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.

 

Managing your financial turn around strategy

How to Manage Your Company’s Financial Turnaround

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If you’re a small business owner, you probably took a major financial hit during the dark times of the COVID-19 pandemic. Right now however, you should probably be congratulating yourself – you survived over a year of turmoil! 

With a light at the end of the tunnel shining brightly as more Americans get vaccinated, now is the perfect time to plan your company’s financial turnaround, provided you’re willing to rethink your operations, cash flow, employment situation and potential financing.

Rethinking Your Cash Flow

Maintaining a healthy cash flow is one of the most important aspects of running a business, as it impacts every area of day-to-day operations – both current and future. If the last year and a half taught us anything, it’s that you never know what can come around the corner and negatively impact your cash flow, so it’s important to address this head-on, and there are a number of areas where you can do that, but a great place to start is your collections and billing processes.

Tackle those outstanding invoices

Lazy bookkeeping, the pandemic, and other factors could have resulted in a negative cash flow for your business over the past year. While outstanding invoices are positive assets on your company’s balance sheet, they are useless until your customers actually pay them. If you’re behind on collecting invoices, or if your customers are slow to pay, one strategy that could be useful to you is invoice factoring – financing that quickly provides you with cash tied up in outstanding invoices.  

Review and Adjust Your Process

As you ramp back up post-pandemic, take advantage of the opportunity to do a complete review of your billing and collections policies.  Many times, a review will reveal some holes and/or inefficiencies that, if corrected, can have a substantial impact on cash-flow stability. Once you’ve defined any gaps, consider implementing invoice management software, such as Quickbooks or Invoice2Go – useful tools that can automate the invoice, payment processing and collections systems for your business. 

Negotiate with Vendors

Healthy vendor relationships are almost as important as a healthy cash flow, and one way to maintain a great relationship with your vendors and suppliers is to negotiate contracts that are mutually beneficial. Suppliers generally want to keep you as a customer, so it never hurts to ask them if you can renegotiate prices and payment options, at least until the economy gets back on its feet. Be honest about your financial situation and propose a solution that seems mutually beneficial, such as longer-term payment options. 

Restructuring Your Business Should Be a Consideration in Your Company’s Turnaround

Operational restructuring should be a major consideration in any organization’s financial turnaround.  Look for costly and redundant processes in your business and have a plan to streamline or outsource them. Consider that it could be cheaper to outsource certain services to freelancers or outside firms. For example, if you’re a small publishing company, it may be cheaper to streamline production services for all of your publications and hire freelance writers. If you’re a doctor’s office, for example, it may be cheaper to outsource x-ray analysis work to radiologists in a different country.

Prepare for Rapid Growth

As the COVID-19 pandemic winds down, most small business owners and economists are expecting the economy to grow. The national unemployment rate dropped to 6.1% in April from 14.8% a year ago, according to the Bureau of Labor Statistics. Consumer spending has increased by over 40% in 2021, while it was down by nearly 30% in 2020, according to the Bureau of Economic Analysis. 

Whether you’re a construction company, a restaurant or retailer, you need to be ready to handle this growth. You should sit down with your accountant and produce a realistic, three-year business plan that accounts for an increase in sales, operational growth and an increase in your number of employees. Some factors to consider:

  • During the pandemic, employees have gotten a taste of working from the comfort of their own homes. If you’re a small business that operates out of an office and you want to permanently move to a remote working environment, you should consider relocating your company headquarters to a smaller, less expensive and more tax-friendly location. However, if you do this, talk to your accountant about the tax implications.
  • Consider financing to handle growth. More business should be coming your way over the next year. Whether you’re a construction company that needs a new excavator, or a restaurant owner that wants a new brick oven to make your famous pizzas, you may consider new financing that you can repay as your business grows. Kapitus offers a wide array of financing options such as equipment financing, a new line of credit or a business loan that could help you with that.
  • As business grows, you will probably need to hire additional employees. When you do, it is important to make sure that you are hiring within your means. The number of additional staffers you hire should be in lockstep with the rate at which your business is growing.

