Taxes are an important part and issue in running small businesses.  Advocacy groups hope Congress will pass laws to simplify compliance and to lower taxes.  Such measures will help small businesses create jobs and improve the economy.  Much depends, too, on the outcome of the elections in 2012.  Barbara Weltman enumerated tax trends for 2012 in SmallBizTrends.com.

Can a discussion of the federal deficit, now in excess of $15 trillion, be separated from a discussion on taxes? Of course not! Therefore, taxes will continue to be an important topic on the federal level because of the dichotomy between raising taxes to address deficit concerns vs. keeping taxes low to help create jobs and improve the economy.

Which will win out in 2012? Much depends on what happens in the November elections. Until then, however, there are some important trends in taxes worth noting:

1. Taxes will remain a political football.
As a general rule, Republicans are against raising taxes, while  Democrats want to raise taxes on the so-called wealthy (many of whom are small business owners).

Taxes will surely be a key issue in the presidential race.

2. Tax audits are on the rise.
According to one KPMG survey, tax audits of businesses have increased. Corporate executives who were surveyed reported a 61 percent increase in federal tax disputes; 37 percent reported an increase in state tax audits.

What continues to be a popular audit topic is worker classification to determine whether a company is properly treating a worker as an independent contractor or whether the worker should be treated as an employee.

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New rules set out by accounting regulator, the FRC will soon force company accounts to include a report (from the audit committee) about the key risks a company faces, both strategically and operationally.

Following a review of the current auditing system, the FRC have revealed that many audits fail to communicate key information about a company’s potential dangers, resulting in many shareholders being left in the dark about the full extent of their company’s financial health.

Because of this, the FRC have proposed the following changes:

1. That company accounts now include a new report outlining the key risks a company faces in terms of strategy and operations (from the last year moving forward)
2. Businesses be made to re-tender for chartered accountants every 10 years or be forced to explain why they haven’t
3. That any description of the risks a company faces be made easy to access/understand and not be scattered about the report

And it is easy to see why the FRC are so keen to change the auditing system…

Whereas in the past audits focused purely on ensuring that everything added up; the FRC have recognised the importance of getting to the heart of the matter and putting a company’s needs first.

And it will certainly make a difference.

By taking this initiative, companies will be able to avoid any potential dangers which could undermine their strategies and instead have the information they need to better allocate capital.

As Richard Fleck, chairman of the Auditing Practices Board goes on to explain: ‘Audits used to be about making sure everything added up correctly. Now it is more important to assess a company’s soft decisions, such as whether a company has impaired assets, how it has approached sovereign debt issues, or how it has approached future liabilities.’

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Valuing a business is a challenging aspect when buying a business.  How can you arrive at the right price for a business for sale?  Will you, the buyer, just rely on the asking price of the seller?  In most cases, the seller wants a price higher than the real price of the business because the former factors in the hard work and number of years he or she invested in the business.  It is up to you to decide if the price accurately reflects what the business is worth.  How will you arrive at a counter offer?  Here are some tips in valuing a business.

1.  You should learn how to read and understand income statements, balance sheets and other important financial records.  From the data reflected in these documents, you can follow the financial status of the business through the years.  These numbers can provide you with the basis in valuing the business.  Is the business growing?  Is it worth more now than last year or previous years?

2.  You can use the Asset Valuation method of valuing a business if you are buying a retail or a manufacturing business.  Calculate the fair market value of tangible assets such as equipment and inventory of the business, or the price to replace them.  If possible, use the replacement costs of the assets in the same or similar condition.  This method is usually used for companies losing money or with flat income.

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Great companies all have a common thread that runs through them. And its not just one thing that makes them great either. In reading this article, you’ll see the things that make them great every single time. The basics you’ll find are related to money management, markets, products and finally management its self. You’ll know the signs that make a great company and learn when to recognize a great one, and avoid the losers.

Products And Markets: Products and markets are important because without them, there’s nothing to sell. The first trait that great companies have is a great product. Their products solve a problem, are relevant and are have a good price point. The second trait is markets.

