How to Save on Taxes

Greece's Accounting Problems; Is your Accounting System working?

2010-05-23T16:35:00.001-07:00

Is your Accounting System Broken?

In the last month or so we have heard and seen so much about Greece’s large debt burden and budget deficit leading to a contagion of problems that are likely to take the entire Euro Zone down. You wonder how this problem just revealed itself so suddenly without any prior warning. After all didn’t the Government of Greece and the Euro Zone’s central bank know they were taking on too much debt? Wouldn’t their accounting system tell them the level of debt and growing deficit as it got worse over the years?

If Greece were not a nation but a corporation, it would probably have had to file for bankruptcy by now. The reason why its problems went undetected for so long is that they had a broken accounting system. Every year, I come across so many small and large businesses that have accounting systems that don’t work. Business owners invest in accounting programs such as QuickBooks and Peach Tree, and pay thousands of dollars in fees to CPA and accounting firms but their accounting systems are just not set up to do what they are supposed to.

How to tell if your Accounting System is Broken?

A broken accounting system can break your business and your financial well being. Fortunately, you can tell very quickly if your accounting system is working the way it should. Here are some broad indications that can help you assess the health of your business accounting system.

Warning Sign #1: You don’t know how much money your business made last week, month, quarter or year.

Many small business owners just don’t know exactly how much money their business is making. They have a ‘general’ idea that the business is making money, but have no clue of the exact profit or loss the business made last month or last year. If the accounting system is set up and running right, you should be able to tell at any point in time exactly how much money your business is making looking at the Profit and Loss Statement.

Whether you hire a professional accounting firm in Charlotte to manage your books or do it yourself, you need to generate a profit and loss statement that summarizes your revenue and expenses for a specific interval of time. Given the nature of your business, you may not need to know your profit or loss on a daily or weekly basis. But you must be able to tell at least on a monthly basis, exactly how much money your business is making. If you hire an accounting firm to manage your books, make sure you receive a monthly profit and loss statement.

Warning Sign #2: You see items on your Balance Sheet that don’t make any sense to you.

Balance Sheet is a record of your business assets, liabilities and owner’s funds. It provides a snapshot view and health of your business at a certain point in time. If there are items on your Balance Sheet that you do not recognize or understand, your accounting system may be broken.

Wrong balance sheet numbers include things like big negative bank account balances, incorrect accounts receivable or accounts payable, and any other accounts with strange names or balances. It is difficult to fake a balance sheet. If you see goofy numbers on your Balance Sheet, your accounting system is not capturing the financial data of your business accurately and working as it should.

The debt and long term value of your business is determined by the Balance Sheet. If you have a professional firm manage your books of accounts, you must be able to review your Balance Sheet at the end of each month or at least at the end of each quarter.

Warning Sign #3: Your CPA gives you lots of adjusting journal entries.

It is common to get adjusting entries at the end of the year, especially during tax return preparation. At K&M Accounting and Tax Services, we often prepare a handful of accounting entries such as tax return depreciation, and deductions for small business clients while preparing the tax return.

However, if your accountant or bookkeeper is making many other adjustments, you should verify that the charlotte accountant isn’t adjusting accounts at year-end because you’re not regularly tracking the account as you go through the year. Especially making adjusting entries to your Cash or Inventory Accounts is dangerous. Large end-of-year adjustments mean just one thing: The books aren’t up to date with the financial realities of your operation. This lack of up-to-date information, sadly, means you may be flying blind.

Warning Sign #4: You don’t receive regular financial reports from your accountant for several months.

As a business owner, you must expect regular reporting from your accounting system. Profit and Loss Statement, Balance Sheet, Sales Tax and Payroll Tax Report, Accounts receivables and payables report are some of the standard reports that you should have access to on a monthly basis.

If your accounting system is not able to produce accurate and timely reports for your review, it is most likely broken and needs to be reviewed. A well managed and accurate accounting system not only provides you with the information needed to make important business decisions, it also serves as a system of record to prove your point in case of a legal or tax liability. Having a professionally managed accounting system becomes the first step in proving your case in a legal battle with business partners, IRS or any other claimant.

Remember, broken accounting systems can eventually take down large corporations such as Enron as well as entire Nations and Regions. As a small business owner it is important to stay on top of your accounting system which in turn will help you stay on top of your business performance.

Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation.

