Small Business Archives - CironeFriedberg, LLP

Know the Difference Between Cash and Accrual

July 1, 2022 by Adam O'Feeney CPA

Every business has to keep track of cash flow, but there’s more than one way to do it. Review the basics before you decide what the appropriate method is for your business.

Cash method of accounting

In this system, you record income as cash is received and expenses as cash is paid out. You don’t make a note of any invoices or bills you send, but instead record income when you actually have the money in hand. Cash accounting is convenient and reliable, allowing management to keep tabs on revenue and expenses without a great deal of bookkeeping. You don’t have to pay income tax on any money that hasn’t been received yet, helping improve cash flow and ensuring that your business has funds available for tax payments. If you’re a sole proprietorship or a very small business, this keeps your business afloat when cash flow is restricted.

If your business has average gross receipts of less than $26 million over the previous three years (or over the period of existence if less) and doesn’t maintain large inventories or sell merchandise directly to consumers, the cash method of accounting might be the best choice for you. It’s a simple system, similar to how you might track your personal finances.

Of course, there are disadvantages. It’s hard to tell whether high cash flow in a particular month is a result of work done in that month or you’re receiving delayed revenue from a previous month. And there are no records of accounts receivable or accounts payable, creating difficulties when you don’t receive immediate payment or have outstanding bills.

Also, it doesn’t conform to generally accepted accounting principles, the standard framework that accountants must adhere to when preparing financial statements. If your business really takes off, you’ll have to update your accounting practices. If you think you could get larger, then you should consider the accrual method.

Accrual method of accounting

This system provides a clearer picture of a company’s overall finances. The business records income when it is earned and expenses when they are billed, no matter when the money is received. This gives business owners a longer-term view of how the company is faring, showing how much money it’s earned and spent in a specific time and providing a clearer gauge of when business speeds up or slows down.

Even though it requires more intensive bookkeeping, accrual accounting gives owners a more realistic idea of income and expenses over a specific time, providing a better understanding of consumer spending habits and allowing you to better plan for peak months. Its complexity may mean you need some bookkeeping help, either in-house or outsourced.

Also, the system may give an inaccurate picture of your short-term financial situation. You’ll have to track cash flow separately to make sure you can cover bills month to month because accrual accounts for money that hasn’t come in yet. Indeed, you need very careful bookkeeping practices; your books could show a large amount of revenue when your bank account is empty.

Which method you choose is ultimately a management decision, depending on your business goals, the resources you have available, and your firm’s size and financial requirements. It’s wise to speak with an accountant and tax professional in your decision-making process.

As a business owner, you need to focus on growing and tending to your business. Put the accounting in our hands. CironeFriedberg’s Outsourced Financial Services team can provide accounting solutions tailored to your needs. Learn more about our Client Accounting Services and how they may fit into your business.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

The Tax Implications of Closing a Business

June 21, 2022 by David Moseman CPA

The decision to close a business for good is never an easy one. However, it’s important to keep abreast of compliance requirements before you say goodbye. That’s why you should take time to visit a qualified tax advisor for guidance on:

What forms to file.
How to report revenue received in your final year of business.
How to report expenses incurred before closure.

Closing even a simple sole proprietorship requires a fair amount of paperwork. For example, you may have to file the following:

Form 4797, Sales of Business Property, for each year you sell or exchange property used in your business. You also need to file this form if closing your business causes the business use of an eligible property under Section 179 to drop to 50% or less.
Form 8594, Asset Acquisition Statement, if you sell your business.
Schedule SE (Form 1040), Self-Employment Tax, if you have net earnings of $400 or more from your business.

