Taxable vs. Nontaxable IncomePosted on April 7th, 2021
Marianne Kern, CPA
Kern & Associates CPA, P.A.
Are you wondering if there’s a hard and fast rule about what income is taxable and what income is not taxable? The quick answer is that all income is taxable unless the law specifically excludes it. But as you might have guessed, there’s more to it than that.
Taxable income includes any money you receive, such as wages, tips, and unemployment compensation. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.
Here are some types of income that are usually not taxable:
- Gifts and inheritances
- Child support payments
- Welfare benefits
- Damage awards for physical injury or sickness
- Cash rebates from a dealer or manufacturer for an item you buy
- Reimbursements for qualified adoption expenses
In addition, some types of income are not taxable except under certain conditions, including:
- Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
- Income from a qualified scholarship is normally not taxable; that is, amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts used for room and board are taxable.
- If you received a state or local income tax refund, the amount might be taxable. You should have received a 2020 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency might have provided the form electronically. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.
Important Reminders about Tip Income
If you get tips from customers, that income is subject to taxes. Here’s what you should keep in mind:
1. Tips are taxable. You must pay federal income tax on any tips you receive. The value of noncash tips, such as tickets, passes or other items of value are also subject to income tax.
2. Include all tips on your income tax return. You must include the total of all tips you received during the year on your income tax return, such as tips received directly from customers, tips added to credit cards, and your share of tips received under a tip-splitting agreement with other employees.
3. Report tips to your employer. If you receive $20 or more in tips in any one month from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit, and credit card tips you receive. Your employer is required to withhold federal income, Social Security, and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer.
4. Keep a daily log of tips. Use the Employee’s Daily Record of Tips and Report to Employer (IRS Publication 1244) to record your tips.
Bartering Income is Taxable
Bartering is the trading of one product or service for another. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Typically, there is no exchange of cash.
If you barter, the value of products or services from bartering is taxable income. Here are four facts about bartering that you should be aware of:
1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to members who barter and file a copy with the IRS.
2. Bartering income. Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.
3. Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes, or excise taxes on their bartering income.
4. Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
Avoiding an IRS Tax AuditPosted on March 31st, 2021
Marianne Kern, CPA
Kern & Associates CPA, P.A.
Just 0.45 percent of taxpayers were audited in fiscal year 2019. Still, with taxes becoming more complicated every year, there is an even greater possibility of confusion turning into a tax mistake and an IRS audit. Avoiding “red flags” like the ones listed below could help.
Red Flags That Trigger IRS Audits
- Claiming Business Losses Year After Year
When you operate a business and file Schedule C, the IRS assumes you operate that business to make a profit. Claiming losses year after year without any profit raises a red flag with the IRS.
- Failing to Report Form 1099 Income
Resist the temptation to underreport your income if you are self-employed or have a second job. The IRS receives the same 1099 forms that you do, and even if you didn’t receive a Form 1099 when you think you should have, you can’t be sure the IRS didn’t either. If the IRS finds a mismatch, you are sure to hear about it.
- Early Withdrawals From a Retirement Account
In general, if you withdraw money from a retirement account before age 59 1/2, you will need to pay a 10 percent penalty. You will also owe income tax on the amount withdrawn unless you qualify for an exception. Sometimes – but not always – these types of early withdrawals trigger an audit, typically a correspondence audit where the IRS sends you a letter.
- Excessive Business Expense Deductions
Too many deductions for your income and type of business, claiming 100 percent use of a car for business, and inflating business meals, travel, and entertainment expenses are examples of excessive business expenses that could raise a red flag. Always save receipts and document your mileage and expenses.
- Overestimating Charitable Deductions
Taxpayers that don’t itemize can take an above-the-line deduction for charitable contributions made in tax year 2020 on their tax returns of up to $300 for qualified charitable cash donations that reduce taxable income. The maximum amount for 2020 tax returns is $300 (i.e., not $600), even if you are married filing jointly.
For taxpayers that do itemize, taking disproportionately large deductions as compared to your income could raise a red flag. The IRS keeps records of average charitable donation at various income levels, and even if you inherited a large sum of money and want to donate it to charity, there’s a chance you could get audited.
