Bookkeeping

Will the Loss of the Business Entertainment Deduction Affect Business Decisions?

One of the material changes made to the tax code resultant of the 2018 tax reform is that the business entertainment deduction has been suspended until 2026. It’s not just large enterprises that are affected by this law, but also small businesses, freelancers, solopreneurs, and other self-employed individuals who may now be changing their plans and budgets depending on how integral this deduction was to their operations. While company funds can still be used to cover these expenses, they are just no longer deductible.

Since the tax code intends to influence behavior, the significant overhaul to the business entertainment deduction could spell some interesting outcomes for business decision-making. Here’s a detailed explanation of how the law changed and what behavioral shifts could ensue.

Offsite Entertainment No Longer Deductible

If you’re taking a prospect or client out to a ball game, concert, or other event it’s unfortunately not deductible anymore. The same also goes for other offsite entertainment such as facility rental for parties and other activities deemed primarily for recreation. It also applies to memberships and season tickets at recreational facilities. This provision has small business owners, freelancers, and their advocates worried since the elimination of tax savings on these expenses will hurt them. They rely on these events to develop closer relationships with prospects and clients given that fully-deductible traditional advertising is more effective for established and/or larger businesses.

A possible work-around for entrepreneurial types is to host parties that have more promotional than recreational elements present. Events purely for marketing purposes, like getting a booth at a trade show, are still fully deductible. If your business hosts a party that prominently features your branding and has some kind of presentation or professional networking aspects that are front and center with the recreational portion being more incidental, you may be able to work around the death of the business entertainment deduction.

The Meals Deduction Remains

There is currently a lot of confusion regarding business meals in light of this law change. Entertaining clients by taking them out for a meal or just brainstorming over a cup of coffee is still deductible, as are meal expenses for eligible business travel. Both are still subject to the 50% limit with the only exception being for meals that are a significant part of your line of work such as a chef or food blogger. But if you’re taking your client out to dinner and a show, only the dinner portion is deductible.

Then for businesses that have employees and a physical workplace, the provisions for providing meals to employees aren’t as generous as they were. Prior to 2018, employers could deduct 100% of the cost of meals furnished to employees as a de minimis benefit. This means that the meals were provided for the employer’s convenience, such as giving employees free dinner for working late using a corporate meal delivery account, to get de minimis treatment. The deduction remains but is now subject to a 50% limit just like the standard business meals and entertainment deductions have been for most taxpayers. However, after 2025, de minimis benefits for employer-provided meals intended for their convenience will no longer be deductible.

This law change is probably not going to make most employers immediately stop making employees work later or stay on the premises during lunch break. But for Silicon Valley type environments where lavish cafeterias are a major draw for talent, it could definitely give these employees less incentive to work later or stay on the premises for lunch if employers stop providing them meals. A healthier work-life balance could result over time if there’s no incentive for employers to provide this benefit and employees need to pay out of pocket for meals now.

Office Holiday Parties and Entertainment on the Premises

This is the only type of entertainment that survived the 2018 tax reform. Whether you’re a Fortune 100 company or solopreneur holding a party for your clients and colleagues, entertainment off the premises is no longer deductible. But if you’re hosting a party for your employees at the workplace, it’s actually 100% deductible. The party doesn’t need to specifically be for holidays: it can be for retirement, birthdays, celebrating a strong sales quarter, or making new hires feel welcome. But in order to be deductible, the party needs to be held at the workplace and not offsite like a restaurant or other external venue.

Because this is the only surviving portion of the business entertainment deduction, employee morale could face a downturn if they feel like they never get to leave the workplace. However, event planners and other party professionals may also see a budding opportunity in making parties come to the workplace instead of hosting corporate events at the venues they’re affiliated with. With the reduction of the corporate meals deduction for employees and the entertainment deduction otherwise being eliminated, office parties being the only deductible form of entertainment will affect corporate catering budgets. With less incentive to provide meals on the premises or arrange for offsite parties at restaurants, budgets are likely to be cut. But given that the deduction for parties intended for employees at the workplace  is also not limited to 50% of the costs, there’s definitely more incentive to go all out for office parties now with the best food, decor, and entertainment although this definitely leaves out smaller employers who lack the proper facilities for this type of hosting.

Given the costly audits and frequent misuse and abuse of the meals and entertainment deductions, it makes sense that Congress culled it as a cost savings measure. Not all of the behaviors associated with the business entertainment and meals deductions are necessarily going to go away overnight given how conducive they are to business. But one can expect to see entertainment budgets reduced and some events canceled or modified.

Retail Accounting: Are your shipping costs too high?

The advent of online shopping has completely turned standard retail practices on its head. Stores that have thrived for decades have been forced to start selling their goods online and compete on the global marketplace. One challenge that many retail owners struggle with is how to charge the right amount for shipping without scaring away the consumer. Are your shipping costs too high?

