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Member of Russell Bedford International, a global network of independent professional service firms.
If you asked entrepreneurs to make a list of everything they think might one day pose a threat to their company, you’d probably hear a variety of answers. Some might be (rightfully) worried about ultimately developing a product in search of a marketplace. Others may be worried about how they’re going to overcome cash flow issues. And some may still be worried about getting “taken for a ride” by the venture capital people they’re putting so much of their faith in. While all of these are understandable concerns, there’s one that’s often missing from the list: cofounder conflict.
While it’s absolutely true that founding a business with at least one other person increases your chances of becoming a success, it’s equally true that about 50% of cofounder relationships fail, and most of those failures aren’t pretty.
That’s because cofounder conflict is very real and far more common than many people assume. But by taking the time to learn as much about it as you can, you put yourself (and your colleagues) in the best position to mitigate risks from these issues as much as possible — before it’s too late.
Cofounder conflict can happen for a myriad of reasons, and not all of them are going to be immediately obvious. Sometimes when you start a business with someone else, you don’t realize just how incompatible your managerial styles are because you’ve never had the chance to put them on display. But once your startup is up on its feet and real decisions are being made on a daily basis, you might discover that you and your cofounder have two very different working styles.
Other times it comes down to the fact that roles and responsibilities among cofounders are not clearly defined. Who is actually supposed to be doing what? What is your specific job description and how does it overlap with that of your cofounders? What boundaries are in place that give each of you your necessary space, but that also allow you to truly collaborate with one another in the way you need to run a successful business?
Another issue, and arguably the biggest issue, could be the absence of stipulations on how significant future changes affect the management and control of the business. Without a buy-sell agreement and succession plan in place, your business is at risk if any major event — like your partner’s death, divorce, or bankruptcy — may occur.
Remember that being an entrepreneur and founding a business with someone else ultimately requires a fair amount of give and take. Therefore, once you start to see conflict develop, don’t be afraid to address it head-on. But also understand that you must be willing to make compromises, too. Don’t just spend time identifying problems with someone else, rather, offer up solutions of your own.
In terms of mitigating some of these potential risks, a buy-sell agreement can be very effective (and should be viewed as a necessity). This legally-binding document spells out how the assets and business interests would be distributed if an owner leaves the business, becomes disabled or passes away.
Consulting with a tax and accounting professional during the process of negotiating a buy-sell agreement can be very beneficial for all parties involved. The team at Cray Kaiser has facilitated several buy-sell agreements and would welcome the opportunity to help you and your cofounder(s) with yours. Please contact us today at 630-953-4900 to get started.
Please note that this blog is based on laws effective on May 2, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
We last shared some best practices and next steps once you receive your PPP funds. It’s now time to start tracking your use of the funds to determine the amount to be forgiven. To aid you in this process, we’ve prepared a few Excel workbooks which you can download by clicking the link below. Each workbook contains instructions, the loan forgiveness calculator, determination of your FTE (full time equivalent), actual tracking of costs template, a certification template and two examples so you can “see the math” in action.
Last week, the Treasury issued an FAQ to provide a recovery period to public companies that took PPP loans when they had adequate resources. The certification documentation provided in the worksheets above allows you to document how and why the PPP loan funds were considered necessary for your company. For entities with loan funds in excess of $2,000,000, it may be necessary to substantiate this documentation with projections and financial amounts in the event of an audit. It’s best practice to complete these worksheets regardless of your funding to be ready in the event you are asked. Remember those sleepless nights before receiving the funding? Those are the reasons why you needed these funds!
Some of you may already be two to three weeks into your eight-week covered period, so acting fast to do the math will get you better positioned once the loan forgiveness process is in place. We anticipate more guidance in the upcoming weeks and will keep you informed on our blog as we know more.
There has been a lot of narrative around the computations of the loan forgiveness (including our own) and now it’s time to put those numbers to work! Should any questions arise as you complete these calculations with the PPP loan forgiveness templates, please contact Cray Kaiser at 630-953-4900.
These are certainly trying times and we want to reiterate that Cray Kaiser is here for you. As things continue to evolve in light of the COVID-19 pandemic, we at CK are taking additional precautions for the benefit of our team members and our clients.
Effective immediately:
We want to remind our clients of our portal access and your ability to safely and securely share your information with our team. We ask that you email efile@craykaiser.com to request your portal access. This will eliminate the need for you to drop off your tax information at our office.
Thank you for your patience and understanding during this challenging time. We wish you, your family, and your business health and safety. We will continue to support you as best as we can while keeping each other’s health a priority. If any changes occur during the course of the next few days, we will update our website.
Please note that this blog is based on laws effective on April 27, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Self-employed individuals, unlike employees, don’t have an employer withholding federal (and state, where applicable), Social Security or Medicare (FICA) taxes tax from their wages during the year.
