The Importance of Establishing Written Procedures

Ensure that your documented policies and procedures encompass best practices in the following areas: 

Implementing best practices for these essential procedures can help reduce errors and enhance the prompt collection of payments. By improving the collection of outstanding invoices, you can steer clear of the need for borrowing and inject funds directly into your company’s bank account for operational needs, payroll, and other expenses.

While best practices may differ depending on the company’s type and size, there are certain key areas that remain consistent. To assist you in identifying what best practices might entail for your business, a few examples are outlined below:

Best practices for securing a sale:

• Consider requesting personal guarantees from customers, especially for high-value products or services, to safeguard against defaults on payment obligations. It is advisable to assess their financial standing and gather relevant information to determine their ability to fulfill their commitments.

  Additionally, utilizing UCC-1 filings under the Uniform Commercial Code can aid in the recovery of specific items sold if executed correctly. Seeking legal counsel may be beneficial to ensure precise and accurate filing of the necessary forms.

Best Practices for collections:

Maintaining solid credit policies and procedures can certainly streamline the collections process. However, it’s inevitable that some customers will be late with their payments. Here are some effective best practices to optimize this aspect of your business:

• Personal interaction is key – while emails or letters can be overlooked, a direct phone call can be more impactful. Encourage your collectors to pick up the phone without hesitation.
• Equipping your collectors with relevant information is crucial in addressing potential payment objections from customers. Make sure they have access to details like order history, shipment records, and up-to-date contact information.
• Efficient payment application processes play a significant role in this function. By ensuring payments are processed accurately and applied to the correct customer accounts, you can minimize unnecessary follow-up calls from the collections team.
• Maintaining thorough records is essential – a system that documents conversations with customers regarding overdue accounts enables collectors to track promises made and promptly follow up on any commitments.
• Offering various payment methods is a strategic approach. Providing collectors with multiple payment options can expedite cash flows by reducing reliance on traditional methods like mailed checks. Accepting credit cards, PayPal, ACH, and wire transfers can significantly enhance payment efficiency.

In conclusion, having well-defined policies and procedures that encompass best practices for key functions impacting cash flow is vital for the success of your business.

If you’re interested in a professional assessment of your company’s procedures and tailored guidance on implementing enhanced best practices, click the button below to schedule an appointment

The importance of reviewing your tax return before your tax preparer presses the “file” button cannot be understated. Catching potential mistakes before your return is filed can help you avoid those unwanted IRS or state tax notices and more.  This article provides four reviewing tips that even the most novice tax filer can use to make sure most common mistakes are caught before filing your tax return:

 1. Make sure you have provided all your documentation

Not reporting all your income received during the tax year is one of the most common tax return mistakes.  Some items to be sure you haven’t missed is dividend/interest income, stock sales, retirement withdrawals and social security income.

2. Ask and understand where certain items are located on your tax return to ensure accuracy

This tip is all about making sure you have verified that all income and other documentation you provided to your tax professional has been included on the return and/or analyzed to determine whether or not it can be excluded from your tax return.   If you are told that certain items had not tax impact, make sure you understand why.

3. Ask for explanations for anything you don’t understand

You are the only person ultimately responsible for your tax return.  If audited you will be the person “called on the carpet” to defend or explain anything questioned on your return.  Therefore, you have not only the right to ask questions, but the responsibility of making sure you are filing an accurate return.  Asking questions does not mean you do not trust your tax professional.  It simply means you need to understand what you are reporting to the IRS and that it is true and accurate.

4. Signature on the Return

The tax professional preparing your tax return, if being paid for this service, is required to include their information on your tax return.  Beware of the signature section stating “self-prepared.”  This means your tax professional is leaving you 100% on the hook for your tax return essentially and more than likely does not have the proper credentials needed to legally offer tax services to you.

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It is common, for businesses in the start-up phase to have a handful of high paying clients. The mistake in starting out in this is in the the owner remaining comfortable at this level.  This is frequently seen with consulting type of businesses with only a few employees, who may land one big client worth $100K or so annually in revenues.  This is great until the contract ends and you haven’t marketed for new customers to build some financial sustainability for the longterm.  This article is for any business owner who have lost one of their top customers and may be scrambling to recover. Small business owners seeking to gain new customers will also benefit from this article.