What really costs so much to ship goods

While many owners likely already know what makes shipping so expensive, I want to list the items here to distinguish them later and identify which ones we can cut back on to save money. In no particular order:

  • Vendor: Who you choose directly affects your rate. USPS costs less than FedEx or UPS but you sacrifice on customer service, speed, tracking and other options.
  • Ship to/from location: Where your customer is located relative to you is a major factor in shipping costs. Most consumers don’t keep this in mind when shopping online.
  • Speed: How soon the customer wants it is another major factor, as all vendors charge more for faster shipments.
  • Packaging: This is a cost retail owners incur and is mostly “silent” in nature–consumers don’t understand how much that cardboard box and those packing peanuts really cost.
  • Value of product (insurance): If you’re shipping anything of value then insurance is a must have.

So now that we listed them, which items should retail owners skimp on? There is nothing the shop owners can do about the location of themselves or their customers nor should they reduce any insurance purchased on the item. Without insurance the owners are forced to eat the cost of the product by shipping a new one to the buyer. Why do that when you can get insurance and pass on the charge?

The easiest method for retail owners to drive down shipping costs is to buy packaging in bulk. Storage could be an issue but for retailers that spend thousands each year to ship their goods must try to bring down the cost of packaging every way they can.

That leaves two options: Vendor and Speed. My advice here is to let your consumer decide who they want to send them the package and how fast they want to get it there. There is no reason to send an item via 3 day shipping at an extra cost if the buyer doesn’t need to have it right away. Many consumers can care less that UPS vs FedEx delivered their package as long as it saved them a couple bucks.

It takes extra work on your part to know the different rates for different speeds per vendor but if you find that one shipping company always is less over another then remove the more expensive option from you list. Sounds simple right? You would be surprised about the lack of research retailers do on shipping products across the country and if you’re not constantly trying to save your consumers money then guess what… someone else will!

How To Determine If You’re Charging Enough for Shipping

Most consumers don’t realize that the amount they pay for shipping isn’t dollar for dollar what actually goes into the cost of shipping the product. In fact, its at best a guess to what the retailer thinks the item will take to ship the item to the consumer’s local given the zip code. Sometimes it costs the retailer less than they charged and sometimes more. With enough volume this should even out but sometimes it doesn’t… and sometimes it doesn’t by a significant margin.

The first step you will want to take is to separate out your shipping revenue from your other sales. Your POS software will do this for you so that is likely already being done. Second, you’ll want to use the default Postage & Shipping expense account in QuickBooks to track the expenses you incur to ship your product. These numbers will not even out every month as the expenses you incur in one month will be used to ship the products in another.

Look at the moving average of expenses over the past 3, 6 and 12 months and compare that to the moving average of the shipping revenue received. Notice something off? If you’re constantly paying more for shipping than you’re bringing in every month then you know you are not charging your customers enough for shipping. Divide the net difference over that time period by the total packages you shipped–so if over a 12 month period you’re off by $100/month and you ship 100 items/month, then you should increase the cost of shipping to each of your customers by $1.

You will not want to raise prices significantly or too quickly as doing so could cause a negative reaction from your customers. Start with $1/shipment and see what happens over the next several months and hopefully the cost curve starts to bend down in your favor.

Your Customers Don’t Like To Pay For Shipping

Here is something you’ll already know: Your customers hate to pay for shipping. Don’t you? I know I do. Want to offer free shipping for your customers without having it break your bank? Force them to buy more! As a consumer, I would much rather spend $10 in products to get free shipping than spend $10 on shipping. Fortunately for you the cost to ship a product most likely does not increase at the same rate that consumers spend money.

To come up with a free shipping scenario, calculate the average purchase dollar amount your customers make and then go above that amount to offer free shipping once you account for your margin. For example: If an average customer of yours will purchase $50 worth of items with a 50% markup and it would normally cost $10 to ship those items, then offer free shipping on purchases of $75 or more. Your customers think they will be getting a deal by not paying for shipping, you’ll have broken even on the extra shipping costs and everyone will be happy!

Uniqueness of Product

Finally, don’t let the era of free shipping persuade you to take actions you don’t have to take. Retailers with a unique product don’t have to worry about losing customers due to increased shipping costs–your customers have no other option to get what they want. In that case charge what you must to recoup your shipping expenses and don’t let your customers dictate your reduced margin.

An example: I recently had to purchase a replacement piece to repair our dishwasher at home. The piece itself cost $2.50 and I couldn’t find it anywhere else but one place online. The cost to ship the product to me was $7.50; frankly they could have put the piece in a standard envelope with a stamp and I wouldn’t have minded. I was forced to pay the full $10 on a $2.50 part because I had no other option if I didn’t want to go out and buy a new dishwasher.

If you have a product your customers both need and want and you’re the only place they can get it… you win.

