The Appletree Core Newsletter - Accounting, Payroll, and Tax CPA in Londonderry, NH

New Hampshire small businesses and reasonable compensation – The new rules

CPAsteve — Tue, 17 Jan 2012 15:00:43 +0000

New Hampshire businesses need to start thinking about documenting what is ‘reasonable compensation’ to the owners or partners if they are operating as a sole proprietor or partnership.

As an indirect result of New Hampshire introducing and ultimately repealing the so-called LLC tax several years ago, New Hampshire has now enacted new rules giving more guidance over what is ‘reasonable compensation’ in the preparation of the Business Profits Tax Return. I’m going to try to dumb this whole area down a little, and perhaps try to make all this look a little simpler than it actually is. Devine Millimet was kind enough to provide the specific section of New Hampshire’s statutes that I’m referring to.

What’s the problem, you wonder? Well, the New Hampshire Business Profits Tax (BPT) is a tax of 8.5% on the income of your business. So, if you made $40,000 as a sole proprietor from your dry cleaning business, you would have to pay $3,400 to New Hampshire as BPT tax. However, because we have no ‘income tax’, the state permits you a deduction against that $40,000 for ‘reasonable compensation’, resulting in NO business profits tax owed. Now, New Hampshire has enacted new rules giving specific guidance on what reasonable compensation is.

Let’s start with the safe harbor.

First, if the profit we’re talking about is due to a sale of assets, an amount not to exceed 15 percent of the gross selling price as a commission on that sale is permitted, no questions asked.

Second, A business organization or group of related business organizations may elect to deduct up to $50,000 as total compensation for the tax year, again no questions asked. This should be good for many sole proprietors, but will undoubtedly cause problems for partnerships since the safe harbor is for the entire organization, provided at least one partner or member of an LLC performed personal services for the business organization or group of related business organizations.

In an article written by Maurice Gilbert, Director of state taxation for Devine Millimet, he states “…It is clear from these statutory changes to the BPT that business organizations will be required to maintain supporting documentation for any compensation deduction taken for proprietors, partners and members of limited liability companies that is greater than the recordkeeping safe-harbor … Failure to maintain supporting documentation could result in a complete disallowance…”.

So, what are some things that Mr Gilbert suggests that the business owner could do to help build a case that their owner, member, or partner compensation is reasonable? Guidance is limited, but this might include:

Using employment agreements that identify key services provided and the methodology for compensating the individual for such services, This could actually be a huge argument that all affected businesses in New Hampshire should be operating as an LLC or some other incorporated entity, since a sole proprietor could not enter into such an agreement.

Retaining any personal calendars, appointment notes, comments entered on the owner-employee’s PDA devices, such as their I-Phone or Blackberry, regarding business activities or other business records that demonstrate the activities of the owner-employee. Examples of such records may be sales reports in the case of an individual who is involved in the marketing side of the contracts or other agreements requiring the skills of the owner-employee that may have been negotiated by the individual during the taxable period or other business documents that support the owner-employee’s key efforts.

Compensation paid by a similar company to its owner-employee could establish the reasonableness of a deduction, provided you can get your hands on what that would be.

Comparing the compensation methodology for the owner-employee and other employees of the business also provides potential support for the compensation level of the owner-employee. A business that provides, for example, significant bonuses to key employees, other than the owner, for their contributions can support the reasonableness of a compensation plan that includes significant bonuses to the owner-employee.. or

Documented discussions with your tax preparer exploring the value of your services for the year.

Many small business owners are going to want to ignore this., but one thing to realize is that before these rules were instituted, the burden of proof was on the state. That burden has now been moved to the taxpayer, so absent ANY proof could be a real problem.

There are also a couple of other techniques that I can see being very useful in avoiding a challenge, but you’ll have to call me and we can meet to discuss those further!

Steven A Feinberg, CPA of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire, has more than twenty five years experience in Federal and New Hampshire issues, specializing in small business general, tax and payroll matters. For additional information on these and other current business and tax issues, email Steve at info@appletreebusiness.com or call (603) 434-2775.