Assess the Reason for the Loss

1. What reason did the client give for not utilizing your product or service any longer? If one was not provided, ASK!
   1. Was it poor customer service?
   2. Consistent failure to meet their needs and/or expectations?
   3. A change in their needs?

The answers to these questions could uncover a misunderstanding that could either be resolved or that could bring insight helps you avoid this situation in the future.

Determine what your company could have done better and how you can implement improvements

No customer is guaranteed to be a customer for life.   To increase your customers, we recommend you seek to understand the needs of your customers on a continuous basis.  Additionally,  a regular needs assessment of your products/services will ensure your offerings meet your customers’ changing needs and helps you determine if any should be eliminated.

Determine who your target customers are 

Most often business owners use what I call the “toss the net wide” approach to gaining customers, particularly in the beginning stages of operations.  This approach seeks to bring in anyone who will give you their money in exchange for your products or services.  Once even a small change in their taste or price preference changes, this could mean no more revenue for your business.  Instead, we suggest that you have an understanding of who your BEST customer is and tailor your efforts to gaining more of these types of customers.  This way you ensure that you are aligning your offerings with your prime customers’ needs.  

Assess if your offerings are aligned properly with the right customers 

In closing, losing a top customer can be a temporary negative impact to your bottom line, if not replaced, but it can be a game changer that elevates your business if handled properly.

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One of the most important aspects of running any business, but especially a partnership, is making sure you remain tax compliant.  Tax compliance refers to meeting all the tax filing and other reporting requirements timely and completely.  If you are operating a partnership, this article will be a great quick read for getting acquainted with your tax responsibilities and knowing what talks you’ll need to have with your Certified Public Accountant.

 1. File your tax return on time

Partnership returns are generally due by the 15th day of the 3rd month following the date its tax year ended.  For most partnerships with partners who must file using a calendar year, this due date is March 15th.  There are hefty late filing penalties when this deadline is not met.  It is highly recommended that you request a tax extension if you don’t think you’ll be ready by this date.  The extension will provide six additional months to file.  However, if this extended filing due date is not met, late filing penalties will be assessed from the March 15th date.  The current late filing penalty for partnerships is $210 per month/per partner, not to exceed twelve months.  So, if you are two months late and there are three partners in your partnership, the total late filing penalty that would be assessed is $1,260 ($210 x 3 x 2).

2. Keep good records

Performing bookkeeping on a regular basis throughout the year greatly helps in meeting important deadlines.  Good record-keeping also ensures you are filing a complete and most accurate tax return which is important because the IRS can assess a penalty for incomplete filings as well.

3. Create a partnership agreement that aligns with your partnership’s taxing structure

The partnership agreement is an important tool that the IRS uses to help understand your partnership’s intentions when it comes to certain tax laws.  Therefore, you should work with your CPA or tax professional, as well as your attorney, to ensure your partnership agreement clearly outlines how the partners will share in the income and expenses of the partnership, how the overall cost basis of each partner’s interest will be calculated, the reimbursement policy for ordinary and necessary expenses incurred by partners, and more.

4. Understand your tax filing requirements

Not all partnerships are responsible for filing a Form 1065.  For instance, there are special rules for a husband and wife only partnership that, if eligible, allows you to file your partnership’s income and expenses on a married filing joint tax return.  Additionally, there are circumstances where you could be under the impression that you don’t truly have a partnership and therefore not file a required tax return which could mean big tax problems for you.  Partnerships are complex and require an expert CPA or tax advisor who understands partnership taxation that you can work with to receive the necessary guidance for staying tax compliant and avoiding costly mistakes.

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Capital gains is the income made from selling capital assets, including real estate, for more than their basis.  If you are a homeowner looking to sell your home during these peak real estate times, what does this mean for you and your taxes? 

This is a question that many are asking, but is often misunderstood.

 Myth 1:

I won’t have to pay capital gains tax on the sale of my home because gain is not recognized on the sale of a primary residence.

Reality 1:

So, you sold your home for more than you paid for it- this is good news! The downside to this is that you have a capital gain, and you might have to pay a capital gains tax. Each individual may be eligible for a $250,000 tax free exemption on capital gains from a primary residence, but anything over this threshold will be taxable.

Myth 2:

I am selling one of my homes- I will automatically receive a $250k exemption on my capital gains.

