Business Accountant Archives | Page 2 of 13

Do You Have Trouble Paying Back Taxes? The IRS Cares! No, Really. But to a Point.

As CPAs, every year we acquire clients who need help negotiating with the IRS regarding their back taxes. This apparently seemed to be such a problem, that the IRS has actually made it a little easier to satisfy the debt. It’s called the “Fresh Start” which offers more flexible terms in paying your taxes using its Offer-in-Compromise Program. I gathered this information from the IRS Tax Tips–July 9, 2012.

An offer-in-compromise (OIC) is an agreement between a taxpayer and the IRS
that settles the taxpayer’s tax liabilities for less than the full amount owed.
An OIC is generally not accepted if the IRS believes the tax liability can be paid
in full as a lump sum or through a payment agreement. The IRS looks at the
taxpayer’s income and assets to determine the reasonable tax collection potential.

This expansion of the “Fresh Start” initiative focuses on the financial
analysis used to determine which taxpayers qualify for an OIC.

Here are the OIC changes:

Revising the calculation for a taxpayer’s future income
The IRS will now look at only one year (instead of four years) of future
income for offers paid in five or fewer months; and two years (instead of
five years) of future income for offers paid in six to 24 months. All OICs
must be paid in full within 24 months of the date the offer is accepted.
Allowing taxpayers to repay their student loans Minimum
payments on student loans guaranteed by the federal government will be
allowed for the taxpayer’s post-high school education. Proof of payment must
be provided.
When a taxpayer owes delinquent federal and state or local taxes,
and does not have the ability to fully pay the liabilities, monthly
payments to state taxing authorities may be allowed in certain
circumstances.
Standard allowances incorporate average expenses for basic necessities for
citizens in similar geographic areas. These standards are used when
evaluating installment agreement and offer-in-compromise requests. The
National Standard miscellaneous allowance has been expanded. Taxpayers can
use the allowance to cover expenses such as credit card payments and bank
fees and charges.

One thing to remember is once you start the payment plan, you cannot miss a month. To do so could result in unpleasent consequences. You must keep the communication open with the IRS. Discuss this with a tax advisor before taking any action since all situations are different.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Groupon or Deals May Not Help You if You Are Just Another Commodity

As a CPA business consultant, almost any business risks becoming a commodity. Now, when you think of commodity, you may think of oil, gold, or pork bellies. However, when we prepare business and/or strategic plans as CPA business consultants, we brand a company’s product (or service) as a commodity if they can be distinguished by price only. In other words, if your competitor can steal your customers by lowering the price of their service/product, then you are a commodity.

In reading A Smart Guide to Using Daily Deals by Denise Lee Yohn, I found her well-meaning advice missing the target. Ms Yohn states the following when a business offers a deal:

Design promotions to make your brand meaningful.
Differentiate your brand through creative promotions.
Promote value beyond a specific product or offering
Use deals as the first step to customer relationships

This advice is relatively good. As CPA business consultants, we like to project profits in our business plans based on such aggressive marketing strategies. However, one sentence in the article says a lot. “But if designed incorrectly, daily deals and other price-centered promotions can hurt your brand more than help it.”

The author described what we call a “red ocean” according to the Blue Ocean Strategy. In other words, when you differentiate your brand based on price, you are in an ocean with sharks.

The article is correct in that you can “train” your customers to buy from you based on price. In fact, it touches on Blue Ocean Strategy attributes without embracing them when the article states that customers do not look at price alone. They look at their specific needs, guarantees, free service, and quality. However, two of these still have to do with the money that will leave the customer’s pocket.

The main secret is to focus on the industry. What is the customer not getting that they need? What is the customer getting (and paying for) that can be eliminated.

Take this article for example. As CPA business consultants, we distribute this article in attempt to meet the needs of the business reader. Second, we are not a commodity because we don’t charge for the article, so price is irrelevant. Lastly, we display our expertise in the field we are writing about. Our business consulting fees may be cheaper or a little more expensive, but that is not a concern if we have displayed our value to the reader whose needs we may satisfy. In other words, if there was an additional cost to our service, we would argue that it would be greatly negated by the huge increase in value of what we are advising.

The Yohn article professes some sound advice, but as CPA business consultants, we see businesses a living creatures that can take on a life of their own, if you unleash them.

