With an ever-growing Federal budget deficit, the Internal Revenue Service (IRS) is working harder to find new or missing revenue and has hired more agents in the last five years to conduct business audits.

Alan Weinberg, leader of the IRS Tax Practice and Procedure Group with Dixon Hughes, PLLC, (www.dixon-hughes.com),certified public accountants and advisors, says the IRS is moving audits away from the largest corporations. “With our clients, we’re seeing a significant increase in audits of mid- to large-sized companies,” he says.

Pass through entities— corporations that pass income, losses, and deductions to shareholders for federal tax purposes, such as partnerships and S Corporations—are also seeing increased audit activity. But Weinberg indicates that audits are never random. The IRS has senior agents who classify returns for audit potential after selection by computer profile.

Jamie Smith, managing member of Dixon Hughes’ Jacksonville office, indicates that the IRS views small and mid-sized businesses as the biggest offenders in noncompliance with tax laws.

“In most cases, the business isn’t purposely attempting to defraud the government,” he says. Errors in bookkeeping, record keeping and misreporting information on tax returns are typically reasons why an audit occurs.

“Sometimes the classification of certain assets as depreciable or available for immediate expensing may be interpreted differently by the IRS then what was reported,” Smith says. “That will trigger an investigation.”

Weinberg adds that the IRS wants to expedite the audit process because more audits should mean more revenue for the treasury and better compliance in the future.

“It is best to be prepared for the day you get that telephone call from the revenue agent that your return has been selected for examination,” he says.

How to prepare

Weinberg says that many businesses immediately panic when contacted by the IRS. “Often taxpayers believe that they did nothing wrong and their initial reaction is to give the IRS more information than needed to prove what they did was correct,” he says. According to Weinberg, the best course of action is to seek the assistance of a professional. However, if you elect to go it alone, you need to make a plan.

Weinberg indicates that a few steps should be done to prepare for the audit, like assigning a person in your company to coordinate the audit and determine what company resources are needed.

Ask yourself what you may have done. Was there an unusual transaction that year? Have you pushed the envelope on deductions or maintained other practices that would make your return standout? A taxpayer should ask the agent for a risk analysis at the initial meeting to determine what issues will be examined.

Some mid-sized companies have invested in hiring in-house tax specialists, but many may not have adequate staff to handle the IRS requests.

“Audits can be very expensive due to the time and effort it takes to gather data and meet IRS demands in a timely manner,” Weinberg says. “The cost of time commitment, staff availability, and internal tax knowledge should be weighed against the cost of hiring an outside professional to help.”

The IRS confirms in writing that a company is under examination and issues an Individual Document Request (IDR), “which asks for a significant amount of information,” he says.

What the IDR does not tell you is that the agent will want to interview your highest-ranking official at the first meeting.

“The agent wants to know about the company, what it does, and how it does it,” he says.

The IRS Web site (irs.gov) has information on a number of issues, risks, and potential penalties that may provide insight about the reasons for the audit.

“Taxpayers need to know what the issues are and what needs to be provided to prove their position,” Weinberg says.

What the IRS knows

The IRS probably knows more about your company than they will lead you to believe. The agents will look up your Web page; the agents will Google your company and your corporate officers.

Different tactics may be used to get information such as asking for all records or for other information that may not seem relevant.

“Uninformed tax departments or individuals may be pushed pretty hard,” Weinberg says. “You need to have some knowledge of the regulations and the audit process to navigate an IRS examination smoothly.”

In an attempt to help auditors, the IRS developed a Market Segment Specialization Program (MSSP) to provide a better understanding of different industry issues. These MSSP guides are available to all business owners as well. Weinberg suggests that business owners become familiar with the guidelines for their types of business.

“The IRS is educating its agents and providing them with more information about issues they will encounter during a field examination,” he says. “There’s no doubt that the agent who walks into your office will have done his or her homework on your company,” he says.

The agent’s length of visit

The size of the company, how well books and records are kept, or other issues that arise determine the length of an audit, which can take from six to twelve months.

The IRS expects taxpayers to respond to IDRs within two weeks from issuance. How quickly requested information can be turned around will have an impact on how long the audit will take. If books and records are not well organized, an examination could take longer. The person representing the company wants to be available to respond to questions.

