No matter the size of a business, one can’t overstate the importance of sound accounts receivable policies and procedures. Without a strong and steady inflow of cash, even the most successful company will likely stumble and could even collapse.
If your collections aren’t as efficient as you’d like, consider these five ways to improve them:
It may seem superficial, but the design of invoices really does matter. Customers prefer bills that are aesthetically pleasing and easy to understand. Sloppy or confusing invoices will likely slow down the payment process as customers contact you for clarification rather than simply remit payment. Of course, accuracy is also critical to reducing questions and speeding up payment.
At some companies, there may be several people handling accounts receivable but no one primarily focusing on collections. Giving one employee the ultimate responsibility for resolving past due invoices ensures the “collection buck” stops with someone. If budget allows, you could even hire an account receivable specialist to fill this role.
The more ways customers can pay, the easier it is for them to pay promptly. Although some customers still like traditional payment options such as mailing a check or submitting a credit card number, more and more people now prefer the convenience of mobile payments via a dedicated app or using third-party services such as PayPal, Venmo, or Square.
If your business largely engages in B2B transactions, many of your customers may have specific procedures that you must follow to properly format and submit invoices. Review these procedures and be sure your staff is following them carefully to avoid payment delays. Also, consider contacting customers a couple of days before payment is due — especially for large payments — to verify that everything is on track.
Often, the culprit behind slow collections is a lack of timely, accurate data. Accounts receivable aging reports provide an at-a-glance view of each customer’s current payment status, including their respective outstanding balances. Aging reports typically track the payment status of customers by time periods, such as 0–30 days, 31–60 days, 61–90 days, and 91+ days past due.
With easy access to this data, you’ll have a better idea of where to focus your efforts. For example, you can concentrate on collecting the largest receivables that are the furthest past due. Or you can zero in on collecting receivables that are between 31 and 60 days outstanding before they get further behind.
Need help setting up aging reports or improving the ones you’re currently running? Please let us know — we’d be happy to help with this or any aspect of improving your accounts receivable processes.
No matter the size or shape of a business, one really can’t overstate the importance of sound accounts receivable policies and procedures. If your company’s collections aren’t as efficient as you’d like, consider the following five suggestions: 1) Redesign your invoices to ensure they’re clear and easy to understand. 2) Appoint a collections champion who has the primary responsibility of following up on past-due invoices. 3) Expand your payment options to include the latest mobile technology. 4) Acquaint (or reacquaint) yourself with your B2B customers’ procedures for invoice formatting and submission. 5) Generate accounts receivable aging reports. Contact us for help.
As mitigation measures related to COVID-19 ease, it will be interesting to see which practices and regulatory changes were taken in response to the pandemic remain in place long-term. One of them might be relief from a sometimes inconvenient requirement related to the administration of 401(k) plans.
In IRS extends administrative relief for 401(k) plans, the IRS recently announced a 12-month extension of its temporary relief from the requirement that certain signatures be witnessed “in the physical presence” of a 401(k) plan representative or notary public.
The original relief, which appeared in IRS Notice 2020-42, was provided primarily to facilitate plan loans and distributions under the CARES Act. However, the relief could be used during 2020 for any signature that, under regulations, had to be witnessed in the physical presence of a plan representative or notary public. This included required spousal consents. The relief was subsequently extended through June 30, 2021, under IRS Notice 2021-03.
Under the notices, signatures witnessed remotely by a plan representative satisfy the physical presence requirement if the electronic system uses live audio-video technology and meets four requirements established under the original relief:
Signatures witnessed by a notary public satisfy the physical presence requirement if the electronic system for remote notarization uses live audio-video technology and is consistent with state law requirements for a notary public.
As mentioned, IRS Notice 2021-40 further extends the relief — subject to the same conditions — through June 30, 2022. The notice also requests comments regarding whether permanent modifications should be made to the physical presence requirement. Comments are specifically requested regarding:
Comments should be submitted by September 30, 2021.
Going forward, the need for a signature may often relate to spousal consents. If your business recently established a 401(k), the plan may be designed to limit the need for spousal consents.
