Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Aug 3

    In the flurry of launching a new business, filing your taxes may well be one of the last things on your mind. But, you don’t want to wait until the last minute to figure things out. At best, you could leave money on the table – at worst, suffer penalties or other legal ramifications.

    Avoiding these common startup bloopers can ensure your new business is on the right track to handling its tax obligations properly.

    1. Not keeping track of all of your expenses
    From the moment you launch a business, you can deduct “all ordinary and necessary” business expenses such as office supplies, professional fees, and business mileage. Your biggest mistake is not keeping track of these expenses throughout the year, and trying to gather every receipt when it’s time to file. The bottom line is you can’t deduct what you can’t document, and failing to record as you go most likely means you’re forgetting expenses and leaving money on the table.

    Find a method for documenting expenses that works for you. An accounting program, such as QuickBooks®, will let you record and manage revenue and expenses. In addition, there are dedicated apps such as Expensify for tracking expenses, MileBug for recording mileage, or Shoeboxed for capturing paper receipts. The best method is whichever one you will consistently use.

    2. Mixing personal and business
    New startups and small business owners often invest so much of themselves, their time and their money, into their new company that it’s hard to separate them. But separate them you must! The mixing of business and personal funds makes it extremely difficult to make sure you deduct all of your business expenses and only your business expenses. At the very least, you must have separate business and personal checking accounts. Just imagine the look on an IRS auditor’s face when she finds out you can’t tell your business and personal expenses apart.

    3. Choosing the wrong legal entity
    Your business’ legal structure affects how you report your taxes and how much you pay, so it’s important to choose the right entity. For example, many start out as a sole proprietor or partnership because it’s easiest, but soon find themselves paying way too much in self-employment taxes. Creating a corporation can help lower their tax bill significantly.

    4. Mixing equipment and supplies
    Both first-time and experienced business owners get tripped up by what is considered equipment versus supplies. Equipment are often higher value items that will typically last longer than one year, while supplies are generally things that you use up during the year.

    When it comes to equipment, there are a couple of approaches: 1) You can recover a portion of the cost each year, or 2) you may qualify to write-off the full amount in the year of purchase. There are, naturally, some restrictions on the ability to deduct the full amount. Be sure you talk to us first to find out if you qualify.

    If you mistakenly deduct your equipment or other capital item as an operating expense such as supplies, the IRS could determine that you’re not entitled to any deduction.

    5. Not sending Forms 1099
    When you pay any freelancer, contractor, attorney or other non-corporate entity $600 or more for services over the course of the year, you’re required to issue Form 1099-MISC and send copies to both the entity (business, contractor, individual, etc.) and the IRS. If you fail to do so on time the penalty can be as high as $520 per occurrence.

    6. Deducting too much for gifts
    Maybe you sent some of your best clients a holiday present, or sent them a closing gift after a large purchase, or sent a colleague a thank you gift for an especially nice referral. Great! Business gifts are deductible, but there’s a big catch. You can only deduct $25 per gift. So, if you send Paula a $150 fruit basket, you only get to deduct $25 for it.

    Documentation is going to be important. If you report $2,500 in business gifts, you need to be able to have documentation that shows you gave gifts to 100 different people.

    7. Not making estimated tax payments
    If your business is any legal form other than a C corporation you are personally going to be liable for paying taxes on the profits you earn. Business owners are required to pay in sufficient taxes to cover their expected tax obligations. Those payments can be in the form of payroll withholding – if you or someone in your household qualifies – or through quarterly estimated tax payments. Even if it wasn’t required, it is generally easier to make smaller payments on a quarterly basis than to have to pay the entire bill at year end.

    The best way to stay on top of your estimated tax payments is to get into the habit of setting aside a percentage of your revenue on a regular basis. Then, on a quarterly basis, review your revenue and expenses, calculate your tax liability, and make the appropriate payments.

  • Jun 9

    Congress recently enacted significant changes to partnership audit and adjustment rules. The changes are expected to dramatically increase the audit rates for partnerships, and will require partners to carefully review, if not revise, their partnership’s operating agreement.