Weinberg adds, “The more time an agent is in your office, there is more room to find errors in your tax return. The agent becomes part of your office environment— tying up an office, desk, phone line and generally becoming part of the atmosphere— where break room discussions are overheard and access to even more information is gained. This intrusion can potentially put a business in jeopardy for penalties or worse.”

Afterwards

When the audit is finally finished, the IRS will issue a proposed adjustment, if one is required, and will request a response within two weeks. But be prepared. If there are adjustments made to the return, it is possible that a penalty will be assessed.

“The IRS is asserting more and more penalties against taxpayers,” he says. “It is getting harder to reach an agreement to drop the penalty.”

Many times, taxpayers must decide if the time and cost to fight the penalty exceeds the amount levied. According to Weinberg, a good agent is usually willing to work with a business to resolve many adjustments. If not, the taxpayer has the right to apply for review by the IRS Appeals Office. Any increased tax liability is not payable during the appeals process.

If an agreement still cannot be reached, the IRS issues a Statutory Notice of Deficiency to the company.

While a taxpayer can then petition the United States Tax Court “pro se” (without counsel), Weinberg says, “at that point, legal assistance may be a good idea.”

But be aware that all legal representation is at the taxpayer’s expense.

“Complex tax audits are best done with the assistance of an experienced specialist from the start,” says Smith. “That can be a small investment compared with a business’ lost time, productivity, and potential penalties.”

By Lewis Hunter, CPA    

Experts say the economy is improving, but Jacksonville unemployment reached 12%, and many business owners are worrying about a double-dip recession. Good planning requires business owners to consider their alternatives in case the economy does not improve as quickly as everyone hopes. This means transitioning your business practices to save money during a long-term recession.

Here are some cost-cutting strategies will help support your business’s bottom line while the economy perks up.

• Switch to a recession-time loan. The recession has changed lenders’ attitudes. They are much more skeptical and hesitant to give loans. Businesses that depend on loans will need to revise their pitch to lenders in order to get the financial backing they need.

You can do this by working the recession into your pitch for a loan. Present a realistic business plan to lenders that incorporates the recession, and mention how you plan to adjust your business to meet the challenges of the economy. 

Lenders don’t want to hear a “business as usual” approach because the economy has prevented business as usual for most companies. The more realistic you are about finances, the more likely lenders will be to give you a loan.

• Shorten your business cycle. During a recession, smart business owners review business activity more frequently so they can act swiftly on cash flow changes.

With shorter business cycles, you can see upward trends sooner and respond accordingly. If you were reviewing your finances quarterly in the past, you may want to start reviewing them bi-monthly or even monthly.

• Outsource services. It’s tempting to keep everything in-house when finances are tight, but outsourcing time-consuming services could save your business money in the long run.

Start by examining the services that take your team longest to complete. Focus the majority of your employees’ time on bringing in new business. Tasks such as bookkeeping, IT support, direct marketing, public relations, writing, and Web design are all good options to outsource if they are not a central part to your business.

In addition, the recession has put an abundance of freelancers into the market, giving business owners a chance to work with these specialists on contract to get quality work on a project-by-project basis.

• Update business technology. Although it’s difficult to justify investing in new technology during a recession, your business could lag behind competitors who have newer, faster equipment. Not only will your business processes become more efficient with new technology, but potential customers will also be impressed that your business continues to improve during a recession.

Many retailers are selling equipment at a discount, so you may be able to get a better deal now than if you wait until the recession passes.

• Increase your online presence. Although you may not have enough cash for an all-inclusive marketing campaign, you can still get your name into the market without breaking the bank. Start with your Web site. Invest in search engine optimization (SEO) software to bring your site out of hiding and make it easy to find online.

Also, if you don’t have control over editing your Web site, consider switching over to a site host that will allow you to maintain and update pages on your own. This will save time and money in working with a Web developer for all site changes.

Social media is one of the best ways to market online, and it is free. Create Twitter, Facebook and LinkedIn accounts and post to them regularly. Don’t forget to include links to your Web site or blog in each post to drive additional traffic to your Web site. 

• Market your company effectively. Don’t stop marketing and advertising because of the recession. Customers will want to see that you are still around and operating in any economy. Because finances are strained for everyone, you might be able to negotiate better advertising or printing deals now for external promotions.

Another way to market your company is to do some old-fashioned networking. Attend local business events, non-profit fundraisers, and community functions. This way, you can promote your company personally.

