What Is Internal Control?

In accounting, a key term to know is “internal control.” Internal control is the series of processes and procedures that are performed within the organization to ensure the integrity and accuracy of the financial information and reporting of that organization.  Internal control is very important to consider in order to protect the business owners, employees, vendors, investors, and other stakeholders.  

In a small business, maintaining good internal control is often a challenge since staff size is smaller and resources are limited. Yet, it is essential to understand so that the business owners understand what risks they are taking every day in their businesses.  A good system of internal controls can help the organization reduce the risk of fraud, safeguard against loss, and demonstrate good business practices.

Key Concepts

Segregation of duties is the first of three key concepts of internal control. It means that tasks should be assigned to different people when there is a risk that having everything assigned to one person could hide errors or even theft.  For example, the person who opens the mail and receives checks should not be the same person who applies the check to the correct customer in Accounts Receivable. 

Delegation of authority is the second key concept of internal control.  While the owner has ultimate control, they cannot do everything. They must delegate to staff. Staff have the responsibility to maintain internal controls in their area of responsibility. 

System access is the third concept of internal control. Access to documents, rooms, computers, applications, and other items should be on a need-to-know basis to reduce risk. While one person might have system access to enter a transaction, they should not also be the one to have system access to review or approve that same transaction. 

Business Operations

Every aspect of the business should be considered while setting up the company’s policies and procedures.  In a small business, an easy way to develop internal controls is to review each major transaction flow and implement the controls needed. 

On the customer side, this includes receiving the customer order, sales contracts, shipping, invoicing, managing accounts receivables, collections, bank deposits or merchant reconciliations, and cash management. It can also include customer service, pricing, and promotional activity.

On the vendor side, the process includes adding controls for vendor selection, purchase orders, receiving, bill pay, managing accounts payable, payments, managing travel and expense accounts, and company credit cards.

Depending on the company, additional areas that need to be reviewed for internal control include inventory and supply chain management and government contracts, if any. 

When hiring, the process of hiring, onboarding, training, evaluating performance, and payroll should be considered.  Safety is also an important consideration.

A very large part of internal control development should focus on the information technology operations of the company. Areas include user access and controls, password management, naming conventions, physical security, disaster recovery, and network and applications development, updates, and change control. Data entry should also be considered and is best included when developing controls for the customer, vendor, and employee functions.

Additional functions that need internal control processes include treasury and financing; financial reporting, budgeting, and planning; records storage, access, retention, and destruction; asset management; and insurance. 

Internal controls can be applied to small businesses as well as large organizations. It’s all about being able to feel confident that your business is operating with financial integrity, accuracy, efficiency, and a reduced risk of failure. If you have questions about how internal control applies to your business, be sure to reach out to us any time.         

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Categories: May 2021 Newsletter

Partner Capital Accounts Required to be Reported on Tax Basis for 2020

In response to the Tax Cuts and Jobs Acts of 2017, there were a number of changes to the disclosure requirements for partnerships and LLCs filing as partnerships – specifically, on the K-1s of Form 1065 returns, some of which became effective for the 2019 tax year. 

For the current (2020) tax year, however, the most significant change relates to the reporting associated with partner capital accounts.  Beginning with the 2020 year, partnerships are required to report capital accounts for partners using the tax basis method.  The prior rules allowed the capital accounts to be reported in accordance with Generally Accepted Accounting Principles or Section 704(b).  This will no longer be permitted.

According to IRS, most partnerships/LLCs taxed as partnerships have already been reporting capital accounts on a tax basis.  For those taxpayers, no change is required.  

For partnerships that were not using tax basis, the “transactional approach” must be used to switch to tax basis for capital reporting purposes. Under that approach, partnerships use partner contributions, the partner’s share of partnership net income or loss, withdrawals and distributions, and other increases or decreases using tax basis principles, instead of reporting using other methods such as GAAP. 

