Running a successful business requires proactive financial management, careful planning, and effective decision-making.
At Business Advisory and Accountancy Partners, we know that one of the most crucial tools in achieving your business goals is the development of a well-structured budget.
Let’s explore what developing a budget can do for your business.
What’s a business budget?
A budget serves as a financial roadmap, guiding your business toward profitability, growth, and long-term sustainability. It’s a spending plan for your business based on your income and expenses. A business budget identifies available capital, estimates your spending, and helps a business owner to
predict revenue.
A business budget should include:
Estimated revenue
Fixed costs
Variable costs
One-off costs
Cash flow
Profit
A budget calculator
We have seen over the years that developing a budget for your business can positively impact your operations in 5 ways:
Set clear financial goals
A budget provides your business with a tool to establish clear financial goals. You can define your revenue targets, expense limits, and profitability objectives. Having specific goals and a roadmap to track the business’ progress allows you to make informed decisions and identify areas for improvement. A budget allows you to set realistic targets and work towards them strategically.
Forecast and make decisions
A budget allows you to anticipate potential challenges. By forecasting revenue and expenses, you can identify potential cash flow gaps, manage working capital effectively, and make informed decisions about resource allocation. A budget provides a framework for proactive decision-making, reducing risks, and maximizing opportunities.
Manage cash flow
A budget plays a critical role in effectively managing cash flow. When you accurately estimate your income and expenses, you can anticipate any surplus or deficit and take appropriate measures to ensure adequate liquidity. Effective cash flow management enhances your ability to meet financial obligations, seize growth opportunities, and weather economic downturns.
Allocate resources
Budgeting helps you to allocate your resources efficiently and control costs within your business. You can track and analyze spending patterns, identify areas of overspending, and implement cost-cutting measures where necessary. Budgeting also facilitates better accountability and transparency within your organization, as it helps monitor departmental budgets and encourage responsible spending.
Evaluate performance
A budget acts like a benchmark against which you can evaluate your business’s financial performance. By regularly comparing actual results with the budgeted figures, you can identify variations, trends, and potential areas of concern. This analysis enables you to take corrective actions promptly, revise strategies, and ensure that your business remains on track.
Budgeting for success
Developing a budget is a smart step in effective financial management for any business. It gives your business clarity, control, and direction. A well-crafted budget helps set goals, make informed decisions, manage cash flow, allocate resources efficiently, and evaluate performance.
With our extensive expertise, we can help you to develop a comprehensive budget tailored to your business’s unique needs. We are happy to share our knowledge and experience. Our goal is to establish a partnership with companies and cultivate long-term rewarding business relationships.
As your business advisor, we will guide you toward a successful future. Let’s talk about business strategy, tax management, accountancy, and financial advice. We specialize in everything from basic compliance to business advisory services and advanced tax planning to business exit planning.
Let’s discuss the needs of your business and schedule a free strategy session.
We understand what it takes to make a business thrive. So, let’s delve into those questions. We are ready.
As a business owner, you know that it’s essential to keep organized and up-to-date records of your company’s financial transactions, day-to-day operations, and other important information.
That’s why today we’re exploring why record keeping is so important, and what kinds of records you need to retain. Plus, we’ll give our tips on effective record management.
Why is it important to retain business records?
Keeping effective records ensures legal compliance and helps you to make informed decisions, improve efficiency, and protect your business from potential risks.
Maintaining financial records ensures accurate reporting for tax purposes, audits, financial management, and tracking financial health.
Legal and corporate documents must also be retained to comply with regulatory requirements, protect your legal rights, resolve disputes, and ensure smooth business operations. Maintaining operational records allows you to analyze business trends, improve efficiency, and address any potential issues promptly. Maintaining employee records is important to achieve legal compliance.
Keeping organized tax records is necessary to comply with tax laws and simplify the tax filing process. Tax records play a significant role in meeting your legal obligations and preparing accurate tax returns. The IRS generally recommends retaining tax-related records for at least three years.