However, plans that offer annuity forms of distribution are still subject to the spousal consent rules. And other 401(k) plans must require spousal consent if a married participant wants to name a non-spouse as the primary beneficiary. Feel free to contact our firm for more information on the latest IRS guidance addressing employee benefits.
In Notice 2021-40, the IRS recently announced a 12-month extension (through June 30, 2022) of its temporary relief from the requirement that certain signatures must be witnessed “in the physical presence” of a 401(k) plan representative or notary public; instead, audio-video technology can be used. The relief was provided primarily to facilitate plan loans and distributions under the CARES Act, but it applies to any signature that is required to be witnessed in the physical presence of a plan representative or notary public. This includes spousal consents. Notice 2021-40 also requests comments regarding whether permanent modifications should be made. Contact us for more information.
Summer is here, but taxes never end. Here are a few recent tax questions for 2021 and updates we want you to be aware of:
If you are age 72 or older, you must take annual required minimum distributions (RMD) from traditional IRA’s and 401(K) plans. The 2020 exclusion to this rule does not apply to 2021 and going forward. Be sure to make these distributions this year.
If you are age 70 ½ or older you can transfer up to $100,000 yearly directly to qualified charitable organizations. This distribution counts towards your RMD, but they are not taxable and not included in your adjusted gross income. It’s much better to use this than to report as an itemized deduction on Schedule A of your tax return. Keep in mind the distribution must go directly to the charity. You cannot receive the distribution and then donate to charity for this to qualify. Transfers to donor-advised funds do not qualify for QCD treatment.
You’ve probably read about the possibility of increased capital gains rates. While this initially is targeted to taxpayers with incomes of $1M or more you may think this will never apply to you. But what if you are selling your company’s stock and retiring? Do you have stock options with sizable gains?
When you sell online such as PayPal or Amazon and receive $600 or more (starting in 2022) you will receive form 1099-K that reports the income to the IRS. There are slightly different rules for 2021. This income must be reported on your tax return. How does this affect you? Many people use these platforms as the new “garage sales”. An example might be if you tire of your exercise equipment and sell the equipment online. If you receive $600 or more, you will need to report the income and have tax due
This tax season we are seeing an increased number of delayed refunds, some up to several months. The IRS says they are checking amounts reported for stimulus payments and other verification measures. As preparers, we have no additional resource to check on the status of your refund other than using the IRS’s “Get your refund status” on their website. This adds even more questions to ask. We can verify the return has been electronically filed and accepted, but not as to the status of the refund.
At David Mills, CPA, LLC our experts can help answer your tax questions for 2021. Contact us online or call (309) 266-5700.
Most of us are taught from a young age never to assume anything. Why? Well, because when you assume, you make an … you probably know how the rest of the expression goes.
A dangerous assumption that many business owners make is that, if their companies are profitable, their cash flow must also be strong. But this isn’t always the case. Taking a closer look at the accounting involved can provide an explanation.
What are profits, really? In accounting terms, they’re closely related to taxable income. Reported at the bottom of your company’s income statement, profits are essentially the result of revenue less the cost of goods sold and other operating expenses incurred in the accounting period.
Generally Accepted Accounting Principles (GAAP) require companies to “match” costs and expenses to the period in which revenue is recognized. Under accrual-basis accounting, it doesn’t necessarily matter when you receive payments from customers or when you pay expenses.
For example, inventory sitting in a warehouse or retail store can’t be deducted — even though it may have been long paid for (or financed). The expense hits your income statement only when an item is sold or used. Your inventory account contains many cash outflows that are waiting to be expensed.
Other working capital accounts — such as accounts receivable, accrued expenses and trade payables — also represent a difference between the timing of cash flows. As your business grows and strives to increase future sales, you invest more in working capital, which temporarily depletes cash.
However, the reverse also may be true. That is, a mature business may be a “cash cow” that generates ample dollars, despite reporting lackluster profits.
The difference between profits and cash flow doesn’t begin and end with working capital. Your income statement also includes depreciation and amortization, which are non-cash expenses. And it excludes changes in fixed assets, bank financing, and owners’ capital accounts, which affect cash on hand.
Suppose your company uses tax depreciation schedules for book purposes. Let say, in 2020, you bought new equipment to take advantage of the expanded Section 179 and bonus depreciation allowances. Then you deducted the purchase price of these items from profits in 2020. However, because these purchases were financed with debt, the actual cash outflows from the investments in 2020 were minimal.
