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Tax Season is Here: How to Properly Get Your Finances in Order Before You File

The new year is also the start of tax season, so it’s time for your small business to get organized, file business expenses correctly, and ensure you are getting the correct refund. The details of how to accomplish this depend, in part, on how your business is organized: sole proprietorship, partnership, LLC or corporation. Yet the ways you go about calculating your taxable business income are pretty much the same however you’re organized. Here are the basic steps you’ll need to file your taxes properly.

Collect your business records: Hopefully, you have a computer and/or file drawer that is carefully organized to maintain all your raw paperwork, such as invoices, receipts, tax documents, bank statements, business diaries, etc. But we know that some folks are in the habit of piling all their papers into a heap on a desk. Well, now is the time to attack those records, get them sorted and entered onto a spreadsheet or accounting package. If you use software like Quicken or QuickBooks, you can go through your transactions, flag tax-related items and associate them with the appropriate IRS tax forms and lines. Once complete, you can then import the data into tax preparation software and it will automatically prefill many of your forms and schedules. 

Resurrect missing information: If you are somewhat disorganized, you may not have done a 100 percent perfect job of preserving your receipts. For example, you know you went on a business trip last year, but can’t seem to locate any of the receipts for travel, lodging, meals, taxis and so forth. Unless you paid for everything in cash, you can resurrect the missing information by combing through your credit card and bank statements. In fact, it’s a good idea to scour the entire 12 months of these statements to make sure you haven’t missed any deductible expenses. If you operate on a cash basis, remember that tax-related events occur when money is collected or disbursed. Accrual-based businesses must instead use the dates on which income is earned and expenses are incurred.

Find the correct forms: The IRS is pretty picky on which forms you use to file your taxes – they want you to use the right If you are a sole proprietor or run a one-person LLC, this means you’ll be getting intimate with Schedule C of Form 1040. A corporation must instead file Form 1120 separately from your personal return. Partnerships have separate forms as well. Your tax software can quickly ascertain which forms it will use to collect and report your information.

Make 401(k) payment: Your tax software will keep a running total of your refund or taxes due as you fill in the required data. If it turns out you owe the IRS money and you file on Schedule C, remember that you can fund your personal 401(k) up until the tax filing deadline and deduct the contribution from last year’s income. For 2016, that contribution can be as much as $59,000, depending on your age and income.

File on time: If you need an extension, remember that only buys you time for filing, not for paying. You still must pay what you think you owe by the April 15 deadline. Note that if you file Form 1120S as a Subchapter S corporation, the deadline is March 15. If your fiscal year doesn’t coincide with the calendar year, adjust your dates accordingly.

Should you find yourself short of cash at tax filing time, it’s good to know that IOU Financial can lend you up to $150,000 in as little as 24 hours.

Business Budget Basics: 5 Things you MUST be Doing to Ensure Success

Whether you are a startup or a seasoned company, small businesses rely on cash flow to stay in operation. Budgeting is the primary weapon a business owner has to control cash flow and predict possible shortfalls. If you want long-term success, you must maintain a budget and adjust your operations when budget tracking indicates the need to do so.

A budget that both estimates and matches expenses and revenues helps a small business forecast its cash position in the short and medium term. You need a cash forecast to ensure you can operate as planned, expand the business if the opportunity exists and verify that you can generate enough earnings to pay yourself a viable income.

What to Do

Don’t worry too much about how to do a budget. You can use an online spreadsheet, such as the IOU Financial Business Budget Smart Sheet, to make all the entries and generate reports. It’s more important to concentrate on what you must do to get the most from your budget. Here are five tips that you’ll find useful.

Check out industry standards: Every industry has its own characteristics regarding how much of your revenue you’ll have to allocate to various cost groupings. Retailing is quite different from refining, and you need to know the right numbers to use when constructing your budget. You can glean this kind of information from several sources, including the IRS website, the library, and other local business owners. You don’t have to be too precise, because small businesses tend to be volatile – what’s important here is to understand the industry averages.

Leave some slack: It’s great to budget, but it can be self-defeating if you aim for precision down to the nickel. Predictions are often unreliable and the future is uncertain. Bearing this in mind, it’s better to underestimate revenues and revenue growth relative to expenses when projecting the next three to 12 months. Better to have some extra cash on hand then to be caught short unexpectedly.