What financial records do you need to keep?
Banks and institutions
Credit card statements
Retirement account statements
Bank statements and copies of canceled checks.
Invoices and bills
Accounts payable (bills you pay)
Sales invoices for customers or income
Emails and text messages
Receipts
All receipts for business purchases
Debit/ credit card statements are not evidence enough
Cash receipts
A receipt for a cash purchase is your only proof
A contemporaneous record: a note at the time an event happens is better than nothing at all.
Tax records
Income tax returns
W-2 and 1099 forms
Receipts and documentation for deductions and credits
Correspondence with tax authorities
3 Tips for effective record retention
To stay on top of your business record keeping you’ll need to:
Organize and categorize your records
Create a logical filing system (this can be both physical and digital) to easily locate and retrieve documents when needed.
Decide on record retention and disposal
Your business needs to outline how long each type of record should be retained based on legal requirements and business needs. Then when a record reaches the end of the retention period, dispose of it securely to protect against a breach of confidentiality.
Backup and secure your business records
Remember to regularly back up your digital records to prevent data loss and protect sensitive information with appropriate security measures.
Setting the record for business advisory
When it comes to running a business, there’s a lot to know. It’s wise to seek professional advice to ensure compliance with regulations and best practices.
Efficient record retention is vital for the success of your business and is an investment that pays off in the long run. At Business Advisory and Accountancy Partners, we understand what it takes to make a business run smoothly and efficiently. So, if you’ve got questions, we’ve got answers.
As your business advisors, we can guide you toward a successful future. Let’s talk about business strategy, tax management, accountancy, and financial advice. We specialize in everything from basic compliance to business advisory services and advanced tax planning to business exit planning.
If you’re thinking about how your business can thrive in the future a good start is to have an expert ready to advise you. Our goal is to establish a partnership with companies and cultivate long-term rewarding business relationships. Let’s discuss the needs of your business and schedule a free strategy session.
We’ve rebranded FMA, C.P.A as Business Advisory and Accounting Partners. But what does this mean for you, why change our brand, and where are we headed?
We’ve made some positive changes in the firm over the last few years. These changes are all part of our goal to make us more valuable to our clients, business owners, and real estate investors, as well as our individual clients with complex planning needs.
We’d love to opportunity to tell you more about how and why our rebranding came about and to explain why our clients helped to shape our new direction.
Why re-brand the firm?
The name Business Advisory and Accounting Partners (B.A.A.P) more accurately reflects the future direction of our firm. Traditionally in the accounting field, a firm would use the initials of the managing partner in the firm’s name. We think it’s time for a change.
So, two years ago we officially changed the name to B.A.A.P, and it’s time now to fully commit to the brand and remove the FMA, C.P.A name.
One question we get asked is if it’s an indication of ownership change now or in the foreseeable future, and the answer to that is no.
So, how do these changes affect our clients?
It’s business as usual, folks. You can expect the same commitment and attention to detail that we pride ourselves on. The partners (Mark, Rose, Lisa, and Jensen) are fully committed to providing valuable planning and high-quality services to our existing and future clients.
We’ve secured the new domain busadvisory.com and we’ll be transitioning the website and email addresses to this new domain. The old fma-cpa.com domain and email addresses associated with that domain will still work, and both email addresses will for the foreseeable future.
To make sure that our emails reach your inbox, you can check your spam filtering, and whitelist the new domain.
Our past and our future
We’re proud of our experience – it makes us experts. We’ve been helping business owners and real estate investors with theirtaxplanning needs since 1989.
In 2014, Mark took over as managing partner of the firm and became more active in an industry-wide thought leadership role within the Thomson Reuters Tax and Accounting division. He has had the pleasure of interacting with and training many CPA firms on offering advisory services to clients.
Over the years we’ve heard a consistent message from small businessowners: they need more from their accountants. They need guidance and support to help make better financial decisions and run their business more efficiently. We listened to this message and remodeled our firm around business planning and guidance. We don’t just record what happened in the past.