They know how to pick the right markets. If their market is too small, then the revenues wont sustain their efforts. Too much competition, and it might be too costly to enter that market. But products and markets are just part of the story.

Margins, Revenues, Cash and Debt: The third trait is growing revenue. By having increasing revenues and earnings, you know a company has life. Its alive and the market is buying its products and services. The fourth trait is that they have cash on hand. With Cash on hand great companies have the ability to seize opportunities as they come. Even as competitors are shrinking, the great companies are pressing in and growing with their cash.

The fifth trait is that they have low debt. For any company, this shows that they know how to manage money properly. The sixth trait is rising margins. Its not enough to make sales. A company can go broke with a high amount of sales but no margins. Great companies have growing margins. This is where they get their cash from.

Good management: The seventh trait of a great company is good management. It takes good leaders to control debt and margins.

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You must avoid making these mistakes when getting a business appraised as they could cost you your business. Here are the top 7 mistakes when getting a business appraised:

1. Not considering the approaches that you can take when it comes to valuing a business – there are three approaches that you should consider and they are:

• The income approach – This approach is where the value of a business is based on the sum of the current value of likely economic benefits.
• The market approach – This approach is where the value of a business is calculated by comparing it to other similar businesses that have been sold in the area.
• The asset approach – This entails making adjustments to a business’ assets as well as liabilities when it comes to their market values.

2. Not thinking about the discounts that might be applicable – the usual discounts that can be applied when it comes to business valuations are the ones for a lack of control as well as for the lack of marketability.

3. Not knowing the standards of value – for an operating business, the value standards will most likely be one of the following:

• Fair market value – simply put, this is the price which is determined in terms of cash equivalents.
• Fair value – this is used when it comes to issues that range from dissolving marriages to nonconforming shareholder suits.
• Investment value – this is normally used for transactions when the buyer who wants to acquire the business makes a return on investment (ROI) assessment to determine the value of the business.

4. Not knowing the difference between an appraisal and a fairness opinion – an appraisal entails knowing about a business’ industry, economic conditions as well as trends, among others.

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What is a payroll service and how does it work?

To a business there is perhaps no more important part of its infrastructure than its payroll service. The purpose of a payroll, simply put, is to make sure that each and every single person in a company’s employment is financially compensated for their work to the correct degree and on time. To many employers, who simply are happy to receive their check at the end of the month, the system would seem straightforward, invisible or effortless. However, the system is anything but and, were an employee to receive a mistake in payment, they would soon realise that payroll management can sometimes be harder to manage than they envisioned. Also if an employee does not get the money that they have earned on time and in the full amount, they may refuse to work or cause a whole host of legal problems for a company.

Payroll services have been changing quite a bit in the last few years; previously they could be undertaken in house with rudimentary equipment such as a calculator and a typewriter. However, as payroll maintenance has become more sophisticated and complicated over the years the procedure has become more time consuming to the degree that a large number of specialist members of staff, there simply to deal with payroll, would have to be hired to maintain accuracy. As these members of staff would have no means to create profit for the company it has become the case more and more often that companies and businesses will outsource their payroll to a third party. This means the company no longer has the time consuming burden of running their payroll and can ensure more time is spent in creative or productive areas of their business.

Another alternative has been to look for computer software to help run this area of business. Many companies have tried to move on to electronic payroll processing systems.

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In the digital era, managing your payroll manually is unnecessary and inefficient. Various payroll software solutions are widely available to help business owners with this task. These tools are usually highly specialized, do not include unnecessary features, and often come at a relatively low price. To assist you with your payroll, we have selected the 10 best payroll services.

Best Business Payroll Services
Small business payroll software solutions offer a variety of options, ranging from expensive and comprehensive in-house business payroll software to cheap and popular, yet trustworthy, specialized online services. The Top 10 list is as follows:

1. QuickBooks – an accounting package and payroll software solution which prides itself in its simplicity, efficiency, and multiple payroll options. With the price ranging from $100 to $300 per year, depending on your needs, this is certainly a good choice for a small business owner looking for a comprehensive payroll service. In addition, the company also runs Online Payroll service, which is priced at $29.95 per month.
2. SurePayroll – an online payroll service, which is priced at $45 per month. It integrates very well with other popular desktop accounting solutions and can file your returns for you.