• Use a mentor. Confiding in an experienced mentor is extremely useful during business challenges. A mentor will help you pick out opportunities or threats you might have missed, as well as offer guidance during business growth or decline. Most of all, a mentor will keep you accountable.

Remember that even the strongest business plans can be deterred by unexpected changes in the economy. In your business plans, include a scenario that could test your revenue, expenses and cash flows.

Your business should be prepared to adapt as the economy changes to get the most out of every situation. 

Lewis Hunter is a certified public accountant and owner of Hunter & Associates, P.A. He specializes in financial planning, tax planning and business coaching for small businesses. Visit www.huntercpa.com.

By Robyn A. Friedman    

One of the biggest challenges for any entrepreneur is raising the necessary capital to launch—or grow—abusiness. Without adequate funding, any business is doomed to fail. But startups face a particular challenge: They don’t have a track record. While that may make the process of financing a business a bit more daunting, with proper research, preparation and planning, many startups can adequately meet their needs for cash.

Alysia Gilliam learned this firsthand. Gilliam, a behavior analyst, is owner of Pediatric Behavioral Services, a startup in Jacksonville. She needed working capital to cover the rent for her facility, as well as utilities, office furniture, and other costs of opening her firm, which provides behavioral services to children diagnosed with autism or other developmental disabilities. But after attending a workshop on raising capital, she was discouraged.

“In the workshop, it was emphasized that there are not many funding opportunities for startup businesses,” Gilliam said.

But she persevered. She developed a business plan, practiced interviewing techniques and researched funding sources. Her efforts resulted in a loan from Regions Bank under the Small Business Administration’s 7(a) loan program. “Make sure you know what the bank is looking for, in terms of cash, condition of the industry, capacity to repay and credit,” said Gilliam. “And know where you stand in terms of your strengths and weaknesses.”

Bank loans are just one of the ways that entrepreneurs can finance their ventures. Here are some other common ways:

• Personal savings. According to the SBA, this is the primary source of capital for most new businesses. Some people tap bank accounts, while others max out credit cards or utilize home equity loans. You retain control of the business this way, but you put your personal wealth and security on the line.

• Friends and family. Often, friends and relatives will lend money interest-free or at low rates, a huge advantage for a startup. But you’ll have to give up a piece of the business. Another disadvantage: Friends and family are no longer friends and family if you lose their money. “You better have a lot of conviction in your business if you’re going to have your aunt invest in it,” said Jim Philip, co-founder of Harbor View Advisors in Jacksonville, an investment banking firm.

• Banks and credit unions. A common source of funding, banks and credit unions will scrutinize your business plan to ensure that you are capable of paying back the loan. The SBA offers several programs to help new businesses get loans. These include the popular 7(a) Loan Guaranty Program, the SBAExpress loan, and the 504 loan program, more commonly used by seasoned entrepreneurs.

• Angel investors and venture capital firms. Angels and venture capitalists provide funding to new businesses in exchange for equity, or a percentage of ownership in the business. Fees are usually higher than a bank would charge, and you have to give up some control over your business. But for many businesses, venture capital is a necessary step toward growth. “If you can’t get a loan from a bank, and a venture capitalist is willing to lend to you, then you may want to take a hard look at that,” said Wilfredo J. Gonzalez, district director of the SBA’s North Florida District Office.

Planning to seek financing for your new venture? Here are some tips from the experts on successfully raising capital:

• Be prepared. Put together a binder before meeting with prospective sources of financing. The binder should contain your business plan, financial statements, tax returns, marketing projections, and any other information that’s relevant. “The person will think to themselves, ‘This guy has his act together,’” said Gonzalez. “He will feel very comfortable going to the committee on your behalf.” If you don’t know how to prepare properly, the Small Business Development Center (SBDC) and SCORE can help.

• Develop a relationship with your banker. Don’t just walk into your branch and apply for a loan. You need to know who the small business specialist is in your bank—and establish rapport with him or her prior to seeking financing. “Many people will tell you that they have a bank, but not a banker,” Gonzalez said. “It’s a big difference.” Your goal: To find someone willing to go to bat for your business.

• Apply for funding before you really need it. The worst time to go to a bank to apply for a loan is when you don’t have any money. If you have monetary reserves, however, your financial situation appears a lot better to a lender.