Following that ethos has made us leaders in this industry and we’re excited to see what the future brings – for us and our clients.
The next step
This is a great opportunity to say thank you to our clients – without their support, we wouldn’t have been able to achieve all that we have. We believe in long-term relationships, and when we partner with you, we’re in it for the long haul.
We help business owners get organized, more efficient, and more strategic in the way they manage their businesses. Ask us about our solutions: compliance services, tax efficiency, organizational services, and financial strategies.
When it Comes to Understanding Financial Statements, We’ve Got the Key
For every business owner, understanding your financial statement is a necessity. And if you’re like many people, financial statements can look like a headache.
Let’s get to grips with financial statements and get an understanding of balance sheets and income statements.
What is a financial statement?
Financial statements are accounting reports that summarize a business’ activities over a period. Overall, they provide the business lenders, investors, and creditors with an idea of the business’s financial health, financial performance, operations, and cash flow. They provide key information about the company’s revenue, expenses, profitability, and debt.
Often financial statements are used to ensure accuracy for purposes of tax, financing, or investing. Financial statements are useful if you’re looking for investors, or if you want to apply for credit.
There are different types of financial statements – typically they are the balance sheet, the income statement, the cash flow statement, and the statement of the owner’s equity.
Let’s explore exactly how they work. Firstly, the one key thing to get your head around is:
What the business owns is equal to what the business owes.
A business owns assets, and a business owes liabilities to third parties and equity to those who own the business.
In other words, assets = liabilities + equity. This is known as the accounting equation. Once you’ve grasped this, you’re well on your way to understanding financial statements.
Balance sheets and income statements
The equal sign that we mentioned above is important because you must remember that the assets must always balance liabilities and equity. When you look at a business’ accounting equation at a particular point in time, this is known as a balance sheet. It’s like a snapshot of the business’ assets, liabilities, and equity. This is a summary of what the business owes and owns on a certain date.
Now for the income statement. To understand this, we need to know that equity is made up of capital contributions (the cash or assets invested into a business by an owner in exchange for a share of equity). The income statement summarises the business’ revenues and expenses over a period.
We also need to understand the business’ retained earnings (the business’ accumulated profits that they hold onto for the future.) It’s what is left over after the business has added up all the profit that the business has generated and takes away what has been withdrawn by the owners. Retained earnings are made up of opening retained earnings plus current-year profits minus current-year withdrawals.
Opening the door to your financial success
As a business owner, you’ve invested heavily in the company and deserve a good rate of return. Trust us – some basic knowledge of tax and financial compliance goes a long way, helping you to open doors to a successful future.
As your business advisors, we are here to guide you. You can talk to us about the often complex world of business strategy, tax management, accountancy, and financial advice. We specialize in everything from basic compliance to business advisory services, and from advanced tax planning to business exit planning.
Although the chances of an audit are rare, the fact is tax audits are a fairly routine business for the IRS. That said, audits can be especially scary for small business owners. After all, there are certainly horror stories in which IRS audits have resulted in company closures.
Fundamentally, an IRS audit is an evaluation of your business’s financial accounts and information. As such, you’ll find most audits are a result of discrepancies on tax returns. The IRS is simply reviewing your entries to ensure everything is in order. Sometimes an audit is random, and other times it can be based on suspected suspicious activity.
So, here are some red flags that could trigger an IRS audit of your business.
1. Data Entry Errors
The more manual your accounting and expense management functions are, the more likely you are to make errors when filing your taxes. Your accounting system is crucial to understanding business performance and is also vital to tax preparation.
While most accounting functions are digitized nowadays, data entry blunders like treating expenses as income or duplicating an entry could trigger a letter from the IRS. An audit can be triggered by something as simple as misspelling your business name. This is where e-filing comes in handy because you can load vital information from past tax returns.
If your math is a little shaky, soliciting the services of a tax preparer near you could save you the headache of an IRS audit.