Sharpen your pencil: That’s old bookkeeper lingo for finding ways to cut costs. To do so, you’ll need to identify budgeted expenses that you can control. Fixed expenses like rent and insurance usually can’t be changed in the short run, but other items can, including non-critical maintenance, adjustments to labor usage, discretionary purchases and so forth. Remember to take advantage of your suppliers’ payment terms. In some cases, you might be able to reduce retirement plan contributions for the current year.

Review your budget frequently: Big businesses often work on an annual budget cycle. That makes sense, since their size requires a complex and time-consuming budget process. You, on the other hand, need to review your budget at least every month. A small business doesn’t have the kind of resources that the big ones use to smooth out surprises in the company’s cash flows. The more volatile your environment, the more frequently you will need to review and update your budget.

Comparison shop: It’s your responsibility to conserve your cash, and one of the best strategies is to shop around for new suppliers and service providers. There is never a bad time to do this, but the start of a new budget cycle is a natural point to comparison shop. It’s also important to do this when you are planning a change in operations.

In sum, budgeting is an essential part of running a business. A cash crunch can kill a small business, so stay ahead of the curve by tracking your budget closely and revising estimates as you gather new information. Finally, establish a relationship with a lender so that you can borrow money when you need it, whether budgeted or not.

DIY or Hire an Accountant?

Many owners of small business do their own accounting, usually with the help of a software package such as QuickBooks. This can make sense if you run a one- or few-person operation, are familiar with basic accounting, and have the time and inclination to take on the work yourself. For you DIYers out there, we recommend our IOU Financial Business Budget Smart Sheet to establish and track your budget.

For some, the question of hiring an accountant is confusing. Here are nine signs that indicate you should go ahead and hire one: 

  1. Knowledge: If you aren’t familiar with accounting terms, financial statements or report creation, you might need an accountant, at least in the beginning, to teach you what you need to know. If you don’t think you have the time to study the subject, you can keep the accountant on as long as needed.
  2. Taxes: Tax law is complicated, and one of the worst mistakes a business can make is to overpay its taxes. But even worse is to underpay and get caught, because then you’ll be hit by penalties and interest. Use an accountant if you don’t understand which deductions and tax credits to take, and/or if you don’t want to file your tax return on your own.
  3. Time: Let’s face it, bookkeeping can eat up your time and divert you from more important tasks. You need to operate the business, make staff decisions, market your offerings and troubleshoot problems. It shouldn’t be surprising that bookkeeping would be low on your priority list. You can hire a bookkeeper who knows how to do other accounting tasks – they usually charge less than full-blown accountants.
  4. Growth: Congratulations, your business is experiencing rapid growth. However, that also means you have more customers to attend to, more staff to hire, more vendors to negotiate with, and so forth. These activities require more paper pushing, number crunching and meeting time. With these management challenges, why not let an accountant lift some work off your shoulders?
  5. Profit margin: It’s nice when revenues grow, but less nice if profits don’t follow. The reason is invariably that your costs are too high. You could use an accountant with a sharp pencil to evaluate your overhead costs and suggest ways to save money. The savings could easily pay the accountant’s salary and hopefully a lot more.
  6. Investors: Have you grown to the point that you have investors? Well, they’re going to want to see professional reports that lay out the current financial condition of the business. Professional financial reports are also useful in recruiting new investors. An accountant can produce the reports you need and make them look professional – that will help keep investors happy.
  7. Expansion: If you are thinking about expanding into a new state, an accountant will help you meet the regional reporting requirements for payroll tax, income and sales. Expansion to a new state may include opening new locations, creating new distribution logistics and hiring new staff. An accountant can help you track the costs of these moves.
  8. Merger/acquisition: If you are looking to buy or sell your business, you’ll need an accountant to evaluate the entities involved and how to structure the transaction in order to minimize taxes.
  9. Audit: If the IRS has signaled that it wants to audit you, a CPA or other qualified accountant will be able to represent you to the IRS. This can help prevent you from making mistakes as well as lower your stress level. Generally, you don’t want to face the IRS on your own.