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

Tax Deductions that small businesses often mess up on

CPAsteve — Mon, 09 Jan 2012 15:00:03 +0000

According to National Federation of Independent Business (NFIB), here are a few tax deductions that small business owners often make mistakes with:

Mileage: Be sure you’re deducting trips to meet with clients, run work-related errands and attend meetings and networking events, particularly with personal vehicles. You will need to log the date, destination, and start and end mileage for each trip. It’s always a good idea to keep some sort of mileage log that documents the use of your vehicle for business.

Asset deductions. Section 179 of the IRS Code allows small businesses to take a depreciation deduction for certain capital expenditures in one year, rather than depreciating them over a longer period of time. If you’ve been hit hard by the recession, that could allow you to keep a bigger chunk of money in the short run. Most tax preparers will automatically try to take the Section 179, ‘if they know about it’. In certain situations though, you may not realize that you have larger deductions available, such as if you were to enter into a LEASE for equipment (you will rarely see auto loans like this)that is eligible to be capitalized, where the lease calls for a purchase amount at the end of the lease for substantially less than fair market value, typically a dollar or so. So, make sure your accountant/tax preparer is provided copies of any significant purchases.

Specialty items. If you own a building, you may be entitled to state and federal tax savings for building improvements, like adding special wiring or a soundproof room. Certain assets related to such projects qualify for accelerated depreciation, meaning you can take larger tax deductions over a shorter period—increasing your cash flow and lowering the cost of capital in the years following the project.

Charitable donations. Sometimes it may make sense for the business to make the charitable deduction rather than it coming from personal funds. It’s always best to see if there’s a business purpose to the contribution, such as advertising. If’s it’s not a business expense, then the question is whether a charitable contribution in the name of the business makes more sense. If your company makes the donation, it can take a deduction and lower both its federal and state taxes. The less money your company makes, the less you will be taxed on your Form 1040, particularly if it can reduce your wages if you receive a W-2 as an employee.

Bad debts. If someone owes you money you cannot collect, you may be able to deduct that as “bad debt” as an expense on your business tax return. While bad debts are mainly the result of credit sales to customers, according to the IRS, they can also be the result of loans to suppliers, clients, employees or distributors. Keep in mind however, that in order to be able to deduct bad debts in your business , you generally can not be a cash basis taxpayer.

Supporting items. Remember to file receipts for any purchases that are related to your business. Expenses related to conferences, new software and accounting services are frequently overlooked.

Loan interest. Have you borrowed money against a personal loan, like a mortgage, to purchase equipment for your business? You can write off the interest on personal loans, provided you’ve invested the money into your company. Just be sure to document how it was used in case of an audit.

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

Making the right pricing decisions for your New Hampshire small business

CPAsteve — Thu, 05 Jan 2012 15:00:23 +0000

Are you making the right pricing decisions for your business? In business, making pricing decisions is always tough – and even more so when the economy is slow and sales are slipping. It’s tempting to cut prices hoping to generate higher sales volume. But sometimes that just produces lower margins on a low volume.

What do you do if you’re being squeezed by cost increases? Can you increase prices in a slow economy? How do you respond if your customers complain? Can you justify holding prices steady if your competitors cut their prices? There are no easy answers, but running through a three-step process can help you make the right decision.

Know your strengths. How does your product or product range stack up against the competition? Are your products higher quality, lower quality, or indistinguishable from your competitors’ products? Do you have an edge that can justify higher prices? How about all the other elements that make up your total service package? Do you provide a bigger inventory, faster delivery, better payment terms, wider product line, better service on returned items? If not, can you change your operations to gain an edge in any of these areas? Consider holding a brainstorming session with your salespeople to go over these questions. The answers might point the way to pricing decisions, and they’ll certainly give you good replies to customer pricing objections.

Put yourself in your customers’ shoes. Try to understand your customers’ needs. Are they under profit pressure? What changes are occurring in their industry? How can you adjust your products or service to add value for them – value that they might be willing to pay for? What are their alternatives if you raise prices? If your salespeople are staying in touch with their customers, they should already have the answers to many of these questions.

Know your competition. Run through the same questions you asked about yourself and apply them to your competitors. What are their strengths and weaknesses? What can they offer your customers that you can’t? How will they respond if you change prices? Here again, your sales staff should have good information on the competition they face. When you’ve worked through these three steps, you should have a much better idea of the likely competitive effect of a price change. Run some profit scenarios and then review your pricing decision with your salespeople. Make sure they understand the rationale and jointly rehearse how they’ll present the change to customers. For assistance with pricing issues in your business, give us a call.