2. Failing to Report Some Income
Underreporting your income on your tax return is a top audit trigger. The IRS compares your income from one tax year to the next. A noticeable discrepancy without supporting information can make Uncle Sam sit up and take notice.
The IRS wants what it’s owed and will go to great lengths to verify the reported amount of tax is correct according to tax laws. So, it’s only a question of when before it spots your omission. This is especially true for cash-heavy businesses like barbershops and nail salons.
3. Questionable Business Deductions
It’s not uncommon for small business owners to have itemized deductions on their returns, like home office deductions. While these tax deductions can reduce your taxable income, they can also raise red flags when they don’t measure up to your income. Same case if you’ve made significant contributions to charity.
The IRS also compares your tax returns to those of other businesses in your industry – anything that’s out of the ordinary may subject you to further scrutiny.
4. Excessive Business Expenses
The IRS stipulates that a business expense has to be both ordinary and necessary to qualify as a deduction. For instance, a professional painter could claim paint and paintbrushes as business expenses, but a software engineer who paints as a hobby cannot.
If you have large expenses, it’s pertinent to keep all your receipts in case you are asked for verification. However, matters get a little more complicated when it comes to entertainment, travel, and meal expenses, as they may blur the lines between personal and business expenses.
5. Earning Substantial Income
One in 100 businesses get audited each year, and usually the ones that earn more than $1 million per year, especially if they report a significant change in income. It’s not unheard of for companies to start raking in millions in revenue seemingly “out of the blue”, particularly in the age of social media when branding has a direct impact on your bottom line.
Don’t be surprised if you hear from an IRS agent when you start showing a substantial increase from year to year. That’s also a great time to bring in a business advisor to develop a growth strategy.
6. Reporting Too Many Losses on a Schedule C
If you claim a business loss each time you file a tax return, you may be due for a tax audit. While it’s not uncommon for small businesses to have losses, having many years of Schedule C losses could have the IRS questioning the legitimacy of your business. If you don’t turn a profit, the IRS may consider your business a hobby which could limit your tax deductions.
Keep all your business documentation that shows your company’s revenue and expenses throughout the year to cover all your bases.
7. Being Self-Employed
Unfortunately, the IRS tends to scrutinize self-employed individuals, especially if they fail to report a profit for at least three out of five years. This applies to freelancers and anyone working in the gig economy as well. Yet again, the IRS could claim your business to be a hobby, which would disqualify you from claiming certain business deductions.
As a small business owner, you should consider forming an LLC to lower your audit risk. Consult a tax professional near you to determine which entity would work best for you.
8. Misclassification of Employees
Some businesses intentionally misclassify employees as part-time workers or independent contractors for several reasons:
To lower labor costs
To avoid paying certain small business taxes
To reduce business insurance expenses
It’s important to classify your employees appropriately and keep documentation of any independent contractors you hire.
Avoid the Dreaded IRS Tax Audit with FMA CPA
Talk to FMA CPA about your accounting practices, income, or deductions to determine what could trigger an IRS audit. We’re a CPA firm in Clearwater offering business advisory services designed to help you understand your business better and keep you on Uncle Sam’s good side.
Contact us for comprehensive tax preparation services and any questions you might have.
The I.R.S. recently announced a new tax rule for small business owners related to the 2021 American Rescue Plan Act. And as a result, any payment your business receives from a digital service or third party that accepts credit cards will appear on your income tax return if it exceeds $600. Between this rule and the coronavirus-related tax changes, you might wonder what the small business tax rate will look like in 2022.
Here’s everything you need to know.
Business Tax Changes Related to the COVID-19 Crisis
The U.S government brought in tax breaks and made specific changes to help businesses hold out during the pandemic.
Coronavirus Aid, Relief, and Economic Security (CARES) Act. This act encompasses the Paycheck Protection Program (P.P.P.), a loan meant for utility, employee payrolls, and mortgage payments. Your business may apply for loan forgiveness. If granted, this P.P.P. loan will not appear on your taxable income.