While the pandemic was a source of severe economic strain for many small businesses, there is a bit of a silver lining:  It has created a valuable opportunity to rework aspects of your business that you may have had to put on hold in the past, which puts you on the road to recovery while providing a stronger foundation for your business in the future. 

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.

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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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Do You Know Your Fixed Charge Coverage Ratio?

Do You Know Your Fixed Charge Coverage Ratio?

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Usually when someone mentions a company’s coverage ratio, they’re referring to the ability of the business to pay its debt obligations. Specifically, they’re referencing a financial metric known as the times-interest-earned ratio. But, a company has more fixed obligations than its principal and interest loan payments. The fixed charge coverage ratio includes all of a company’s fixed obligations–not just its debt service coverage.

What are a Company’s Fixed Charges?

Every business has fixed obligations they must regularly meet, regardless of sales volume or profits. Here are a few of the fixed obligations in addition to loan payments that most companies have to make:

Insurance premiums covering vehicles and property
Rent for offices and warehouses
Licenses and fees
Employee wages and salaries
Lease payments on equipment
Property taxes
Utilities

A company’s cash flow must be enough to at least pay these obligations or it could go out of business.

What is the Fixed Charge Coverage Ratio?

The fixed charge coverage ratio, FCCR, shows the ability of a business to pay all its recurring fixed charges before deductions for interest and taxes. The formula to calculate the FCCR is as follows:

Fixed Charge Coverage Ratio = (Earnings before interest and taxes [EBIT] + Fixed charges before taxes)/(Fixed charges before taxes + interest)

Let’s illustrate with an example. Suppose Company A has an EBIT of $110,000, interest charges of $10,000 and other fixed obligations of $115,000 before taxes (leases, insurance and salaries). Its FCCR would be as follows:

FCCR = ($110,000 + $115,000)/($115,000 + $10,000) = 2.0

The FCCR shows the amount of the company’s cash flow that fixed costs consume. In the case of Company A, an FCCR of 2.0 means the company generates $2 in EBIT for each $1 in fixed costs.

How do Lenders Use the FCCR?

Lenders use FCCR to gauge a business’s financial health and ability to repay its loans. They want to know that a company can meet all its obligations even if sales decline.

Generally, lenders prefer an FCCR of at least 1.25:1. Higher ratios mean that the company can more comfortably cover its fixed costs with its current cash flow. It also shows that the company can take on more debt and still meet its obligations. An FCCR less than one means the business does not have enough earnings to cover its fixed costs. In this case, the owner could be forced to dip into reserve savings to cover the deficit.

How Can a Small Business Owner Use FCCR?

A business owner can use it to learn where the company currently stands and look for ways to improve. Tracking the FCCR over time will let you see if the company’s financial health is improving or declining.

You should know your FCCR before submitting a loan application. An FCCR of 1.25:1 makes lenders less inclined to offer a loan. As a result, you’ll know that you need to improve your FCCR.

If your FCCR is low, you could look at ways to improve marketing and increase sales. Or, on the other hand, you could analyze fixed costs to see if any expenses could be reduced. Owners can use this information to find which projects they can pursue without straining the business’s financial resources. Constructing various “what if” scenarios of different loan arrangements and the effects of changes in revenues and expenses will let you see the resulting FCCRs in the future.

Besides a high FCCR helping you to get financing, it is also assuring to you and your employees to know that the business is healthy and on a solid base for growth.

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2020 new year small business plan

A Small Business New Year Checklist to Help You Ring in the 2020s

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After crunching for year-end deadlines, the arrival of a new year–and decade–gives you a chance to take a breath, reevaluate your business and get back on track. Depending on the seasonality of your products, January may be a good time to make changes and begin long-term projects to help your company run better. Here’s a list of items to consider adding to your Small Business New Year Checklist for 2020 and beyond.