Final Thoughts

As a consumer, we all hate paying for things we don’t have to pay for–shipping is one of those items. Make your customer feel like you’re doing everything in your power to reduce their cost and they will reward you with more sales.

If you need help calculating your shipping costs or with any other retail tax or bookkeeping questions then contact us for a free consultation.

The 3 Stages Of Filing Small Business Taxes

For accountants, this is the time of year for reflection. We’re passed all of the filing deadlines and we have about 6-8 weeks until we start to hound our clients about W9 Forms and 1099s. I remind each of my clients about 10x per year about W9 forms and I’m hoping for an easy season. I also do this because it fits neatly into Stage 1 of 3 when it comes to filing small business tax returns.

You see filing correct small business tax returns is a lot more than entering in data from a spreadsheet or accounting software and into advanced tax software. Small business owners and tax accountants both must put in hour after hour of organization just to get the data the way they want before it even goes near the tax software (the first stage). Once the data is nice and neat then we can start entering in the data and filing the return (stage two). Finally, organization plays a big role in stage 3 as tax accountants have to be prepared to back up their determinations when representing clients before the IRS.

To make it nice and neat, the 3 Stages of Filing Small Business Taxes are:

      Stage One: Getting your bookkeeping in order and maintaining it monthly
      Stage Two: Preparing your tax return correctly
      Stage Three: Representing you in front of the IRS in case of an audit

In fairness, each of these 3 stages can and should be broken down into 100 smaller steps. What makes working on each stage easier is if you keep all 3 stages in mind each stage of the way.

For example:

You went to lunch with a potential new client and you picked up the $100 meal tab at the hot new restaurant in town (it was delicious by the way). Do you know how this effects all 3 stages?

Stage One: This expense should obviously go into a Meals and Entertainment Expense (50%) category. I like to put 50% at the end of the expense for my own benefit or for the future tax accountant so there is no confusion (Not all meals go into the 50% category… do you know which don’t?). Make sure you write the name of the person you had lunch with, their company and what you discussed at the meal.

Stage 2: The expense goes into the Meals and Entertainment Expense (50%) on the corresponding Schedule C, 1065 or 1120/1120s. Stage 3: If you get audited you have sufficient documentation to back up the expense. Keep this receipt with your other tax documents for the year.

What are some other ways you can make your life easier come tax time? Here are just a few:

  • Reconcile your bank and credit cards on a monthly basis. Hire a professional bookkeeper to help out and you’ll save prep time from your (much more expensive) tax preparer. Additionally, some tax preparers provide discounted monthly bookkeeping fees if they also prepare the tax return. Do I? Yes!
  • Keep your records organized throughout the year. If you have a lot of receipts, keep them in separate folders organized by month or by statement. Use staples over paper clips as they will help you maintain all of your records without potential slip-ups.
  • Write the date paid, date mailed and check number to any and all invoices. This allows you to keep track of who hasn’t been paid and you’ll know for easy reference if you’ve mailed that pesky vendor who keeps calling about whether you’ve mailed his check or not.

These all seem like pretty simple and easy to do tasks and in fact they are. But so many small business owners just keep their receipts in a shoe box, grocery bag or, worst of all, nowhere (aka everywhere). Use your smartphone and the latest technology to your advantage–take a photo and upload quickly and easily to Google Drive or Dropbox (they’re free!). Organize by month and rename the receipt to the day it was taken (vendor name would be nice too but I’ll take what I can get) and you’re good to go.

And look, if you ever need any help working on any of the organization above, please contact us to set up a free consultation. We can help you organize your office so that you’re spending less time dealing with receipts and more time making money (or having fun, whichever is your goal).

An Easy Way For Small Business Owners To Save Money

Most small business owners already have a credit card they use for multiple transactions a month but if you don’t it could be costing you hundreds of dollars a year. Even if you already use a credit card you might not be using it to your greatest benefit! In this article I am going to discuss how you will have more money in your pocket each year by paying your vendors on your credit cards.

If you currently pay all of your vendors by check or debit card when you can be paying them by credit card you’re throwing money away.

Extra Cashback

The benefit that likely already has come to your mind is the extra cash back, points, or miles you would receive from your credit card from the extra charges. Don’t underestimate how paying an extra $1000 a month on your credit card over a check can help your bottom line. At $12,000 a year on a 2% cash back rewards card that relates to $240 in missed cash.

In addition, with the extra purchases on your credit card, upgrading to a higher cash back for a set yearly fee could become profitable. You can find many credit cards that offer 1% cash back on all purchases without a yearly fee, but 2% cash back if you’re willing to pay a $60 yearly fee (Capital One’s Spark comes to mind). This becomes an easy upgrade decision with the extra purchases on your card and it usually comes with a higher credit limit. Not only would you be able to double your rewards on your current purchases, it would come at no cost to you because of the additional payments!