- Failing to Report Winnings or Claiming Big Losses
Professional gamblers report winnings/losses on Schedule C, Profit or Loss from Business (Sole Proprietorship). They can also deduct costs related to their profession, such as lodging and meals, for example. Gambling winnings are reported on Form W-2G, which is sent to the IRS. As such, you must report this income. You may deduct gambling losses, but you must itemize your deductions on Schedule A (Form 1040) and keep a record of your winnings and losses. Ordinary taxpayers (recreational gamblers) report income/losses as “Other Income” on Schedule 1 of their Form 1040 tax return.
What To Do if You Are Audited
If you’ve received correspondence from the IRS in the U.S. mail that indicates that you are being audited, don’t try to handle it yourself. Instead, contact the office immediately for assistance.
Taxpayers who have been audited or otherwise interacted with the IRS should know that they have the right to know when the IRS has finished the audit. The right to finality is one of ten basic taxpayer rights – known collectively as the Taxpayer Bill of Rights. All taxpayers dealing with the IRS are entitled to these rights.
Small Business Tax RoundupPosted on March 24th, 2021
Marianne Kern, CPA
Kern & Associates CPA, P.A.
Tax changes due to recent legislation such as the Tax Cuts and Jobs Act and the CARES Act affect both individual taxpayers and small businesses. In 2020, the IRS issued several guidance documents and final rules and regulations that clarified several tax provisions affecting businesses. Here are five of them:
PPP Expenses Now Deductible
Deductions for the payments of eligible expenses are now allowed when such payments would result (or be expected to result) in the forgiveness of a loan (covered loan) under the Paycheck Protection Program (PPP). Previous IRS guidance disallowed deductions for the payment of eligible expenses when the payments resulted (or could be expected to result) in forgiveness of a covered loan.
The COVID-related Tax Relief Act of 2020 amended the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to say that no deduction is denied and no tax attribute is reduced. Furthermore, no basis increase is denied because of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan. This change applies to taxable years ending after March 27, 2020.
Meals and Entertainment
The Tax Cuts and Jobs Act (TCJA) eliminated the deduction for any expenses related to activities generally considered entertainment, amusement, or recreation for tax years after 2017. While taxpayers may still deduct business expenses related to food and beverages as long as certain requirements are met, certain questions remained.
Recent IRS regulations provided clarification for several of these issues: disallowance of the deduction for expenditures related to entertainment, amusement, or recreation activities, and including the applicability of certain exceptions to this disallowance. The regulations also provide guidance to determine whether an activity is considered entertainment. The final regulations also address the limitation on the deduction of food and beverage expenses.
Like-kind Exchanges of Real Property
The 2017 Tax Cuts and Jobs Act (TCJA) limited like-kind exchange treatment to exchanges of real property. As such, effective January 1, 2018, exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain as like-kind exchanges.
Furthermore, like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment. An exchange of real property held primarily for sale does not qualify as a like-kind exchange.
Under the IRS’s final regulations, real property includes land and generally anything permanently built on or attached to land. In general, it also includes property that is characterized as real property under applicable State or local law. Certain intangible property, such as leaseholds or easements, also qualify as real property under section 1031.
Property not eligible for like-kind exchange treatment prior to the enactment of the TCJA remains ineligible. Neither the TCJA nor the final regulations change whether the properties exchanged are of like kind.
Qualified Transportation Fringe and Commuting Expenses
The 2017 TCJA generally disallows deductions for qualified transportation fringe (QTF) expenses and does not allow deductions for certain expenses of transportation and commuting between an employee’s residence and place of employment.
Final regulations address the disallowance of the deduction for expenses related to QTFs provided to an employee of the taxpayer, including providing guidance and methodologies to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee’s residence and place of employment.
Relief for Developers of Offshore Renewable Energy Projects
Renewable energy projects constructed offshore or on federal land are ordinarily subject to significant delays that can result in project completion times of up to twice as long as other renewable energy projects. These delays threaten taxpayers’ ability to satisfy requirements to claim the production tax credit and the investment tax credit.