For those partnerships that have never used tax basis, since many partnerships would have difficulty reconstructing tax basis, the IRS is allowing them to re-figure beginning basis using one of a number of options including the modified outside basis, modified previously taxed capital, or Section 704(b) methods.  These options are all described on page 32 of the Form 1065 instructions. 

The same basis method should be used for each partner.  IRS is not assessing penalties as long as the calculation is done with “ordinary and prudent business care.” 

“Small partnerships,” which are defined as having less than $250,000 in total receipts under $1 million in total assets, are exempt from reporting capital accounts on the tax basis.

The IRS is hoping this new disclosure will assist in assessing compliance risk and result in fewer audits for compliant taxpayers.

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Categories: April 2021 Newsletter

5 Tips to Spice Up Working from Home

We’ve been in a pandemic for what seems like five years now, right? All joking aside, if you’ve been lucky enough to work from home this past year, then it’s possible that you are in the process of going stir-crazy. Or maybe you’re simply ready to shake things up a bit.

Working from home has its benefits. Yet, if you are someone who enjoys going to the office every day, chatting with co-workers in person, attending meetings that aren’t all virtual, and having a little spontaneity each week, then we’re here to help. Here are five tips to boost your WFH (working from home) environment.

Take Short Breaks

Taking regular breaks throughout the day is so important, and more so now than ever before! Without a doubt, these breaks will help you mentally (that is, keep you from going stir-crazy), but they can also help your work productivity and quality. These breaks don’t need to be—and shouldn’t be—long or strenuous.

Walk the dog. Stand up and do some light stretches. Run up and down your stairs. Go outside into your backyard. Dance to a song. Do a quick chore, like emptying or loading the dishwasher. Call a friend. Or choose your own favorite break activity.  The goal is to get the blood flowing and the fog cleared from your mind.

Switch Up Locations

Get creative and switch up your location. If you have a yard or patio of some sort – and good weather — that allows you to sit outside and work, perfect! If not, try working from the living room, the dining room, the kitchen, even the bedroom. The idea here is to change your surroundings a couple of times a week so that you don’t feel stuck or get lost in the monotony of a daily routine.

Treat Yourself with Lunch

Everyone needs something to look forward to, and what is better to look forward to than food? Depending on your budget, treat yourself to a special lunch once a week, every other week, or monthly. Consider trying new restaurants, different foods, places that you’ve always wanted to eat at but haven’t had the opportunity to do so. Not only will this be fun for you, but you will also be supporting small, local businesses. Win-win!

Dress for Success

We can probably all agree on one thing: sweatpants are comfortable! As such, it can be difficult to trade in the sweats for jeans or dress pants every day. After all, if you’re working from home and there’s no dress code to enforce, it can be hard to dress for success. Yet, doing so can give you a little burst of inspiration to get through the day. You can keep your outfits casual just as long as you have fun getting dressed. For example, you could have Sandal Mondays or Blue Shirt Fridays. Again, just have fun with it!

Create a New Playlist

Does music motivate you? Are you able to work and listen to music at the same time?  If so, create different music playlists to listen to throughout your day. Try listening to various genres or new artists, anything that keeps you alert and stimulated, even excited about your workday. Depending on the type of music you enjoy listening to, you can even get up periodically and take dance breaks (Tip #1)!

Keep your day fresh, and boost your productivity and mood by using your imagination and trying the tips above.

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Categories: April 2021 Newsletter

American Rescue Plan Act

The recently passed American Rescue Plan Act (ARP) of 2021 provides additional relief to taxpayers impacted by the COVID-19 pandemic. The 2020 individual filing and tax payment deadline has been moved from April 15 to May 17, 2021. This relief does not apply to estimated tax payments that are due on April 15. Victims of February winter storms in Texas, Oklahoma and Louisiana have until June 15, 2021, to file and make payments. Following is a brief overview of some of the key provisions of ARP.

Categories: Tax Tip Tuesday

What is the Difference Between Your Marginal Tax Rate and Your Effective Tax Rate?