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Short Answer…
Yes.

The Concept of Business Valuation
Whether you own a business and want to sell it, or else you’re an entrepreneur who desires to buy an existing small business, somehow or other you need to know what the company is worth.  On the selling side, the plan is to make the price low enough to attract a bevy of buyers, while making sure you’re not giving away potential profits.  From the buyer’s standpoint, you want to assess the value of a business in comparison to its posted cost.  The price you pay for a small business can seriously affect months or years of down-the-road profits, so this factor is not to be taken lightly.  In many cases, a seller will engage the services of an expert to determine a reasonable market value.  Buyers oftentimes hire their own experts to assess the price of a business they wish to acquire.  These dueling experts may arrive at vastly different figures.  Their ability to compromise can result in a mutually satisfactory transaction for both buyer and seller, but much of that process may be based upon what method each side uses to arrive at a price.

Determining the Value of a Business
There are three reasons why an owner of a small business will hire someone to determine its value—a pending sale, some sort of lawsuit, or else tax and estate-planning issues.  For the purposes of this article we are concerned only with the first, but the process is the same no matter why a valuation is required.  There are three basic methods experts use to value a business:

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Why Business Valuation Is Important
The process of arriving at an accurate assessment when valuing a business is perhaps the most challenging aspect of any prospective small business purchase.  A seller has arrived at a specific price he or she wants for the company, and one must determine if that business value is accurate.  Pay too much, and you will struggle to make a profit.  Pay too little—well, there’s hardly a down side there, but the scenario is unlikely at best.  There are several ways to value a business; choosing the most appropriate one for your situation—and ensuring that it’s accurate—can make the difference between success and failure.

Three Basic Approaches
Small business valuation generally falls into one of three categories:

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Fair Pricing for Buyers and Sellers

Whether you are planning to buy an existing business or expect to sell one you currently own, one of the biggest challenges involves deciding on a fair price.  As the buyer, if you pay too much, you risk damaging future profit by digging too deep a hole early in your ownership cycle.  As the seller, asking too little unfairly discounts the investments you made that created a successful business.  Additionally, an improperly priced company sends the wrong message to potential buyers.  If a business is being sold for significantly less than its true value, potential owners will immediately sense that something is wrong.  This is hardly the way to attract a group of qualified buyers.

Abandon the Dartboard

Believe it or not, one of the most common ways people price a business for sale is by guessing.  “Well, I paid X dollars ten years ago and made Y dollars a year in profit, so I’ll figure a 10 percent annual increase in value and sell it for Z dollars.”  Good luck convincing a savvy buyer that the price tag you posted is an accurate one.  One of the dangers of putting the wrong value on a business involves a concept called “shelf life.”  The longer your business remains unsold, the likelier it is you will sell it for far less than its true worth.  Let’s say you guess that your business is worth $1 million.  Maybe it is -maybe it’s not.  But because you have no facts to back up your claim, your company stays on the market for months and months.  As you get more anxious to sell, you keep dropping the price until a buyer surfaces.  That is neither a profitable nor a sensible exit strategy.

Revenue Versus Profit

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On February 17, 2009 President Barack Obama signed the “American Recovery and Reinvestment Act of 2009” (“ARRA of 2009) into law.  Section 1251 of the bill temporarily reduces the recognition period for “built-in” gains tax (BIG tax) on S Corporations from 10 years to 7 years for the 2009 and 2010 tax years.

Why is this important? 

Historically, if you were a shareholder in an S Corporation that converted from a C Corporation and sold the company within 10 years of the date of conversion, you would be subject to BIG tax.  For 2009 and 2010, that 10 year “recognition period” has been reduced to 7 years.  So, if you sell your S Corporation in 2009 or 2010 and it has been converted from a C Corporation at least 7 years prior, you will avoid the 35% BIG tax.  Companies originally organized as S Corporations have never, and remain, not subject to BIG tax.