    The new rules generally apply to partnership returns filed after 2018, but careful planning today will help mitigate any unfavorable consequences.

    Important new provisions that may impact you:

    • The IRS may collect any additional tax, interest, and penalty directly from the partnership rather than from the partners (the tax could be collected at the highest individual tax rate).
    • Current partners could be responsible for tax liabilities of prior partners.
    • New elections and opt-outs will be available and your agreement may need revision to specify who makes these decisions.
    • There are many new tax terms and concepts that will likely require you to adjust your partnership’s operating agreement.

    Particularly, the new term “partnership representative” replaces the prior “tax matters partner.” The partnership representative is critical; they will act as the single point of contact between the IRS and the partnership and will have full authority to bind the partnership and the partners during an audit.

    Potential opportunities and the need for planning today

    Certain partnerships with 100 or fewer partners may elect out of the provisions. To do so, the partnership may make an annual “opt-out” election with their timely filed tax return (Form 1065).

  • May 24

    They played baseball together for ten years, and it happened so often, Franklin P. Adams, a New York Evening Mail columnist, wrote an eight-line poem about it. Originally published under the title “That Double Play Again,” it is better known as “Baseball’s Sad Lexicon,” or simply as “Tinkers to Evers to Chance.”

    These are the saddest of all possible words:
    “Tinkers to Evers to Chance.”
    Trio of bear cubs, and fleeter than birds,
    Tinker and Evers and Chance.
    Ruthlessly picking our gonfalon bubble,
    Making a Giant hit into a double—
    Words that are heavy with nothing but trouble:
    “Tinkers to Evers to Chance.”

    A little background: Back when the Chicago Cubs were a dynasty they won the National League pennants in 1906, ’07, ’08, and ’10 and the World Series in 1907 and ’08. Anchoring their infield were shortstop Joe Tinker, second baseman Johnny Evers, and first baseman Frank Chance -the best
    double play combination of the day.

    Adams considered the poem a throwaway when he wrote it. He simply wanted to get out to the ballpark and watch the game. But those three may still be the best known Cubs of all time.

    But, it didn’t happen by chance. (Did you see what I did there?) It happened by teamwork. It happened because they practiced. It happened because Tinkers and Evers and Chance developed a special relationship with one another unlike most others. The same is true if you’re trying to grow your business by word-of-mouth. You can’t expect people to shout your praises and send you referrals just because you showed up at the ballpark. It takes a relationship to make it work. Referral relationships work just like other relationships work.

    Think about the relationships you have with your neighbors. How willing would they be to help you out if your car broke down? Depending on your relationship, they might each respond differently. One might outright refuse to help. Another might share the name of his favorite mechanic. Another might be willing to take you or pick you up at the garage. Still another might insist on fixing it for you at no cost. Each of your neighbors may display a different willingness to help. And naturally, your willingness to help them would probably differ as well. Even your requests for help would be dependent on your history with each of them.

    Great referrals don’t happen just because you ask. At some level of consciousness, people who are good salespeople know this. Yes, sometimes, just asking for referrals will work, but more often, asking someone with whom you haven’t yet developed a relationship, may sour them forever.

    Like a great double play combination, it may look easy, but it takes a lot of work behind the scenes to make it happen. Getting ideal referrals with strong introductions from influential people involves planning, preparation, and practice. It involves developing that special relationship.

  • May 12

    I’ve written before about what a good tax planning technique hiring your children can be. (See “Hiring Your Children for the Summer: The Job of Last Resort or Just Good Tax Planning,” Taxing Times, June 2015.) It can be an effective way of shifting income from your high rate to as low as zero percent! It can also be good for the kids. However, as a recent tax court decision demonstrates, it’s important to dot your i’s and cross your t’s.

    The case involved Lisa Fisher, a New York attorney, faced with a common dilemma to find summer care for her children, all under the age of nine. So, during the summer, she brought them into her office two or three days a week where they shredded waste, mailed letters, answered phones, greeted clients, and copied documents.