Formal Goal Setting

This may be the year to start setting clear business goals if you haven’t done so in the past. What do you want to get out of your company? What are some areas of potential improvement? Are you happy with the amount of business you bring in, or would you like to try new strategies to increase growth? Setting formal goals with a supporting action plan can help you propel your business forward.

Implementing Process Changes

If something is simply not working and causing you unnecessary stress, the start of the new year is a good time to revamp a broken process. Does your equipment need to be upgraded? Have you outgrown your manual record-keeping system? Would you benefit from technology that streamlines financial recordkeeping?

Develop a Budget

Goal setting and strategizing are big picture tasks. Experienced owners also recognize the importance of setting a detailed budget to keep spending in check. At the very least, start tracking your business spending. Open a separate bank account or credit card to help determine where the company’s money goes. Look for opportunities to improve profitability by lowering expenses.

Review Insurance Coverage

Has your business changed significantly in the last year? You should review insurance policies annually and add new items to coverages to reduce loss risk.

Tax Preparation

The beginning of the year is also tax prep season. Resolve to start the process early and know when your deadlines are. You may also want to research small business tax credits that you may qualify for.

Tax Planning

As you prepare tax forms for last year, keep an eye out for opportunities to save in the future. If tax laws change, research the ways they may affect your company. Consult with a tax expert, if warranted.

Facilitate Growth

You may need to invest in your business and prepare to handle more customers and higher sales volumes to increase growth. A new truck, expanding to another storefront, or hiring more employees will increase your expenses in the short-term, but also help to facilitate expansion. To help manage cash flow during growth periods, look into business financing options.

Start the new decade off right by using this small business new year checklist: set clear goals supported by tangible actions steps. Develop a budget and keep an eye on cash flow to determine how you’ll manage your company through the coming weeks and months. The new year is a chance to start over and improve your business aspirations. It is the perfect time to make improvements and upgrades to your company.

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Audit vs. Review: How to Choose the Right CPA Firm for Your Business

How to Choose the Right CPA Firm for Your Business

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You feel pretty confident in the accuracy of your financial statements. But, you know that “trust me” won’t cut it with outsiders when you’re looking for a loan or investment capital. And, perhaps, you just want some reassurance that whoever is doing your books (even if it’s you!) is up to the task – and honest. If this is you, it looks like it’s time for you to to face the audit vs. review and compilation question. This is where CPAs, and the assurance services they provide, come into the picture.

Audit vs. review

There are tiers of assurance services and levels of scrutiny that CPA auditors can apply to your books, with corresponding confidence levels. It ranges from a “compilation” at the low end, to a full-blown audit at the top. Each has a different purpose, and price tag.

Cost depends upon the amount of time spent performing the service, and the level of complexity (also impacting time requirements and thus cost). The range is wide, say from around $2,000 to $10,000, $20,000 or more.

A compilation of financial statements technically does not belong in the same category as assurance services because the CPA isn’t passing judgment on the accuracy of your financial statements, as they do in the audit vs. review area. A compilation, which does not need to be performed by a bona fide CPA, is basically just a set of financial statements compiled by an accountant using your financial records.

The accountant (or CPA) who performs the compilation should know your industry enough to understand your numbers, and adapt them to standard financial statement formats. Those statements will then be understandable to anyone who needs to look at them.

If the CPA has questions about where some numbers come from, you need to provide clarification. If the accountant / CPA isn’t satisfied with your answers, they quit the engagement.

Even if the accountant has no problem compiling the statements with a compilation, a letter accompanying those statements must be shared with anyone you give them to, making it clear that no opinions are expressed about their accuracy. The letter should describe the process used to perform the compilation, and any issues that arose.

Who Uses Compilations?

There’s a lack of assurance that goes with compilations. You might use them to seek a small loan or a larger one if you pledge sufficient collateral.