Economic Injury Disaster Loan (EIDL). The S.B.A. increased the borrowing limit for this low-interest loan.
Employee Retention Tax Credit (ERTC). Small businesses whose gross receipts decreased by at least 50% due to the pandemic qualify. If eligible, companies receive a tax credit, that is 50% of staff wages.
Families First Coronavirus Response Act (FFCRA). This act mandated particular businesses to offer sick pay and family leave arising from COVID-19. These companies would then receive 100% tax credits.
Small Business Tax Rates for 2022
Small business tax rates aren’t straightforward. This complexity is because of the non-existence of a uniform tax rate for all of them. Below are the small business tax rates by business structure.
C corporations
C corporations’ small business tax rate is perhaps the simplest form, courtesy of the 2017 Tax Cuts and Jobs Act. If you qualify, you will pay a flat tax rate of 21%. Moreover, there’s no need to worry about the alternative minimum tax (A.M.T.) as the TCJA got rid of this requirement. Note that C-corporations comprise approximately 5% of small businesses.
As for dividends, your business must pay shareholder dividends. Your shareholders must then include the dividends tax on their individual income tax returns, hence the term “double taxation.” The shareholders’ tax rate varies based on whether it’s a qualified or ordinary dividend. While C-corp experiences double taxation, their corporate tax rate is less than several personal tax bracket returns.
Pass-through entities
Pass-through businesses include partnerships, S corporations, sole proprietorships, and Limited Liability Companies(L.L.C.s).
These entity types make up about 95% of small businesses in the U.S. and don’t pay federal income tax. Instead, an employer includes business income on their individual income tax returns. Therefore, your income in a tax year will determine your federal income tax rate.
Therefore:
If you are a business owner and receive secondary income from a different job or investment, your tax rate will reflect the total income.
Also, the more your taxable income is, the steeper your tax rate.
Two primary factors determine your small business tax rates.
1. Tax credits
Tax credits are precise reductions. For businesses, these may include work opportunities and alternative car credit. Individuals also receive federal tax credits such as the adoption credit and the earned income tax credit.
2. Deductions
Deductions reduce your taxable income. Examples of business deductions include rent expenses and legal fees. Individual deductions include medical expenses and charity donations.
Other Small Business Taxes
Small businesses must pay other taxes besides federal income taxes.
These include:
State income tax. Tax rules differ by state. The only states without a state tax are Florida, Wyoming, Alaska, South Dakota, Washington, Nevada, and Texas. As for the other states, businesses are subject to a corporate income tax within the 2.5 and 11.5 percent range.
Gross receipts tax. This tax typically applies to states that don’t levy a state income tax.
Payroll tax. Payroll taxes are a requirement for any business that has employees. These taxes include federal and state unemployment taxes and Federal Insurance Contributions Act taxes ( Social Security and Medicaid).
Self-employment tax.
Excise tax. Businesses that sell specific goods and services like gasoline and indoor tanning must pay the excise tax.
Sales tax. Sales tax is a requirement in 45 states. Rules differ for each state. And in some cases, you may need to remit taxes for more than one local jurisdiction.
We, therefore, recommend working with a C.P.A. firm to help you navigate these tax rules.
Property tax. You must pay property tax if you own vehicles and real estate.
Tax-Saving Tips
Here are several ways to make tax filing more successful in the 2022 tax year.
Make use of accountable plans
Monitor your adjusted gross income as it affects your deductions
Track all business transactions
Avoid late payments
Consider business restructuring
Take advantage of technology by installing a tax preparation software
Knowing which entity type will offer better tax rates can be confusing. For instance, L.L.C.s have several options available and may pay taxes as S corps or sole proprietors. A business advisor can break down the rates to help you choose the most beneficial option.
F.M.A. C.P.A. is a C.P.A. firm in Clearwater with a team of professionals who understand state tax rules. Our business advisory services include tax planning and accounting. Tax season doesn’t need to be stressful. Contact us at 727-530-0036 to learn how our team can make your small business tax planning stress-free.
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