A Closer Look

When you sell a C Corporation the proceeds from the sale of the assets are owned by the corporation.  They get taxed once at the corporate level (35%) and then again upon distribution to the shareholders where they are taxed at your personal rate.  This effective “double tax” makes it advantageous for the shareholders of a C Corporation to convert to an S Corporation prior to sale.  In an S Corporation the proceeds from sale are “passed through” directly to the shareholders and taxed ONLY at their individual tax rates.

Since the result of converting a C Corporation to an S Corporation is a reduction in revenue for the IRS, the IRS states that the conversion must occur prior to the recognition period or the proceeds from sale will be taxed on a prorated basis.

Example:

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Those of us who own businesses, corporations, and commercial or residential investment real estate assets are often reluctant to sell because of capital gains taxes associated with the sale. But what other choice do we have other than a property exchange directed by a Qualified Intermediary? Is there another way to deal with the capital gains tax deficits that so many investors experience when they sell their real estate assets? The answer may lie in the Deferred Sales Trust™.

This capital gains tax deferral tool could save you thousands of dollars, and at the same time, you would then have the opportunity to potentially make a profit on the money you would have paid to Uncle Sam in the year of the sale. Obviously, this strategy is gaining popularity among those who have highly appreciated assets that are marked for sale. You too can potentially take advantage of this program once you understand how it works.

The process starts when a property owner sells its property to a trust owned by a third party company. The trust sells the property or stock. Next, the trust “pays” you. The payment isn’t in cash, but with a payment contract called an “installment contract.” The contract promises to make payments to you over an agr­eed period of time. There are zero taxes to the trust on the sale since the trust “purchased” the property from you for what it sold it for. The payment is made with an installment contract which makes payments to you over an agreed period of time.

The options on when and how payments can be made are flexible. You may have other income and don’t need the payments right away. The tax code doesn’t require payment of the capital gains until you start receiving installment payments.

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These time tested techniques will do much to enlighten you to discover “hidden information” and relevant data as you prepare your 2008 Year-End Income Tax Returns. Whether you are a C Corporation, S Corporation, in Ministry, an LLC or LLP, Partnership or proprietorship looking beyond the numbers is the best way to discover critical and insightful news to help make wise and informed financial and business decisions. Whether you have a CPA prepare the return for your business or you chose to “go it alone” seeking out and utilizing this data will make you a wiser and more dutifully informed owner and entrepreneur. Evaluating and staying abreast of these key ratios, components and insights well help you steer clear of financial disaster:
 

Limit Debt Payments

We are continually exhorted to limit our debt payments but our society and now even our government has gotten on the band wagon of debt is good. In fact even the recent $15,000 “tax credit” announced by the IRS is not really a credit at all but a loan, as these monies will have to be ultimately repaid. By limiting your debt payments, you allow yourself to both have discretionary spending, to take advantage of opportunities, and to fulfill your mission statements and dreams. For the only way to have money, is not to spend it. A good general rule of thumb goes back to the old days of mortgage lending when debt could not exceed 25% of aggregate income and cash flow. In a bad economy a better goal would be 15% and when it is anticipated that interest rates are going to rise, then limiting your total debt payment to less than 10% would be prudent and advantageous. If we do not limit our debt then we will certainly become its slave.
 

Avoid Credit

If there is a key item on this list, it would be to avoid credit in its entirety.

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Choosing an Entity Type Which is Best for You and Your Business.

If you have just made the hardest decision of opting to go into business for yourself or if you have owned your own business for years, having a working knowledge of how your overall tax bill is determined can cost or save you thousands. Making the right decision for your business will be critical to both your short terms success as well as eventually how comfortable your retirement might be. To this end, setting up the right entity from day one is your best bet to ensure you pay no more taxes than are legally necessary. The job of your most trusted adviser, your CPA, is to assist and guide in this process being sure to ask questions and contemplate issues you might not have even known to be a concern. As a business owner or running your business, the options will appear to be daunting but these parameters will do much to “lift the veil’ on whether you want your business to be an S Corporation or an LLC.

