Small business owners we work with take pride in their early start up assets: a new office, company car, computers and technology.  But when it comes to valuing those assets BE CAREFUL!  Using estimates, measurements and other valuations of assets can be a sticking point during an audit.  Items such as goodwill and other intangibles are under increasing scrutiny by financial auditors.  A good rule is to discuss such times with your accountant and to keep those assets under a cap that might raise red flags.

Often business owners fall in love with their own assets and want to keep their asset estimates high.  Truth is, that can really become an issue down the road – especially if the business is successful in the long run.  No one wants a young company that is doing well to suddenly become hampered in an audit.  At Foreman & Airhart we work closely with our small and mid-size business customers to ensure that they have a fair and defensible valuation strategy for their assets – real or intangible!

Not all IRS audits are the same. Not all tax return issues involve the same complexity or require the same level of scrutiny.

The IRS, in its effort to enforce the income tax laws of the Unites States, has three different types of audit examinations in its arsenal:

1. Correspondence examinations
2. Office examinations
3. Field examinations

Correspondence examinations are conducted entirely through the mail. (The IRS NEVER uses e-mail to correspond with taxpayers.) Since this audit requires less involvement from IRS examiners it is being used more frequently by the budget strapped IRS. This method is considered the ‘work horse’ of the IRS’s tools.

Office examinations involve small businesses or individual income tax returns that predominantly include sole proprietorships. Office examinations generally take place at the IRS office located nearest to where the taxpayer maintains its financial records. Once the IRS has selected a tax return for office examination, the return is assigned to an examiner and scheduled. Office examinations are conducted primarily by interview. The taxpayer will provide certain records to support the items on the tax return. During this process, an examiner might ask a taxpayer to explain certain items such as insufficiently substantiated charitable contributions or itemized deductions which appear to be disproportionate to the taxpayers reported gross income.

Field examinations are initiated by sending a letter 2205 or 3572 which lays out the issues to be examined and lists a specific IRS agent as the point of contact. Sometimes the taxpayer will receive a telephone call from the field agent prior to receiving the letter. The taxpayer has 10 days to schedule an interview.

It is advisable to have your CPA represent you with any IRS interaction. This will ensure that the audit will be conducted in an efficient manner and that any adjustments are verified and agreed to by your CPA representative.

Things to remember: There is a 3 year statute of limitations on all tax returns filed with the IRS. (beginning with the date of filing)

We just cant help it – we are proud as can be about our newest team member, Mikel Baltes!  He brings everything we look for in a new staff member: experience, certified expertise AND a deeply personal approach to taking care of his clients.  Mikel is our first Intuit QuickBooks ProAdvisor and our “go-to” guy for business clients with questions about how to use QuickBooks.

Intuit  offers ProAdvisor certification only to professionals who have completed a rigorous training program and passed examinations to prove their knowledge.  It makes Mikel uniquely qualified to help businesses set up their books, transition from old to new versions of Quickbooks and clean up accounting files and practices that make bookkeeping more complex than it needs to be.  We think of it as enabling our clients to control how much (or little) of their own business management they want to have.

Some business owners love to do their own books. (not many) Others love that we can handle their payroll, taxes – even paying their bills – for them.  Join us in welcoming Mikel on board – and reach out if you have QuickBooks questions.  Even Intuit knows he’s a smarty-pants!

All Minnesota Businesses with employees must file a quarterly Unemployment Insurance tax each quarter.  Think of it as an insurance premium that can change with your company history.  Just as drivers with clean records typically pay less for auto insurance, companies with strong records of hiring and retaining workers typically pay less for their Unemployment Insurance (UI) than companies that have high incidents of layoffs and terminations.

The Department of Employment and Economic Development sets rates for every Minnesota company based on past records or sets rates for new companies. In 2013, there are five components to determine the UI for each company:

Base Tax rate  - same for all employers.  Set at 0.50% of taxable wages for 2013.

Tax rate for new employers – only for new employers. Either 2.5%* or 8.9%**

Additional Assessment – takes effect the following year if the balance in the UI Trust Fund falls below certain levels.  14.00% of tax due.

Workforce Development Assessment – an additional assessment used to retrain unemployed Minnesota workers. 0.10% of taxable wages.

Taxable Wage Base – the amount of wages paid to each employee that are taxable.  This is recalculated each year to keep pace with the average wage of Minnesota workers.  2013′s rate is $29,000 per employee per year.

*2.5% is the average of the UI for all Minnesota employers.  Is it the rate assigned to new employers who are deemed not to be in high experience rating industries.

**8.9% is the average for all Minnesota employers int he high experience rating industries.  These industries include construction, mining, manufacture of concrete, asphalt, road building, repair or resurfacing.  This is the rate assigned to new employers in these and other high rate industries.

UI taxes are payable each quarter to the state and follow this calendar for 2013:

Ever think to yourself: The first of the year marks the end of this bloat? And mean your business budget?  If you think you’ve overindulged and need to get your budget back under control, here are a few of our favorite places to look to find ways to cut expenses while improving your company’s efficiency.

1. Look at those mailing lists.  If your holiday cards were returned or your target list hasn’t been refreshed, take a close look.  At the per-piece rate to mail, you could cut your budget by eliminating old contacts while maintaining your sales results.

2. Contact technology cell phone and internet providers and ask to review your terms and renegotiate your current rates. Review cell phone, internet, email and website providers.