To address this hurdle, the Treasury Department and the IRS have determined that it is necessary to extend the safe harbor period to up to 10 calendar years after the year in which construction of the project began.
The extension of the safe harbor for these projects provides flexibility for taxpayers constructing renewable energy projects offshore or on federal land to satisfy the beginning of construction requirements despite ordinary course delays that threaten their ability to claim tax credits.
How Does the “2017 Tax Cut and Jobs Act” Affect YOU in 2020?Posted on October 30th, 2020
Outsourced Accounting Department, Inc.
So first, how does the The 2017 “Tax Cut and Jobs Act” affect small businesses? Let’s take a look. Assume the following:
- You and your spouse are 50% owners in your Sub-Chapter S (1120S) business.
- Each of you takes a $25,000 annual salary
- The Net Income of the business is $50,000, so each of you reports 50% of the business Net Income on your K-1 on your personal (1040) tax return.
- You do not have enough deductions to itemize on your tax return, so can take only the standard deduction.
Based on the above assumptions, here is what your tax liability would have been in 2017:
Based on your total gross income of $100,000 (salaries plus net income), and the standard deduction in 2017 of $12,700 and 2 exemptions of $4,050 (total of $20,800) for a married couple filing jointly, your taxable income becomes $79,200, resulting in taxes due of $11,278.
Now, in 2020, not only were tax rates reduced in all tax brackets, but the standard deduction was increased to $24,800 for a married couple filing jointly, while the exemptions were eliminated. Also, for small businesses, an additional credit is available based on of 20% of business net income. In this case based on the above assumptions, this credit would amount to $10,000, resulting in Taxable Income of $65,200, and taxes due of $7,429, or a decrease in taxes of $3,849 from 2018.
But what if you don’t own a business, how would the tax cuts affect you? Assume now that you each have an annual salary of $50,000, so total gross income of $100,000:
Your taxable income is now $75,200, resulting in taxes due of $8,629, or a decrease of $2,649 from 2017 (that’s nearly $8,000 over 3 years, 2018 through 2020!).
Clearly, this tax cut act does benefit both small businesses and individuals, just something to consider as we approach the mid-term elections. As to how tax cuts affect the economy, obviously, it depends on who you ask. But below are some charts created from historical government statistical data.
Related Articles and Statistical Data:
The Effect of Business Taxes on Job GrowthPosted on October 19th, 2020
Outsourced Accounting Department, Inc.
As most are aware, presidential candidate Joe Biden has proposed raising individual income tax back up from 37% to 39.6% for individuals with income above $400,000, plus increases in capital gains, and payroll taxes. He is also proposing increasing the corporate income tax rate from the 21% established under the 2017 Tax Cuts and Jobs Act, to 28%. For purposes of this article, I will focus on the income tax component only.
The question is, what effect do such tax increases have on businesses, and in turn, job growth? As I have discussed in numerous articles, profit is a component of cash flow which is required to support sales growth, fund capital expenditures for plant and equipment, repay debt, and many other “after-tax” expenditures. Thus, it is also a determinant of a company’s ability to raise capital and obtain bank and other types of loans.
So what happens to profit and cash flow as a result of paying income tax? Let’s take a look. Say a company, in this case a C-Corporation, has the ability increase sales by a whopping 153% in one year (it happens), and the business is taxed at the current 21% rate:
Note that its tax liability in the above example is around $246,000. Now assume that the corporate tax rate is increased to 28%:
The company’s tax liability has now increased by $81,000 to around $327,000. To put this into perspective, now say it typically hires direct labor employees at an hourly rate of $15.00, times 40 hours a week, times 52 weeks = $31,200 per year. So (at the risk of over-simplification) that $81,000 is equivalent to approximately 3 employees who will either not be hired or may be laid off.
Of course, businesses will always have to pay taxes, the point of the above being that when the government is fooling around with corporate tax rates, it’s tampering with people’s jobs as well. So it’s not “free” money just because a business is paying it rather than an individual.
