Plan Now To Avoid Tax Surprises

November 2009

A good practice for all business owners is to sit down with their CPA every fall to do tax planning to identify expected liabilities and strategies to minimize the tax burden. This year it is more important than ever to stay on top of tax issues given the dynamic economic and tax environment. Plus, most small business tax issues need to be reviewed in an integrated fashion along with the personal tax situations of the principal owners.

Specific issues to address with your CPA, if you have not already done so, include:

Estimated taxes

1. Most business owners wish to avoid interest and penalties by paying their tax liability via quarterly estimated tax payments.
2. One tactic sometimes used to avoid penalties is to prepay current year taxes, via quarterly estimated taxes, by paying an amount equal to the prior year's actual tax liability. Many businesses are unfortunately posting significantly lower profits in 2009 than in 2008, so this method may result in excessive and unnecessary tax payments. Work with your CPA to match estimated tax payments with your actual current year estimated tax liability.

Integration with personal taxes

1. Most small businesses are structured as entities such as LLCs and s-corporations where the tax liabilities of the business pass through to the owners of the business. In this case, the tax decisions of the business directly impact the tax liabilities of owners. Business owners should be informed of the estimated taxable gain or loss that will flow to them personally. Any associated cash distributions should be planned to provide owners with the cash with which to pay their pass-through tax liabilities.
2. For closely held businesses with one owner or a small number of related owners, the tax issues of owners may impact decisions made for the business. With the volatile stock market and real estate market, owners may be sitting on large realized or unrealized capital gains or losses which can factor into the overall strategy.

Transaction timing

1. There may be a benefit from recognizing certain revenue and expense items in 2009 or from delaying the transactions into 2010. This may be especially true if there is going to be a significant change in your marginal tax rates in 2010.
   

Bookkeeping and reporting

1. Effective tax planning is dependent upon accurate and up-to-date financial reports showing year-to-date business profits and capital expenditures, and expected results through year-end. Your CPA will struggle to provide effective tax advice if you do not present him or her with good information.
2. Ask your CPA for feedback on the quality of reporting you provide and for suggestions on how bookkeeping can be improved to make the tax planning process easier and more effective.

SmartBooks can help:

Our clients receive accurate, timely financial reports which can be used for effective tax planning. We work directly with our clients' CPAs to provide whatever additional information would be helpful to the CPA. For c-corporation clients, we set up estimated tax payment schedules and income tax accruals on their monthly financial statements.

If your business is having trouble staying on top of its bookkeeping or getting regular financial reporting, please contact us. If you are looking for a good CPA to help with your tax planning, we have relationships with several very goods CPAs and can make an appropriate referral depending on your needs.

Take Control of Your Business Finances

June 2009

Given the difficult current economic conditions it is more important than ever that business owners take control of their finances. This means understanding who owes them money, to whom they owe money, and the profitability of goods and services sold. We suggest business owners review the following areas:

Cash

1. Surprisingly many businesses have bank accounts that have not been reconciled in many months. It is critical to know your current cash balances. Quoted bank balances are insufficient as they do not take into account uncleared checks or pending electronic debits.

Accounts Receivable

1. Review a current accounts receivable aging report to understand which customers owe you how much money and how many days’ sales outstanding are represented by your accounts receivable.
2. Identify bad debt risks and determine collections strategies for those accounts.
3. Establish credit limits to mitigate collections risk.
4. Review credit hold policies.
5. Establish criteria for cost-effectiveness of using a collections agency or litigation.
6. Understand the cash flow impact of delinquent accounts.
   

Accounts Payable

1. Review current accounts payable aging report to understand which vendors you owe how much money and how many days’ expenses are represented by your accounts payable.
2. Identify vendors to whom the business owner has personally guaranteed debts
   If cash flow does not permit payment of all bills when due, try to renegotiate payment terms with vendors and prioritize vendors based upon ongoing business plans.

Profitability

1. Review trends in growth rate and profit margins, both gross margins and operating margins, as well as the return on capital that has been invested in the business.
2. Review the profitability of different goods and services, not just the business as a whole.
3. Adjust cost structure and management attention to focus on areas offering the greatest potential for profitable growth.

SmartBooks can help in each of these areas.

You should know how your business is performing as you go, not long after the fact. Financial and operational reports are worth little unless they are available when business managers need the information to make good business decisions. A timely close used to mean 15 to 30 days after the end of a month. These days we can close a company’s books within a week using best practices and technology tools.