Reduced Filing Expenses

Every year, business owners are required to file 1099-Misc forms for combined payments made to all unincorporated vendors over $600–with a few exceptions. One of the exceptions is that payments made via Credit Card or Paypal do not have to be reported each year–the credit card company and Paypal are required to do that work on your behalf. However, you are required to still file 1099-Misc forms for Debit Card and any other payments taken directly from your bank account.

The cost of filing 1099-Misc forms comes out to around $5/person if you use the QuickBooks filing options. This doesn’t include the cost of labor to prepare/verify these forms, the cost of printing and mailing the forms to your vendors and contractors or the time it takes for you to gather each individual’s W9 form.

On that note, don’t let your busy schedule prevent you from getting W9 forms throughout the year before you pay vendors. If your vendor refuses to fill out the form then you are required to withhold 28% of their pay. Failure to do so on your end could make you liable for their unpaid taxes.

Use Intuit Payment Network or Paypal To Pay By Credit Card

Before sending a check or paying by Debit Card, ask your vendor if he accepts payment by Paypal or Credit Card. If he uses QuickBooks, perhaps he has an account on the Intuit Payment Network (IPN); sometimes there will be a link to pay on the invoice. Definitely use either Paypal or the IPN if you have that opportunity as both will let you pay by credit card.

Drawback: Negative Vendor Feedback

In the cases where you can use your credit card, your vendors may not be as happy as you are. For starters, they will undoubtedly receive less than their invoice–the amount the credit card processor or Paypal charges to send the payment. This could be up to 3% of the total transaction and is the reason why some vendors stipulate that they will charge an additional fee if payment is made by credit card. If you have a vendor that has those terms, then do not use a credit card as the extra cost to the vendor is not worth the future savings from using the card.

Most vendors on the other hand (including us), price the credit card processing fees into their rates and consider it a cost of business. We benefit from knowing that you paid your bill on time and the fact that we don’t have to wait 60 days to receive a check. We also don’t have to drive to the bank to cash it and then wait for it to clear before using it. This doesn’t include the extra headache that is created when a check bounces.

For businesses that only receive a few checks a month we recognize the cost of the payment processor actually saves us time each month–time that could be spent working on clients.

If you would like more information on how you can save money as a small business owner or you are interested in any of the other services that we provide, please contact us!

Welcome to Lipsey and Associates

Welcome to Lipsey and Associates! Formerly Jeff Lipsey Bookkeeping, LLC we’ve recently changed the name to reflect how much more we can do for your business than just bookkeeping. Over the past several months we’ve worked hard to also include:

-Business Development and Consulting
-Tax Representation
-Tax Preparation

The new name also reflects our ability to connect with other local professionals to help meet your needs.

Other than a name change, however, it is business as usual around the office. We are still using our old email address but we prefer you upgrade to the new one as soon as possible.

So with that welcome and wish us success going forward!

Restaurants: An Industry Where Percentages Matter

Restaurants: An Industry Where Percentages MatterIn a conversation with a new contact last week, we discussed that in new businesses, trying to set “ideal” percentages is pretty much meaningless. In one industry where that is not the case however is the restaurant industry.

If you check my Linked-In and About Me pages, you’ll notice I mention I was both a manager and then general manager of a local successful restaurant. About halfway into my stay at the company, the owners made a shift to focus on the “best” percentages–and the results were phenomenal.

If you are getting ready to open a restaurant then a focus on Fixed Costs (Rent, Utilities, Permits, etc) as a percentage of potential sales (10-15%) is important. Restaurants with low fixed costs are able to charge a lower base price for all meals than their competitors while also maintaining profitability. In my opinion, there are 3 major percentages (cost/sales) that already-established restaurants should focus on to increase profitability: Food Cost (25-30%), Labor Cost (25-30%), and Variable Costs (10-15%).

In a restaurant with gross sales of $100,000 a month (a small to mid-size restaurant), a 1% reduction in costs is an extra $12,000 of profit each year.

Variable Costs

These expenses are not glamorous to think about but every restaurant must go through. They involve: Reducing paper usage, limiting your linens expenses and choosing the right cleaning products. When I read an article about a NY Restaurant with Zero Waste I am breath taken–their variable costs percentages must be phenomenal!

In the end, the best way to reduce these expenses is to remain vigilant with your staff, constantly search for savings with your vendors and install the most efficient fixtures that you can afford. As a restaurant owner, I would estimate your variable costs should be around 15% of your sales.

Labor Cost

Restaurants and the cost of their labor will likely always be a contentious issue. I never could just look at the labor cost as a figure of dollars and cents because for every $1 of labor you cut, you essentially reducing the salary of one of your workers by $1. Restaurant owners cite high labor cost as a main reason to not pay their employees more, when it is typically the lowest paid workers who are doing the most strenuous of tasks.