Limited Liability Company.
Limited Liability Companies/LLC’s are legal in most, if not all, states where their respective legislatures approved them.  LLC’s allow for some flexibility options that are not allowed in some other entity selections as well as some liability limitations that are not otherwise available for professional service companies, those where professionals, such as physicians, are required to have a professional license in order to practice.

Advantages of being an LLC include:

• Ease of formation. LLC’s do not require a Board of Directors or an election of Officers.
• Anyone or entity can have ownership in an LLC. This allows other corporations or those who are not citizens of the United States to be owners.
• Unlimited number of owners.

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CPA Teaches Your Tax Payment/Filing Responsibilities

Paying Your Taxes/Extensions…The IRS Requires us to Pay as We Go

Since World War II, the IRS has been a pay as you go system. Prior to that time, the IRS simply collected their monies at the end of the year when one’s annual tax return was filed. Many entities by virtue of their tax treatment as flow through entities do not pay any income taxes when the returns are filed but rather the income is communicated to the partners via a K-1 which is a part of the return. The entity’s partners are then responsible for reporting their portion of the earnings on their personal/appropriate returns. Thus there are many entities such as Partnerships, LLC’s, LLP’s, an S Corporations for which no income taxes are due when these returns are filed. 

C Corporations are responsible for paying their taxes as they go and they do not have the ability to pay all of their taxes at year end and still avoid assessed penalties and interest. Thus, it is critical to tax plan several times a year to determine the ultimate amount of year end liability due and to take appropriate measures to plan accordingly. For S Corporations and individuals we suggest that you tax plan at least twice annually. At that time it is also advantageous to review a client’s internal finances and obtain their projections of profits for the rest of the year. By utilizing this information as well as by being aware of their personal return issues, itemizations, exemptions, etc. you are able to get an estimate of what your taxable income and your tax will be.Both the IRS and states require you to pay as you go thus requiring you to pay enough in estimates for the taxes due on the profits/taxable income generated.

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So you want to buy an accounting or law firm?  There are many details that you will need to attend to in order to take over a law firm for sale or other type of legal business for sale.  Locating a CPA firm for sale or accounting companies for sale can be quite a challenge.  However, it is not impossible and you can be quite successful in this industry.

Legal Background
It is important to have some sort of legal background before you even begin to think about finding a legal service business for sale or buying a law firm.  If you do not know the workings of the legal system, you will have trouble making the best decisions for the firm and to operate it efficiently to make a profit.

Accounting or Business Background
If you want to buy a CPA firm for sale or other accounting companies for sale, it is important to have an accounting or business background.  This will ensure that you can make operate and run the new company with the ease and with profitability.

Finding a Law Firm
Finding a law firm may be somewhat difficult.   Typically not a large number of firms go up for sale.  Most law firms that are established are usually operated and run by a partnership.  If one person wants out of the partnership, the other person traditionally continues the legal practice.

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If you’ve been paying any sort of attention to the news this week, you’ll probably be aware that the Chancellor released his pre-budget report on Monday. This report is likely to have a major impact on your business, whether or not you are VAT registered. 

I’ve outlined the main points below:

VAT From Monday 1st December, the VAT rate will go from 17.5% to 15% for at least a year. If you are VAT registered, you will need to use the new rate as of this date. HMRC have issued detailed guidance on this.

The new calculation for working out VAT is now 3/23.

CORPORATION TAX The Government is deferring for a year the planned increase to the small companies rate of corporation tax. The rate will remain at 21% for 2009-10.

EXTRA LENDING UK small businesses should also be able to benefit from around £4bn of lending from the European Investment Bank (EIB) between 2008 and 2011. Approximately £1bn of these funds should be available by the end of 2008. The Government will launch a new Small Business Finance Scheme to support up to £1bn of bank lending, together with another guarantee facility for up to £1bn of bank support to small exporters. It will also make available a £50m fund to convert businesses’ debt into equity.