Tax Documents you must Maintain

2010-05-23T16:32:00.000-07:00

What a great year this year has been for the tax payers in the US. Perhaps this may have been the best year for tax payers to get tax refund in recent history. Massive tax cuts from Bush administration and huge tax incentives from the Obama administration for individuals such as the home buyer’s credit have reduced the effective tax rate of US tax payers to the lowest levels seen in many years. We shall wait for the official figures from the US treasury, but from what we have seen at K&M Accounting and Tax Services in Charlotte, this year has been a bonanza of huge tax refunds for our clients.

Now that the tax returns have been filed, what to do with all the paperwork and documents? This may be a good time to clean out the growing pile of tax and financial papers that clutters your home and office. Here's a list of what you need to keep and what can be safely thrown away without fearing IRS’s audit and queries.

IRS Statute of Limitations - Three Year Rule

This rule limits the number of years that IRS can audit your tax returns. For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. The idea behind this is that after a period of years, records are lost or misplaced and memory isn't as accurate as well. Once the statute of limitations has expired, the IRS can't go after you for additional taxes. However there are exceptions to this general three year rule:
• Failure to report all income (Remember IRS expects you report your global income) and the unreported amount being more than 25% of the income shown on the return, increases the limitation period to six years.
• Claiming loss from a worthless security increases the limitation period to seven years.
• If you file a 'fraudulent' return, or don't file at all, the limitations period never begins to run. The IRS can get you at any time.
Assuming that you've filed on time and paid what you should, you only need to keep your tax records for three years, but some records have to be kept longer than that.

Check List of Tax Documents you must Maintain

Employment, bank and brokerage statements: All W-2s, 1099s, brokerage and bank statements that prove your income must be maintained for at least three years.

Itemized Deduction expense documents: In case you itemized your deductions you will have to maintain all the expense receipts, mileage logs and other documentation that help substantiate your expenses. Remember, with IRS the rule during an audit is you prove it or loose it! At K&M Accounting and Tax Services we recommend our clients to maintain a scanned backup of their documents on our client portal in case you misplace or loose the originals.

Business records: Business records can become a nightmare to maintain. Since your income is not directly reported to the IRS as in the case of a salaried W2 income, the IRS is even more stringent when it comes to checking business records. If you have a sole proprietorship and have filed business loss on your personal return, make sure you maintain all possible income and expense records.

Tax returns: Keep copies of your tax returns for at least 3 years. Those of you that are in the midst of the immigration process may want to hold on to the tax returns at least until after your immigration case is completed. At K&M Accounting and Tax Service, we recommend our clients to hold on to the tax returns for at least 3 years after the immigration case is completed.

Social Security Records: Check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If the Social Security Administration records are wrong, you will need the W-2 or copy of your Schedule C (if you are self employed) to prove the correct amounts. Don't dump those records until after you've validated those contributions.

Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax advisor regarding your individual tax situation.

For a tax consultation with K&M Accounting and Tax Services L.L.C. in Charlotte, NC please contact us at 704 502 3960 or visit our website at www.kmaccountant.com

Tax Software for Charlotte Tax Payers

2010-01-20T13:14:00.000-08:00

Choosing the Right Program for Tax Return Preparation and Filing

In recent years every aspect of our lives has been transformed by technology. Just as Google and Online Shopping have become part of our life, preparing and filing Tax Returns is no exception to the internet revolution. Almost 75% of individual tax returns are paperless and received by the IRS through the electronic filing (E-file) service and $180 Billion in tax refunds is paid electronically through direct deposit. Paper Returns are quickly becoming a thing of the past, but there is still the difficulty of choosing the right tax program and getting maximum tax refund from the IRS with peace of mind.

“Can I self-file my Tax Return using Online Tax Program?”

Most individual tax payers can self-file their tax return using online tax program. However as per the data released by the IRS, close to two-thirds of the tax payers still find comfort in having their tax returns prepared by a tax professional. Individual preferences and complexity of tax situations continue to drive individual and small business tax payers to work with tax professionals. There are advantages in filing the tax return using online programs: 1) Working at your own pace. 2) Convenience of filing taxes while watching a football game at home. 3) Saving money with lower tax filing costs. 4) Simulating different financial scenarios and tax situations. 5) Quick and easy access to Tax Refund money.

How to Choose the Right Tax Program?

Key factors to consider while selecting a good do-it-yourself tax software program:

Phone Support: Select a company that offers phone support in case of an issue while preparing the return.