On the other hand, it is very important for owners and managers to make sure their workforce is efficient. Restaurant owners must be willing to adequately train their staff and treat them with the respect they deserve. Your staff has just as much power to influence your sales as your menu, so if you treat them well they will return the favor by selling more to your current clientele.

Don’t be afraid to pay your employees well and expect a lot out of them. Instituting and maintaining a well-paid and well-rested staff will reduce employee turnover and create goodwill with your customers.

What do I mean by well paid and well rested? Don’t pay minimum wage and make sure your wages are above average for your area. Give your employees sick days and vacation days, even if they’re only in small amounts.

As a restaurant owner, you should expect to pay around 25-30% of sales in labor costs. If you’re too low and you’re still unprofitable then expect to reduce costs in other areas; if you’re too high then wait to see if we have to raise prices then redetermine. The last thing you want to do is lay off or reduce hours, but if you notice an inefficiency then don’t be afraid to act either.

Food Cost

Every restaurant can improve their food cost percentage even if you think your restaurant already does pretty well. The first step in reducing your food costs is to determine exactly how much each item on the menu costs to make per unit. It is not an easy task to find out exactly how much each item costs but that is the only way to really reduce your food costs significantly (you have to know what your costs are first before you can change anything). If you have different portion sizes and prices for lunch and dinner then you should have separate numbers for each.

When you break down the cost of each item, keep a spreadsheet with the ingredient, portion size, and cost per ingredient for every one of your items on the menu from appetizers, main courses and yes, even drinks (especially alcoholic drinks). Then add up the cost of each menu item and then factor in a waste percentage of 10% (multiply the cost by 1.1)–this way you can account for all the times you mess up an order and have to remake it. If your error rate is less than 10% then awesome as that will only increase your profitability but it is best to error on the side of caution when setting your prices.

The next step is to divide the new cost by the price of the item on your menu; in an ideal world your percentage would be 30% or lower if you’re not a fast-food franchise. Create a new menu with your prices compared to the food cost percentage. You will probably be surprised that some items you’re selling on the menu you are making a lot of money on (food cost of 20%) and others not so much (food cost of 40% or more).

If you’re really good at tracking your sales, you can see how often each item on your menu is ordered; customers are not dumb and they know when they are getting a great deal compared to when a menu item is too highly priced. The goal is to have the average of all items to be 30% or lower so don’t go raising your prices… yet. Look at your higher food cost items to see what is the cost driver: Is it waste? Is it delivery cost? Expensive item? Before raising your prices find out if it makes sense to change the dish to make it less expensive without sacrificing the quality.

I have three examples where I significantly reduced food cost percentages while at the restaurant and I did so by 1) raising prices, 2) reducing waste and 3) reducing delivery charges.

1) Raising Prices – We were always hesitant about raising prices, as we were already viewed at having expensive (yet high quality) food for our area. There was one item I was adamant about raising prices on and that was one of our fish options. We dealt with a lot of seafood and many consumers can’t tell the difference between them (one of the many reasons seafood fraud is so rampant today), so they would typically go for the item with the lowest price. Unfortunately, this was also our lowest-margin fish option so every time they chose this item we lost money (compared to if they ordered something else). When changing prices, never raise the price of the most expensive dish (of a comparable nature) on the menu and never lower a price below the least expensive dish on the menu–but feel free to move around in between. Consumers might notice that you raised a price on one dish by as much as 15%, but as long as you kept the other prices the same they are likely to forgive you; that is exactly what happened in our case.

What happened was the demand for that dish did reduce so we only saw a minor increase in sales from the increase in price. However, the cost/dish was now below 30% and the individuals who found it too expensive to purchase that dish went on instead to purchase other, more higher-margin items, on our menu. It didn’t matter which option they chose, we were guaranteed to make our money on it.

Note: Raising your highest-priced dish even higher is how you can alienate your customers.

2) Reducing Waste – Bars and restaurants who serve fries at their restaurants literally sell them by the ton on a monthly basis. Most bars buy them pre-packaged and frozen, so their waste is already quite low (that is also why most fries taste the same). For the restaurants who still take the time each day to peel each potato by hand (a worthwhile investment), be mindful of both the size of the potato and how they are peeled. I have an excellent example on this: One of my first changes as a GM was I changed the way our workers peeled the potatoes.

What seems now like an obviously bad practice, the cooks used to peel potatoes using paring knifes. The reason? Our potatoes were pretty massive, weighing nearly a pound each and frankly they could cut through 2 to 3 times as many potatoes in the same amount of time than if they used a potato peeler. At this point I did an experiment: Use potato peelers for a week to see how much we save on waste from cutting potatoes.

The result? The cooks cut as much as 35% fewer potatoes while not taking that much longer each morning. In fact, I calculated I could have hired an additional employee to cut potatoes all day every day and it would still have saved money from the old method. Food costs were significantly reduced on a magnitude of $10,000 or more each year just from that one change alone.