Have you heard the phrases “marginal tax rate” (or tax bracket) and “effective tax rate” and wondered what the distinction is between them? In order to explain the difference, it is first important to note that in the United States, we do not pay a flat tax – we are on a graduated system and therefore pay taxes in tiers.

Let’s say that you are a Single filer, and you have taxable income of $60,000 for the 2020 tax year. According to the IRS tax tables, that puts you in the 22 percent tax bracket – in other words, that is your marginal tax rate. Twenty-two percent of $60,000 is $13,200, but luckily, you don’t have to pay that much.  If you calculate the tax based on the 2020 IRS Tax Tables, the amount of tax is $8,990, which is less than the $13,200 based on the 22 percent marginal rate.

This scenario illustrates the difference between your marginal tax rate (tax bracket) and your actual effective tax rate. Even though you would be in the 22% bracket based on $60,000 of income, you do not pay 22 percent flat tax.  You would pay less than that since there is one bracket below your tax bracket: the 12 precent bracket. (There are really two for you math geeks: 12 percent and 0 percent.)

The rate that you actually pay in taxes is your effective tax rate. This rate is unique to you individually and is simple to calculate.  Just take your total tax liability and divide it by your taxable income. In our example, that would be $8,990 / $60,000 = just about 15 percent.  Compare that to the 22 percent marginal rate and it sounds pretty good! 

The effective rate is often more useful because it gives you an average rate you pay on all the money you make during the year. It is much more accurate in terms of gauging what you might owe based on your projected taxable income. In most cases, the effective tax rate is less than the marginal rate.

The marginal tax rate is still helpful to know for tax planning.  For example, you can get a feel for how much potential benefit you could receive from an additional deduction. For example, how much would you benefit from making a $6,000 IRA contribution?  Your taxes would be reduced by $1,320, or 22 percent of $6,000. Looking it up in the tax tables is another way to double-check the math and yields the same savings.  

Understanding the difference between your effective and marginal tax rates makes you a smarter taxpayer!

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Categories: March 2021 Newsletter

Managing Customer Service with Technology

Do you have a lot of customer service inquiries in your business? If so, it can be a challenge to manage them all. Being responsive with customer service can make all the difference in your company’s success, so it makes sense to take a look at some tools that can streamline the process. 

The most common solution to automating customer service inquiries is to implement a ticket management system, which is also called help desk software. Some of the things that are important to consider include:

  • How fast you can respond to a customer
  • How well you solve the customer’s problem
  • How to track a customer’s issue if it has to be open for a while before it can be solved
  • How to do all of this in a cost-effective and efficient, yet friendly, manner

These days, an inquiry can come from a multitude of places:

  • Phone calls and voice mails
  • Emails
  • Text messages
  • Social media accounts, for all the platforms you have a business presence
    • Posts, replies, and comments
    • Messaging
    • Any other methods you have set up in your social accounts
  • Chat feature on website
  • Snail mail

That’s a lot of inputs to organize. When they can all be fed into the same system, you have just unified your messaging input and taken a giant step toward organizing all of these moving parts.  A good ticketing system will accomplish this, and the feature you want to ask for is multi-channel accessibility. 

Keeping your customer service costs low is another factor, and one way to accomplish that is to help users self-serve and solve their own issues when they can. This requires a robust knowledge base feature. A knowledge base is a set of how-to articles and videos of the most frequently asked customer service questions. 

Here are a few very basic topics to consider including in your knowledge base:

  • What forms of payment do you accept?
  • What is your shipping policy?
  • How can I get help if I need it?
  • What is your return/refund policy?
  • What is your privacy policy?
  • What is your guarantee?
  • Is my data secure with you?
  • How do I update my credit card/address/phone/email?
  • When will my items arrive?
  • What licenses do you have?
  • What are your hours?
  • Do you have hours for seniors?
  • How do I login?
  • How do I access my digital items?
  • What are your Covid-19 policies for your employees? For customers?
  • Are you hiring? How do I apply? What are your employment policies?

