Businesses need financial information that’s accurate, relevant and timely. The Securities and Exchange Commission requires publicly traded companies to follow U.S. Generally Accepted Accounting Principles (GAAP), often considered the “gold standard” in financial reporting in the United States. But privately held companies can use simplified alternative accounting methods. What’s right for your business depends on its size, regulatory and contractual requirements, management’s future plans and the needs of its stakeholders. Menu of accounting methods Here’s an overview of the accounting methods available for small and medium-sized entities (SMEs): GAAP. This framework follows rules set forth by the Financial Accounting Standards Board (FASB). It’s based on the accrual method of accounting, where revenues and expenses are matched to the reporting period in which they’re earned and incurred, respectively. Under this method, companies report receivables for revenue that’s earned but not yet collected and payables for expenses that are incurred but not yet paid. Prepaid (and accrued)...[ Read More ]
Low interest rates and other factors have caused global merger and acquisition (M&A) activity to reach new highs in 2021, according to Refinitiv, a provider of financial data. It reports that 2021 is set to be the biggest in M&A history, with the United States accounting for $2.14 trillion worth of transactions already this year. If you’re considering buying or selling a business — or you’re in the process of an M&A transaction — it’s important that both parties report it to the IRS and state agencies in the same way. Otherwise, you may increase your chances of being audited. If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax...[ Read More ]
Internal controls are a system of policies and procedures organizations put in place to protect assets and improve operating efficiency. Effective internal controls are critical to accurate financial reporting. A solid system of controls can help prevent, detect and correct financial misstatements due to errors and fraud. Internal and external risk factors evolve over time. So, upon completion of the year-end financial statements, managers and internal auditors should reassess whether internal controls are up to snuff and brainstorm ways to solidify controls. Start your annual assessment with the following three basic controls: 1. Physical restrictions Employees only should have access to those assets necessary to perform their jobs. Locks and alarms are examples of ways to protect valuable tangible assets, including petty cash, inventory and equipment. But intangible assets — such as customer lists, lease agreements, patents and financial data — also require protection with controls including passwords, access logs...[ Read More ]
In today’s unprecedented market conditions, it can be challenging to predict metrics that underlie your company’s accounting estimates. Examples of key “unknowns” include how much longer certain pandemic issues will continue, how federal stimulus spending will affect the economy over the long run, and the extent to which tax laws and environment regulations may change under the Biden administration. Your predictions on these matters could, in turn, have a material impact on your company’s financial statements. Inaccurate predictions could lead to restatements or write-offs in future periods. Relying on estimates Accounting estimates may be based on subjective or objective information (or both) and involve some level of measurement uncertainty. Some estimates may be easily determinable, but many are inherently subjective or complex. Examples of accounting estimates include allowances for doubtful accounts, work-in-progress inventory and uncertain tax positions. Fair value measurements are another type of accounting estimate. Under U.S. Generally Accepted...[ Read More ]
Many companies are continuing to struggle financially during the COVID-19 pandemic. If cash is tight, what can your business do to shorten its cash cycle? The answer could lie in your outstanding accounts receivable. Here are five strategies to help convert receivables into cash ASAP. 1. Apply for a line of credit. A line of credit can help bridge the “cash gap” between making a sale and getting paid. Often credit lines are collateralized by unpaid invoices, just like equipment and property are pledged for conventional term loans. Banks typically charge fees and interest for securitized receivables. Each financial institution sets its own rates and conditions. Typically, these arrangements provide immediate loans for up to 90% of the value of an outstanding debt and are repaid as customers pay their bills. 2. Encourage early payment. Your company may be able to expedite collections if customers are given a financial incentive to pay...[ Read More ]
High-income taxpayers face a 3.8% net investment income tax (NIIT) that’s imposed in addition to regular income tax. Fortunately, there are some steps you may be able to take to reduce its impact. The NIIT applies to you only if modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, $200,000 for unmarried taxpayers and heads of household. The amount subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you. Net investment income includes interest, dividend, annuity, royalty, and rental income, unless those items were derived in the ordinary course of an active trade or business. In addition, other gross income from a trade or business that’s a passive activity is subject to the NIIT, as is income from...[ Read More ]
If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case. Facts of the case In the case, the taxpayer ran a notary and paralegal business. She deducted business meals and vehicle expenses that she allegedly incurred in connection with her business. The deductions were denied by the IRS and the court. Tax law “establishes higher substantiation requirements” for these and certain other expenses, the court noted. No deduction is generally allowed “unless the taxpayer substantiates the amount, time and place, business purpose, and business relationship to the taxpayer...[ Read More ]
It takes more than dedication and enthusiasm for your not-for-profit’s cause and programs to make a good board member. The most critical duty for all board members is being a fiduciary. This means, among other things, that they can be trusted to always act in their nonprofit’s best interests, avoid unnecessary risk, make decisions thoughtfully and execute them efficiently. Core duties Not all board members are aware of their duties — and it’s up to your organization to ensure they understand them. In general, a fiduciary has three primary duties: Care. Board members must exercise reasonable care in overseeing the organization’s financial and operational activities. Although disengaged from day-to-day affairs, they should understand the nonprofit’s mission, programs and structure, make informed decisions, and consult others — including outside experts — when appropriate. Loyalty. Board members must act solely in the best interests of the organization and its constituents, and not for personal...[ Read More ]
As we continue to come out of the COVID-19 pandemic, you may be traveling again for business. Under tax law, there are a number of rules for deducting the cost of your out-of-town business travel within the United States. These rules apply if the business conducted out of town reasonably requires an overnight stay. Note that under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses through 2025 on their own tax returns. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025. However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses. Here are some of the rules that come into play. Transportation and meals The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your...[ Read More ]
As we approach the holidays and the end of the year, many people may want to make gifts of cash or stock to their loved ones. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2021 is $15,000. The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified...[ Read More ]