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5 Ways to an Accountant’s Heart

In the last few years, the shortage of accounting professionals has grown tremendously, and many business owners are struggling to find reputable, quality accounting services. Prices for accounting services may have gone up due to this supply/demand imbalance, and they will keep going up for years to come– due to the shortage of accounting graduates and the overall pipeline. It makes sense to explore how to work better with your accountant as they become more and more scarce and in demand.

A Successful Partnership

Intuit conducted a survey in October 2022 which found tremendous benefits to the accountant-business owner relationship:

  • Nine out of ten small businesses with an accountant or bookkeeper say they contribute to the business’s success.
  • More than eight out of ten business owners say accounting professionals helped them reduce the impact of inflation on their business.
  •  More than 80 percent of business owners say their accountant helps them make better use of technology.
  •  More than 98 percent of business owners say they are more confident in their business because of their accountants.
  •  Small business owners overwhelmingly say their accountants save them time and money.

There’s no doubt that the relationship between a business owner and their accountant is of utmost importance to your business. Here are five ways to work even better with your accountant so that you can both benefit from this important business relationship.

1. Reduce your accountant’s administrative time.

There is a lot of paperwork when it comes to accounting and tax work, and administrative work goes hand in hand with that paperwork. When you can reduce the administrative work, your accountant can focus more on planning and advisory work, which is more valuable to your business. Here are a couple of tips.

  • When sending paper information to your accountant, scan it in and convert it to PDF instead. Then upload it to your secure portal.
  • When sending digital information, convert images to PDF files when possible. Images can’t easily be converted to text as PDFs can.
  • Instead of sending multiple files, combine PDFs into one image so they are in the same document.
  • Use a client portal instead of email if a client portal is provided.

2. Spend time understanding your accounting and tax reports.

A little education can go a long way. Learning a bit about finances and accounting can help you become a much better business owner. Your accountant may have suggestions on the best source for this or they may have videos they have produced themselves.

3. Honesty is paramount.

It’s critical that there is trust and complete honesty on both sides of the relationship. Your accountant may have earned a CPA or Enrolled Agent or other certifications that took years to acquire. Their license is in peril if anything is not above board. You might be surprised to learn that there are potentially many penalties and jail time for the accountant as well as the client if fraud or other criminal acts are discovered.

One example of something you can do to ensure your accountant’s trust is in tax preparation: clients should complete the tax organizer in full when the tax preparer sends it, even though it is a pain to do so. If a piece of information is missing, or you decide it’s not important but the government feels it is, that omission can spell the beginning of trouble for both you and your tax preparer.

4. Be mindful in communications.

Good communication is an essential part of the accountant-client relationship. A great client will take the time to read any emails or correspondence and answer all the questions in the email (not just the first one!).

Both you and your accountant may have preferred ways of communicating, among the choices of text, voice, and email. Keep in mind your accountant has a higher duty to protect your private information. Text and unencrypted email can be problematic for them, depending on the type of information to be conveyed.

To save time and reduce interruptions, keep a notes file on your desktop, and add any non-urgent questions to your list. That way, you can cover a lot of ground when you meet periodically. It’s a better use of both of your time. Of course, if you have urgent questions, feel free to contact your accountant at any time.

5. Vet any advice you hear.

Be wary of unsolicited advice as well as tips you might see on social media. They can be uneducated and worst case, downright fraudulent. One of the biggest problems today is ERC

mills: companies that have sprung up to help small businesses claim the Employee Retention Credit from 2020 and 2021. Most of these companies are not following IRS guidelines and do not have the proper credentials to evaluate the tax law properly.

Social media sources can be quite unreliable as well. TikTok has some outrageous financial claims regarding the choice of business entity, so please do not act on this advice until you speak with a qualified accounting or tax professional.

Try these tips to build better rapport with your accountant, and your business will blossom as well.

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Cool Tech Tools: Drones

Drones were considered fun when they first came out, but they are far from toys. Drones have surprising benefits with extremely high return on investment to certain business owners.

A drone is a robot that can fly and that is controlled by a remote device. The technology includes GPS (global positioning system) and built-in sensors. There are many benefits to using drones:

  • They can go places where it might be dangerous for employees to access, improving employee safety.
  • They increase efficiency and productivity while decreasing workload and costs.
  • They can improve accuracy.