Now with the respect to the tax increase to individuals, one major item that Biden’s tax plan does not really explain is whether that $400,000 also includes “pass-through” taxes on the net income from a small business owned by that individual. This is how most small businesses are taxed, at the personal income tax level of the owner. Again, that money is needed by the business to operate and grow, so in most cases, the profit never even leaves the business. It’s just taxed on the individual’s 1040 tax return and included in his or her Adjusted Gross Income. If it is included in Biden’s tax plan, then these business profits would be taxed at the higher 39.6% rate (ignoring the effect of the 20% Qualified Business Deduction that was also part of the 2017 Tax Cut and Jobs Act).
To sum up, according to the The Tax Foundation’s article, Joe Biden – 2020 Tax Plan, “Biden’s tax plan would reduce the economy’s size by 1.47 percent in the long run. The plan would shrink the capital stock by just over 2.5 percent, and reduce the overall wage rate by a little over 1 percent, leading to about 518,000 fewer full-time equivalent jobs.”
The Effect of Taxes on Businesses and the EconomyPosted on October 18th, 2020
Outsourced Accounting Department, Inc.
Do tax cuts work? Critics say no, it only increases the deficit. Proponents say yes, lower taxes enable individuals and businesses to spend more money which, in turn, also increases tax revenues and, therefore, reduces, not increases, the deficit. To find out who is (more or less) right, let’s take a look at some historical government statistics.
First to be clear, the tax rates I am referring to in this article are the individual tax rates charged on the 1040 tax return. This is because, as I have discussed in previous articles, most small businesses are set up as either an LLC (i.e., sole proprietorship or partnership) or S-Corporation for tax purposes, both of whose taxes are “passed through” to the owner’s personal tax return at individual tax rates. (I will discuss corporate (C-Corporation) tax rates in a subsequent article.)
Of course there are a multitude of factors that affect the economy and deficit. But in terms of the government’s role, there are two primary policies it has at its disposal to affect the rate of economic growth, and in turn, unemployment and inflation: Fiscal Policy which is controlled by Congress and the President, and deals with tax rates, government regulation, and government spending; and, Monetary Policy which is managed by the Federal Reserve, and deals with interest rates and the supply and demand for credit through the banking system.
The Kennedy Administration was one of the first to advocate tax cuts as a means of stimulating the economy (chart-Kennedy)). Later during the Carter Administration, the economy was plagued both double digit inflation and unemployment, which President Carter described as “the misery index” and blamed it on a “malaise” on the part of the American people (chart-Carter). Doubting this, the Reagan Administration subsequently used tax cuts again to stimulate the economy, this time significant cuts, as well as reduced government regulations, which became known as “Supply-Side Economics” (dubbed by critics as “Trickle Down Economics”) (chart-Reagan).
Note the pattern between lower taxes and the declining unemployment rate between these three charts. There certainly would appear to be a correlation between those two statistical trends.
But did the lower tax rates actually stimulate economic growth, or was the lower unemployment rate just a coincidence? In other words, what was the effect on the Gross Domestic Product (or GDP, the measure of the U.S. economy)? The next chart is a comparison of tax rates to the GDP during the Reagan Administration (chart-Reagan GDP). It indicates there does seem to be a direct relationship between the two, especially in 1984 when GDP jumped 7.9% shortly after the tax cuts, and averaged nearly 5% through the end of the Reagan term.
Now, let’s look at the Obama Administration. Ignoring where the unemployment rate started (which is the topic of a whole different discussion), the unemployment rate steadily declined over the eight-year period, and despite a tax increase in 2013 (chart-Obama). But what about the GDP during the Obama Administration? A comparison of tax rates to GDP indicates that the GDP was barely increasing as compared to the Reagan era above, hovering around 2 percent throughout most of the eight-year period (chart-Obama GDP). So it would seem based on this chart that there is a strong correlation between tax rates and the GDP.
In contrast, the increase in tax revenues under the Reagan Administration (see again above chart) ranged from 4.8% to over 11%, averaging 6.8% following the earlier tax cuts. And this included another jump in tax revenues in 1987 after additional tax cuts were enacted, reducing the top tax rate from 50% to 38.5%. So this increase in tax revenues can only be explained by economic growth. And sooner or later, this also has to produce jobs.