There will likely be additional requirements for partnerships and corporations. Other Steps When Closing a Business

File a final tax return and related forms. The return you need to file depends on the type of business you were running.
Take care of employees. You’ll need to pay any final wages or compensation, making final federal tax deposits and reporting employment taxes.
Take stock of any pensions, benefit plans, health savings accounts and other tax-favored health plans. There are strict rules about how these are handled.
Pay any taxes owed. Tax payments may be due next filing season, even if that is after the business closes.
Report payments to contract workers. If you paid contractors at least $600 for services, including parts and materials, during the calendar year you go out of business, you must report those payments.
Cancel your EIN and close your IRS business account. You have to formally notify the IRS so it can close your IRS business account.
Keep business records. How long you need to keep records depends on what’s recorded in each document. For example, keep property records until the period of limitation expires for the year you dispose of the property. Employment tax records must be kept for at least four years.

Taking Care of Employees These tasks are among the most important. If you have one or more employees, you must pay them any final wages and compensation owed. You must also make final federal tax deposits and report employment taxes. The following forms are mandatory:

Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, for the quarter in which you make final wage payments. Check the box to tell the IRS your business has closed and enter the date when final wages were paid. Attach a statement to the return showing the name of the person keeping the payroll records and the address where those records will be kept.
Form 940, Employer’s Annual Federal Unemployment Tax Return, for the calendar year in which you paid final wages. Check box “d” in the Type of Return section to show that the form is final.

You must also provide a Form W-2, Wage and Tax Statement, to each of your employees for the calendar year in which you pay them their final wages. If your employees receive tips, you must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, to report final tip income and allocated tips. This is just a summary.

Be sure to work closely with a qualified tax professional at CironeFriedberg to make sure you are meeting all the requirements. The IRS provides a resource for those considering closing a business. Click here for more information.

What Business Owners Need to Know About Depreciation

June 13, 2022 by David Moseman CPA

Depreciation is an annual tax deduction that allows small businesses to recover the costs of certain eligible property that decreases in value over its lifetime. Depreciation is an allowance for the wear and tear, deterioration or obsolescence of the property.

As a small-business owner, you can depreciate property when you place it in service for use in your trade or business or an income-producing activity. Depreciation stops when the full cost of the property has been recovered or when the property is retired from service, whichever happens first.

What’s depreciable? Machinery, equipment, buildings, vehicles and furniture that are owned by the business. Personal property is never depreciable. If you use an asset — a car, for instance — for either business or investment and personal purposes, you can depreciate only the business or investment use portion of the asset. Other depreciable assets may consist of building improvements and land improvements, but land is never depreciable.

To depreciate property, your business must:

Own the property. The business is considered to own property even if the property is subject to a debt.
Use the property in a business or income-producing activity. If your property is used to produce income, the income must be taxable. Property that’s used solely for personal activities can’t be depreciated.
Be able to assign a determinable useful life to your property. This means it must be something that wears out, decays, gets used up, becomes obsolete or loses its value from natural causes.
Expect the property to last more than one year. The property must have a useful life that extends substantially beyond the year you placed it in service.
Exclude excepted property from depreciation. Excepted property includes certain intangible property, certain term interests, equipment used to build capital improvements and property placed in service and disposed of in the same year.

Consider the different depreciation methods

The IRS allows you to use different depreciation methods, depending on the type of property and life of the property.

The most common depreciation method for tax purposes is the modified accelerated cost recovery system (MACRS). This method is used to recover the basis of most business and investment property placed in service after 1986. This method allows a depreciation deduction based on a percentage of the total cost based on when the property was placed in service and the life of the property.

Other depreciation methods that may be used are the straight-line method or the forecast method. The straight-line method lets you deduct the same amount of depreciation each year over the useful life of the property. While the forecast method depreciation is calculated each year by the cost of the property being multiplied by a fraction, which is the current year’s net income from the property over the anticipated net income that the property will bring in 10 years after it is placed in service.

There are also methods that are called accelerated depreciation methods, and the most common of these are bonus depreciation and Section 179 depreciation. These methods allow a more upfront depreciation deduction and may allow the entire cost of the property to be depreciated in the first year.

Work with one of our tax professionals to help you decide what method is the best choice for your situation.