In 2021, your business will make loan payments that will reduce the amount of cash in your checking account. But your profits will be hit with only the interest expense (not the amount of principal that’s being repaid). Plus, there will be no “basis” left in the 2020 purchases to depreciate in 2021. These circumstances will artificially boost profits in 2021, without a proportionate increase in cash.
It’s dangerous to assume that, just because you’re turning a profit, your cash position is strong. Cash flow warrants careful monitoring. At David Mills CPA, LLC, our team can help you generate accurate financial statements and glean the most important insights from them. Contact us today or call (309) 266-5700.
For many business owners, putting together a succession plan may seem like an overwhelming task. It might even seem unnecessary for those who are relatively young and have no intention of giving up ownership anytime soon.
But if the past year or so have taught us anything, it’s that anything can happen. Owners who’ve built up considerable “sweat equity” in their companies shouldn’t risk liquidation or seeing the business end up in someone else’s hands only because there’s no succession plan in place.
To help you get your arms around the concept of succession planning, you can look at it from three different perspectives:
If you have many years to work with, use this gift of time to identify one or more talented individuals who share your values and have the aptitude to successfully run the company. This is especially important for keeping a family-owned business in the family.
As soon as you’ve identified a successor, and he or she is ready, you can begin mentoring the incoming leader to competently run the company and preserve your legacy. Meanwhile, you can carefully identify how to best fund your retirement and structure your estate plan.
Many business owners wake up one day and realize that they’re almost ready to retire, or move on to another professional endeavor, but they’ve spent little or no time putting together a succession plan. In such a case, you may still be able to choose and train a successor. However, you’ll likely also want to explore alternatives such as selling the company to a competitor or other buyer. Sometimes even liquidation is the optimal move financially.
In any case, the objective here is less about maintaining the strategic direction of the company and more about ensuring you receive an equitable payout for your ownership share. If you’re a co-owner, a buy-sell agreement is highly advisable. It’s also critical to set a firm departure date and work with a qualified team of advisors.
The COVID-19 pandemic has brought renewed attention to emergency succession planning. True to its name, this approach emphasizes enabling the business to maintain operations immediately after an unforeseen event causes the owner’s death or disability.
If your company doesn’t yet have an emergency succession plan, you should probably create one before you move on to a longer-term plan. Name someone who can take on a credible leadership role if you become seriously ill or injured. Formulate a plan for communicating and delegating duties during a crisis. Make sure everyone knows about the emergency succession plan and how it will affect day-to-day operations, if executed.
As with any important task, the more time you give yourself to create a succession plan, the fewer mistakes or oversights you’re likely to make. At David Mills, CPA, LLC, we can help you create or refine a plan that suits your financial needs, personal wishes, and vision for the future of your company.
The premium tax credit (PTC) is a refundable credit that helps individuals and families pay for insurance obtained from a Health Insurance Marketplace (commonly known as an “Exchange”). A provision of the Affordable Care Act (ACA) created the credit.
The American Rescue Plan Act (ARPA), signed into law in March 2021, made several significant enhancements to the PTC. Although these changes expand access to the credit for individuals and families, they could increase the risk of some businesses incurring an ACA penalty.
Under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) were ineligible for the PTC. Under ARPA, for 2021 and 2022, the PTC is available to taxpayers with household incomes that exceed 400% of the FPL. This change will increase the number of PTC-eligible people.
For example, a 45-year-old single person earning $58,000 in 2021 (450% of FPL) would have been ineligible for the PTC under pre-ARPA law. Under ARPA, that individual is eligible for a PTC of about $1,250.
The PTC is calculated on a sliding scale based on household income, expressed as a percentage of the FPL. The amount of the credit is limited to the excess of the premiums for the applicable benchmark plan over the taxpayer’s required share of those premiums. The required share comes from a table divided into income tiers.
Because the required share is less under the new tables for 2021 and 2022 than it otherwise would have been, the PTC will be greater. Under pre-ARPA law, a taxpayer might have had to spend as much as 9.83% of household income in 2021 on health insurance premiums. Under ARPA, that amount is capped at 8.5% for 2021 and 2022.