3) Delivery Method – This was probably my most difficult change that I made and it involved getting two of our vendors to work together. We purchased a lot of fish every day and all of it fresh. We wanted to use the most sustainable fish we could, which involved us paying over $1.20/pound of overnight shipping using FedEx from the North Atlantic coast. Our vendor would cut up and package our fish and put it on the truck for overnight delivery. No offense to FedEx here, but that is not how food should arrive at a restaurant kitchen!

We used a couple of different vendors to get our fish, and they all worked out of the same area and drove the same routes every day. Even though these guys were competitors they all knew each other and worked well with each other, and that is how we were able to reduce our food costs. Every night, the vendor that packed the boxes for overnight delivery instead put them on a freight train to take them half way down the coast. Our other vendor, which frequented the same area, would then pick up the fish from the train and deliver the fish to our door.

The result: While we were paying $1.20/pound to FedEx every day, we instead paid the freight train $0.15/pound, we paid our first vendor an additional $0.35/pound for their trouble, and an additional $0.25/pound to the second vendor. So everyone involved increased profitability (sorry FedEx) for a total savings of $0.50/pound (about 3% on that dish alone). That doesn’t sound like a lot but when you sell thousands of pounds of fish each year, those savings are pure profit

Conclusion

You’ve made it with me this far so you will see that I have estimated return of sales for the owner of between 10-15%. Many restaurant owners and shareholders strive for 20% of sales for profit which is an excellent goal.

It does take effort to come up with solutions to reduce costs but the changes you make will add up to a lot of money when you have a lot of volume over the period of several years. But the first step in making these changes is to find out what your exact percentages are and then identifying where you need to improve. If you could save $100,000 over a 10 year period by making a few changes now, why wouldn’t you?

Why It Doesn’t Make Sense To Do Your Own Payroll

Payroll Can Be A Big Weight!Are you ready to hire your first employee? Maybe you already have a few employees on your payroll but you’re thinking of bringing the operation in house to save money each month. I’m here to tell you that you may be better served to keep it out of your hands.

Most small business owners cite cost as the biggest reason to bring payroll back under your roof rather than keeping it with one of the many payroll providers that exist. Starting at around $50/month, the costs can add up quickly over the course of the year but before you switch consider what those costs pay for. Below are just some of the options that some payroll operators provide to assist your needs:

  1. Monthly and quarterly payroll returns
  2. Cutting and mailing paychecks, as well as tracking and paying any payroll “trust fund” expenses
  3. Managing your retirement accounts, health care, vacation, sick days
  4. Paying 1099 Vendors
  5. Filing W2s each year
  6. And dozens more features!

So how much is too much for a payroll service? It depends on your business structure and the number of employees. Keep in mind that just #1 above will easily take you about an hour (or more) of your time each month, depending on how familiar you are with your state’s filing requirements. If you’re an employer in the DC metro area then it absolutely makes sense to go the payroll provider route because they keep track all of your employees’ residences and the filing requirements in each state.

There are many payroll providers in the DC metro area and most of them are pretty similar, give or take a few features. When searching, I’d look for the following features:

  • Automatic payroll form submission
  • Direct deposit and automated payments
  • Trust fund, health care, and retirement account set-up

I’m definitely a numbers guy and, when you start to think about the cost of each check, envelope, stamp and transaction fee in addition to the hourly time dump that comes with filing payroll returns, it is a no-brainer to have someone else handle those payroll returns for you.

QuickBooks Online users looking for more hands-on control should look at the Intuit Payroll options that connect directly to their online account. You’ve got to set it up initially yourself but once you’ve set it up all it takes is a click of the button each pay period to get your checks out. The handy reminders each period to pay your employees are big help too! Intuit has several payroll options but I prefer the Intuit Payroll Full Service produce for the most benefit, but you could get by with the “Enhanced Version” too. Try it for the first 30 days and see what you think!

Arlington, VA Small Business Series

Starting a small business in Arlington (and for most of Northern VA too) doesn’t have to be complicated, but I haven’t found a definitive guide anywhere of the steps necessary. While most articles available online discuss the general needs of a small business including such popular topics as creating a business plan, choosing a legal structure and finding the right location, I’m interest in digging deeper to help my clients succeed.

Those topics are very important indeed, and most first-time small business owners do research on those topics before starting their venture. The following article series will be dedicated to helping small business in Arlington (and the rest of Northern Virginia) succeed on some of the more specific details with our area.

Know Your Local Laws

I specialize in helping both established and aspiring small businesses with their bookkeeping in the Northern Virginia and DC Metro area. In my initial interview I typically ask several question including: What is your organization structure, how do you plan on filing your taxes and do you have your required permits. Even if they say they have created an LLC… there is more to it than that and way too often I get a blank look!