Get Your Finances Straight for 2017

With 2017 upon us, it’s an important time for taking stock of your business’ finances and setting right whatever issues are unresolved. Here are 9 tips you can execute right now to get your finances straight:

  1. Update your business plan: Several sections may need updating. What was the last time you analyzed your competitors or reevaluated your marketing plan? It’s easy to let these things slip, but important to bring them up to date. You will, of course, want to also recast your financial projections and budgets for 2017 in light of current conditions. Check out our Business Budget Smart Sheet to help you whip your budget into shape.
  2. Stay informed about health care: Donald Trump has promised to repeal Obamacare. This will have unpredictable repercussions for companies with employee health plans. It would be wise to anticipate the worst, which is health insurance costs rising substantially. On the other hand, you may no longer need to provide health insurance, which might save you a ton of money. The best advice is to stay informed.
  3. Reassess your capital structure: Do you have enough capital to fund your operation and expansion in 2017. If you plan to grow your business at the start of the year, now would be an excellent time to line up a commercial loan from IOU Financial. Our streamlined process can provide loans of up to $150,000 in as little as one business day. Whether you plan to move to bigger quarters, increase your inventory or add another shift, an IOU Financial business loan can get you ready for 2017 with the capital you need, quickly and hassle-free.
  4. Set aside contingency funds: An excellent 2017 resolution would be to earmark some of your profits for a contingency fund to handle unexpected cash crunches. A proper emergency fund should be able to keep your business afloat for three to six months. You can, of course, supplement your contingency fund with a quick loan from IOU Financial. Unlike a bank, we respond to emergencies immediately with fast funding.
  5. Review your insurance policies: You should review at least once a year your liability insurance, key-person life insurance, health insurance and so forth. The insurance market is quite dynamic, and it’s always a good idea to find out whether money-saving policies are available.
  6. Stay informed about 2017 tax changes: We already mentioned the Obamacare changes that are brewing. Mr. Trump has also promised a giant tax cut for businesses and a relaxation of regulations, all of which could have a major impact on your business finances. If necessary, confer with a tax specialist to ensure you understand the latest rules.
  7. Check the latest salary guide: Every year, several publishers put out the latest industry salary guides. See how your pay structure compares to your industry statistics – you may need to modify you pay structure if you are looking to recruit good people.
  8. Use cash accounting to advantage: Many small businesses use cash accounting, in which income is recognized at collection and expenses realized at disbursement. To lower your 2016 tax bill, prepay expenses and delay collections. This will shift some profits into tax year 2017, giving you an extra year to hold onto them, when tax rates might be lower.
  9. Evaluate your offerings: Depending on what type of business you run, it might be a good idea to look at the products and services you offer and see whether some changes are in order. If you are a merchandiser, you can look at your mix of products and eliminate the weakest performers, and/or extend your range of merchandise to new areas.

One last thing: Happy New Year from your friends at IOU Financial!

Small Business Finances 101: How to Profit

We finish this introduction to business finances by discussing the payoff for all your hard work – profit! In particular, we dive into how to use your business’ profits to get paid. Unless you’re independently wealthy, you probably need to extract profit from your company to pay your bills and live your life. Like many of the important things in life, you have options. In this case, you have to decide how to structure your business and how to tap into profit while creating the smallest tax obligation. Your particular circumstances will help determine the best type of business entity to use, and you should, of course, seek formal advice from a trusted accountant or lawyer.

Structuring Your Business

Your choice of the type of business entity to adopt will greatly influence the amount of time and work you’ll have to expend administering the business. A small business set up as a sole proprietorship is certainly easier to run than a limited liability company (LLC) or C-Corporation, but the latter give you all sorts of protections or tax breaks not otherwise available.

The five most popular business structures are:

  1. Sole proprietorship: A simple structure in which you are the sole owner of your small business. You file your taxes on your personal return, as there is no separation between you and your business. That means you have unlimited personal liability for your business’ debts, putting your personal assets are at risk. It’s also harder to get a business loan for a sole proprietorship.
  2. Partnership: This is much like a sole proprietorship, except it involves at least two owners. Once again, you file your taxes on a personal return and you have unlimited personal liability. You share the business’ profits proportionally with your partners, so it’s a good idea to ensure they are trustworthy.
  3. LLC: A separate entity that provides liability protection but not separate tax filings unless you chose to file as a corporation. It is easier to set up and run than is a C-Corp. However, it’s harder to get investors, since you can’t sell shares. Also, you can’t pay yourself a salary, although there are other ways to get money out of the LLC.
  4. S-Corp: Recognized in most states, its similar to an LLC except it can issue shares and can pay wages to shareholders while avoiding corporate taxation. The S-Corp requires more paperwork than does the LLC, and you are limited to 100 shareholders.
  5. C-Corp: A corporation is the most difficult to set up, as it requires its own set of books and separate tax filings. It’s the most professional approach to business, with limited liability and no limits on the number of shareholders. C-Corps provide many tax deductions and benefits not available elsewhere.