    Fisher took deductions for the $28,770 in wages she paid her kids over a three year period. But, she didn’t keep any payroll files or issue any W-2s. She didn’t keep any records substantiating the work they did or establishing that she paid “reasonable compensation” for the work performed. Nor could she present any documentary evidence, such as cancelled checks or bank statements, to verify that she actually paid them the wages she deducted.

    You know where this is headed. The IRS disallowed the deductions for the children’s wages and imposed an accuracy related penalty. The Tax Court affirmed that decision.

    Bottom line: Hiring your children to work for your business, or rental properties, can be perfectly legal tax planning. But, you have to follow the rules and document everything in order to protect the benefits.

  • Apr 27

    In business, doing what others don’t do can often give you an edge. It can position you head and shoulders above your competition. It helps you stand out in a positive way, and when you do, people are attracted to you and your business, and your success grows stronger, deeper, and more durable.

    Asking for feedback is a simple way to gather information for improving our businesses, but many of us never take the time to ask. We get so wrapped up in the day-to-day running of the business that we fail to pause and ask people, “How are we doing?” Others are simply intimidated by the process – and afraid of what they’ll hear.

    According to the book The 29% Solution by Ivan Misner and Michelle R. Donovan there are five main reasons why we don’t ask for feedback: (1) we’re afraid the response will be negative; (2) we don’t know who to ask; (3) we don’t know when to ask; (4) we don’t know how to ask; (5) we don’t want to take up other people’s time. With all these objections, the thought of asking for feedback can give us heartburn, but it’s worth the pain; the potential for growth can be tremendous.

    Whether positive or negative, feedback should be considered constructive, because it helps our business develop new products, improve existing services, and sometimes adopt a whole new approach.

    Fear of a negative response may be what keeps many of us from asking for feedback. Nobody is eager to be criticized. But, as difficult as it to receive, negative feedback is actually a gift. It’s a reality check; it reminds us that no matter how good we are, we can always improve. It’s also a reminder that we can never make everyone happy. If you’re willing to ask for feedback, you’re going to get some negative feedback along the way. It’s your attitude toward it that will turn that negative feedback into an opportunity. Don’t ask for feedback unless you’re ready to hear it – and respond to it constructively.

    Whom should you ask for feedback? One answer is everybody. Ask your coworkers, supervisors, subordinates, partners, customers.

    When is the best time to ask for feedback? That depends. A professional development trainer might ask for feedback several times. During a session, so it can be tailored, the end of a session, and three or four months afterwards. She’ll ask different questions at different times. Someone selling a product might need to give the customer time to use it, or might not. Someone selling professional services might want to ask shortly after the services have been delivered.

    What if you don’t know how to ask for feedback? The easiest, and most logical, way is make it part of your sales process. Many companies use a questionnaire; some hand it out upon completion of the assignment, some e-mail it afterward, and some mail it as a follow-up in a few weeks. How you choose to do it depends on your customer base.

    The last reservation that a lot of us have is that we are reluctant to take someone else’s time by asking for feedback. What a cop-out. Adults have the option of saying no. It’s our responsibility to ask. Increase the likelihood that you’ll get useful feedback by making the request simple and timely. If it’s too complicated, or if you set a hurry-up deadline, your requests may end up in the circular file. Make the deadline too far off, and people will set it aside and forget it.

    I dare you – do something few others do. Stand out from the crowd. Ask for feedback. And be ready to turn it into opportunities for your business.

  • Feb 17

    New January 31 Deadline for Employers

    Employers are now required to file their copies of Form W-2, submitted to the Social Security Administration by January 31.

    The new deadline also applies to Forms 1099-MISC reporting non-employee compensation, such as payments to independent contractors.

    In the past, employers typically had until the end of February if filing on paper, or the end of March if filing electronically, to submit copies of these forms.