TAX PAYMENTS Businesses in financial difficulty will be able to spread payment of their tax bills over an indefinite time period. A new Business Payment Support service has been launched to help businesses calculate over what period they need to spread their corporation tax, VAT, PAYE, income tax and national insurance contributions in order to remain profitable.

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Many of the things that need to be considered when deciding to buy a business apply to any purchasing decision.  It is all about striking a sensible balance between risk and reward.  Consider a situation where you go into a store and buy something for $5, you get it home and find that it does not quite match your expectations.  You could take it back and get a refund or an exchange or you might just put it down to experience and write-off the $5.  After all, most people squander at least $5 on every tank of gas by the way they drive and waste similar amounts in other areas of their lives without even knowing it. 

So, you are now considering buying a business.  You may well be raising funds from the bank, probably secured on your assets such as your home or your pension plan, you may borrow money from friends and relatives and you will put in as much money as you can from your own resources.  You are now definitely into a high risk activity.  If it does not work you cannot just write it off, move on and put it down to experience, it could change your life forever.

I have often heard it said that many successful business people have had one or more failures in their past before becoming successful and as Friedrich Nietzsche said “That which does not kill us makes us stronger.”  While I am sure this is true and it is a great line to quote while licking your wounds over some failure or disaster, would it not be better to avoid the mistakes and move straight to your success story?

When considering buying a business you really need to know why you are doing it and to help you need to think about a few key things:

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As a business owner the business valuation process seems like a big black box. You insert lots of information into it and several weeks later you get a very thick and confusing report that tells you how much your business is worth. The problem is you don’t understand the process or the report and don’t know how to evaluate either. When reading the report, look for these common business valuation mistakes.         

Mistake #1 – Unqualified Appraiser

The most common problem with business valuation reports is that they have been prepared by someone who is unqualified. There is little, if any, regulation of the business valuation industry and it is often difficult to find firms that offer business valuation services. People tend to hire the first firm they find or their current accountant/tax preparer. Not all CPAs are competent in business valuation. In fact, many CPAs have very little or no business valuation experience or training.

Look for professionals that have at least one of the following major business valuation designations by searching their online directories.  

• Accredited in Business Valuation (ABV) – http://www.aicpa.org/credentialsrefweb/ABVCredentialSearchPage.aspx
• Accredited Senior Appraiser in Business Valuation (ASA-BV) – http://www.bvappraisers.org/find/
• Certified Business Appraiser (CBA) – http://www.go-iba.org/directory.php
• Certified Valuation Analyst (CVA) – http://www.nacva.com/dir/

Mistake #2 – Not Objective

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“Cash is king!” And, running out of cash is the most common reason that businesses fail.

This article is about practical tips to reduce your risk that slow or late-paying customers will cause a cash crunch in your business.

Finding out that a customer for whom you’ve just done a large project has gone into bankruptcy is bad news.

Here are some practical tips to avoid collections problems.

Tip 1. Put it in writing.

Contracts are important! The contract should clearly define the scope of work and payment terms. It should also clearly define the responsibilities of each party, including things you may not think of, such as permits and fees, necessities like scaffolding or temporary heat, and even responsibilities for trash removal may be clearly stated in the contract. When it comes to contracts, the more you define in advance, the better off you’ll be. If you have your agreement in writing, you are much better positioned to pursue your legal remedies if the customer doesn’t pay.

Tip 2. Accelerate the receipt of cash.

Require deposits or payment up front. Accept credit cards. Insist on ‘payment on delivery.’ Offer incentives for prompt payment (e.g., 2% discount if paid within 10 days). Be cautious about extending credit. Check credit history. You may even want to implement the use of a credit application with a personal guaranty. Ask for references.

Subcontractors and sub-subcontractors should be wary of the “pay when paid” clause, which would condition payment to you upon receipt of payment by the General Contractor from the Owner.

Tip 3. Set up a system.

Invoice promptly. Set up a system and follow up promptly on all late payments.

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