Tax Law updates: Make sure the software is updated with the most recent changes in tax laws.

Data Protection: Make sure the online E-file provider uses secure technology to transmit data. Identity Theft is a real issue and tax returns contain your confidential data.

Tax Deductions: Good tax software will have a step-by-step guide asking questions and dig up tax deductions.

Accuracy and Guarantee: Check if the company offers guarantee for accuracy of the program. In most cases the guarantee may be limited only to the extent of the fees paid for the program. You may be out of luck, if an error results in IRS penalty of $1000.

Audit Support: Check if the software company provides a tax professional to assist you in case of an IRS audit.

Picking the Right Tax Program for your Tax Situation

Having short listed tax programs based on the above criteria, now you need to select a Tax Software that best suits your particular tax situation.

Simple Tax Situations
In a simple tax situation you may have salary (W-2), interest and dividend income and take standard deductions on the tax return. You may be able to prepare your federal and state tax return online very quickly and at a cost of under $30-$50 using several tax programs such as TaxAct (http://www.taxact.com/), TaxCut (Part of H&R block at home online: http://www.hrblock.com/) and TurboTax (http://turbotax.intuit.com/).

These are good products for savvy individuals with simple tax situations. Give yourself 2-3 hours to answer the guided tax questionnaire and review the data once you have collected all the relevant information.

Free Tax Software
If your Adjusted Gross Income is less than $56,000 you may qualify for ‘Free File’ online tax program offered by IRS in partnership with private companies. You need to start on IRS website in order to get the ‘Free File’ version (http://www.irs.gov/efile). The program provides step-by-step guide to e-file the return and also sets up direct deposit of your tax refund into your bank account. Now, here’s a free lunch in America!

Be careful with ‘free’ tax filing offers on the internet. Half way through the program may inform that your tax situation makes you ineligible for the ‘free’ version. This could be quiet frustrating as you leave your confidential data behind. If the tax program is not approved by the IRS, you are better off staying away from it. The potential damage and cost of loosing your personal data could be very high.

Complex Tax Situations
Complex tax situations involve more than one source of income (W-2s, self-employed, 1099s etc), investments in stocks, real estate and business partnerships etc. They need serious number-crunching and you should be comfortable navigating through tax documents and familiar with tax concepts such as figuring the cost basis of your assets before depreciation etc. The web version of TurboTax Premier (http://turbotax.intuit.com/) is a good place to start. You may also check out KM Tax Services (http://kmtaxservice.com) Charlotte Tax Service

Working through the complex tax situation can get quiet tiresome, often going back and forth reviewing the data, fixing errors and may take 4 to 6 hours to finish. Many tax payers with a complex tax situation simply prefer to enjoy their hard earned weekends and let a tax professional handle the complex number crunching. Give yourself enough time ahead of the tax deadline as you may run into road blocks and getting an appointment with a tax professional at the last minute may prove difficult.

Special Tax Situations
There are several special tax situations that the tax software may not be able to handle effectively. Investments in small business corporations, net operating losses, home office and other special deductions, active trading with mark-to-market accounting, H1 and other temporary work visa taxes, individuals with income in multiple states, ITIN applications and US tax resident tests for immigrant workers require special tax knowledge and are not suitable for online tax programs.

Most of the tax programs will let you try for free before filing the actual return. This tax season try out some of the online tax programs and see if it works for your tax situation. And finally for those of us that prefer the comfort of human presence and discuss tax saving ideas, there will always be tax professionals that can be counted upon.

This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.

Krutika Chheda
K&M Accounting and Tax Services L.L.C.
www.kmaccountant.com
You can Contact her at kmchheda@kmaccountant.com

Choosing Right Tax Software for Charlotte Tax Payers

2009-12-23T10:54:00.001-08:00

Choosing the right software for your tax return

Top tax deductions for small business and professionals

2009-11-22T19:30:00.000-08:00

Small Businesses and Individual Professionals can Reduce their Taxes

Taxes are the biggest expense for most Small Businesses and Individual Professionals. And yet most of us provide minimal time for planning and reducing this expense, except perhaps an annual visit to the accountant’s office during taxes! Is it any surprise then that Small Businesses and Professionals contribute the most to Tax Revenues?