A good ticket system will also have the ability to customize the ticket, the customer service agents, the customer records, and the other important parts of the system. For example, you may want to set up your own status items for each ticket.  Open, assigned, active, hold, and complete are typical status types, but you may need another one. 

The workflow must also be considered in a ticket system.  How does a typical ticket flow through your business, and can the system replicate that flow. 

Other important features of a ticket system include:

  • Support for multiple languages
  • Customer response to tickets, as well as customers can view status of their tickets
  • Uptime of system – service-level agreements
  • Tracking, such as number of open tickets, tickets on hold, and the like
  • Reporting metrics, such as wait time, ticket servicing time, and number of tickets handled by each agent
  • Ticket tagging and categorizing
  • Feedback loop for customer suggestions of product improvements
  • Ease of use for customers and agents
  • Notifications

A few of the most popular ticket management systems include:

  • Zendesk
  • Freshdesk or Freshservice by Freshworks
  • Zoho Desk
  • HubSpot Service Hub
  • Salesforce Service Cloud
  • LiveAgent

There are literally hundreds of technology options for any size business. 

If you want to take your customer service to the next level or just want to get more organized, consider looking into these ticket systems. 

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Categories: March 2021 Newsletter

Do Nonprofits Ever Pay Taxes?

When you think about a nonprofit, the first thing that often comes to mind is that it is tax-exempt. Most nonprofits are not subject to federal, state, and local income tax.

Does that mean nonprofits are completely free of ANY tax liability? The answer to this is likely no – there are still some taxes that a nonprofit might be liable for. If you are considering starting a nonprofit organization, you won’t want to be surprised, so we’ll break it down for you. 

Taxes That Do NOT Apply to Nonprofits

Generally a nonprofit is not subject to income tax at the federal, state, or local level on funds raised in direct association with the organization’s mission.  The reasoning behind this exemption is that it allows more resources to be put toward its cause(s).

A nonprofit that qualifies for federal tax-exempt status is also exempt from paying property tax in all 50 states, by law. Sales tax is also often waived for certain transactions related to the organization’s mission, but not always. It depends on the nature and amount of sales activities of the nonprofit.

Taxes That Do Apply to Nonprofits

If a nonprofit organization hires employees, it will be subject to payroll taxes. Just like employees of for-profit entities, these individuals are required to pay tax on their earnings, and the organization is liable for the employer’s share of the payroll taxes.

Sales and use tax may also need to be paid. With sales tax, there is a distinction between paying sales tax on purchases, and collecting and remitting sales tax on sales. A nonprofit may need to pay sales tax on purchases from a vendor depending on the rules of its state and other considerations.

On the flip side, if a nonprofit is engaged in a business activity unrelated to its charitable mission and/or involved in sales of taxable items or services to customers, it may be obligated to collect and remit sales tax.

It is important to distinguish between these two areas and keep in mind that even if a nonprofit is exempted from paying sales tax on purchases, that exemption does not necessarily extend to collecting and remitting sales tax on outside sales.

Another area where a nonprofit might be liable to pay tax would be on what is called Unrelated Business Taxable Income (UBTI). This is income that is unrelated to the nonprofit’s core mission. As an example, a fundraising event to sell merchandise to raise money for equipment that will directly help carry out the entity’s cause would NOT be considered an unrelated activity, despite the sale of items to customers, because the money is going directly towards helping to advance the charitable mission.

On the other hand, if that merchandise is sold as part of a trade or business that is regularly carried on by the nonprofit and the proceeds are used to fund general operating costs like payroll or office expenses and not specific program expenses, that income could be considered UBTI because it is not substantially related to the organization’s charitable purpose.

If a nonprofit has over $1,000 of UBTI it must file Form 990-T and pay tax on that income. If the nonprofit is structured as a corporation, it will pay the flat 21 percent rate on that income, like the 21 percent tax paid by for-profit corporations.  If it’s set up as a trust it will be taxed at trust rates, the highest of which is 37 percent. Because this is a gray area of the law and subject to some interpretation, it is highly recommended that a nonprofit seeks the advice of a tax professional in navigating the rules and determining if it is subject to UBTI reporting and taxation.