The entry level assurance services category is the review. According to the American Institute of CPAs (AICPA), the review service “is one in which the CPA performs analytical procedures, inquiries and other procedures to obtain limited assurance on the financial statements and is intended to provide a user with a level of comfort on their accuracy.” To produce a review, the CPA needs to gain a basic understanding of your business and your accounting procedures and principles.

Still, in performing a review, the CPA “does not contemplate obtaining an understanding of your business’s internal controls, assessing fraud risk, testing accounting records through inspection, observation, outside confirmation or the examination of source documents ordinarily performed in an audit,” the AICPA explains.

A review is only performed by a CPA who has no ties to you that could compromise the CPA’s independence.

“Material Modifications”

A report accompanies a report, giving the CPA’s opinion on any  necessary “material modifications” for statements. This will bring them in line with applicable accounting standards.

A review may get you by if you’re applying for a larger loan and prospective lenders will tell you what they need. They’ll provide a basic level of assurance, too. But a review is closer to a compilation than an audit, which involves significantly more digging on the CPA’s part. The audit is the gold standard of financial statement scrutiny. It provides what the AICPA describes as a “high level of comfort” in terms of accuracy.

An audit only reassures yourself, lenders, investors or prospective business buyers that your financial statements are solid. And if the auditor does have some issues with your numbers or your internal accounting quality control systems, anyone reading the audit report will know that, too.

A Roadmap for Improvement

Any reported weaknesses in your financial controls can give you a roadmap on how to improve them. Once you fix the deficiencies, your next audit report will be cleaner.

However, an audit report indicates that it only provides ‘reasonable’–as opposed to absolute–assurance of your financial statements’ integrity.

Think about an audit vs. review and keep this in mind: In an audit, the CPA can’t rely on numbers from last year’s statements as the starting point for the current year’s audit. Instead, the auditor might first need to perform tests on the prior year’s numbers (and possibly earlier years). That suggests that the sooner you have an audit performed, the less expensive it will be.

There are steps you can take to reduce the cost of an audit, or for that matter, a review. Make sure your bookkeeping system is reliable, and that your financial records are easy to decipher. Consider bringing in a pro in to clean things up before you engage a CPA.

The CPA tells you the documents you need for and inspection. Be sure to have all your papers ready before the review or audit.

Pick an appropriate auditor to get an efficient audit. Large CPA firms tend to be more expensive than mid-sized or smaller firms. You probably don’t need a large national firm. However, a firm that’s large enough to have experienced auditors might be cheaper than a tiny firm. If it can perform your audit more efficiently, take it into consideration.

The public accounting industry is highly competitive. Don’t hesitate to shop around. Before signing an engagement letter, gain a high comfort level with a firm. Check the firm’s client references, fees, promised turnaround times, scope of services, audit procedures and technology infrastructure.

Choose wisely and build a strong relationship with a CPA firm. This can benefit you not only in assuring your financial statements are trustworthy, but ultimately help you to build a strong financial foundation for your business.

 

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best loans for contractors

Business Loans for Contractors: The Best Choices

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Contractors need different types of capital to run their businesses. They use long-term capital to finance equipment purchases and short-term capital to smooth out temporary fluctuations in cash flow. Here are the best loans for contractors with descriptions of their collateral requirements, application procedures and repayment terms.

Line of Credit

A business line of credit is a valuable and flexible source of funds for a contractor. It allows you to make “draws” as needed against the maximum approved line of credit. You will only pay interest on the amount of loan drawn down. If you repay the loan, you can come back later and borrow again. These types of loans are known as “revolving” lines of credit.

Lines of credit help smooth out short-term fluctuations in cash flow. They can be used to meet payroll expenses, pay suppliers and provide cash during slow periods. They can be drawn down at any time.

Lines of credit are usually secured by the contractor’s assets, such as accounts receivable, inventory and equipment. The amount of the loan is based on the lender’s appraisal of the worth of the company’s assets and its financial leverage. For example, a lender might advance 80% of the value of accounts receivable but only advance 50% of the book value of inventory and equipment. The maximum line of credit would be the sum of these appraisals.