• Don’t underestimate your financial needs. The most common mistake entrepreneurs make, according to investment banker Philip, is underestimating the amount of capital they’re going to need. “If they believe they need one million dollars, chances are they need three,” he said. “You always need more capital than you think.”

• Don’t focus on exit strategy. Yes, angel investors and venture capitalists are going to want their money back—plus a sizeable profit. But entrepreneurs should focus not on how they’re going to exit or sell their company, they should focus on building a great company. “If you build a great company that has a great product and momentum, somebody’s going to want to buy you,” Philip said.

Tyler Saldutti is one entrepreneur who is doing just that. In October 2008, he founded Jacksonville-based Prime Realty, a commercial real estate brokerage, with $75,000 from savings. He was cautious, kept operating expenses low, and focused on cash flow. Saldutti wanted to avoid outside funding, so he ran his business conservatively, refusing to take on new overhead until he had sufficient cash flow to support it.

“Self-funding is a difficult way to go, but it offers the most flexibility and control,” he said. “My advice to the startup business owner writing their business plan is to get creative with your cash flow, fight the temptation to take money early on, come up with a plan to self-fund your business if you can and take investment as a last option. Then re-evaluate at the appropriate time when you are ready to grow to another level.”

Robyn A. Friedman is a contributing editor to Jacksonville Small Business Advantage. She can be reached at RAFWriter@att.net or through her Web site www.everythingwrite.com

By Joe Palermo    

Financing a small business can be a real challenge. Small businesses combine various methods of financing usually starting with the business owner’s saving, and in some cases their 401(k), home equity line of credit, friends and family, and credit cards.

After a two or three year track record the business may turn to bankers for a lease or loans to purchase equipment and establish lines of credit. Some business owners use factoring to speed cash flow when bank loans and personal borrowing power are not available.

But are these good choices? Understand your options before focusing on any one solution:

• Home equity line of credit. This is a convenient way to get the funding you need to grow or start a business. Although this was a sure method to finance a business if you had no credit history, in today’s business climate using a home equity line of credit is now one of the toughest and dangerous methods: Your house is used as collateral. If your business hits hard times and your income decreases or is eliminated your credit history will impact your ability to obtain additional business credit in the future.

• Credit cards. Credit cards are used for all types of expenses and depending on the various interest rates charged, this method can be a costly method. Because of high interest rates, you should make every effort to pay the balance off within the due date to avoid paying interest.

A word of caution: If you must use a credit card for short-term financing, keep in mind that the majority of small businesses do not pay off the balance each month. So, when you choose a card, select it for its low interest rate—not because of reward programs.   

• Business line of credit. If your business needs an occasional influx of capital, you might seek a line of credit, but the recession has made obtaining this difficult. A number of companies offer business loans to companies with questionable credit history but these firms usually want an up-front fee and higher interest rate, since the risk factor is greater due to the business’s credit history.

• Term loans. A term loan is a type of financing provided by banks to businesses as a “working capital loan” or “accounts receivable loan.” This type of loan enables businesses to consolidate high interest credit cards, expand the business, and cover equipment purchases.

From a business owner’s perspective a term loan is a preferred method of financing because of the the length of time—sometimes years—the business has to pay the loan off. But—always a but—getting approved for this type of loan is challenging today, since banks have tighten the requirements.

The question you must ask yourself is, “What is the best type of debt for my business to handle?” The answer is not simple. There is never “good debt.” One method of financing, however, might fit a your  business better than another business.

Best advice: Try to get the lowest interest rate, favorable payment terms, and reasonable line of credit. Search for non-traditional methods such as purchase order financing, accounts receivable factoring. And customize solutions that fit your business needs.

Joe Palermo is a partner in B2B CFO and can be reached at 925-548-3395 or jpalermo@b2bcfo.com.

SIDEBAR

Good bookkeeping essential for financing options

The majority of small businesses are undercapitalized right out of the gate. To improve the possibilities of obtaining any type of financing or even to be able to continue self-financing from company profits, you need to keep on top of your financial status.

A good set of books and records are essential. With those books, learn how to explain your company’s financial performance to run your business more efficiently and improve your chances of obtaining a loan.

By Steffanie  Wood    

Spring is here, and that means it’s time to spruce up your house, get rid of clutter and get things organized. But as you start your spring cleaning, go beyond the home and yard and look for ways to rejuvenate their investment portfolio.