So, as you can see, taxes are not completely off the table just because an organization is exempt from federal income tax. Several different types of tax could come into play for a nonprofit, depending on whether it has employees, the nature of its activities, and other considerations.

If you need help with taxes in your nonprofit, please contact us. 

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The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act

The Consolidated Appropriations Act, 2021 (CAA 2021) became law on December 27, 2020, and among many other things, provided for a second round of potentially forgivable Paycheck Protection Program loans to small businesses that were financially impacted by the effects of the pandemic.

The Act not only provides funds and guidelines for a round two of PPP money; it also expands PPP round one in a number of ways.  Here are a few of the highlights. 

Changes to PPP Round 1 Loans

Existing borrowers with PPP loans can reapply for a loan or request a loan increase as long as they have not received forgiveness. This includes borrowers that returned all or part of their PPP loan or whose loan maximum has increased due to regulations implemented after receipt of their loan.

Businesses that have not been granted forgiveness can spend PPP money and apply for forgiveness on an expanded list of expenses, including: 

  • Software, cloud computing, HR, and accounting
  • Property damage
  • Supplier costs
  • Essential contracts in force prior to loan
  • Worker protections, e.g. PPE
  • Payroll costs can include group insurance including group life, disability, vision, dental

They can now choose their covered period at any time between 8 and 24 weeks (previously it was 8 OR 24 weeks only).

There will be a simplified forgiveness application for loans under $150,000.  However, do note that this is not the rumored rubber stamp: the backup paperwork and calculations are still required.

The SBA has until January 21, 2021 to establish the guidelines for the application process.

PPP Second Draw Loans

Additional PPP monies will be available to qualifying businesses, up to loan amounts of $2 million. The business must:

  • Employ 300 or fewer employees
  • Have used or plan to use the full amount of PPP1
  • Can prove a 25 percent drop in revenue in any quarter of 2020 compared to 2019

Businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives are eligible.

In round two, borrowers may receive a loan amount of up to 2.5X the average monthly payroll costs in the one year prior to the loan or the calendar year. Businesses with NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5X average monthly payroll costs. The rules for forgiveness are the same as in round one.

Organizations not eligible for PPP2 include:

  • Businesses not in operation on Feb 15, 2020
  • Businesses that received a Shuttered Venue Operator Grant
  • Entities normally ineligible for SBA loans in general, except for nonprofits and religious organizations
  • Political organizations and lobbyists
  • Entities affiliated with entities in the People’s Republic of China
  • Registrants under the Foreign Agents Registration Act
  • Publicly traded companies

The entire program in extended to March 31, 2021.

There are also special provisions for these types of businesses:

  • Venues
  • Farmers and Ranchers
  • Housing Cooperatives
  • News Organizations
  • 501(c)(6) and Destination Marketing Organizations
  • Businesses in bankruptcy proceedings

The disclosures have also gotten stronger, with specific provisions for collection of demographic information and required disclosures for leaders in government to publicize their receipt of PPP forgiveness as well as prohibition of them receiving PPP loans in the future.

The law gives SBA a deadline to act, which varies from 10-24 days depending on the section. The next course of action for businesses that want to apply for these funds is:

  • Continue gathering your documents,
  • Make your calculations,
  • Check with your accountant if you need help,
  • Select your SBA-approved bank, and
  • Wait for both
    • The SBA guidance and
    • Your bank to open the application portal

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act starts on page 2042 of the 5593-page bill in case you want to see for yourself. And if not, know we’re here as your tax law interpreter, so feel free to reach out anytime. 

Categories: Tax Tip Tuesday

Should Your Business Become Cash-Free?

A cashless business is one that processes all cash transactions electronically. There is no paper or coin money taken or handled. While no one society has become 100 percent cashless yet, most organizations are moving in that direction.