A Business Visionary Must Be Grounded, and Not in the Clouds

I don’t really buy into philosophy. Oh, don’t get me wrong, I respect it. I just don’t look to it to solve world problems or even identify them. In 1975 I was introduced to Hegel and Feuerbach and loved to ponder their quotes. However, it did nothing to help me innovate, especially in business some decades later.

The article, 8 Visionaries on How They Spot the Future by Joanna Pearlstein brought me back to those days. As I read that essay, I saw a spark of genius in some of the interviewees, but also I muttered the all annoying “hm-mm” to those comments that seemed like mental calisthenics.

What some of these “visionaries” did not allude to was the nexus between the vision and the disruptive technology that changed industries.

For instance, “vision” is the fourth step in creating a strategic plan in the 60 Minute Strategic Plan by Johnson and Smith. The first three steps are issue, assumptions, and values. In other words, according to Johnson and Smith, in order to establish a vision in strategic plan, you must first identify the issue that you are trying to solve, what you know to be true, and lastly the value proposition you are trying to convey to your customer.

For example, the IPHONE. Jobs and company must have seen an issue. That is issue was, “Can people control their music, research, communication, money, etc. in the palm of their hands? Taking music, Apple had to address the assumption that the music value chain was in the hands of the major record companies. Their vision and solution: To create a new value chain by introducing disruptive technology. Apple started to sell music, not just play it like an MP3.

Summit Performance System designed a similar process stating that “a strategic management system is a systematic process that enables an organization to establish a foundation by defining its mission, vision, and values.”

If you are an artist, a business person, or both, you must establish a foundation of what you are trying to accomplish before brainstorming with a committee of people to create a vision.

Even in Business, Leave ’em Laughing but Drive Your Point Home

My wife threw a 50th surprise birthday party for me five years ago. One of the highlights was when my three sons roasted me. My oldest son, Brandon, approached the microphone and relayed a conversation that he CLAIMED he and I had. He said, “As most of you know, I am a starving college student. So, one day I went to dad and said, ‘Dad, can I borrow some money to buy some food?’ My dad replied, ‘ Gee son, I’d really like to help but I have to buy your mother a horse.'”

That story came to me when I read Mike Michalowicz article, 6 Thinks Comedians Can Teach You About Public Speaking. The article outlines some good points about public speaking that can be even be used in many business settings, especially presentations.

1. Humbling personal stories: Don’t be arrogant, humble yourself.

2. Just say no to PowerPoint: If you have to use a PowerPoint, use it sparingly and face your audience.

3. Gesticulation: Move around and be more animated. If you stand behind a mic and recite deadpan, you may be mistaken for a Pat Paulsen reincarnation

4. Laugh-cry-laugh: Eb and flow with your talk through emotions, but always get back to your point. Don’t go off on rabbit trails.

5. No lectern: Don’t hide behind a podium. Of course, you can use it as a prop and take off your shoe and pound it like Nikita Khrushchev did at the UN back in the 1960s.

6. No notes: Now this is a tough one. I use an outline to keep myself on track, but the article said if you take you eyes off the audience, they will take their eyes off you. Use mnemonic techniques.

7. The loop-back: You’ve seen comedians do this when they bring a point back at the end that they mentioned at the beginning. But in any meeting, refer back to your point when doing a presentation.

You don’t have to be funny telling dumb jokes, but the biggest resource in any business are people. The more your act like one, the better you can address the business culture. Use these techniques in the following situations:

Teaching

Presentations

Meetings

Training

If done right, you will be happy with the results.

Are Small Business Start-ups Really Disappearing, or Just the Bad Ones?

In the 1970s I knew a guy who made a lot of money off hubcaps. He knew a guy who made a lock for the expensive Cadillac spoked-hubcaps that were being stolen. My friend invested $5,000 to help market this small business product to GM. As expected, GM refused to entertain a small business idea. So, my friend went to the auto insurance companies. The small business became an instant goldmine.

That of course is one small business success story against millions of small business failures. But are small business start ups disappearing? According to Jan Norman and US Census Bureau, they are. The studies say that the starts ups (in general) have declined from 13% of all US companies in 1980 to 11% in 2006. Companies that are less than 5 years old have decreased from 50% in the 1980s to 35% in 2006. Lastly, young companies used to account for 1 in 5 jobs. Now, 1 in 8.