Instead of taking the “out with the old, in with the new” approach, simply make a consistent effort to make progress toward your financial goals. You may need to make adjustments in response to changes in the financial markets, the economy and your personal situation.

Here are tips to get your started:

1. Dispose of things that aren’t working. Whether it’s a burnt-out computer or a treadmill that lost its grip back when “the Web” was reserved for spiders, we all own things that are no longer useful.

And the same may be true of some of your investments. If one hasn’t performed the way you had hoped, and you’ve given it adequate time, you may be better off by replacing it and using the proceeds to purchase another investment.

2. Get rid of duplicates. If you went through everything in your house, you might find several items that do the same thing. Do you really need two toaster ovens? And how many radios can you listen to at one time?

If you looked at your investment portfolio in this same way, you might be surprised to find some redundancies. For example, do you own several stocks issued by similar companies that make similar products? This might not be a problem when the stock market is booming, but it could be a definite concern if a downturn affects the industry to which these companies belong. Always look for ways to diversify your holdings. While diversification, by itself, can’t guarantee profits or protect against loss, it can help you reduce the effects of volatility.

3. Put things back in order: Over time, the spaces in your home can get “out of balance.” Perhaps your flat-screen television is crowding out your family pictures, or your new desk takes up too much space in your home office. With some rearranging, you can usually get things back in order.

The same need for rearrangement may apply to your portfolio, which might have become unbalanced with too much of one investment and too little of another. This situation could undermine your financial strategy, especially if the imbalance means you are taking on too much risk or, conversely, if your holdings have become too conservative to provide the growth you need. Look for ways to restore your portfolio to its proper balance — one that reflects your risk tolerance, time horizon and long-term goals.

By giving your portfolio an annual spring cleaning, you can help make sure it reflects your current needs and is positioned to help you make progress toward your key financial objectives. And you won’t even have to get near the dust cloths or furniture polish.

Steffanie  Wood is a financial advisor with Edward Jones, Unit 3103, 11251 Campfield Dr., Jacksonville. She can be reached at 904-751-1747 or Steffanie.Wood@edwardjones.com.

By Hal Rogers    

For the last several years the journalistic community has painted a pretty ugly picture of annuities and people who sell them. . From financial journalist Jane Bryant Quinn to the local beat reporter, writers have found annuity bashing to be a good bet to fill an empty page and satisfy their sensationalistic tendencies. 

 Some of these articles have stated things that simply weren’t true, blew up isolated incidents to make them sound epidemic, or generalized information to infer that something that was true about one type of annuity was true of all annuities.    

Annuities are good when they are appropriate—if they are part of a financial strategy. Let’s see how that works.

Annuities are investment vehicles offered by insurance companies.  However, the term “annuity” is so generic as to be virtually meaningless.  It is like saying “vehicle”—which could be a tricycle or a space shuttle, a skateboard or a BMW.  The word annuity itself only tells you that earnings are tax deferred until withdrawal and withdrawal of earnings before age 59½ are taxed like IRA withdrawals before age 59½—that is, they are subject to ordinary income taxes and a 10% penalty tax. 

Beyond that, the differences among types of annuities are legion.  There are fixed annuities, indexed annuities, and variable annuities.  There are immediate annuities and deferred annuities.  All annuities transfer some type of risk to the issuing company.

The perceived downside to annuities generally relates to their lack of liquidity and their cost.  There is no initial sales charge on an annuity purchase; there is a contingent deferred surrender penalty during the early years of a contract.  The surrender period can range from three to 20 years, the longer periods often on products that pay higher commissions to the selling agent.

An annuity isn’t the right product for every financial situation.  However, if an annuity is the right answer for you, you must realize that any annuity has a cost.  Everything of value has a cost.  In every purchase decision, consumers elect whether or not that value is worth the additional cost.  Annuities provide guaranteed benefits you don’t get with other investment vehicles. 

Sometimes the cost isn’t a dollar amount deducted from an account.  Sometimes that cost is an opportunity cost.  A given annuity may limit upside potential, but the trade-off is that it minimizes downside risk.  Along with tax advantage, risk mitigation is one of the primary advantages of annuities.  Annuities aren’t for everyone and aren’t the answer for every situation, but when risk transference is an objective, annuities are worth considering.