Cash

1. SmartBooks accounts for cash on an ongoing basis and can provide a near-real-time cash balance to business owners.

Accounts Receivable

1. We provide weekly A/R report to clients to facilitate internal collections efforts.
2. SmartBooks, with the benefit of having a founder attorney with collections expertise, can manage accounts receivables for clients to improve cash flow and minimize bad debt expense.
3. We identify bad debt risks, recommend credit limits and credit hold policies, and assess when a collection agency or litigation is cost-effective.

Accounts Payable

1. We provide clients weekly A/P reports so business owners understand their liabilities and can prioritize payment when necessary.

Profitability

1. We provide clients with a monthly income statement and analysis report showing profit margins and trends in growth rates and margins and return on invested capital. We can also track various other business metrics that are important to your business and generate those reports on a regular basis.
2. For clients needing more extensive financial analysis, planning and management, we introduce one of our Chief Financial Officer partners to consult on strategic finance issues.

Safeguarding Your Legal Retainers

March, 2009

When attorneys receive retainers or other advance deposits from clients, those retainers must be kept in a separate bank account and may not be comingled with attorneys' own funds. Only after service has been delivered and billed may those funds be transferred to attorneys' own accounts. There have been important recent developments affecting client funds accounts, impacting both attorneys and clients. As you may have seen in the news there have unfortunately also been some serious scandals in which client funds were misappropriated, most notably by the Dreier Law Firm in New York. Now is a good time for both attorneys and clients to review requirements for client funds accounts.

IOLTA Accounts

Client funds are typically placed in IOLTA accounts (Interest on Lawyers Trust Accounts). These accounts are a specific kind of bank account and are required by state law. The intent of the law is for interest earned on client funds held in trust by attorneys to be remitted to state committees and ultimately used to provide legal aid to the indigent. IOLTA rules require attorneys to maintain specific accounts, internal controls and bookkeeping for client funds.

Recent Developments Affecting IOLTA Accounts:

1. As part of its attempt to stabilize the banking industry and protect depositors, the FDIC recently expanded its insurance coverage. The FDIC is now providing unlimited coverage to IOLTA accounts at participating banks through December 31, 2009.
2. The requirements Massachusetts banks must meet to offer IOLTA accounts have changed as of February 1, 2009. Banks must be re-certified to offer IOLTA accounts. Some banks previously certified to offer IOLTA accounts are no longer certified. To be IOLTA compliant, attorneys must have their IOLTA accounts at banks that have been re-certified.

Why Should Attorneys Care About IOLTA Compliance?

1. Comingling of attorney and client funds is a serious ethical violation which can lead to disciplinary action.
2. Having a dedicated client funds account is insufficient; the law stipulates that it must be a specific IOLTA account at an approved bank.
3. Attorneys, partners, and their firms are liable to clients if client funds are used improperly.
4. There is reputational risk from non-compliance: perception is reality even if there is no misuse of client funds.

Why Should Clients Care About Their Attorneys Being IOLTA Compliant?

1. Many instances of fraud by attorneys involve misappropriation of client funds facilitated by comingling of attorney and client funds.
2. An IOLTA account alone will not prevent fraud, but full compliance with IOLTA standards including internal controls and records retention significantly reduces the risk of fraud.
3. IOLTA compliance is indicative of a law firm that is professionally managed and takes its client responsibilities seriously.

Primary IOLTA Requirements:

1. A client funds account holds all advance payments and retainers until services are delivered and billed.
2. Client funds accounts can only be held in an IOLTA account at an approved bank (many banks are not approved for IOLTA accounts).
3. Three separate ledgers are maintained: Client Ledger, Bank Charge Ledger, and Check Ledger.
4. Internal controls are maintained over deposit and disbursement processes.
5. Six year retention of ledgers, reconciliations reports, and other documentation.
6. If electronic records are kept, as is commonplace today, a good data backup system.

SmartBooks Service is IOLTA Compliant:

1. One of our partners is an attorney who understands law firm operations.
2. The SmartBooks system includes electronic workflow with internal controls.
3. The three IOLTA ledgers and other documentation can be generated with a few mouse clicks.
4. Data is backed up daily in secure datacenters.
5. Documents are retained for at least seven years.

Advantages of SmartBooks Over an Individual Bookkeeper

Some individual bookkeepers do great work. However, there are a number of issues to consider when a business relies on one person for an important business function regardless of how well intentioned or highly skilled that one person may be. SmartBooks alleviates many of those issues.