Here are some quick and easy steps to get most small businesses on the right path:

  1. Create an LLC (It isn’t required but usually recommended). Head to the VA SCC to sign up, it costs $100.
  2. Register an EIN with the IRS (its free!). If you want to operate as a C Corporation (Form 8832) or S Corporation (Form 2553), then you should make this election now (more on these in a later article).
  3. Apply for a Business License from Arlington County. If you’re working from home, you MUST have a Home Occupation Permit. This is negligible in cost but important for you to remain in compliance.
  4. Arlington Home Occupants make sure to read your license! I work from my home office and there are several restrictions on what I can and can’t do. If you ever wonder why I have a PO Box, it is because I am not allowed for clients to visit me at home due to Arlington County regulations. This isn’t for every type of industry, but it is for bookkeepers!
  5. Open your business checking AND business credit card accounts. If you’re using the online banking feature in QuickBooks make sure there are no fees for your bank to connect. Most banks allow access to QuickBooks Online for free, but QuickBooks Desktop may have a monthly fee. If you’re not sold on whether you should open up separate accounts, read one of my previous blog posts… I highly recommend it!
  6. Purchase all required software and hardware: Computers, Monitors, Laptops, Phones, Printers, Office Supplies, QuickBooks, MS Office, Adobe, etc. The list can get pretty long but this is what your business plan was for to start! Make sure you put all of this on your credit card too and more on that later.
  7. Hire me as a part-time bookkeeper to help you monthly with your finances. I can be very beneficial as you progress your business; I’ll remind you to pay your taxes, of outstanding bills and help you set up your accounting software as needed. In fact, you don’t even have to purchase QuickBooks–I will keep track of your finances in my office and provide you with monthly reports. This is all included in my monthly charge as low as $100.

I could keep going on that list but it goes away from being Arlington/NOVA specific to just general small business items. Many starting small business owners in Arlington (and many other counties in NOVA) don’t realize that they have to pay a business property tax every year to the county, so keep track of all of your hardware items from #6 above. These are not expenses but fixed assets! The tax itself is very minimal but it must be paid regardless at the beginning of your 2nd fiscal year and each year thereafter.

The Importance Of Your Credit Card

Their are several important benefits to using your credit card on each transaction in addition to earning rewards and higher security. One of my biggest arguments for having a business-only credit card is the ability to track expenses, and then to pay those expenses off when you want to. Cash-flow is very important to both established and starting small-business.

At the start of your small business, cash is very hard to come by; it is possible you may not receive payments on an invoice for up to 60 days from the start of your first day for your first client. Even with fast-payment options like Paypal and the Intuit Payment Network, most vendors still pay by check and send it in the mail. Having the option to put expenses on your credit card and pay them off nearly 45 days later is invaluable (in case you’re wondering, credit cards have 30 day billing cycles and give you typically 2-3 weeks to pay your bill). I don’t recommend paying credit card interest and fees unless absolutely necessary, but having a small line of credit such as a credit card has provided me much needed financial security over the years.

There is so much on your plate when you’re starting your small business that it is easy to overlook any of the above steps. You could be tempted to “put it off until later” or even “wait until you generate revenue” but that could be too late.

Contact me for your free consultation and I will help you with your monthly bookkeeping.

Introducing Updated Fixed Rate Pricing

I am constantly searching for the fairest pricing both for what you (my clients) need and what I can deliver. I have just updated prices on my services page.

I’m starting to go more towards a fixed rate model than a bill-by-the-hour model and if you have any questions or require a custom quote, don’t hesitate to contact me. I don’t think I’ll be changing these prices again for a while as I like where they are and are extremely fair for everyone.

Accounting For Web-Based Businesses

If you’re in the business of buying and selling domains and websites, as well as operating these websites for a profit then using the correct accounting treatment is important. I have also noticed that the amount of information available on the internet regarding the proper treatment is difficult to come by and, so far, I have not found a detailed or consistent method for this type of business.

Additionally I must state that the following is simply my opinion and may or may not relate directly to your domain/website business. From my research, accounting for web-based businesses have not been discussed at length; I have developed the following series of articles through my experiences while both owning and running several websites and domains.

This series of articles will attempt to clarify and create a standard set of principals that business owners and accountants should use when relating to this relatively new market. Feel free to contact me in relation to this article series to give me your opinion either on LinkedIn or through my contact form.

The proper treatment of Domains and Websites on your Chart of Accounts

My first article on this topic will discuss how you should treat the purchase of domains and websites on your chart of accounts. Many times, business owners who use the cash-basis method of accounting will ‘write-off’ the purchase of these items as expenses, when in fact they should be capitalized and either amortized or depreciated over a useful life.