More penalty exposure
As mentioned, the expanded PTC will help individuals and families obtain coverage through a Health Insurance Marketplace. However, because applicable large employers (ALEs) potentially face shared responsibility penalties if full-time employees receive PTCs, expanded eligibility could increase penalty exposure for ALEs that don’t offer affordable, minimum-value coverage to all full-time employees as mandated under the ACA.
An employer’s size, for ACA purposes, is determined in any given year by its number of employees in the previous year. Generally, if your company had 50 or more full-time or full-time equivalent employees on average during the previous year, you’ll be considered an ALE for the current calendar year. A full-time employee is someone employed on average at least 30 hours of service per week.
If your business is an ALE, be sure you’re aware of this development when designing or revising your employer-provided health care benefits. Should you decide to add staff this year, keep an eye on the tipping point of when you could become an ALE.
Our staff at David Mills, CPA, LLC can further explain the ARPA’s premium tax credit provisions and help you determine whether you qualify as an ALE — or may soon will. Contact us today.
The COVID-19 pandemic has affected various industries in very different ways. Widespread lockdowns and discouraged movement have led to increased profitability for some manufacturers and many big-box retailers. The restaurant industry, however, has had a much harder go of it — especially smaller, privately owned businesses in economically challenged areas.
In response, the Small Business Administration (SBA) has launched the Restaurant Revitalization Fund (RRF). It was established under the American Rescue Plan Act (ARPA) signed into law in March. The RRF went live for applications on May 3, and the SBA is strongly urging interested, eligible businesses to apply as soon as possible.
Funds are available for restaurants, of course, but also many other similar types of businesses. Food stands, trucks and carts can apply, as well as bars, saloons, lounges and taverns. Catering companies may also file a Restaurant Revitalization Fund application.
In addition, the program is available to snack and nonalcoholic beverage bars, as well as “licensed facilities or premises of a beverage alcohol producer where the public may taste, sample, or purchase products,” according to the SBA.
For some restaurant-like businesses, on-site sales to the public must comprise at least 33% of gross receipts. These include bakeries; inns; wineries and distilleries; breweries and/or microbreweries; and brewpubs, tasting rooms and taprooms.
Under the ARPA, the RRF received a total of $28.6 billion in direct relief funds for restaurants and other similar establishments that have suffered economic hardship and substantial operational losses because of the COVID-19 pandemic.
The dollar amount an eligible business can receive under the RRF will equal its decrease in gross revenues during 2020 compared to gross revenues in 2019 — less the amount of any Paycheck Protection Program (PPP) loans received. Other amounts must be excluded from 2020 gross receipts as well, including:
Overall, the RFF may provide a qualifying establishment with funding equal to its pandemic-related revenue loss up to $10 million per business and not more than $5 million per physical location. Recipients must use funds for allowable expenses by March 11, 2023.
A timely, properly completed application is critical to acquiring this funding. An applicant business must submit documentation of its 2020 and 2019 gross receipts, as well as at least one of the following:
Warning: Internally prepared financials could significantly delay SBA review of your application.
You’ll also need to disclose the amount of any PPP loans you’ve received. However, the SBA’s online application system should provide this information automatically.
To get started, register for an account at restaurants.sba.gov. The SBA advises applicants to first download a sample version of the application here. Our firm can help you identify necessary documentation and navigate the process.
For businesses, so much has changed over the past year or so. The COVID-19 pandemic hit suddenly and companies were forced to react quickly — sending many employees home to work remotely and making myriad other tweaks and revisions to their processes. Understandably, you may not have fully documented all the changes you’ve made. But you should; and among the ideal places to do so is in your employee handbook. Now that optimism is rising for a return to relative normalcy, why not look at your handbook with fresh eyes and ensure it accurately represents your company’s policies and procedures.
Among the primary reasons companies create employee handbooks is protection from legal challenges. Clearly written HR policies and procedures will strengthen your defense if an employee sues. Don’t wait to test this theory in court: Ask your attorney to review the legal soundness of your handbook and make all recommended changes.