Obviously, in the biggest economic downturn since the Hoover Depression, small businesses will took a big hit. Many small businesses just don’t have the capital to weather a storm. But does this mean that we are losing our entrepreneur spirit?

I would challenge the article on that point. As a CPA firm, more and more business plan opportunities are coming through our door. Entrepreneurs grace our presence with investors who want some sort of business plan or strategic plan for their new idea or small business. If you want to know more about setting yourself apart, read one of my earlier articles:Changes:Bowie Was Right, Look Out You Rock n Rollers. The article advocates the creation of smaller strategies instead of one big one.

So, are startups failing, or are new business people just choosing more carefully what they should invest their time and money into? Remember, back in the 1980s and 1990s, credit was rampant. People maxed out their credit cards and credit lines.

Now, those sources are not as available.

Don’t shy away from your dream. Strategic planning is the key word to vision, and a business plan is the necessary tool to implementing it.

Global Strategy and Italian Speeding Tickets

In 2010, our family vacationed in Paris, Italy, and London. We had a great time, especially visiting with our cousins in Italy. A few months after I got home, I received a parking ticket from Bologna, and a small speeding ticket from Rome. I never saw the parking ticket on my car during the pouring rain. In addition, contrary to my diligent efforts to drive under the speed limits (which were confusing), I possibly was picked up for speeding, driving on the wrong street, or something by a camera. I never saw the picture, but I was in Rome driving at that time. My visiting Italian friend was able to translate the ticket for me. Regardless, my wife had created a great vacation strategy.

Like vacationing, if you engage in, or plan to engage in international business transactions, it is important that you design and implement a strategy. Otherwise, many dollars, if not the whole venture, can be “lost in translation.”

With the current European slowdown, governments are finding ways to skim your profits. In Roger Russell’s article, Global governments are getting hungrier, Roger discusses the global sharing of information and how that is affecting how companies move revenue from one country to another.

Another victim of the global information sharing is the financial information sharing that the IRS is pushing. Don’t you remember the IRS obtaining Swiss Bank information? This is becoming commonplace. Businesses must find strategy experts to chart the strategic course in order to avoid double and triple taxation. If you are not one of those experts, at least know where to find help.

There is a quick fix on Tuesday, April 10. I am the local chapter President of the Association for Strategic Planning, Los Angeles. We are presenting Creating the Future from the Future. Speakers, Daniel Feiman and Ivan Rosenberg have designed strategies all over the world.

If you cannot make it, and you engage in international transactions, find a strategy expert who can navigate the waters for you.

Business Creativity and Illusion

As an Entertainment CPA, I find my clients are not short of creativity. Every year, clients retain us to create a business (and sometimes a strategic) plan for an entertainment industry venture. Usually they google Entertainment CPA, or Business Manager CPA, or Strategic Planning Entertainment CPA, and find us. However, we convince them that our role is not just as a mere number cruncher, but an integral part of developing the concept.

For example, a common prospective client is one who is trying to start a record company. Usually, it is two musicians that have not posted their first hit. One of them has parents (or potential investors) that believe in them. They want to start a record company and collaborate with other writers and performers offering them 360 degree contracts, or some variation of it.

My response to them is always the same. “So what?” They then look puzzled. I ask, “What makes you different from any other record company that is struggling to survive? Where is your Blue Ocean?” Then I proceed to give them a 3 minute explanation of Kim and Mauborgne’s Blue Ocean Strategy.

From an entertainment CPA point of view, the most troubling of the prospective clients are those who base their success on one band, one writer, or one performer. I remember one time, there were a group of people who wanted to start a record company, but it was dependent on the musical composition of only one of them. The entire business model depended on one guy(who had a tiny bit of success) writing music for potential bands. I asked the question, “What happens if he dies or gets really ill?” They didn’t hire me.

Even though many see us as entertainment CPAs or entertainment business managers, we have designed business plans for more than the entertainment industry. Strategy too, has no industry. Many of the issues are the same. For example, companies both inside and outside the entertainment industry usually make the same miscalculation, i.e., how much start up money they will need. Usually, I find that clients need 2-3 times more money than what they originally project. The reason for this is mainly the start up phase. Most are under the illusion that once they “open their doors,” they will reach operating capacity within a few months. Full capacity takes years. If you create a company with an unusually high overhead for its size, full operating capacity may not make a difference because the “monthly nut” is too high. In other words, if you hire your friends, family, and anyone else who strokes you, your company probably won’t survive. Keep it smart, keep it simple, and you may keep it past a year.