The application and approval process for a line of credit is usually very quick.

Equipment Loans

From vehicles to high-priced heavy equipment, contractors need all types of equipment to perform their work. Equipment purchases for large amounts should align with the useful life of the asset. Equipment purchase loans are payable over several years, usually up to five years with monthly payments.

Lenders will require down payments of 10% to 20% but will finance the rest of the purchase price. This enables contractors to buy big-ticket items that may have otherwise been out of reach.

The collateral for an equipment loan is typically the equipment itself. This leaves the contractor’s other assets, such as receivables and inventory, available for collateral for other loans.

Small Business Administration Loan

Because of their long repayment terms and low interest rates, SBA loans are highly desirable. Lenders guarantee up to 85% of loans to contractors. This way, they have solid security in case the borrower defaults.

To finance long-term working capital needs and businesses with seasonal fluctuations, you can use funds from an SBA loan.

The hard part is that SBA loans are difficult to get. Only the most creditworthy applicants receive approval. Borrowers must have several years in business with good revenues and a strong credit history.

SBA loan applications require a considerable amount of paperwork and can take several months to get approved. SBA loans are highly desirable if you have the credentials and time to wait.

Accounts Receivable Financing

Under an accounts receivable financing agreement, the lender agrees to make advances up to a certain percentage, say 80%, of the contractor’s total accounts receivable outstanding. Repayment terms are either weekly or monthly. The contractor retains ownership of the receivables and assumes the risk of non-payment from the customer.

To make up short-term deficits in cash flow as needed, use funds from an accounts receivable agreement.

Invoice Financing

Invoice financing, also known as factoring, lets a contractor receive an advance against the company’s receivables. The factor typically will make an advance to the contractor of up to 80% of the invoice amount and collect the balance from the client at due date. Funds from factored invoices normally go into the contractor’s bank account the next business day.

In a factoring agreement, the lender, known as the “Factor”, purchases invoices from the contractor. They assume the responsibility of collecting the debt. Factoring fees can range from 2% to 4% of invoice value.

Approval for this type of invoice financing is based more on the creditworthiness of the contractor’s customers than the credit rating of the contractors themselves.

Loans for contractors range from lines of credit and receivables financing to meet short-term cash needs to equipment loans and SBA loans for long-term purposes.

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guide to pos systems for small businesses

Guide to POS Systems for Small Business

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Small businesses face stiff competition, and they need every advantage they can get. Sometimes, an advantage can be found in an unlikely place, such as your point of sale (POS) system. POS systems provide an array of functionality that can help you with marketing, employee management, inventory management and payment processing, among others. So, getting the right system that meets the needs of your business is one way to gain an edge. But, how do you know which POS system is right for you?

Let’s start with the basics.

What Are POS Systems For Small Business?

By definition, a point of sale is where a sales transaction takes place. It could be at a register in a brick-and-mortar store, on a mobile device or even online.

A POS system combines hardware and software that retailers use to process sales transactions. It is not just a credit card processing system.  In reality, a POS can handle a variety of back-office functions in addition to processing credit card payments.

What Functions Does a POS Perform? A POS can have the following capabilities:

Scan barcodes – Use a barcode scanner to quickly input product and sales data into the system.
Process card payments, returns and exchanges – The credit card reader should input the customer’s credit card data from swiping a magstripe, dipping cards with chips or accept contactless payment such as Google Pay and Apple Pay. For mobile sales, you can connect card readers to tablets and smartphones per the headphone jack. Purchases made through your website can be processed with online POS software.
Track customer history – Keep records of customer profile data and sales history. Collect customer contact information and create lists for email marketing.
Keep records of employee performance and time management – Track employee clock-in and clock-out data and record sales performance for commissions.
Track inventory – Maintain current inventory in-stock levels of products and issue alerts for low stock amounts to reorder and prevent missed sales. Store supplier information, wholesale costs and discounts and issue purchase orders.
Produce reports- Produce sales performance reports. For example, track top sellers, identify slow movers and predict seasonal fluctuations.