3. Look at space.  If you are happy with your current location and still have 2-3 years on the lease, consider renewing the lease early but at a new rate. Ask for a reduction in utility rates, community access fees (landscaping, snow plowing) or other service fees that may be added to your base lease rate. Some landlords will be happy to have you stay put for 7 years in return for a reduced rate.  Otherwise, begin looking for another location.  If you have too much space, consider subleasing space to get a return.  Even if it is not the same as your current rental rate, some income is better than nothing.

4. Review your software needs.  Can you move to using more freeware? Can you dump expensive servers and move to a pay per month model with backup and memory in the cloud?  Are you really going to pay for Windows 8?

5. Review your advertising and see how you can piggyback on other people’s.  Combine your mailing with others to create a larger mailing list AND a lower cost per piece.  That will stretch your budget and raise awareness.

Even if it has been a rough year, many businesses will offer some kind of holiday recognition to their employees.  44% will gift food, 13% will gift cash and 37% will provide a retailer gift card.  From an accounting perspective, holiday bonuses or “gifts” are treated as a taxable event subject to both income and payroll tax. Ebeneezer IRS does not see these as “gifts” so much as another payment to an employee.

The only exception? “de minimis” fringe benefits that cannot be easily valued.  Since cash, food  or gift cards can all be easily valued and entered onto the books what is left?  A gift must be of “nominal value” to be excluded from income. The IRS does not define “nominal value,” but it is clear an item with value over $100 is not considered de minimis. However, many experts advise “nominal” is much lower, either $25 or $50.  Think of something like a tote bag,ornament or other gewgaw.

So with that bit of merry cheer, we sign off for our own holiday – and wish you a holiday that would never be described as de minimis.

With December 31 around the corner, here is a quick check list every small business can use to make the year end as smooth as possible.  Let’s face it: none of us likes doing these things.  But smart business people know that starting early and making progress each day will make the accounting process better than delaying and postponing the inevitable.  To stay on top, we recommend that you R – A – I – D

R = Reconcile

Internal bookkeeping should balance with bank statements.  All money is accounted for – by either being in a bank account or in a bookkeeping account, in a payables account (a liability) or a receivables account (an asset.)

Employee balances should reconcile.  Withholding amounts should be appropriately accounted for and deposited with the federal and state governments.

A = Assets

Assets need to be reviewed on the books.  If assets were sold throughout the year, that must be noted.  If depreciation occurred before the items were sold, that must be noted as well.  If new assets were purchased or put into service, sales receipts can create the asset’s initial value.

I = Inventory

A proper inventory not only accurately reflects what a business has on hand, but also its true market value.  Beware of holding inventory at a price above its true market value as it ages. Find all hidden pockets of inventory and ensure it is properly accounted for on your books.

D = Debts

Debts are a natural course of most companies.  It is important to note any changes in the value of the debt, due to payments, forgiveness or new interest rates.

Simply covering the RAID points at year end can make closing out the 2012 books a straightforward process.

The Internal Revenue Service has announced the cost-of-living adjustments applicable to dollar limitations for various qualified retirement plans and other amounts for 2013. Many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. If you are a business and a plan sponsor, verify that your administrative and payroll systems reflect the appropriate limits. Communications that specify benefit plan limits should be reviewed for accuracy before materials are given to participants.

⁽¹⁾ This table has been updated based on IRS Announcement IR-2012-77, October 18, 2012.

⁽²⁾ This applies to the total of all elective deferrals an individual makes for the year to 401(k) plans, 403(b) plans, SARSEPs and SIMPLE plans.  HOwever, deferrals to each SIMPLE plan in which the individual participates are also limited, as shown later in the table.

⁽³⁾Catch up contributions are available each year to individuals who reach age 50 by the end of the year.

As you can see, this is a lot of detail and we never expect our clients to digest this.  That’s what we are here for.  If you have any questions or for more information about the 2013 Cost-Of-Living adjustments for retirement plans, please contact us.  We do more than taxes.

It is like the federal government has a year-end sale for businesses looking to make some equipment purchases!  That means businesses need to buy new equipment and software in 2012 before these tax breaks expire!  Section 179 is one of the few incentives included in any of the recent Stimulus Bills that truly helps small businesses. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses – and millions of small businesses are actually taking action and getting real benefits.

Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. All businesses that purchase, finance, and/or lease less than $560,000 in new or used business equipment during tax year 2012 should qualify for the Section 179 Deduction. If a business is unprofitable in 2012, and has no taxable income to use the deduction, that business can elect to use 50% Bonus Depreciation and carry-forward to a year when the business is profitable. For tax years beginning in 2012, the maximum Section 179 deduction is $139,000. For tax years beginning in 2013, however, the maximum deduction is scheduled to drop back to only $25,000.

CAUTION: Watch out if your business is already expected to have a tax loss for the year (or close) before considering any Section 179 deduction. Why? You cannot claim a Section 179 write-off that would create or increase an overall business tax loss. Please contact us if you think this might be an issue for your operation.

This expiring business tax ruling will expire on 12/31/2012 . We advise taking action between now and year-end!

50% First-year Bonus Depreciation. Your business can claim first-year bonus depreciation equal to 50% of the cost of most new (not used!) equipment and software placed in service by December 31 of this year. For a new passenger auto or light truck that’s used for business and is subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service this year. The 50% bonus depreciation break will expire at year-end unless Congress extends it. Contact us if you want more details about this generous, but temporary, tax break.

Note: When applying the 50% bonus depreciation deductions – you can create or increase a Net Operating Loss (NOL) for your business’s 2012 tax year. You can then carry back the NOL to 2011 and/or 2010 and collect a refund of taxes paid in one or both those years. Please contact us for details on the interaction between asset additions and NOLs.