Mistakes Small Business Owners Make That Can Cost Them…DOH…The Sequel

O.K., I lied. Two weeks ago, when I did the first part of this discussion, I said that I’d post part 2 the following week. I’m a week late, but I’ve had other things on my mind, like tax season, and keeping my clients happy. I think I have a good excuse.

Anyhow, if you recall, a couple of weeks ago, I started talking about ways that small business owners can get themselves into hot water, and how to avoid it. The following are a few more things…

1-Filing tax returns late: When tax returns are filed late, penalties and interest will be computed on any tax due. This is applicable for payroll tax returns, sales tax, income tax, pretty much any tax that can be levied. Don’t be under the wrong idea that filing an extension for any tax return will keep you safe. An extension only gives you more time to file the return itself; it’s not an extension of time to pay any tax. The late filing penalty will cost you 4 ½% per month, late payment is ½% per month, and interest is 3%. Additionally, pass-through entities (S corporations, partnerships, LLCs), while paying no tax of their own, can be assessed a penalty of $195 for each late filed K-1.

“DOH!” Just take care of filing all of your tax returns on time, and you can avoid all of these charges. It’s so easy!

2- Penalties: While I’m discussing the above, let me tell you about other penalties that you can owe, when you deviate from the straight and narrow. To name a few-failure to deposit taxes, negligence, substantial understatement, accuracy related, failure to have JayTheCPA prepare your return…April Fool’s, just kidding about the last one!

“DOH!” The point I do want to make here is that you really don’t want to mess around with tax preparation, or fall behind in tax filings. The additional charges can add up really quickly, and all of them are completely avoidable, by taking care of things timely.

3-Home office deduction: Over the years I’ve had many clients tell me that they don’t want to claim a home office deduction for their business, because they think it’s a red flag for an audit. It’s not necessarily a red flag but the rules for claiming a home office deduction are specific, in particular the rule that the area in your house/apartment must be used “regularly and exclusively” for business. What this means is that if you’ve got a desk set up in the den, which your family also uses to watch TV, or you work at the dining room table, where the family also takes meals and entertains, that’s not regular and exclusive use.

“DOH!” If your work space fits into IRS’s requirements, not only will your home office deduction save you on income tax, but it’ll save you on self-employment tax too, which is currently about 13 percent. It’s a completely legitimate deduction that should be taken, when applicable.

4-Not using a CPA: It’s my blog, and I’m allowed just a little bit of self-promotion, right? Let me start this with a statement; I don’t know much about I.T., printing, banking, law, or medicine. Or lots of other things, for that matter. I’m not qualified to do any of those. How about you; what qualifies you to be a bookkeeper/accountant/CPA/tax preparer? Probably not much, which is why you should have a CPA as part of your professional team.

“DOH!” You can pay a CPA more later, to clean up the mess that you made with your taxes or your books, or you can pay less now to have a qualified bookkeeper help you with the books, and a CPA help you with the returns. You can try to use Google to research things yourself, but do you really have the time? Can you keep up to date with tax laws? Kids, don’t try this at home!

I hope you’ve found this and the prior installment of “DOH!” moments helpful. Please pass this information along to somebody who might benefit by these sage words of wisdom, so you don’t wind up looking like this little guy, after you’ve been spanked by IRS with penalties!

The Risk of Fraud in Small Businesses

As small business owners, we wear many hats. For example, a restaurant owner can also be the procurer of supplies, chef, maitre d’, waiter, and bottle washer. One hat many small business owners tend to not wear is the bookkeeper’s, and therein lies the risk of fraud. To many, the lack of bookkeeping knowledge, hatred or fear of numbers, the need to focus on growing the business, or lack of time, drives the need for employing a bookkeeper.

In the accounting world, there’s a term called “segregation of duties”. In a nutshell, this refers to having different people do different accounting functions. For example, the person receiving customer payments isn’t also the person writing (or signing) checks. The problem in many small businesses is that they can’t afford to have an entire accounting department (such as accounts receivable, accounts payable, payroll), so all the functions are performed by the one bookkeeper. The danger here is that you’re entrusting someone with your money (i.e. your checkbook), and if that person isn’t honest, embezzlement can be the result. It’s beyond the scope of this article to get into the numerous ways a bookkeeper can “rob you blind”, but the point is that regardless of how busy the small business owner is, she/he needs to pay very close attention to what the bookkeeper is doing with deposits and payments, as it’s possible for both money coming in and money going out to be diverted. Bank statements should be reviewed for irregularities when received, blank checks should never be pre-signed, internal financial statements (such as a balance sheet and profit & loss printed from QuickBooks) should be reviewed, and payroll needs to be monitored, both for false employees and for pay rates. There are too many ways of misdirecting company funds, and the small business owner needs to be mindful of the possibilities.

I hope you’ve found this article helpful, and that it’s got you thinking. Please contact me if you have any questions, and if you know of any real life “horror stories” involving employee fraud, please leave a comment.

I Started a Nonprofit, and Now I Have to Do What??

You just formed a nonprofit organization. Congratulations on your altruism, and your chutzpah! Most people would’ve just made a donation to the charity of their choice, and considered that to be doing their part to help humanity, or the environment, or the planet, or something else. You’ve taken a step past that; a BIG step. You’re going to personally help further a cause that’s near and dear to you, and that’s beyond commendable, because you’re about to sacrifice yourself in ways that you may not have considered.

This is a brief discussion of some things that you’ve hopefully thought of, when you decided to form your nonprofit. For those of you considering starting your own nonprofit, think about these things before you take the big leap. The following issues have all arisen in discussions with clients, over the years.

I’m in business for myself?

In a word, yes! Starting a nonprofit is the same as starting your own for-profit business, except you’re using the public’s money. Until you’re large enough to have your own staff, you’re going to be the program director, development director/fundraiser, bookkeeper, and other positions, all rolled into one. Taking into consideration other ‘adult’ duties (i.e. spouse, parent, ”real job”, soccer practices, etc), when you add the responsibilities of managing a nonprofit business, you may run out of hours in a day.

I have to file what with IRS?

Just because you filed with the Virginia State Corporation Commission (SCC) to be a non-stock corporation, doesn’t mean that you’re done with the formation. When most people think of forming a ‘nonprofit’, they’re thinking of a 501(c)(3) public charity, as recognized by IRS. That doesn’t come automatically with your SCC filing. To be recognized as a public charity, Form 1023 “Application for Recognition of Exemption…” must be filed with (and approved by) IRS. The application is fairly rigorous, and is not rubber stamped, so make sure all the information is completely and accurately filled out, before submitting.

I need to be a bookkeeper too?

For us CPAs, this part is a breeze, but for the general public, maintaining accounting records can be a real drag. If you’re going to be a public charity using public funds (contributions), you will be accountable to the public as to how you used their money. By some means (yourself, a bookkeeper, etc) you will need to keep books and records of the organization’s finances, for different purposes, one of which follows, next.

I have to file what with IRS?

I know, you’ve heard that already. The issue is, filing that original application for tax exemption with IRS doesn’t fulfill your obligations to them forever. A report of one length or another must be filed with IRS annually. It can be as detailed and complicated as the Form 990 (Return of Organization Exempt From Income Tax), which is the “long form” 990, or can be the 990-EZ “short form”, or even the 990-N “e-postcard”. Which form you file is dependent on how much your gross receipts and total assets were for each tax year.

This article barely scratches the surface of things that you need to consider when you form a nonprofit organization (or think of forming one). Remember, you’ll be using other peoples’ money, and will be held to a higher standard than if you were in business for yourself. Be prepared!

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