Reality 2:

Not every individual will qualify for the $250,000 exemption when they sell their home. In order to meet the eligibility requirements, you must answer yes to the following questions:

• Have you owned the home for at least 24 months out of the last 5 years?
• Have you used your home as your primary residence for at least 24 months of the previous 5 years?
• Is this the only home that you have sold in the past 2 years where you have taken this exclusion?

If you are selling a home that has not not been used as your primary residence for at least 24 months of the previous 5 years, you will not qualify for the full amount of the exemption, or any depending upon the facts and circumstances..

Myth 3:

Even if you fail to meet the eligibility requirements for the exemption, you may be eligible for a partial exclusion for capital gains tax. The IRS states that “You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.” Click here to see Publication 523 for more details.

Myth 4:

I just got married- we can now sell my house and receive a $500,000 exclusion from capital gains.

Reality 4:

It is true that once married, a couple becomes eligible for a $500,000 exemption on their capital gains, but specific requirements apply. In order to qualify, only one spouse needs to claim ownership of the home, but both spouses must have:

• lived in the home for at least two of the past five years.
• Not taken this exclusion in the past two years.

If one spouse has not lived in the home or has already taken the exclusion in the previous 2 years, they will not be eligible for the full 500,000 exclusion.

Myth 5: 

My spouse and I bought a house for $200,000 and now we are selling it for $750,000, so that is $550,000 of capital gain, and this is $50,000 over the threshold of our exclusion.

Reality 5: 

Many people are under the misconception that their gain on the sale of their home will simply equal the profit they receive on the sale. Usually, the capital gain calculation on the sale of your home is not this simple- and this can be for your benefit. 

Capital gain is calculated by taking your home’s selling price and deducting any selling and closing costs.  You would then deduct the cost basis of your home. The basis of your home does not just include the purchase price, but also costs of capital improvements that you made (e.g. the new roof you added in prior years, new plumbing, or the new remodeling of the bathroom, etc.). This means that any cost contributed to the value that you put into your home can be added to your basis and ultimately deducted from the selling price- resulting in a lower amount of capital gain income.

Let’s say that in this example, you and your spouse bought a house for $200,000 and sold it for $750,000, but you paid the broker $15,000, spent $30,000 on home improvements, and spent $5,000 on getting the home ready for sale. These costs combined with the $500,000 exclusion would mean that you wouldn’t have to pay tax on any capital gains made on the sale of your home. Much better, right?

In summary, the best way to know with certainty, whether or not you will have a capital gains tax on profits made from the sale of your primary residence and your IRS reporting requirements are to work with your tax professional.

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Your ability to prove whether or not you have a business can greatly impact the deductions you’re able to take on your tax return for expenses you incur in carrying out your activities.  In this article we discuss a few of the factors the IRS considers when determining if you have a business or a hobby.  There is no easy line that can be drawn in making such a determination, which is why a multitude of factors are considered.

 1. Do you have the knowledge to carry out the activity as a successful business?

You’ll have an easier time showing you’re capable of making your business a successful venture if you are licensed or certified in your line industry and/or have experience in your line of work. Additionally, being able show you are working with a professional like a CPA for expert guidance in your business helps to show it’s more than a hobby.

2. Losses are usual in the start-up phase for your type of business or are due to circumstances beyond your control. 

Not all businesses incur losses during their first years.  Businesses that do not require large investments in equipment to get started, for instance, would be more likely to be profitable in the first year versus a company who does.  You can show an understanding your industry and an anticipation of early stage losses by having a business plan.  Losses could be due to circumstances beyond your control.  A great example of this would be the overall effect the recent Pandemic had on millions of businesses across the world.

3. You’ve made changes in your methods of operations to improve profitability.

Creating new strategies in the face of failure of a particular product or service is necessary for success.  Strategic planning is not usually engaged in when an activity is a hobby.

4. Assess if the activity has made a profit in some years and if so how much. 

5. Is there enough income from other sources to fund the activity?

If you are taking large losses for “business” activities, be aware that such deductions often come under scrutiny.  For instance, red flags can be raised when these losses greatly exceed the income shown on your tax return.  If you don’t have income, you should be able to  show a loan, gift or inheritance or other source of funds was used to invest in your activity.