Much of the negative press surrounding annuities has stemmed from abusive sales practices, failure to consider client suitability, and the marketing of “bells and whistles.”  Agents recommend a particular product based on its selling points, but fail to integrate the use of the product and its particular characteristics with the rest of the client’s investment vehicles.  Sometimes this actually results in the client’s failure to be able to utilize the specific benefits of the contract, even though they must pay for those benefits for as long as they hold the contract. 

The key to the proper use of annuities lies in understanding their different characteristics and strategically integrating them with other annuity and non-annuity financial vehicles.  Doing so can result in investment performance, risk transference, guaranteed income streams, years of virtually tax-free income, and larger tax-free distributions to heirs. 

History shows that the strategic use of annuities works. The guarantees provided in the annuity contracts have accomplished what they are designed to do, even in economic downturns. As a result of the recent severe downturn the financial media has started looking at the valuable benefits enjoyed by many annuity owners.  Take a look at the Wall Street Journal article, July 24, 2009 (http://tiny.cc/annuitieswsj).

The bottom line is that annuities are tax-advantaged risk-transference vehicles.  Strategically integrated into a comprehensive asset allocation model, they can provide significant advantages over non-insured investment alternatives.  As an annuity’s insured benefits are subject to the claims paying ability of the carrier, it is important to choose an offering company that has not only strong financials, but one which hedges against the risks inherent in the contracts.  Glitzy product brochures and agent promises won’t do you any good if the company can’t honor its guarantees.

Harold J. Rogers, CFP, CSA, President of Retirement Services, is a Registered Representative with ProEquities, Inc., and an Investment  Advisor Representative of Investment Advisors, a division of ProEquities, Inc.  Securities offered through ProEquities, Inc., a Registered Broker/Dealer, Member FINRA & SIPC.  ProEquities, Inc., Branch Office, 8596 Arlington Expressway, Jacksonville, FL 32211.  (888) 720-0556.  Retirement Services is a sole proprietorship owned by Harold J. Rogers and is independent of ProEquities, Inc.  Information is for informational purposes and should not be construed to be specific tax, legal, or investment advice. 

When cash is short, consider invoice funding

Is this scenario familiar? Your customers are late in paying their invoices, making you short on cash, and the bank isn’t making any short-term loans. At the same time, your employees expect to be paid on time. What do you do?

You might consider a short-term option called accounts-receivable funding, suggests Chad Todd, regional vice president of AR Funding, Inc. (www.arfunding.com). “Accounts receivable funding is the oldest form of financing in the country,” he explains. “It accelerates cash flow.”

Accounts receivable (AR) funding (also called accounts receivable factoring) provides a line of credit against invoices, and that is what differentiates this source of finance from bank financing. “Traditional bank financing focuses on the business owner’s personal credit, the assets of the company, the kind of business the company is in, and the balance sheet in order to determine if it will lend money,” explains Todd. “Accounts receivable funding does not. Instead, it looks at your customers’ credit. The most important thing in this industry is who you are doing business with.”

What it boils down to is this: If you have good customers, you can get advances on the money they owe you.

How it works

Essentially, in AR funding, a business sells its invoices to the funding company. When a small business works with an AR financing company, it gets a portion of an invoice immediately upon origination. The business, at the same time, advises its customers to send payment to a post-office box. Although the invoice is made out to the business, it actually goes to the finance company. Once the invoice is paid, the business gets the remainder of the invoice amount from the finance company, less the finance fee.

“The value to our customers is that it they perform a service or sell goods today and invoice today, they can receive funding from us today. They don’t have to wait 30 to 45 days for the customer to pay them. In any business, you need money for payroll, rent, insurance, fuel, and other things. You need money; we eliminate the wait to get paid,” says Todd.

Pros and cons

As good as accounts receivable financing seems, there is one disadvantage: Cost. “Compared to traditional bank financing, this type of financing is more expensive,” admits Todd. “I always tell anyone interested in using accounts receivable financing to go to a bank first. If the bank can’t get you approved or will not provide you a line of credit, only then should we talk, because it is more expensive than a bank loan.”

On the plus side, however, is that this type of financing is available for startups. “We fund startups,” says Todd. “The most important thing to us is who you are doing business with. A startup will not have financial statements. But if it can give us a list of customers and how much are it will be invoicing them each month, it can get financing. We’ve gotten deals done with very little. We’ve done deals based on the articles of incorporation and an expected volume of dollars each month.”