They are not paid a wage; instead, a self-employed individual must keep a set of books showing income and expenses associated with their self-employed business that will allow them to determine their taxable profits (or losses). While an employer and an employee each pay half of the FICA taxes due on an employee’s wages, a self-employed person pays 100% of these taxes, termed the self-employment tax (SE tax), on his or her self-employment profit. If the individual has more than one self-employment activity, the net profits and losses from all of the self-employment activities are combined to determine the amount of the SE tax. However, two spouses have self-employment income, the couple cannot combine their SE incomes when figuring their individual SE tax.
Since a self-employed taxpayer doesn’t have taxes withheld on their self-employment income, they need to pay estimated taxes quarterly based upon their taxable profits. These estimated taxes are paid with IRS Form 1040-ES . In lieu of filing Form 1040-ES and sending a check to the U.S. Treasury, the payments can be made online through the IRS’s website or by using the government’s Electronic Federal Tax Payment System (EFTPS), which allows payments to be scheduled up to a year in advance. The payments are due April 15th, June 15th, September 15th, and January 15th. If the due date falls on a weekend day or legal holiday, the due date will be the next business day. (And if you didn’t notice, the second “quarter” is two months, and the third one is four months – one of the many quirks in our tax system!)
A self-employed taxpayer who has more than $400 in net profit from their self-employment must pay self-employment tax, which is made up of Social Security tax of 12.4% on the first $137,700 (2020) of profit from the business and a 2.9% Medicare tax on all of the profits. In addition, there is a 0.9% Medicare tax to the extent the profits exceed $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. Finally, half of the self-employment tax can be deducted from gross income.
If a self-employed taxpayer pre-pays less than 90% of his or her current year’s tax liability, including Social Security and Medicare taxes for the year, then the taxpayer can be subject to a penalty that assesses interest on underpayments by the quarter, unless the taxpayer meets the safe harbor provisions
Estimated-Tax Safe Harbors rather than having to determine their quarterly profits and estimate their income tax and SE tax liabilities, some self-employed individuals instead opt to use a quarterly safe-harbor-payments method allowed by the IRS, which avoids the underpayment penalty if used correctly. There are two safe harbors available:
The underpayment penalty does not apply if the final amount due on an individual’s tax return is less than $1,000.
One thing to consider when deciding whether or not to use the safe harbor method is that because the safe harbor estimates are not based on the current year’s profits, a self-employed individual could be in for an unexpected substantial tax liability at tax time. Or, if their current year’s income is significantly less than it was in the prior year, they could be overpaying their current year tax and be eligible for a large refund when they file their current-year return. If an overpayment results, all or part of it can be applied to the next year’s estimated taxes, instead of the taxpayer receiving a refund payment.
Also remember that tax pre-payments are not just based on the self-employment income and must factor in all other taxable income, including investment income, retirement income, the self-employed individual’s wages from other work, and a spouse’s wages or self-employment income, as well as account for withholding from other sources.
Generally, a self-employed individual keeps track of his or her own income but may also receive one or more 1099-MISC forms issued by a payor. If that income has already been accounted for in the business’s income records, it should not be included again. Beginning in 2021 for earnings received in 2020, Form 1099-NEC will be used in place of the 1099-MISC to report nonemployee compensation.
Self-employed individuals that take credit card payments for sales of their business products or services use third parties to settle the transaction and return payment to the self-employed individual. To combat fraud, the IRS requires all third-party network transactions to be reported on Form 1099-K if the amount is $20,000 or more and the number of transactions is 200 or more. Again, the sales should have already been included as income and should not be included a second time.
Besides self-employed individuals having to pay SE tax on their trade or business income, the SE tax also applies to other situations such as members of the clergy, partnership distributions, foreign self-employment income, agricultural co-op payments to retired farmers, director fees, and certain executors/administrators (fiduciaries). If you fall into any of these categories, please contact Cray Kaiser for more information.
Income from an occasional act or transaction, absent proof of efforts to continue those acts or transactions on a regular basis, isn’t income from self-employment subject to the self-employment tax. In addition, the following are some sources of income as well as individuals not subject to self-employment tax: a shareholder’s portion of an S corporation’s taxable income, fees for the services of a notary public, non-resident aliens, the fiduciary of an estate on an isolated basis, rents paid in crop shares, real estate rental income, statutory employees, a self-employed taxpayer’s child employee under the age of 18.
If you are self-employed and have any questions about your tax planning situation and opportunities, please don’t hesitate to contact Cray Kaiser.
Please note that this blog is based on tax laws effective in April 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Please note that this blog is based on laws effective on April 7, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
A hobby exists for pure enjoyment – there’s (typically) no goal to make money or make a living from a hobby. They are passion projects or fun activities that people choose to spend their time on because it makes them happy. But that doesn’t mean that hobbyists don’t make money from their hobby – sometimes they do! In that case, what are tax issues related to hobbies? Tax law generally does not allow deductions for personal expenses except those allowed as itemized deductions on the 1040 Schedule A, and this also applies to hobby expenses.