A drone can be used in the following ways:

  • To gather information for pricing estimates, such as roof repair
  • To inspect items, such as a tree’s disease progression
  • To monitor systems or the status of certain items, such as landfill fire risks
  • To photograph items from an aerial view

There are many industries that have begun to routinely use drones, such as:

  • Forestry
  • Agriculture
  • Construction
  • Waste Management
  • Environmental
  • Disaster Relief Services
  • Photographers
  • Real Estate
  • Advertising
  • Event Planning
  • Highways, Traffic, and Road Safety

Rules for Drones

Before you fly your new drone, there are rules you’ll need to follow. The FAA (Federal Aviation Administration) has put into place the rules for flying drones safely. There may also be rules passed at the state and local levels that you’ll need to check on.

When using drones for commercial purposes, you’ll need to register your drone, familiarize yourself with the operating rules for your type of drone, and pass a pilot’s test. Find out more here: https://www.faa.gov/uas

Cost of Drones

Drones can cost anywhere from $50 to $25,000 and more. A beginner recreational drone can cost under $100, while a beginner commercial drone can range from $300 to $500. A commercial drone typical starts at a $1,000 price tag. Drone prices will vary depending on their size, features, and intended usage.

If your industry is one that is adopting drones, it might be a good time to start researching them for your business.

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What Income Are You Required to Pay Tax On?

In general, income can be received in three ways – money, services, and property – and IRS requires you to declare most of this income on your tax return. Income is taxable unless specifically exempted by law, and in some cases, even nontaxable income must be disclosed on your tax return.

Taxable Income

Typically, the following types of income are required to be declared on your tax return, and you must pay tax on them:

  • Wages
  • Salaries
  • Commissions
  • Strike pay
  • Rental income
  • Alimony (for divorces finalized before 2019)
  • Royalty payments
  • Gains on stock sales
  • Dividend and interest income
  • Self-employment/business income

Keep in mind that there are other forms of compensation that may be taxable, including fringe benefits or stock options. Fringe benefits are part of your income unless they are specifically excluded by law – or, if you pay fair market value for them. You do not need to be an employee of the provider of such a benefit to be a recipient, and if you perform the services for which a fringe benefit is being provided, you are the recipient and required to report/pay tax on it as applicable, even if it is given to another person and not you (for example, a family member). Examples could include:

  • A company-paid offsite gym membership
  • A company vehicle that can be used personally
  • Holiday gifts from an employer in the form of cash or gift certificates
  • Company-paid tuition exceeding a certain amount
  • Employer-paid group life insurance over a certain amount

Nontaxable Income

The following types of income are usually deemed nontaxable by IRS and aren’t required to be reported on your tax return:

  • Inheritances and bequests
  • Cash rebates
  • Alimony payments (for divorces finalized after 2018)
  • Child support payments
  • Most healthcare benefits
  • Money that is reimbursed from qualifying adoptions
  • Welfare payments

Other Considerations

  • There are some types of income that may or may not be taxable, or may be partially taxable. Examples include proceeds from cashing in a life insurance policy or money from a qualified scholarship, depending on how it was used. Income from retirement accounts may also fall into this category. Consult with your tax professional to determine how much of such income should be included on your tax return, if any.
  • Certain types of income may not be readily identified as taxable, but are generally required to be included on your return. Examples include: the fair-market value of property received for your services; disability retirement or sickness/injury payments from an employer-paid plan; property and services for which you bartered; money/income from offshore accounts; or canceled/forgiven debt.
  • IRS rules state that you are taxed on all income available to you, regardless of whether it is actually in your possession. For example, if a check is received by or made available to you before the end of the tax year, but you do not cash or deposit the check until the next year, the income was “constructively received” before year-end and, therefore, is taxable in that year.
  • If you have a contract with a third party (agent) to receive income on your behalf, the income is considered received by you (and therefore taxable) in the year the agent received it.
  • If you receive payment for future services to be provided, the income is generally included in income/subject to tax in the year you receive it. An exception to this is if you report on an accrual basis of accounting – consult with your tax professional for more information.
  • Note that in some cases, the tax treatment of certain income for State purposes is not consistent with Federal tax law. For example, while alimony is no longer reportable on Federal returns for divorces finalized after 2018, California still requires such income to be included on the state tax return. Check with your tax professional to learn more about federal and State tax law differences.