Todd says that although AR funding is a very old type of financing, many small businesses have never heard of it. “We are admittedly a stepping stone for small businesses. And, we know we will only have our clients for perhaps up to 24 months, and then they will graduate to bank financing. We’re happy about that.”

By Joe Palermo    

Does the thought of preparing your business tax return leave you with an uneasy feeling? Then do not wait to the last minute to get all your documents organized. Block out time and begin the process of gathering and organizing all of your financial documentation of all business-related expenses.

Some expenses are deductible and are applied in their entirety to lower your tax bill. Other expenses are capitalized, which means a portion of them are recovered over time. And some—personal expenses—do not affect your tax bill. Unfortunately, the IRS does not allow deductions for personal expenses, such as personal living costs or personal use of your automobile. (However, if a cost is both personal and business and can be broken down with documentation, the business portion can be applied.)

Your accountant will need documentation on the following types of expenses:

• Ordinary and necessary business expenses. This is a broad category of costs incurred to run your business. They include a number of different types of expenses, including employee pay; retirement plans; rent expenses for your business property; interest charged on money you borrowed for business activities; various state, local and foreign taxes directly attributable to your business; insurance for your business; and office expenses as part of operating costs.

• Cost of goods sold. If you manufacture products or purchase goods for resale, you must generally value the inventory at the beginning and end of each tax year to determine the cost of goods sold, which is used to figure gross profits for the year by subtracting the cost of goods sold from your business’ gross receipts.

As you prepare for tax preparation, collect information on the cost of products or raw materials (including freight), storage, direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products, and factory overhead expenses.

• Capital expenses. Capital expenses fall into three general categories business start-up costs; business assets; and improvements. Expenses incurred in these areas are not deducted; however, they are capitalized to help reduce your tax bill. In other words, you may b able to recover a portion of the amount you spent on a capital expense through depreciation, amortization, or depletion.

Joe Palermo, CPA, is a partner in B2B CFO and can be reached at 925-548-3395 or jpalermo@b2bcfo.com.

 SIDEBAR 1

What kind of documentation do you need?

• Bank deposit slips

• Invoices

• Credit card charge slips

• Form 1099

• Canceled checks

• Account statements

SIDEBAR 2

Prepare for 2010 taxes now

To make tax preparation easier in 2010, take these steps now:

1. Set up and maintain a file for each vendor and file paid invoices.

2. Establish a file for each customer.

3. Complete bank reconciliation for each month; never get behind.

4. Prepare financial statements each month.

5. Review the financial statement each month with your accountant or business advisor

Do you believe paying taxes is voluntary? Or that you don’t have to comply with an administrative summons about your taxes? Think again. These beliefs—and many others—are erroneous, says the Internal Revenue Service, which has released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.

Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document, The Truth about Frivolous Tax Arguments.

The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

IRS highlighted in the document about 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.

A number of tax laws enacted in 2009 may affect how much you pay in taxes this year. Business.gov, a portal for information on federal regulations affecting small businesses, summarized a few you should be aware of as you prepare for the 2010 filing season:

• Expensing business property and equipment. According to the IRS, many small businesses that invest in new property and equipment will be able to write off most of these purchases on their 2009 returns. This is because the American Recovery and Reinvestment Act (ARRA) extended the bonus depreciation and increased the Section 179 deduction.

Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. But this year a quick write off of up to $250,000 on the cost of machinery, equipment, vehicles, furniture, and other qualifying property place in service in 2009 is now possible. The IRS has more information on this here.

For more information on when and how to take the deduction, go to www.section179.org, which is a free resource for small businesses.

• Cancellation of business debt. The ARRA also enables certain businesses to elect to delay recognition of income from the cancellation of business debt in 2009 or 2010. Income recognition can be deferred until the fifth year after the reacquisition, and then the income is included ratably over the following five years.

• Business credit for COBRA premium assistance to employees. If your business provided COBRA assistance—extension of health benefits—to employees who were terminated in 2009, ARRA gives you a 65% credit against the COBRA amounts paid. The credit is taken against employment taxes on Form 941, Form 944, or Form 943. The credit is treated as a deposit made on the first day of the return period (quarter or year).

• Business energy credits. Credits for making purchases of qualifying fuel cells property, micro turbine property, and solar energy property have been extended through 2016. The business energy credit can be up to $4,000.

These are just a few of the major changes that pertain to small businesses, so be sure to talk to your tax advisor if you have questions about how your small business is impacted.

—Business.gov