Could the IRS Call Your Business a Hobby?

Fairy Godmother, Lindsey Patrick writes:

In a recent decision made by the IRS, a woman was disallowed $30,000 in expenses on her tax return because the IRS deemed her candle making business a hobby.  The IRS made this determination based on several factors.  Unfortunately there are no hard and fast rules on what you must do to be seen as a business in the eyes of the IRS.

The basics; in order to deduct expenses from your business you have to be in business for a profit.  The IRS refers to this as profit motive and the burden of proof is on you, the tax payer.  Here are a few items the IRS may look at to determine profit motive:

• You operate in a businesslike manner
  • You maintain a checking account separate from your personal checking account
  • you have business cards and stationary
  • you keep financial records and receipts
  • you have marketing plans and a written business plan
  • you have a business license
  • you have registered with the state
• You spend more than just a few hours a week engaging in your business activity.
• You are dependent on the income for your lively hood
• If your company has ever made a profit
• If you have sufficient knowledge to make a profit in the business

If you can show profit 3 out of 5 years you are generally ok and may avoid IRS scrutiny.  Again these are just a few ways to legitimize your business.  Please speak to your tax professional or attorney for advice specific to your business or contact me with any questions Lindsey Patrick, Accountant and QB Pro Advisor – lindseypatrick1@yahoo.com.

Lindsey Patrick has been assisting entrepreneurs and small businesses with their Bookkeeping and Tax needs since 1999.  She is a Certified QuickBooks pro advisor and loves to help small business owners implement and use the software to see exactly where their business is and where it can go.  She is married and has two small children.

Bookkeeping for the Rest of Us

So you made it through tax season…now what?

Every year after tax season, small business owners unanimously proclaim “next year will be better”. No more boxes of unorganized receipts, rushing to gather the necessary documents for my tax preparer, and I will not file an extension simply because I wasn’t prepared.

Fabulous – but how? Here a few tips to get you started.

1. If you don’t already have one, open a small business checking account. It is a lot easier to go through your checkbook at the end of the year and pull out business expenses if they are not co-mingled with trips to Wal-Mart for milk or gas station fill-ups on the way to drop the kids off at school. At the end of the year you will know with few exceptions that what came out of your business checking account was a legitimate business expense and what went is was income.

Several banks offer free business checking accounts. If you are doing business just under your name for now, open a separate free personal checking account at your bank – just for your business income and expenses.

2. Reconcile, Reconcile, Reconcile. You should reconcile your checking account every month. This is the best way to review your cash flow and know at the end of each month where you stand. You can use accounting software or reconcile by hand. At the end of the year you will only need to review December’s expenses because the other eleven months are already done. You can be confident that your records are clean and accurate and your tax preparer will trust the numbers you give them that much more.

3. Plan and Make it Happen. Admit to yourself that bookkeeping is a necessary evil of any business. Very few people enjoy doing it so you are not alone. Set aside one evening a month, or one afternoon a week and review that week or months business. I always do my bookkeeping on Wednesday evenings after dinner. My husband knows that it is his night to get the kids ready for bed and I can spend a few hours reviewing the check register, invoicing clients and sending thank you notes. It is now part of our routine and my business is better for it. I am more aware of where my business is financially and my CPA is grateful for the effort.

Lindsey Patrick Start this month before the receipts pile to high and you may just look forward to tax season. You are welcome to contact me at 801.362.4206 or lindseypatrick1@yahoo.com with any bookkeeping/accounting questions, I would love to help.

When do you know that it’s time to hire an Accountant vs. doing QuickBooks?

This is a fantastic question and one that gets asked of me often. The answer depends on who is asking the question. If you are the type of person who balances your checkbook every month and can stay on top of personal finances, then you will likely do well with either spreadsheets or other accounting software like QuickBooks. Even so, I like to recommend that you sit down with a CPA at least once or twice a year – for most this is done around tax time. As your business grows you may find that your accountant becomes more like a business advisor and you will meet with them more and more often.

If you are the type of person who is unclear what your net income is or you have never balanced your personal checkbook, you would benefit from sitting down with an accountant right away and establishing a plan. The accountant can walk you through what you will need at tax time so you can keep track of the information all year long rather than having to scramble to find everything at tax time. In either case QuickBooks can make the accounting process easier.

QuickBooks in the number one accounting software for small business and is used by millions of small business owners. Having used the product for 10+ years, I can say that Intuit has done a great job in making bookkeeping tasks easy and the QuickBooks software is very user friendly. I have seen QuickBooks work for businesses that have less than $100,000 in sales per year, all the way up to sales of $34 million. Most business owners can use QuickBooks every day with no problems and actually find comfort in having all their numbers in one place rather than spread between sticky notes, excel spreadsheets and notebooks.

What is the secret for successful QuickBooks users? First the program file has been setup correctly for them and the way they do business. For the basic business just starting up the QuickBooks company templates work great. When you install the program, QuickBooks asks about the type of business and has prefilled account names and types available for use. Another great thing about QuickBooks is that even after the initial setup it is very easy to customize. Your accountant or a certified QuickBooks advisor can assist you with this customization if needed.

Second, successful QuickBooks users take the time to receive some training, either through a live course, or using free QuickBooks training provided with the software. Even an hour of basic training can save time and headaches when you need to make your first bank deposit or write your first check.

So, in actuality you may need both an accountant and personal knowledge of QuickBooks to some degree, and your time, desire and knowledge will determine how much of each. An accountant can do it all if you don’t have the time or desire. QuickBooks can be a tool used to do it all yourself if you have the desire, with your accountant only reviewing the numbers a few times a year. Be honest with yourself and decide where your time and energy will be most profitable, and you will be successful.

I am always happy to answer questions, so please feel free to contact me at lindseyp@squire.com. Also, my firm offers several beginning business and QuickBooks classes. For more information, visit the website www.squire.com or email me.

Managing Cash Flow

Knowing what you have is often the key to knowing where you can go.  Managing and maintaining a healthy cash flow is essential for a business to grow and thrive.  Below are a few ideas for better managing your cash flow, review each idea and ask “do we do this in our business” and if so “why or why not “.  Adding just of few of these ideas to your business management can help to improve your cash flow and increase profitability.

• Make prompt payments to suppliers only when discounts apply, otherwise schedule payments near due date
• Maintain good business relations with all suppliers
• Sell items for cash or credit cards rather than on terms
• Accept deposits with balance due upon shipment
• Offer discounts to customers for early payment
• Don’t let policies automatically renew – review them first and shop around for a better deal
• Invoice clients/customers as soon as work is done or order filled – don’t wait
• Be sure the invoice due date is clear and prominent – large BOLD print is best
• Review monthly accounts receivable – who owes you money – and follow up immediately
• Be aggressive in collecting debts
• Require customers to be current on their account before doing additional work
• Deposit payments promptly into an interest bearing checking account
• Reduce inventory to the most necessary items
• Dispose of slow moving items (sell at cost or bundle and discount etc.)
• Vary prices by season
• Encourage non-urgent customers to wait for delivery until a slower time of year

*ideas adapted from Squire Insights Corporate Education Series “Cash Flow Best Practices”

If you’re in Utah County, Square offers FREE Quickbooks courses. Visit www.squire.com for more information.