    The new accelerated deadline will make it easier for the IRS to spot errors and verify the legitimacy of tax returns and properly issue refunds to eligible taxpayers. Penalties for late filing can be exorbitant! For example, if a business fails to file Form 1099-MISC or furnish a copy to the payee on time the penalty can be as high as $520 per occurrence.

    New March 15 Deadline for Partnerships and LLCs

    Partnership tax returns are now due March 15, NOT April 15 as in the past.

    S corporation tax returns due date remains unchanged at March 15.

    New April 15 Deadline for C Corporations

    C corporation tax returns are now due April 15, NOT March 15.

  • Jan 20

    In the book Masters of Networking, Don Morgan asserts that there are three ways to increase the power of your network and improve its ability to help you achieve goals. Fortunately, he says, anyone can create this leverage by understanding three fundamental characteristics of human nature. However, he goes on, only those dedicated to becoming master networkers will commit to mastering the arts of friendship, generosity, and character. The person who creates this trilogy of leverage will be on the road to unlocking the full power of networks.

    Friends like to help friends. And at some point in your life, you’ve probably helped a good friend do something that you might not have enjoyed doing— painting a room, helping out with the move–just because he was your friend. You really couldn’t avoid it. If you make good friends of your networking associates, you gain the same kind of leverage.

    How do you turn networking associates into good friends? There’s nothing complicated or mysterious about it, Morgan says. Think back how you and your best friend became friends. You went places together, did things together, talked about things, and one day you realize that you have been best friends for some time without even realizing it.

    That’s what you do with your networking partners. Go places with them, do things with them, help them when they need help. Soon you’ll discover that associates have become good friends. Not all of them, of course, but the more effort you put into it, the more friends you’ll make. And the more powerful your network will be in helping you achieve goals.

    You’re at a party. You’re given several presents. You don’t have anything to give in return. How do you feel? A little less than wonderful, right? It’s human nature to want to give a gift in return.

    The same holds true in networking circles, when you give something to a networking associate- a business referral, emotional support- she’ll want to give you something in return. Perhaps you won’t get a return gift immediately. However, the more you give your networking partners, the more inclined they will be to reciprocate.

    A true gift is an unconditional gift; you give without expecting anything in return. However, usually you get something back anyway. First, you gain the satisfaction of helping a friend. Second, human nature dictates that you will get something in return. When you least expect it, you may receive a gift worth far more to you than the time and effort you expended.

    The most lasting impression others have of you is the first impression: the way you looked and behaved when they first met you. If that’s a bad impression, it may take a long time to overcome and others may be reluctant to get involved with you. A master networker understands this and puts a lot of effort into creating a good first impression by dressing and behaving appropriately at all times.

    However, your long-term image goes well beyond how you look at first glance. Equal in importance, according to Morgan, are three character attributes: responsibility, reliability, and readiness. The group needs some tasks done or problem handled, do you take responsibility? Can you be counted on to come through when the need arises? Are you quick to volunteer your services?

    Above and beyond the first visual impression you make, your responsibility for, reliability within, and readiness to participate in group activities become the most important aspects of your image in the long run. If the group sees you as an asset by virtue of your character, individuals in the group will trust you, rely on you, and enjoy associating with you. And they will feel more comfortable referring their friends and associates to you— and your business.

    In the end, this trilogy of networking leverage comes down to an old principle, known in some parts of the world as the “Golden Rule”. In BNI we just phrase it a little differently: “Givers Gain.”

    To find a BNI chapter near you, visit BNI.com.

  • Oct 28

    In what may come as a shock to many of you, the country is broke and is looking for additional revenues. You should know, it will be looking in every nook and cranny to replenish the federal coffers. What you may not know is the Internal Revenue Service seems already to be engaged in revenue-finding-missions. Among the objects of their affection – in the tax audit – are sole proprietors filing Schedule C, and substantiation requirements for every possible deduction.

    The IRS now views the Schedule C as the repository of all manner of evil taxpayer intentions to reduce their tax liabilities (and, from the perspective of the IRS, federal revenues). IRS agents are reportedly beating the bushes of sole proprietors primarily to reduce, or eliminate, claimed deductions as unsubstantiated to increase both income and self-employment tax liabilities.