New for 2022

Recently, the IRS imposed new dollar limits on the Section 179 deduction. For tax years beginning in 2022, the maximum Section 179 expense deduction is $1.08 million. This limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year exceeds $2.7 million. Also, the maximum Section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2022 is $27,000.

This is just a brief introduction to a complex topic; there are many other provisions. Again, your best bet is to work closely with a qualified tax adviser at our Firm to make sure you’re following the rules and getting all the breaks to which you are entitled.

EIDL Borrowers Receive Additional Six-Month Deferment

March 17, 2022 by David Moseman CPA

On March 15, 2022, Administrator Isabella Casillas Guzman, head of the U.S. Small Business Administration directed the U.S. Small Business Administration (SBA) to provide additional deferment of principal and interest payments for existing COVID Economic Injury Disaster Loan (EIDL) program borrowers. This will provide a total of 30 months deferment from inception on all approved COVID EIDL loans.

This is the third time in the past 12 months that the SBA has extended the deferment period for the COVID EIDL loans.

The SBA intends this deferment period to provide additional flexibility to small business owners impacted by the pandemic, especially those in hard-hit sectors managing disruption with recent variants, as well as recent supply chain and inflation challenges amid a growing economic recovery.

Read the SBA press release for more information.

Cyberattacks Accelerate and Target Excel Users

February 24, 2022 by Teri Pough

According to Check Point, in the last quarter of 2021 there were over 900 weekly cyber-attacks per organization recorded. In 2021, there was a 50% increase in overall attacks per week on corporate networks compared to the previous year.

The Journal of Accountancy recently published an article on the alarming rise in cyberattacks occurring in the last three months of 2021 related to Microsoft Excel. The article cited the Q4 2021 Threat Insights Report from HP Wolf Security, which detected a 588% rise in campaigns using malicious Microsoft Excel add-in (XLL) files intended to infect computer systems. This is particularly alarming, as this number reflects an increase compared only to the previous three months.

Cyberattacks using malicious add-in files were deployed through emails with .XLL attachments or links. When the recipient opened the attachment or link, they were prompted to install the Excel add-in. Just one click activated the malicious malware.

The Threat Insights Report recommends three steps each organization can take to protect themselves for these Excel attacks:

Configure email gateway to block inbound emails containing XLL attachments
Configure Microsoft Excel to permit add-ins only by trusted publishers
Configure Microsoft Excel to disable add-ins

Cyberattacks can disrupt operations and put the finances and data of businesses at risk. For more information on this topic, see the reference links below.

S Corporations Required to Report Health Insurance Premiums

December 5, 2021 by Adam O'Feeney CPA

In many cases, employees are able to exclude the value of fringe benefits provided by employers, and the employer is able to deduct the cost of providing these benefits. However, when the employer is an S Corporation some special rules apply.

Health and accident insurance premiums paid on behalf of a greater than 2% S Corporation shareholder employee are deductible by the S corporation and reportable as wages on the shareholder-employee’s Form W-2, subject to income tax withholding. (A 2% shareholder is someone who owns more than 2% of the outstanding stock of the corporation or 2% or more of the voting power of all stock of the corporation.)

However, these additional wages are not subject to Social Security or Medicare (FICA), or Unemployment (FUTA) taxes if the payments of the premiums are made to or on behalf of an employee under a plan or system that makes provision for all or a class of employees (or employees and their dependents.) Therefore, the additional compensation is included in the shareholder-employee’s Box 1 (Wages) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2.

A 2% shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S Corporation and the shareholder met the other self-employed medical insurance deduction requirements. If, however, the shareholder could be covered under a subsidized health care plan of the shareholder or shareholder’s spouse, then the shareholder is not entitled to the above-the-line deduction.

Know the Difference Between Cash and Accrual

The Tax Implications of Closing a Business

What Business Owners Need to Know About Depreciation

EIDL Borrowers Receive Additional Six-Month Deferment

Cyberattacks Accelerate and Target Excel Users

S Corporations Required to Report Health Insurance Premiums

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