A business can become cash-free by providing multiple electronic alternatives to payment.  Credit cards are the most common electronic payment implementation. This option most likely includes MasterCard, Visa, Discover, and American Express.  Some businesses also have a PayPal account and offer that method for payments. Vemno, owned by PayPal, is an efficient mobile alternative, but it is mostly used for consumer-to-consumer transactions. And there is also cryptocurrency. 

Cashless businesses are more efficient, help to reduce crime, and have a better audit trail of transactions. Going cash-free also saves money and time spent counting the money, storing the money, safeguarding the money, protecting employees at risk of becoming theft victims, and physically going to the bank.

On the negative side, credit card companies charge fees to merchants, although these can now be passed to the customer in most states. Electronic transactions also require a higher level of technology, and privacy is reduced. And while security is an issue, all merchants that take credit cards must comply with PCI (Payment Card Industry) security standards and sign a document each year stating so. 

If your clientele does not keep their money in a bank or if they are not able (or have chosen not) to have a credit card, you may need to rethink going cashless. About 20 percent of U.S. households are challenged when it comes to having access to checking and savings accounts. This had led to several state and local laws being passed in the U.S. prohibiting a business from going cashless. Nothing has been passed at the national level as of this writing, however the Payment Choice Act was introduced in both chambers in mid-2020. 

The pandemic has accelerated the move to cashless with the desire for contactless transactions. Several countries are leading the way to becoming cash-free as an entire country, including Sweden, Finland, Norway, China, and South Korea. Sweden’s government has been the most aggressive, claiming they will become a 100 percent cashless society by 2023.   

Is going cashless right for you? Meeting your clients’ needs is a prime consideration. At the very least, you can move to increase the percentage of electronic transactions and decrease the percentage of cash transactions when feasible.  This measure will save time and money in and of itself. 

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How to Make Estimated Tax Payments

If you are paid a salary and receive a W-2 from your employer, part of your paycheck goes to Uncle Sam as federal withholding. These are payments toward your taxes. If you earn additional income beyond your salaried income, if you are under-withheld, or if you have your own business, you may need to make estimated tax payments through the tax year.  These estimated tax payments can be made on a quarterly basis.

The general rule is that as you earn income, you should also be paying a portion in taxes. If you don’t pay in enough, you may be subject to penalties.  To avoid penalties, the amount you pay as a minimum should be the lesser of 100% (or 110% depending on your income level) of your prior year tax or 90% of your current year tax during the year.

Whether the payments are made via withholdings or estimated tax payments, the IRS expects those payments to be made evenly and consistently throughout the year. If you don’t make any payments at all throughout the year and then pay a large amount late in December, you might get an estimated tax penalty because you didn’t remit payments as you earned the income.

Exceptions are allowed if your earnings substantially fluctuate throughout the year, quarter-by-quarter. You can complete Form 2210 to help minimize any penalty if you have fluctuating income and tax payments. 

Generally, estimated tax payments become applicable when you have either Schedule C or flow-through business income or significant investment income (interest, dividends, and capital gains), because there is usually no withholding on that type of income.

To make a payment or get directions on how to make a payment, go to https://www.irs.gov/payments. Payments can be made by check (include estimated tax vouchers provided by IRS when you send them – 1040-ES forms) or online using a credit card or bank draft.

The due dates for remitting these payments are generally on the 15th of April, June, September, and January, unless one of those days is on a holiday or weekend (in which case payment would be due on the next business day).

For 2021 estimated tax payments, these dates are as follows:

  • April 15th, 2021 (1st quarter payment)
  • June 15th, 2021 (2nd quarter payment)
  • September 15th, 2021 (3rd quarter payment)
  • January 18th, 2022 (4th quarter payment)

If you have big payments due or big refunds due in April each year, then you are either paying too little or too much. Doing a good job at estimating your taxes will smooth out your payments throughout the year. If you’d like to get a projection for Tax Year 2021, feel free to reach out to us any time.

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