Selling Your Small Business: Winging It In QuickBooksPosted on September 5th, 2020
Outsourced Accounting Department, Inc.
As I tell prospective clients for our services, “QuickBooks has done a remarkable job of marketing its product as ‘easy to use’ — but that is also what makes QuickBooks easy to abuse.” The truth is, QuickBooks will allow you to do just about anything you want, whether is it is correct from an accounting standpoint or not. So you can be going along thinking everything is working just fine, when the reality is your financial statements are a total mess. And your tax accountant is not going to clean all of this up at the end of the year either. That’s too much work to do during tax season. Instead, they’re going to extrapolate from QuickBooks only what they need for tax purposes, and instead rely more heavily on your reconciled bank statements.
As a QuickBooks ProAdvisor, we are often contacted to clean up a client’s QuickBooks file, and for the above reasons, their books are a total disaster. Then one day the small business owner wishes to sell his business, and all of a sudden, the historical accuracy of his or her books has become urgent.
As a case in point, our firm was recently engaged by a small business owner’s CPA to clean up his books, as she had reached a point where she was no longer able to “work around” his massive mistakes. Just about everything he was doing in QuickBooks was the wrong way to do things, and his financial statements and reports reflected this. Normally when we receive an engagement like this, our approach is to tie the client’s books to the CPA’s most recent tax return, usually the previous year, and then start the QuickBooks clean-up from there. In this case, however, after only a short period of time working on his books, the owner informed me that he had a prospective buyer for his business who needed certain information as soon as possible. The information they requested, after their preliminary view of his file that he had sent them, is shown here in their Due Diligence List.
Since the inception of the business, this client had been using QuickBooks mainly to enter supplier invoices and record inventory purchases, and to create customer invoices to send to his customers for payment. He knew nothing else about QuickBooks, leaving everything else to his CPA who, as described above, was mainly concerned with reconciling the bank accounts to prepare his tax return on a cash basis. This ignores most of the accrual accounting information requested in the due diligence list.
Selling a small to medium-sized business is a complex venture, and many business owners are not aware of the the things prospective buyers look at. So if you’re thinking about selling your business, the first step is to be able to provide accurate financial statements going back three or more years. That is what will be needed to prepare an accurate business valuation to determine how much your business is worth. And rest assured, potential buyers will scrutinize every aspect of your business. Not being able to quickly produce financial statements, current, and prior years’ balance sheets, profit and loss statements, tax returns, equipment lists, product inventories, and property appraisals and lease agreements, may lead to loss of the sale.
Suffice it to say in this situation, the clean-up process suddenly turned in a whole new direction, the timing was critical, and much of it could not be recreated at this late stage. Even if the sale goes through, you may not be able to get the price that the business would otherwise be worth if you had been able to produce an accurate financial history as requested by the buyer. Thus, it’s important to maintain your books properly from the start, as someday you’re going to be asked to produce that information, whether it be to sell your business, or simply to obtain a bank loan. And if you’re not comfortable with doing this yourself, then outsource it to someone who does have the expertise.
QuickBooks Desktop vs. QuickBooks Online – Which is Better?Posted on May 22nd, 2020
Outsourced Accounting Department, Inc.
I am a Certified QuickBooks ProAdvisor and have been using the original Desktop version since 1996. In recent years, QuickBooks has been heavily promoting its Online version, and because of that, a lot of new QuickBooks users are jumping on board. First, let me come right out and say this: We frequently receive inquiries for consulting with QuickBooks Online by people who are trying to use it and most likely, making a total mess out of it. It functions completely different than the original Desktop version, and in our opinion, it is inferior in many respects, and calls things differently in the Online version which makes it that much harder and time consuming to correct things.
Now, after that, if you are still considering doing your bookkeeping yourself and trying to decide between QuickBooks Desktop and QuickBooks Online, here are some things to consider:
- Navigation: If you are used to using the Desktop version, as mentioned above, QuickBooks Online functions completely different. Various things are called and located differently almost, it seems, for the sake of calling and locating them differently.
