noted, 38 states and the District of Columbia now have laws requiring marketplaces such as Amazon, Etsy and eBay to collect and remit sales tax on behalf of third-party sellers.

Indeed, those marketplaces could relieve a burden for small businesses, especially with these big online sellers benefitting from a grace period that gives them time to align their procedures with the many state laws. Forbes notes that all but one state with marketplace facilitator laws allows up to three years to be fully compliant with online tax laws.

Do Your Online Tax Homework

Still, not every business wants to put the fate of its goods in the hands of Amazon or eBay. If you’re one of those businesses, having a deeper understanding of the vast online tax landscape should be a priority.

That won’t be easy, though. In the Journal of Accountancy, a publication for CPAs, attorney David Brennan points to how the U.S. has more than 10,000 tax jurisdictions. “While it is possible in some states to register at the state level for counties and municipalities, in other cases the law requires a separate registration in each state, county, and municipality” he wrote. On top of ensuring that they are registered with every possible government entity, businesses also have worry about the many different exemptions to goods. For instance, using Brennan’s example, many states tax the sales of clothing but a few exempt them, while some apply a cost threshold.

Two pieces of advice that Brennan offers to CPAs who represent businesses can also apply to small businesses themselves. First, know your company’s sales and number of transactions for each state and determine potential economic nexus exposure. This requires knowing which products and services are taxable in which states. Also, know the sales tax collection requirement in those states and whether there are any exemptions.

Don’t Go it Alone; Find Expert Help

Even though it’s best to know your businesses’ internet sales inside and out, trying to figure it all out against the backdrop of every state’s expectation might be too much when you already have a long list of financial obligations. You can seek the counsel of an accountant or go a step further and outsource all tax and accounting work to an outside service. Financial services provide not only expert advice but also, more often than not, the latest accounting software. They’ll bring a fresh perspective to your online sales and will already work closely with federal, state and municipal tax and revenue departments.

The expectations and chance of risk are far too enormous to try to handle this alone. Online sales introduce small businesses to a whole new world of customers, but also a whole new world of complexity. As daunting as the vast online sales tax landscape might be, with the right help and proper approach, your business won’t have to sweat the many small details and instead focus on serving your many virtual customers.

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