Large Corporations with help from expert tax professionals pay at a much lower effective tax rate. An extreme example is that of Goldman Sachs which paid an effective tax rate of 1% on a $2.3Billion profit last year. Independent studies over the years suggest that Small Businesses pay up to $160 Billion in excess taxes each year. This is money you can save through proper tax planning. As with everything else in your business, it takes careful planning and professional execution.

There are over 350 Tax Deductions and Credits for Small Businesses and Individual Professionals. Although it is almost impossible to say how many of these may be applicable to your specific business without considering your particular scenario, here are some Deductions that may apply to most Small Businesses and Professionals.

Top 5 Tax Deductions for Small Businesses and Professionals

1. Start-up Expenses

As you get your business started, there are several costs such as furniture, equipment, Computer, Fax etc that may be deducted 100%. Section 179 of the Internal Revenue Code allows you to deduct up to $250,000 of the cost of new equipment or other assets in 2009. Off the shelf Software costs can also be now deducted in the same year as per Section 179.

Although if you know that your business is going to take a couple of years to break even and generate profit, you may want to depreciate these expenses over the years to offset the profits in later years.

2. Business Travel, Meals and Entertainment

If you make a trip for business purposes, travel costs including Airline ticket, Hotel, Taxi, Meals, Shipping business materials, Laundry, Telephone calls, etc are fully deductible expenses.

How about combining business travel with pleasure? It is allowed, as long as the primary purpose of the trip is for Business, although there are strict guidelines on this.

3. Charitable Contributions

This is a great deduction as you can feel good about donating to your favorite cause and save on Taxes at the same time. Charitable contributions are treated slightly different depending on the type of your business entity. If your business is a partnership, a limited liability company, or an S corporation, your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. In case of regular (C) corporations charitable contributions are deducted on the corporation’s tax return. There are some important rules for charitable contribution deductions:

- Only contributions to charities listed as ‘qualified organizations’ by the IRS are deductible and contributions more than $250 require a written acknowledgement from the qualified charitable organization.

- You can deduct donations of assets such as Property or Equipment at their fair market value. Although a fully depreciated (written off) asset cannot be deducted as a contribution even if it is works well.

- You cannot deduct the value of time or services that you volunteer.

- You cannot deduct the part of a contribution that benefits you. If you receive a gift in exchange for a charitable donation or if the contribution made is in lieu of certain benefits, you can deduct only the amount of the contribution that exceeds the value of the gift. If you are making a large donation, make sure you check with your tax accountant first.

4. Bad Debts

Bad Debts hurt the most. Especially when you have worked so hard to satisfy all of the customer’s requirements and they do not pay you. The good news is that certain bad debts are tax deductible.

If your business sells goods, you can deduct the costs of any goods sold, but not paid for, as an ordinary business expense. However, you cannot deduct any lost profits you would have collected from the sale. If your business provides services, no deduction is allowed for the time you devoted to the customer who doesn't pay. For example if you provide medical services and the patient does not pay, you cannot deduct the cost of the time you spent in treating the patient. The rationale is that if businesses were able to deduct unpaid services, it would be quiet easy to inflate the unpaid bills and claim large bad debt deductions making it hard for IRS to catch the fraud.

5. Home Office Deduction

For several years taking a Home Office Deduction was considered a red flag, inviting the IRS to Audit your tax return. But that may no longer be the case, with more and more businesses and individuals taking advantage of working from home and maintaining a healthy work-life balance. IRS is well aware of the rising trend in working from home office. As long as you use the ‘Home Office’ as IRS defines it. This one deduction alone can save you several thousand dollars in tax.

For example if you are an independent Information Technology contractor and mostly work out of your client’s office, however you use part of your home to manage the administrative aspects of your profession or business, you may qualify to take the Home Office deduction. IRS has specific rules to qualify to deduct expenses for home office. I want to share the two most basic qualifiers.

There are other rules and definitions that IRS uses to qualify the Home Office deductions. If you are planning to take advantage of this deduction, I strongly recommend you take help from an expert tax accountant. The money you will save on the taxes will be well worth the professional fees.

Keep in mind this column and the articles published here are only meant to provide you with high level information about taxes and in no way should you consider this as tax advice. Hopefully I have got you started thinking about saving more of your hard earned money and paying less to the IRS as you brave through the economic head winds in a recession. Consult your Tax Advisor regarding your individual situation. Feel free to contact me or visit my company website for more information www.kmaccountant.com