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

When you can deduct the expenses of medical tourism

CPAsteve — Wed, 21 Dec 2011 15:00:05 +0000

Recently, my girlfriend found out that she would need some very significant dental work in the form of mulitple dental implants, root canals, and crowns. The estimated cost would be about $25,000 in the US. Instead,after doing significant due diligence, she has located a dentist in Costa Rica that she feels very comfortable with that will do all the work for about $8,000, a significant savings when you don’t have dental insurance. She is required, by the dentist, to be in Costa Rica for 2 1/2 weeks to have the work done. Her boyfriend will be in Costa Rica (San Jose, actually ) for the first week to make sure she’s properly settled in.

Amazingly, there is a whole industry dedicated to this. The dentist was provided with x-rays electronically, along with a couple of photos taken with a digital camera, of her mouth. There are hotels within walking and short taxi rides to the dentist that will pick you up from the airport, offering high speed internet, breakfast and clean hotel rooms. In addition, there will be downtime available to play tourist around the country.

So, what if any of her expenses (or even his expenses!) can she deduct?

IRS Publication 502 explains what medical expenses can be deducted. It states “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.”

Certainly, the costs of what she pays the dentist is a medical expense. Because the principal purpose of the trip is for medical purposes and NOT a personal ‘vacation’, she would be entitled to also deduct the costs of airfare and transportation to the hotel and dentist’s office. I believe the key here is expenses that are reasonable and necessary, as opposed to extravagant. She’s going to Costa Rica because it’s a lot cheaper than having the work done in the US. Therefore, going to Costa Rica to have the work done is therefore not extravagant, since the total costs of the trip will still be significantly less than if she had the work done in the US. Because she’s required to be there for 2 1/2 weeks, she should be entitled to the out of pocket lodging costs, however she would not be entitled to deduct any cost of meals, unless they were provided as part of inpatient care.

She’s also planning on making a few tourist stops, maybe see a volcano or 2. Any expenses like that are purely personal, and not deductible. Her boyfriend’s costs of transportation would not be deductible. However, if the girlfriend was a minor, she would be able to deduct the cost of bringing her parent. Oh well. The boyfriend was going to get himself a cleaning and a couple of other minor procedures, but since the principal purpose of HIS trip was not medical, but rather personal, he would be entitled to deduct the costs of the actual procedures, but not the costs of transportation or lodging.

You also need to keep in mind that medical expenses in general are only deductible as an itemized tax deduction and only to the extent the medical expenses exceed 7.5% of the taxpayer’s Adjusted Gross Income.

Also, make sure you’ve got some good documentation to prove the medical necessity of going out of country for these expenses, perhaps some sort of quotes from the US doctors. Lastly, if you do have to travel to a foreign country for medical treatment, make sure you try to squeeze in some personal time to see the country!

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

When you can deduct Home Office for your New Hampshire Small Business

CPAsteve — Fri, 16 Dec 2011 15:00:01 +0000

Can-you-deduct-the-home-office-in-your-small-business

Many small business owners who prepare their own tax returns often shy away from taking the Home Office deduction for their business, but oftentimes the ability to deduct the home office can save a lot money, particularly in Social Security taxes.

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. The home office deduction is available for homeowners and renters, and applies to all types of homes, from apartments to mobile homes. There are two basic requirements for your home to qualify as a deduction:

You must regularly use part of your home exclusively for conducting business. For example, if you use an extra bedroom to run your online business, you can take a home office deduction for the extra bedroom. However, be sure to watch the operative word ‘exclusive’, meaning that you can’t have a second TV in there and use the room for recreational purposes as well…

You must show that you use your home as your PRINCIPAL place of business. If you have an Auto Repair business outside of your home, where your customers come in and have their cars serviced, you cannot then try to argue for the home office deduction because that may be where you do some paperwork.

Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.

Are you deducting the Home Office for your small business? Are you not sure whether you’re entitled to take the deduction?

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

Small Business Success…Keeping the books

CPAsteve — Wed, 07 Dec 2011 16:10:16 +0000

A business, whatever the size, is like a wheel with many cogs. And each cog must be in good working condition to keep the wheel running at top speed. One of the important “cogs on the wheel” is bookkeeping, which is simply, keeping records of the business’ financial transactions.