For more information, please refer to IRS Publication 525, Taxable and Nontaxable Income: 2022 Publication 525 (irs.gov)

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Do You Need a Business Savings Account?

If you have accumulated more money in your business checking account than you really need for daily operating expenses, that is a nice problem to have! It’s time to consider putting that money to work. A business savings account might be your answer.

Every bank is different when it comes to the features and benefits of their business offerings. Here is a list of some of the items to consider asking your banker.

  1. Is your checking account interest-bearing, and if so, how does the interest rate compare to a business savings account interest rate?
  2. Is there an initial minimum deposit to open the savings account?
  3. What are the monthly fees for each type of account?
  4. What minimum balances are required in both checking and savings accounts so that fees are waived? And, is it worth it to keep minimum balances?
  5. Are there withdrawal limits?
  6. What are the other benefits of having a business savings account?
  7. Is my money FDIC-insured, and if so, what is the cap?

Often, a bank will tie the checking and savings accounts together, and there will be a combined minimum balance that is lower than if either account was separate. For that reason, having your checking and savings accounts in the same bank might be more effective. Other common benefits include waiving overdraft fees, wire transfer fees, and NSF charges.

There are other types of interest-bearing accounts besides savings accounts, including money market accounts and certificates of deposits (CDs). Money market accounts may have check-writing privileges, but the withdrawals may be limited. While CDs typically pay a higher interest rate than a savings account, they tie up your money for a specified period of time, and there are steep early-withdrawal penalties.

There are many institutions besides your main bank that are focused on savings accounts and will pay much higher interest rates. Typically, online banks and credit unions will pay a higher interest rate than a bank, but the money may not be FDIC-insured, so be sure to read the fine print.

An additional benefit of keeping money in a separate savings account is that you can save for many things:

  • A cushion for emergencies.
  • Lump sum tax payments.
  • Future capital expenditures.

Once you’ve set up your new savings account, consider setting up monthly automatic transfers from your checking account to your savings account so that you build up your savings balance.

Make sure your business cash works as hard as you do in your new savings account.

The relationship between Bell Rock Capital, LLC, an SEC registered Investment Adviser, and P.T. Anderson, “Promoter” is contractual pursuant to which the Company will pay the Promoter a referral fee.  Promoter does not receive any other compensation from the Company. 

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Is Your Business Considered a Hobby by the IRS?

Are you running a business? Or just having fun with a hobby?

The IRS has strict rules for determining the difference between a business and a hobby for tax purposes. While expenses incurred to conduct a business are deductible, expenses incurred for a hobby may not be, causing your taxes to increase.

A person that conducts an activity for profit is allowed to deduct the expenses that are ordinary and necessary in that industry. If the expenses exceed the income, a loss is incurred. This loss can offset other income such as wages, interest or dividends.

However, if your activity is determined to be a hobby for IRS purposes, you cannot reduce your wages, interest or dividends by any losses. When you have losses for three years in a row, you must be able to prove to the IRS that your activity is truly a business and not a hobby.

The IRS will consider the following when evaluating your business/hobby:

  • The manner that you carry on the activity
  • The expertise of the taxpayer in this industry as well as the taxpayer’s history and success in this industry
  • The time and effort spent in the activity and whether the taxpayer depends on the income for their livelihood
  • The elements of personal pleasure or recreation

Even if you have losses, there is a lot you can do to ensure your business is not considered a hobby. Here are some ideas to implement.

  1. Develop a written business plan and update it annually. Show how you plan to convert your losses into gains.
  2. Set up a separate business bank account and credit card account(s), and use them only for business purposes.
  3. Keep thorough and professional books.
  4. Obtain insurance, registrations, certifications, and licenses needed for that type of industry.
  5. Maintain a second phone listing for business.
  6. Keep a detailed calendar of your business activities. Record time spent on your business.
  7. Document evaluations of your operation to attempt to improve the business’s profitability.
  8. Research trends in similar businesses.
  9. Log any personal use on assets, such as a camera or automobile.

If there’s any question that your activities could be considered a hobby, these tips will help you stay proactive for tax purposes.