This is a wonderful time to start a business both inside and outside the entertainment industry. Fortunately, as entertainment CPAs we are not emotionally involved in the project and can offer some objective advice. But, creativity, fantasy, and ego has to take a back seat if they obscure your vision.

Taxes and a Load off Your Debt, Or is It?

Losing your home is bad enough, but paying taxes because the experience rubs salt in the wounds. Prior to 2007, there was very little relief for a debtor that had a residence debt forgiven. However, that changed in 2007. Canceled debt is normally taxable to you, but there are exceptions. One of
those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.

Here are some points I found on the IRS web site regarding the tax implications and considerations:

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions. However, I have found that some clients that have lost rental property with a high basis may have a chance of offsetting the gain with the rental’s basis.

9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home
in Box 7.

If the bank forgave your debt, do not wait until April the next year to tell your tax advisor. Sometimes, proper tax planning can help reduce the pain. Discuss your situation with a tax advisor before making any decisions.

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Business Cents: Before You Add That New Employee or Invest in that Venture…

Several years ago, a small business prospect asked me about their idea of employing a new sales person. At that time, the company’s industry was high sales with low margins. This prospect were being crowded out by the big home technology manufacturers who can work at a much higher sales volume. This company’s gross profit margin was 6%. However, to increase their market share, they wanted to hire a sales person for $60,000. I explained quickly that the sales person would have to bring in $1,000,000 of sales just to break even on the new employee’s salary. This does not count the additional costs like worker’s compensation insurance, payroll taxes, vacation pay, etc.

Now, when you add up all of the relative costs, including sick pay, you have the true cost of the employee. If you divide that by the hours it takes an employee to perform a function, you arrive at your “burden rate.”

Small businesses must do this type of analysis before strategizing to hire new bodies. Other considerations are discussed in How to figure out the actual cost of your employees by Ken Kaufman.

Kaufman’s article eludes to the burden rate per employee, but this analysis sometimes is harder to produce in manufacturer settings. For example, if you have an employee that designs multiple products, you would have to quantify the hours the employee spends on each design. That may sound easy unless that employee moves between products in one day.

This kind of analysis will be valuable to a small business in setting prices, budgeting and forecasting, and expanding. However, where small businesses handicap their information is in business plans. A venture capitalist or entrepreneur should start at the granular data of an employee’s burden rate. Once you know that, you can project the production efficiency and work your way to pricing the item based on a gross profit ratio. Lastly, you can project your units and arrive at forecasted sales.

What a small business entrepreneur will find out from this strategy is whether their pricing will be competitive in their respective market space. If not, they should know that before funding a small business.

Artists’ Futures are Truly in Their Hands

I was twenty-one in 1978 when I got my first part-time CPA accounting job while studying at UCLA. The adding machine I used had a crank…really.

Over the last year or so, I have written about apps that help business people run their businesses better. Recently, I came across Artistgrowth that literally puts “organization” in the hands of the artist, manager, and others in the music world.

The app helps you manage your schedule, gigs, and tours. In addition, it helps you and your CPA manage your finances by allowing you to photograph your receipts and attach it to a report. The app also has a portal that connects you to many different informational sources, videos, etc. that discuss such things as promotion, songwriting, and instrument repair.

The Action Packs section helps you implement the knowledge you learned in the informational sources. I thought the business plan pack was very superficial, but at least it displays the basic concept. (These packs are limited depending on your subscription level.)

Before jumping on your phone and buying it, step back and think about what you and your music business lack. The problems with apps is that they offer a whole list of bells and whistles that you may not need.

I have written several times during the last year that now is the best time in the last 100 years to start a business because of all the resources available online. This app seems to be one of those gems that a music professional can leverage. The boundaries that separated CPAs, managers, and even artists are changing. The things that one person used to be responsible for, may no longer exist. If you have the ambition and maturity, you can evolve your role to further your career and maybe save you a lot of money and grief.

I am not saying that you should replace your CPA or manager with this app. However, by assuming some of the lower level responsibilities, you can empower your CPA to provide higher level services that could multiply the financial return of this app.