- Reporting Capability: In my experience, the reporting capability in the Online version is not nearly as robust as the Desktop version.
- Support: For the above reasons, I’ve found that to do just about anything in the Online version, I had to call Online support, a monumental waste of time!
The reporting capability in particular in the Desktop version is one of its major benefits. This is extremely useful not only for researching accounting issues, but the ability to create and memorize numerous customized reports for the client for managing their business. And as a former CFO /controller, I believe that the most important thing to come out of an accounting software are meaningful financial reports.
Now, what many people are not aware of (because QuickBooks doesn’t promote this service for themselves), is that there are companies that also provide access to the traditional Desktop version via the “cloud,” and have the Intuit certification of “Authorized Commercial Host – QuickBooks.” In our business, we use Ace Cloud Hosting to support the Desktop version.
In the past when I’ve tried to use the Online version, I found myself spending most of my time “re-learning”QuickBooks, sometimes only to find out in the end that what I want to accomplish isn’t available in the Online version. I’ve also read that many Online users are complaining about both software glitches, and issues with Online support. I’ve rarely ever experienced software issues with the Desktop version. But if I do, I have access to both Ace support staff, and as a QuickBooks ProAdvisor, unlimited access to QuickBooks ProAdvisor Support – and at no cost to my clients.
And I am not alone in my views of QuickBooks Online. I’ve been told on more than one occasion by ProAdvisor Support staff that they hear the same frustrations from most CPAs and accountants regarding the Online version. When I asked one of them why it was designed differently, his response was, “Because the desktop version is too powerful to create online” (meaning without being hosted in its entirety on a remote server).
In the area of “pricing,” a QuickBooks comparison chart shows $70 per month for Online Plus (currently discounted to $35), or $840 per year ($420 as of the date of this writing). According to the chart, Online Plus is (“theoretically”) the closest in capability to QuickBooks Pro, the latter of which is what we have most of our clients purchase, and currently sells for a one time purchase price of $299.95 (retail before our ProAdvisor discount which fluctuates). However, with the Desktop version, it is NOT imperative that you upgrade to the newest release every year for at least three years, when QuickBooks stops supporting it with maintenance relaeases. The improvements each year with the Desktop version are mostly cosmetic, and would be of interest primarily to the most advanced QuickBooks users (which most small business owners are not).
Finally, in our case, a monthly user fee of $44 is paid to Ace Cloud Hosting which includes unlimited 24/7 support by phone or email. (And as mentioned above, as a ProAdvisor, I also have unlimited free access to QuickBooks ProAdvisor Support.)
Ace Cloud Hosting recently published an article in their blog comparing QuickBooks Online to QuickBooks Hosting. This is part of what the article concludes: “Hosting [QuickBooks] on the cloud can offer you the flexibility and mobility benefits of the cloud, along with all the features available in the desktop version.”
But that all said, regardless of which QuickBooks you use, let me now say this: QuickBooks has done a great job of marketing its software as being “easy to use,”….. but, that’s also what makes it easy to abuse. Most QuickBooks users we’ve worked with have no idea of the accounting mess they’re making, and that’s when they throw up their hands and turn to us to do a major clean up their books. Our philosophy is to relieve the client from the bookkeeping headache as much as possible by doing most of the data entry ourselves, and WE use QuickBooks Desktop and we do not support the QuickBooks Online version.
So, with our firm, some clients have access to their QuickBooks file, others do not and don’t care. But if they do need access to their file, we still try to make things as simple as possible for the client, and therefore, for us, which is to the benefit of the client in more ways than one. In those situations where the client does not need access, we are paying for our own user fees, the client is paying nothing for QuickBooks hosting, not even for the purchase of QuickBooks. Instead, our clients are paying us to do their monthly accounting and bookkeeping accurately, thus freeing themselves up to focus their full attention on their own business rather than “learning” QuickBooks. Those business owners are, in effect, factoring in the “opportunity cost” of doing the bookkeeping themselves, or hiring a full-time bookkeeper at $25,000 to $35,000 a year, or even half of that for part-time.