    All deductions are a matter of legislative grace, and that grace comes with a price: at a minimum to maintain books and records to support the expenditure, and, in many cases, to meet more exacting substantiation standards than the Code imposes as a condition to deductibility in various circumstances. One might not think of charitable contributions as a source of major contention with the IRS, but in the case of non-cash contributions, the taxpayer is technically required to establish, both the fair market value of the property and the property’s adjusted basis. In some cases, the Code requires an appraisal of property (where the value exceeds $5,000) contributed to a charity.

    However, the property’s adjusted basis comes into question in two cases: first in most cases where the property is inventory in the hands of the donor, and secondly, if tangible personal property that is unrelated to the charity’s exempt function, the amount of the contribution is limited to the donor’s adjusted basis in the property. For example, if a taxpayer donates used clothing to a charity that does not distribute them to poor or indigent individuals, the deduction is limited to the lesser of your basis or fair market value. Now, it may seem like common sense that the current value of almost all used clothing is less than what was paid for it but technically, a claim for a deduction of such items requires some proof of both the fair market value and the cost basis of the property.

    And such was the case I recently read about in Surgent’s Tax Issues Newsletter where a taxpayer was denied a claimed $850 deduction for clothing donated to charity. Yes $850! The return was under audit and the taxpayer submitted photographs of all the clothing donated and matched them up to the current list of retail prices published by The Salvation Army and recognized by the IRS– but that wasn’t enough. The auditor wanted purchase receipts of each item to establish the cost basis. Even if the taxpayer was in the 35 percent tax bracket, the amount of tax at issue was only $298. The IRS correctly assumed the taxpayer would throw in the towel rather than incur additional time, effort and costs to substantiate the deduction. So, the IRS pressed the issue hard enough to deny any deduction. Hooray, the deficit was reduced $300!

    From a practical standpoint, trying to establish the cost of most any item of personal property even shortly after its purchase, much less a couple of years down the road, is extremely difficult. So, nothing prevents the IRS from using similar audit strategies where larger sums of money are involved.

    Echoing the motivation Willie Sutton once famously gave for robbing banks, the Internal Revenue Service knows where the money is.

  • Oct 3

    It never ceases to amaze me: I observe business people and salespeople allowing customers (and money) to leak out of their business. Many times without even realizing it.

    For example, I watch people go to Chamber, or other networking, events with the sole purpose of collecting as many business cards as they can. Somehow they seem to feel, the more cards they collect, the more contacts they can make, the more business they will generate. And they will be everywhere, at every event tangentially connected to their business. Others may view them as the king or queen of networking.

    Yet the business, the referrals, aren’t coming and they ask, “Why aren’t I getting referrals?”

    There could be several reasons such as forgetting to ask, focusing on the wrong people, having no system in place, or putting pressure on customers or referral partners unknowingly.

    Here are six things you can do to increase your referrals.

    Ask. Yes, it starts here. If you don’t ask you may get a few haphazard referrals, with the emphasis on few. If you learn how to properly ask your customers and partners for help, some will enthusiastically promote your product or service. In my experience, you’ll never get all of your customers to give you a referral, but you don’t know which ones will be ambassadors for you until you ask. Note: Referral partners don’t have to be customers. They could be friends, vendors, or others in a supportive group, who have, over time, come to know, like, and trust you.

    Make people comfortable giving you referrals. It’s important to remember that your customers don’t like to feel like they are selling their friends to you. For many, offering an inducement or a bribe in exchange for names not only makes them uncomfortable, but may cause them to question the quality of your goods or services.

    You may have customers or referral sources who would like to refer, but don’t know how. By giving them easy ways to refer their family and friends without making it feel like you are paying them, you will receive more and a better quality of referrals.