Hosting costs, on the other hand, are treated as expenses by both the cash-basis and accrual businesses. However, both cash-basis and accrual should deduct only the prepaid hosting costs that occurred during that time period; my personal belief is that business owners should treat hosting costs the same as they would Rent or Insurance: The IRS does not allow businesses to deduct these expenses in advance of when they occur. Thus if you pre-pay for 3 years of hosting costs on January 1, 2014 to receive a discount, you can only deduct 1/3 of those expenses in 2014, and another 1/3 in 2015 and 1/3 in 2016.

Before going any further let’s separate the accounting treatment of the domain itself from the website, which in my view are two totally different assets even though they are very much so related.

Domains

Let’s say you go to GoDaddy.com and buy a new domain for $9.99/year–how is that any different from when you buy a similar but different domain on the GoDaddy.com Auction for $99.99? When you “buy” a new domain from GoDaddy you’re really just “renting” it at a yearly price with the option to renew each year. If you don’t renew the rent each year, you forfeit your right to the domain and GoDaddy will resell it to someone else (after wiping it clean of any improvements you make). Thus the accounting treatment is similar to that of the hosting I described above–if you prepay for 2, 3, 4 or more years up front, you should only deduct the cost of the rent 1 year at a time.

When you purchase a domain from the Auction block, you’re essentially paying for the additional intangible value to that domain (some domains are worth way more than others). Even though you are paying $99.99 for the domain, you still have to pay GoDaddy.com (or similar site) the $9.99/year in addition to this auction price to manage the domain. So the $99.99 you’re paying to buy the domain from the Auction is similar to that of “GoodWill” which should be amortized over a 180 month (15 year) period. This same treatment holds true if you purchase the domain from a friend, reseller or acquire it via trade.

Websites You Build From Scratch

If you buy a domain new, then you will expend costs to acquire content, designs, logos, coding, etc that add up to create a “website.” These are all similar to the construction materials that go into a leased office building and, when the website is completed, must be depreciated over the useful life of the website. A ‘completed’ website is a term that is wide open to interpretation, but in my opinion I think it would mean when you are ready to do any of the following: 1) You have started to buy/sell advertising for/on it, 2) You’ve placed affiliate/referral links on the site to start earning revenue or 3) You’ve placed the website up for sale. At this time, all the costs that have gone into the website (include paid labor but not the value of your own time), become added into the website and becomes its original basis.

Once the website has been ‘completed,’ you can now depreciate it over a useful life. How long? Again this is open to debate (I am not aware of any IRS clarifications on this) but your reasonable options are 3 years, 5 years or 7 years–I feel the best treatment is either on a 3 year of 5 year time span. For most of my clients, I choose a 3 year treatment because of the relatively short-term trends that the internet tends to create. On the other hand, if you prepay a domain for 5 years in advance I would have difficulty arguing your intention on the value of the website was for less than that amount of time.

Any additional expenditures for the website going forward must either be added to the basis of the website or deducted in the current tax year. What determines the treatment? Essentially if you add a new set of content that is expected to extend the useful life of the website more than 1 year, then it must be capitalized and depreciated over a new 3 year (or 5 year if applicable) time span. However if you’re releasing daily content (news, blog posts, tips and tricks, etc) then these don’t extend the useful life of the website enough that they should be depreciated, even if in the future you receive a form of revenue from these posts.

Websites You Purchase Already ‘Complete’

If, when buying the domain from a 3rd party, you receive a website in addition then you must attribute some of the purchase price to the basis of the website. This basis then gets depreciated over a 3 year or 5 year time span. Just like when you create a website, any additions you make that increases the useful life of the website must be capitalized and depreciated over a new time span.

When You Sell A Website And Domain

Once you dispose of the domain and website, either by sale or refusal to renew (selling price = $0), you recognize a gain or loss based on the difference of the selling price and the adjusted basis (original purchase price minus amortization) of both the domain and website separately. If you bought the domain new then your basis in the domain is $0. Note that this value is different from the website itself and, when you sell both a domain and website together, you must portion the amount received separately to both the domain’s and the website’s adjusted basis.

Why Is This So Complicated?

Mainly because the IRS has released relatively no information on how business owners should account for websites and domains as assets that depreciate. They don’t fit neatly into the predefined terms of neither a “Fixed Asset” nor an “Intangible Asset” and are really a hybrid of the two. Domains and websites “exist” and have a “defined value” but only in cyberspace.

I don’t expect anything to change going forward either until someone who operates a website business that then gets audited and makes the case public.

Do I Have To Follow This Treatment?

As I mentioned there is little in the way of precedent when it comes to treating your websites and domains. There is one tax benefit that I have not mentioned yet so please check with your own tax advisor on this: When you sell a capital asset, you get special gains treatment–you don’t have to pay self-employment tax on it. Thus if you sold a website and you treated it like a depreciated asset and were fortunate enough to make $30,000, you would only pay income tax and not self-employment tax on your gain. That amounts to a savings of $4590 in tax savings.

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This should clear up some issues on how to treat your chart of accounts for a web-based business that deals with domains and websites frequently.