So to summarize our position on all of the above, if you:
- Are NOT interested in struggling with the bookkeeping (regardless of which version), or;
- Are NOT interested in learning QuickBooks all over again if you’re accustomed to the Desktop version, and;
- ARE more interested in managing your business, and letting someone else worry about which bookkeeping software they want to use, or;
- Just want to perform minimal bookkeeping tasks yourself with someone overseeing and adjusting your work;
Then, consider a third alternative of outsourcing the bookkeeping to those who specialize in it. In terms of the services we provide, as stated earlier, we do not encourage our clients to spend a lot of time “learning” QuickBooks, most of whom just end up making a mess out of it. But rather, we encourage our clients to focus on their own business, and let us take care of the (tedious) bookkeeping and accounting tasks. Therefore, we do not wish to spend a lot of unproductive time ourselves, either, relearning QuickBooks for the sake of relearning it, and at our client’s expense.
In a nutshell, simply ask yourself, “How do I prefer to spend my time, learning QuickBooks, or running my own business?”
Some Banks Still Not Understanding Tax ReturnsPosted on April 10th, 2020
Outsourced Accounting Department, Inc.
Marianne has been reading articles and comments by other CPA firms about what’s going on right now with these emergency SBA loan applications. One person said that the banker told their client “they should not have taken the 179 deduction because it reduced their income,” and there were other similar comments. This reminded me of several articles I wrote on this subject a while back about the difference between “book” and “tax” accounting, and the difference between “profit” and “taxable income:”
Do What You Hate and the Losses Will FollowPosted on September 5th, 2019
Outsourced Accounting Department, Inc.
Several years ago I read an inspirational book, “Do What You Love and the Money Will Follow” which in part, led to a few career changes I made. Of course, nothing in life is quite that simple, especially in a society where supply and demand rule, and economic change, or “creative destruction” (as described by Alan Greenspan in his book, “Capitalism In America“) is the norm. But it does make a good point, that if your work is closely aligned with your inherent talents, or in other words, your “spiritual gifts,” you have a much better chance of succeeding.
But what if the opposite is true, and you spend most of your time performing tasks that you hate doing? In a recent article, “4 Reasons Why You Should Consider Outsourcing Your Bookkeeping,” I listed some reasons why it is advantageous for small business owners to outsource their bookkeeping, such as accuracy and the lack of accounting knowledge, or in general, avoiding making a mess out of your books that someone else eventually has to clean-up at tax time, and at your expense. But reason number 4 in this article may be the most important, and that is, the other, more profitable activities you could be doing with your time if you weren’t spending it trying to do your own books.
This article from Entrepreneur Magazine, “The 80/20 Rule of Time Management: Stop Wasting Your Time,” hits that nail right on the head with this statement:
“Sometimes you have to do everything when you start out. But now you’re doing a $10 or $20 per hour fix-the-faucet job and you’re not doing your No. 1 job, which is getting and keeping customers. That job pays $100 to $1,000 per hour.”
The author’s example of how this particular business owner is spending his or her time is an example of the old cliché, “penny-wise and pound-foolish,” and his point is a perfect example of an “opportunity cost.” So how may this concept also apply to doing your own bookkeeping?
To illustrate, assume your sales are currently running at $100,000 a year, and your gross margin after your direct cost of sales is 50%. Now assume that by shifting your focus from “bookkeeping” to “marketing” you could increase sales by say 20% per year to start. The increase in your available profit would then be $100,000 times 20% times 50% = $10,000 (which flows right to your bottom line).
Now, assume that you can outsource all or part of your bookkeeping at say $350 per month, or $4,200 per year. Your “opportunity cost” in this example would then be $10,000 minus $4,200, or $5,800 per year! In other words, that’s the profit you are forgoing by doing your books yourself in an effort to “save money.”
Of course, there may be other marketing costs you would incur depending on how you go about increasing your sales, but you get the general idea. The ultimate question is, as a small business owner, how would you prefer to spend your time, and is that the most profitable use of your time?