Keeping track of income and expenses is one of these important cogs. An effective bookkeeping service will help guarantee the success of the business. Neglect it, and you may be caught by surprise by how things may unravel financially with the business. In fact, one of the main reasons why small businesses fail is because of the inability to manage the business’ finances.

Here are some reasons why bookkeeping is important:

It gives you a clear picture of your business’ financial standing. How are sales doing vs your operational expenses? Is the business making a profit? Is there some aspect of the business’ expenses that should be reigned in?
It makes you keep track of payables and receivables. Regularly updated records will point out to you information with regards to which invoices need to be followed up since these customers are past due. It will also ensure that you don’t pay penalties just because the business has overdrawn its bank account.
It helps you create your budgets and forecasts. Looking at the trends and seeing how an increase in sales, operational activities and so forth can help you make forecasts as to the budget you need. This will help you see if you need additional funding to ensure that your cash flows and operations are unhampered.
Preparation for tax returns and government-mandated reports. Let’s face it, bookkeeping and taxes go well together. Income tax returns are easier to prepare when your files and financial information is properly in place. This includes quarterly payroll tax reports and sales tax reports. When someone is not there to keep an eye on how much tax you owe and what reports to file, you may find yourself paying too much or too little in taxes or you may have to pay penalty fees for turning in your reports late.
It helps you make informed decisions for your business. Keeping track of your expenses and sales will provide you with trends to help guide you in your business decisions. For instance, how will hiring new staff or buying that new piece of equipment affect your bottom line? Which particular product is proving to be more profitable?
It helps you get funding for your business. The banks will usually require you to submit your financial statements and keeping your books on a regular basis will help you create these reports faster. You will need to submit your income statement, balance sheet and cash flow for the past years as well as the present year’s projections. In addition, if you are looking to taking on a business partner or investor, you will need to provide them with your business’ financial picture.

However, bookkeeping is sometimes a task that is left by the wayside. Maybe one is too busy running the day to day operations or just can’t be bothered by what may be considered as the tedious job of recording receipts and invoices. There are also times when one does not have the experience and the training for bookkeeping.

At Appletree, our firm specializes in working with small business all year long, and making sure we’ve addressed all of these issues. Is your bookkeeping under control? Do you know where your business stands so you don’t get any tax surprise. If you’re not sure, or you know a friend who might benefit, please contact me for a complimentary consultation to see how we might be able to help!

Copyright Information 2011 Professional Association of Small Business Accountants

Presented by Steven A Feinberg, CPA of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire. Steve has more than twenty five years experience in Federal and New Hampshire issues, specializing in small business general, tax and payroll matters. For additional information on these and other current business and tax issues, email Steve at info@appletreebusiness.com or call (603) 434-2775.

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

When should you ask the IRS to determine if you should be independent contractor versus an employee

CPAsteve — Mon, 14 Nov 2011 15:00:13 +0000

As a followup to some previous posts, namely “Employee vs subcontractor – Why the Federal rules are more important to know“, and “Employees versus Independent Contractors in New Hampshire – Do you know the law?“, I’ve gotten a number of inquiries from people who weren’t sure they were being properly classified as either an employee or as a sub-contractor.

Enter Form SS-8. This is an IRS form used to request a determination from the IRS on status of workers, and can be requested by the employer, contracting party, employee, or sub-contractor. You should be aware that the IRS’s responses to these forms do tend to lean towards treating someone as an employee, though.

So when does it make sense to get this determination? If you’re being treated as sub-contractor, and believe to be erroneous, you could request the determination. As a practical matter though, if you’re actively working with the employer, I’m not sure this accomplishes much, since the employer may get contacted for further information and then decide to terminate their relationship with you.

It’s rare as an employer, that anyone would want to challenge their employee status, but as an employer , you may wish to make your sub-contractor relationships more ironclad and request the determination. Be sure to have your ducks in order, and be prepared for the IRS to say they believe they are employees.

Are you sure you could survive an IRS challenge as to how you treat your subcontractors? Are you consistently issuing 1099′s, and obtaining Workers Compensation certifications? Do you have formal agreements whereby they acknowledge they are responsible for their own taxes? Do they give you a bill for their services? Are you making payments to them personally versus their corporation or ‘DBA’ (doing business as)?