    Show appreciation. Remember to thank your referral partner or customer for the referrals. If privacy allows, let them know when a referral works out and give them an update. One of my favorite ways to do this is with a handwritten card. People like to be appreciated. When you take the time to do something so few do these days, send a handwritten card – NOT a text, NOT an email, NOT a tweet, a handwritten card – your referral source will be pleased and more willingly refer you the next time.

    Focus on the right relationship. You don’t have the time to have a great relationship with everyone you meet. It’s impossible! That’s why you have to focus your energy developing the right relationships. For example, would you spend the same energy on a customer who has only purchased one entry level item from you in the last year, as you would a CEO who purchased your product for every employee at her company?

    Put systems in place. You already know that you don’t have time to build quality relationships with everyone; however, you can put systems in place such as follow up procedures to help nurture and develop relationships so that you can have more of those quality relationships referring you.

    Grow referral partners. Being an active member of a closed networking group, like BNI, gives you the opportunity to develop relationships with potential referral partners without the distraction of direct competitors. Unlike other networking opportunities, BNI encourages your efforts to build quality relationships with referral partners. Those trusting relationships can develop into your most prolific referral partners.

    Generating referrals takes a well-designed system and consistent effort to operate reliably. But the pay-off is worth it. Referrals are one of the highest probability and most profitable sources of new customers.

  • Aug 19

    Don’t you just love Congressional tricks?

    One of my personal “favorites” is when they cram a bunch of unrelated business into their bills.

    Which is just what happened about a year ago, and it could affect you…

    H.R. 3236, popularly known as “The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (yes, that’s how these things are named) brought some tax-law-related changes.

    Individual tax returns are still due on April 15th — and a six month extension period is still available. But …

    * Partnership tax returns are due March 15, NOT April 15 as in the past. If your partnership isn’t on a calendar year, the return is due on the 15th day of the third month following the close of your tax year.

    * C corporation tax returns are due April 15, NOT March 15. For non-calendar years, it is due on the 15th day of the fourth month following the close of the tax year.

    * S corporation tax returns remain unchanged–they are still due March 15, or the third month following the close of the taxable year.

    On TOP of that, another doozy: audits can get you for six years now, instead of three. Without going into all of the details, essentially if you withhold reporting of 25% or more of your income, the IRS has six years to figure it out. They’ve always had unlimited time for fraud or criminality … but there was some wiggle room for underreporting in the past. No longer.

    All this (and MORE!) in one measly highway bill.

    So, it pays even more to work with a pro, yes?

    These sort of issues are what we specialize in worrying all about — so you don’t have to. Because YOU have to keep your head in a bigger picture.

    Entrepreneurs know that hard work and a great idea don’t guarantee success. Fortunately, most of them also know that failure isn’t final — almost every successful business owner client of mine has crashed and burned at least once in his/her career.

    One of the best ways to pick yourself, or your business, back up off the ground is to take a fresh look at things that you “thought” were set in stone. Here are some strategies I compiled for you to possibly give your business a fresh lease on life, come fall, or into 2017…

    Re-target your market. In the heat of start-up passion, entrepreneurs frequently try to interest too broad a market: “Everyone will want to buy this!” The result: getting lost in the crowd. The more closely you define your market, the more success you will experience.

    Re-examine your price. Price is obviously supremely important. See how you can lower your overhead or cut production costs. Perhaps there’s a new way to package your products, so that your average transaction value can go up?

    Identify and push your best product. Focus on what works. If your hot product is coffee cups, look for ways to highlight and expand that niche instead of veering into new territory. How about different colors and holders for those cups?

    Make your marketing materials more memorable. Emphasize the benefits — SPECIFICALLY how features of your product or service will improve business or the quality of life for your customer. And scrutinize your advertising. Using big media is not always the answer, especially when you have narrowed your market. Don’t overlook narrowly-targeted marketing efforts or joint promotions.

    Keep promoting! Make sure your message sinks in. Find affordable ways to reach your target market, and use these avenues as often as you can. Try social advertising!

    These ideas are to get you started. There may be longer conversations to be had. If so, that’s what we’re here for.