What are the Key Elements of a POS System?

Pricing – POS systems can cost as little as $0 per month up to $300 per month. All systems charge a payment processing fee. They can be cheap or very expensive to operate, depending on the additional functions provided.

Hardware – POS systems typically work on most Android devices, iPhones and iPads. If you have one of these already, you can start your POS with a low-cost or free card reader and few other hardware costs. However, if you don’t have a barcode scanner, you’ll need to purchase one. Additional hardware costs could be anything from a printer for receipts to a cash drawer.

Plans – POS plans should range from a free (or low-cost) option with little more than the capability to process credit card payments, but have the flexibility to add more sophisticated data tracking and reporting as the business grows.

Top POS Systems for Small Businesses

Square

Square is the POS of choice for mobile businesses. Additionally, it’s also an economical favorite for retailers with physical stores. Many users conduct all of their business with just an iPad and a basic Square plan.

Advantages – Square has a basic plan with a zero monthly cost, making it easy to get started with a POS system. The software is intuitive and easy to use.
Disadvantages – Transaction fees can be slightly higher that other POS systems. Square charges more for transactions with manual entry than other POS providers.

Lightspeed

Lightspeed offers more than 40 detailed sales, inventory and analytic reports. It provides nearly any type of data analysis that a retail business would need.

Advantages – The basic plan starts at $99/month and upfront purchases of hardware can approach $700, but you will receive extensive and sophisticated data analysis and reports.
Disadvantages – The ecommerce feature is only available at an additional monthly fee. Shopify and Square offer ecommerce platforms for free. Unlike other POS providers, Lightspeed requires a contract, which means you’re stuck if you don’t like their system.

Shopify

Shopify has a reputation as one of the best POS systems for ecommerce. It’s easy to set up and has a wide range of options that are customizable for any small business. It also scales up as a business grows.

The plans range from a basic option at $29/month up to the Advanced Shopify at $299/month.

Advantages – Shopify has affordable subscription and processing fees and offers a 14-day free trial. Its ecommerce tools are some of the best.
Disadvantages – Data reporting on the Basic Plan is limited. Shopify doesn’t have a free subscription plan; options with more features gets expensive.

ShopKeep

ShopKeep is designed especially for cafes, bars, boutiques and specialty shops. It offers very detailed product and inventory tracking and goes further by keeping track of recipes and ingredients, for example.

Advantages – It offers helpful features for sales staff management, inventory control and reporting.
Disadvantages – It doesn’t have fixed-price plans. Company representatives prepare a custom quote for each business application. Generally, higher business volumes reduce the credit card processing fee. ShopKeep offers a free version, but limits the number of items in inventory, number of employees and registers. Even the sales amount is restricted without an upgrade.

 

How to Choose a POS System

Use the following criteria and ask yourself these questions to determine the best POS systems for your small business:

  1. Price – Is the software and hardware reasonably priced with low monthly fees for a small business?
  2. Payment processing –Do the transaction processing fees compete with other providers?
  3. Inventory management – Does the system produce inventory data that you actually need?
  4. Customer data management – Does the system collect customer profiles, keep lists for email marketing, track customer purchase history, have a customer loyalty option, and offer gift cards?
  5. Employee data – What information does the system provide for individual employee performance?
  6. Customer support – Does the provider have free, live support, and is it available 24/7?
  7. Integrations – Does the system integrate selling, marketing and accounting reports?
  8. Analytics and reporting – What data do the reports provide? Can data be exported? Will the system produce visual charts and graphs?

Making Your Choice

First, decide what you want in a POS system. If it’s just processing credit card transactions, a free card reader with processing charges per individual sale and no monthly fee is good enough. But if you’re looking to add customer data for marketing, inventory management and tracking employee performance, then you’ll need to purchase a system that provides those additional functions.

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