Why is this so important? A supervisor without a legally sound and updated employee handbook is like a coach with an old rulebook. You can’t expect supervisors or team members to play by the rules if they don’t know whether and how those rules have changed.
Make sure employees sign a statement acknowledging that they’ve read and understood the latest version of your handbook. Obviously, this applies to new hires, but also ask current employees to sign a new statement when you make major revisions.
Employee handbooks can also communicate the total value of working for your company. Workers don’t always appreciate the benefits their employers provide. This is often because they, and maybe even some managers, aren’t fully aware of those offerings.
Your handbook should express that you care about employees’ welfare — a key point to reinforce given the events of the past year. It also should show precisely how you provide support.
To do so, identify and explain all employee benefits. Don’t stop with the obvious descriptions of health care and retirement plans. Describe your current paid sick time and paid leave policies, which have no doubt been transformed by federal COVID relief measures, as well as any work schedule flexibility and fringe benefits that you offer.
One word of caution: When updating their handbooks, some businesses acquire a “best in class” example from another employer and try to adopt it as their own. Doing so generally isn’t a good idea. That other handbook’s tone may be inappropriate or at least inconsistent with your industry or organizational culture.
Similarly, be careful about downloading handbook templates from the Internet. Chances are you’ll have no idea who wrote the original, let alone if it complies with current laws and regulations.
Your employee handbook should serve as a clearly written document for legal purposes and a helpful guide for your company’s workforce. At David Mills, CPA, LLC, we can help you track your employment costs and develop solutions to any challenges you face.
We’ve reached 2021, but it has already been an eventful January. Tax season is in full swing, so we want to share a few things:
As you know, there is another round of stimulus payments. Many have already received them. The 2020 stimulus payments will be reconciled on the tax return. These payments are not income.
We will need to know the amount of 2020 stimulus payment you received. At this time, the IRS website only tells us if you received a payment, not how much the payment was. You may not have received the correct amount due to you. For example, if you had a child in 2020, you qualify for an additional $500. If you want to check on your stimulus payment go to this IRS website.
If you do not itemize deductions, you may qualify for a $600 charitable contribution deduction. This must be a cash donation, not a donation of goods typically given to Goodwill, etc.
Medical expense deduction starts at 7.5% of income, not 10% previously allowed. Keep in mind most people do not qualify for this deduction due to income levels or insurance payments.
Educator expenses now include protective equipment expenses. The maximum credit remains at $250.
Private mortgage insurance premiums can be deductible again for the 2020 tax season.
The standard mileage rate is .56 per mile in 2021.
Did you take a distribution from your qualified retirement plan or IRA? If so, and it was for COVID-19 reasons you will not incur the 10% early withdrawal penalty. Also, you have options on how much to report on your tax return. For example, if you withdrew $60,000 from your IRA you can report the entire amount in 2020 or spread this out over three years.
If you repay the loan within three years amended returns can be filed to refund the tax paid on the distribution. Contact us for the COVID-19 rules on this distribution.
Congress recently passed, and President Trump signed, a new law providing additional relief for businesses and individuals during the COVID-19 pandemic.
One item of interest for small business owners in the Consolidated Appropriations Act (CAA) is the opportunity to take out a second loan under the Paycheck Protection Program (PPP).
The CAA permits certain smaller businesses who received a PPP loan to take out a “PPP Second Draw Loan” of up to $2 million. To qualify, you must:
Eligible entities include for-profit businesses (including those owned by sole proprietors), certain nonprofit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, independent contractors and small agricultural co-operatives.
Loan terms. Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the year preceding the loan or the calendar year.
However, borrowers in the hospitality or food services industries may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Gross receipts and simplified certification of revenue test. PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement.
Nonprofits and veterans’ organizations may use gross receipts to calculate their revenue loss standard.
Loan forgiveness. Like the first PPP loan, a PPP Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans isn’t included in income as cancellation of indebtedness income.
Application of exemption based on employee availability. The CAA extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for a borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.
Deductibility of expenses paid by PPP loans. The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans could be deducted. The IRS eventually took the position that these expenses were nondeductible. The CAA, however, provides that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible.
Contact David Mills, CPA, LLC with any questions you might have about loans, including applying for a Second Draw Loan or availing yourself of forgiveness.