Extracting Money

Assuming you are running your business in order to make a profit, the question remains how to extract money from the business to pay yourself for your time and effort. Here are several options:

  1. Salary: You fill out a W-2 and pay yourself a salary, minus any withholding taxes. It’s simple, but not tax-efficient for a corporate entity.
  2. Dividend: A corporation can pay a dividend to shareholders. Any part of the dividend that is a return of capital, rather than profit, is not taxable. The IRS looks dimly on huge dividends.
  3. Shareholder loan: You can borrow money from your company, but if it’s at a below-market interest rate, you might be liable for gift or dividend taxes.
  4. Owner’s draw: Cash available only to sole proprietors or partners, this money is not taxed at the company level. The money must eventually be repaid to the company.

Clearly, the way you structure your business has profound implications for your after-tax wealth. Consult with a professional before deciding the best ways to take advantage of your business profits. If you need tools to grow profits through a maintained budget, check out our Business Budget Smart Sheet. This tool helps you stay on track so you can reach profitability sooner!

How Your Assets May Not Be Working As Hard As You Are

Why A Cash Flow Loan is Better Than Collateral for Business

Assets are the things your business owns. They include short-term ones, such as accounts receivable, cash, and inventory, and long-term ones, such as plant and equipment, intellectual property and goodwill. A business’s job is to convert assets into revenues and profits. If you are not fully leveraging your assets to help your small business grow and thrive, you could be missing out on profits.

There are two major ways that assets can be put to work by your business.

  1. Cash Flow Generation: Whether you are a merchandising company selling inventory, a manufacturer turning raw materials into finished products, or a service-oriented company relying on office space or equipment, you are using assets to generate revenue. The cash flow generated from your business assets can be put to work as the basis for obtaining a loan from an alternative lender. While banks look only at credit ratings, alternative lenders are usually much more interested in daily cash flows and lend based on healthy flows. A loan means working capital to pay down more expensive debts, purchase equipment, increase inventory purchases, expand operations, acquire a competitor or otherwise leverage your revenues so that the additional profits exceed the modest interest costs.
  2. Collateral: Another way to make your business assets work is to use them as collateral. Some lenders, often called factors, will make a loan collateralized by your fixed assets, such as plant and equipment, or backed by your accounts receivable or inventory. In an A/R loan, the factor advances you about 70 to 80 percent of the invoices it accepts, and then pays you the remainder, minus a financial fee, when the invoices are paid. This speeds up your business cycle by allowing you to purchase more inventory faster. It also relieves you of the headache of trying to collect from people or companies who are overdue. You can also sell your A/R for a fixed price to a collection agency.

Comparing the Two Methods

Both of these methods deliver capital to grow your small business, but there are advantages to cash flow generation instead of leveraging assets as collateral.

When you use assets as collateral in factoring, it puts pressure on your sales margins due to the fees you are charged when you pledge assets or the loss you take by selling assets. Also, if you sell your A/R, you could alienate your customers if they start being contacted repeatedly by a collections agency that is unknown to them.

In general, taking out a loan for cash flow generation is the better deal. Rather than tying up your main assets or, in the case of collections agencies, even selling them, you keep your business assets and maintain control. You also get a full sum of money rather than a percentage advance to use as you see fit, and you avoid the financial fees of factors. As long as you have daily cash flow and a solid plan, the profits generated from the additional inventory, expansion, or other project made possible by your loan will be a permanent gain that will let you pay down the loan comfortably. Now that’s putting your money to work!

If you’re ready to try cash flow generation, IOU Financial is a great starting point to find out what a loan can do for your business. You can work with a Small Business Loan Consultant to take you through every step of the process, and we approve 85 percent of applications we receive, including many people turned down by banks. Our base requirements are that you own at least 80 percent of the business, have been in business a year or longer, make 10 or more deposits per month, and have annual revenue of at least $100,000. To get started, give us a call at 866-217-8564.

 

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