The determination of whether someone is an employee versus a subcontractor is probably the most common question we get in our office, particularly from small business owners who do not have a regular accountant or business adviser to consult with..

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

If the IRS or New Hampshire DOR contacts you

CPAsteve — Wed, 09 Nov 2011 15:00:24 +0000

There are numerous reasons why the Internal Revenue Service may contact you throughout the year, so if you receive an IRS missive in the mail, don’t panic. Instead, open the letter and deal with it straightaway. Whatever you do, don’t put it off.

Chances are you are receiving a computer-generated letter because the IRS thinks you owe it money. This is likely due to a mistake on your tax return, such as failing to include all your income. But the IRS is often NOT correct, so before you automatically pay the bill, do some investigation. It’s very possible that the income from one or more W-2s or 1099s is being credited to your account in error. Or they identified stock that you may have sold, and they assume that you had paid nothing for that stock, asking you for tax on what you sold it for.

Even if the income is yours, the amount is correct, and you really did leave it off your tax return, double-check the IRS’s work by adding the missing numbers to your return and recalculating your taxes. IRS and state computers often make mistakes and you might save some money.

The best piece of advice is seek out your preparer, enrolled agent, or CPA, particularly if it is an audit. What may appear to you as a daunting task can often be dealt with just a single letter, or an hour or two’s time with an IRS agent. And if the IRS should give you call on the phone, consult with your accountant before you talk with them. Often a seemingly innocent question and answer session can create a web of questions.

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

How Housing Dealt a Double Blow to Small Business

CPAsteve — Wed, 02 Nov 2011 15:00:17 +0000

In a recent article in Business Week, small businesses have been affected in several ways by what’s happening in the housing market.

First, is that the housing market is dominated by small business owners involved in construction and real estate. With so few housing starts, there simply is a lot less business available than before.

Second, is that many small business owners were routinely using the equity in their homes as working capital in their business. With market values down, the ability to get working capital is reduced substantially.

All of this means small business, which accounts for half of private non-farm gross domestic product and 65 percent of job growth, is unlikely to recover before the housing industry rebounds. “The recent decline in housing prices is significant enough to be a real constraint on small business finances,” researchers at the Federal Reserve Bank of Cleveland concluded in a December report.

How has your business been able to overcome some of these obstacles?

Steven A Feinberg, CPA of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire, has more than twenty five years experience in Federal and New Hampshire issues, specializing in small business general, tax and payroll matters. For additional information on these and other current business and tax issues, email Steve at info@appletreebusiness.com or call (603) 434-2775.

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

New laws that could affect New Hampshire businesses

CPAsteve — Thu, 27 Oct 2011 15:00:36 +0000

New Hampshire has enacted some new laws that could affect many businesses.

Employers will now get only a warning before the Department of Labor issues a fine, at least for minor offenses. This would appear to be good news, but you should watch out since there a number of exceptions that allows the Labor Department to skip the warning:

Failure to pay workers in full and on time
Paychecks on a bank not convenient to the job site
Failure to pay the last paycheck in full
Failure to withhold wages for child support
Deducting wages for insurance benefits when the policy has been canceled
Holding wages to make up for worker’s actions that caused loss or damage
Not complying with illegal immigrant laws
Threatening to fire workers, unless they break the law

Oh yes, the Labor Department can also skip the warning if the employer “intends to cause harm” or if the violation “poses a threat to public safety.”

For instance, a new law applying to Wine manufactures; they can now hold wine festivals much like there are beer fests, ( and for the same fee), and tasters can even bring samples home. The state wants its cut, but no more of a cut than it takes for a beer fest, so this is NOT (lawmakers emphasize) a new fee: $250 for a one-day festival, $300 for two and $350 for three. As with beer fests, you can’t chase your fine Chablis with a cold Bud: “No alcohol other than wine shall be served under this license.”

Also, in the future, you might be able to pay state taxes by credit and debit card though you might have to pay a convenience fee. The state Department of Revenue Administration has the final word on that, but if it goes ahead, businesses will be able to avoid handing over that chunk of change for another month or so without interest.

Are you comfortable with how some of these existing laws might affect your business? Although we’re primarily around to help small business with taxes, questions about proper labor practices constantly come up, and I find us constantly reminding clients that we are not attorneys. Nonetheless, we do like to make sure our small business clients have, at least some basic knowledge in these areas.

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!