1. Like any one person, an individual bookkeeper has limited depth and breadth of skills. No one person can do everything well. SmartBooks provides a team and a structure in which the team can successfully provide a comprehensive suite services, all executed at a very high quality level.
2. SmartBooks can handle more complex accounting. We account for capitalized assets and depreciation on a monthly basis, as well as loan amortization and tax accruals. We can handle complex revenue and expense recognition rules. These are areas in which individual bookkeepers often have limited skills or rely on controllers or CPAs to manage.
3. CPAs are used to being given sub-standard books at the end of the year from many clients who use individual bookkeepers and see the limitations to what one person can handle.
4. When one person is doing all the bookkeeping, there are no layers of supervision and limited checks and balances to enforce internal controls. For example, the same person entering bills is often the same person who pays the bills and then reconciles the bank account. SmartBooks segregates duties among multiple individuals, and the accounts payable module used by SmartBooks is SAS70 certified for compliance with Sarbanes Oxley regulations for internal controls. How many small businesses can say that about their current accounts payable process?
5. When relying on one person, he/she can go on vacation, get sick, leave for another job, retire, suffer a serious accident, become disabled, or otherwise become unavailable, sometimes on short notice leaving you in a bind. Even if you replace the person, there is little continuity with the new person and the transition can be difficult.
6. Many business owners are not qualified to evaluate the skill of a bookkeeper when interviewing and hiring individuals. Because bookkeeping is our core business, all of our bookkeepers are very good at bookkeeping.
7. Individual bookkeepers are constrained by their own capacity, and part-time bookkeepers are further constrained by the needs of their other clients. SmartBooks has the ability to easily scale service volume up and down based on the needs of individual clients and to respond quickly to ad hoc client needs.
8. Bookkeepers are not CFOs and have limited ability to perform financial planning and analysis and deliver strategic financial consulting services. It is difficult and expensive to find a good part-time CFO. Working with SmartBooks, clients have access to a CFO whenever they need one. Because our CFO partners have integrated access to clients' financial information, we can provide support that is more timely and less expensive.
9. Bookkeepers are usually not skilled at collections and managing accounts receivable, nor do they enjor or prioritize making collections call. SmartBooks understands how to manage the entire accounts receivable process, from sales through legal collections, and by making regular systematic collections calls for all delinquent accounts we can significantly improve collections results and cash flow for clients.
10. SmartBooks understands how to use technology to improve the bookkeeping process and client experience. Most bookkeepers know how to use Quickbooks fairly well. SmartBooks has taken it a step further to put together a highly efficient bookkeeping platform that includes a lot more than just Quickbooks software. We understand how to get the most out of Quickbooks, and we have added integrated technology solutions to make the process even more efficient. Because the system is so efficient, clients spend less of their time on paperwork, we can spend less of our time to do the bookkeeping, and we can charge significantly less than the cost of an individual bookkeeper.
11. The principals of SmartBooks are themselves small business owners and understand the needs of small business owners. We bring the perspective of the business owner and senior executive to ensure the results of the bookkeeping process, including ultimately the financial reports, support the goals of the business and do so in a cost efficient and low risk manner.

Ten Ways SmartBooks Makes Life Easier for CPAs

January, 2009

1. SmartBooks helps ease the year end crunch by requiring less review and adjustment.
2. SmartBooks improves your ability to do tax planning by providing up-to-the-minute actual data so you can comfortably do tax planning with no surprises.
3. SmartBooks makes it easy to find estimated tax payments as we book them to appropriate GL accounts. We also make sure your clients' estimated taxes are paid on time and for the proper amount.
4. Chart of accounts are customized to give you tax sensitive information instead of you having to dig for it or request it from the client-- items such as officer life insurance, S corp shareholder health insurance, officer salaries, etc.
5. SmartBooks takes care of fixed asset and loan amortization accounting on a monthly basis so assets and liabilities are on the books when the events happen and large year end adjustments are not required.
6. SmartBooks makes it easy to get quick and accurate interim financial statements for banks or other lenders or regulatory requirements.
7. SmartBooks will dramatically improve your ability to advise your clients on such things as monthly overhead, breakeven, and gross profit because the books will be up-to-date and accurate with an organized chart of accounts.
8. SmartBooks eliminates MQFS - Multiple QuickBooks File Syndrome.
9. SmartBooks will make sure prior year balance sheets are not changed.
10. You can log into your clients' web-based QuickBooks files at any time without having to request database copies via email or CD, drive to clients' offices, or deal with the IT headaches of trying to obtain remote access to their PCs or servers.