Some hobbyists try to get a tax deduction for their hobby expenses by treating their hobby as a trade or a business. By disguising hobbies as a trade or business, and if the hobby expenses exceed the hobby income, they think they can report the difference between hobby income and expenses as a deductible business loss. But not so fast! To curtail hobbies being treated as businesses, the tax code includes rules that do not permit losses for not-for-profit activities such as hobbies. The not-for-profit rules are often referred to as the hobby loss rules.
The distinction between a hobby and a trade or business sometimes becomes blurred, and the determination depends upon a series of factors, with no single factor being decisive. All of these factors have to be considered when making the determination:
Because making a determination using these factors is so subjective, the IRS regulations provide that the taxpayer has a presumption of profit motive if an activity shows a profit for any three or more years during a period of five consecutive years. However, if the activity involves breeding, training, showing or racing horses, then the period is two out of seven consecutive years.
Making the proper determination is important because of the differences in tax treatment for hobbies versus trades or businesses. If an activity is determined to be a trade or business in which the owner materially participates, then the owner can deduct a loss on his or her tax return, and it is not uncommon for a business to show a loss in the startup years.
However, hobbies (not-for-profit activities) have special, unfavorable rules for reporting the income and expenses, which have been exacerbated by the 2017 passage of the Tax Cuts and Jobs Act (tax reform). These rules are:
Another concern for hobbyists who are reporting income from their hobby on their 1040 is whether or not that income is subject to self-employment tax. Luckily, there is an exception for sporadic or one-shot deals and hobbies, which are not subject to self-employment tax.
If you have any questions related to how not-for-profit rules may apply to your activity, please contact Cray Kaiser.
Please note that this blog is based on tax laws effective in April 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Do you know what your tax nexus is and how it impacts your business? In this audio blog, CK Principal Karen Snodgrass gives an overview of nexus, how the Wayfair ruling has affected businesses, and what business owners should be doing to comply with nexus.
This is a complex topic that requires a lot of careful attention to ensure compliance. You should work with your tax advisor to make sure you’re taking the necessary steps to follow the law. In the meantime, click below to listen to a quick introduction to nexus:
If you have questions about your tax situation, please don’t hesitate to contact Cray Kaiser today.
Please note that this blog is based on laws effective on April 2, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
With the ink barely dry on the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, there have already been several hot topics surrounding the benefits it provides. Below are the top 5 tax provisions that we believe will be most impactful to our clients. You are welcome to listen to these key points in podcast format and then scroll down to read more details for each topic.
What It Means:
Eligible taxpayers will receive a payment of up to $1,200 ($2,400 for married filing jointly) plus $500 for each “qualifying child” (under 17 years of age).
What We Advise:
If you have not yet filed your 2019 return, it may be wise to delay filing in order to maximize the advance payment if your 2018 income is less than 2019.
What It Means:
A refundable payroll tax credit for 50% of wages paid between March 12 and December 31, 2020 for the first $10,000 in wages per employee. Eligible businesses will be required to have full or partial suspension and a significant (more than 50% decline) in gross receipts.
What We Advise:
DO THE MATH! In most cases, the benefits of the forgivable Payroll Protection Loan will outweigh both the employee retention tax credit and deferral.
What It Means:
2018, 2019, and 2020 losses can now be carried back 5 years to fully offset income, as opposed to strictly carried forward. This will allow businesses to recoup previously paid taxes, including in higher tax years. After applying the carryback, certain net operating losses can be carried forward and offset 100% of taxable income, instead of only 80%.
What We Advise:
The CARES Act provides opportunities to businesses to review prior loss/expense limitations and determine if returns should be amended to recoup prior year taxes. At CK, we are looking at all of our business clients’ results for this opportunity and amending returns where beneficial.
What It Means:
“Qualified Improvement Property” (QIP) includes any improvement to an interior portion of a building that is nonresidential real property.
What We Advise:
If you have previously placed QIP in service in 2018 and 2019, review with your tax advisor whether it is beneficial to amend returns in order to claim this benefit. If so, utilize the new net operating loss provisions to recoup taxes paid in years prior to 2018.
What It Means:
The required minimum distributions from certain retirement plans (for example 401(k)s and IRAs) are waived for calendar year 2020.
What We Advise:
Tax planning with RMD’s will be critical in 2020. Just because you are not required to take an RMD, it doesn’t mean you shouldn’t. Work with your advisors to project your taxable income, especially in light of tax provisions that could significantly reduce your 2020 taxable income. 2020 might be a good time to withdraw from your plan if you are in a low tax bracket, although the RMD is not required.
In these rapidly changing times, know that CK has your back when it comes to supporting your tax and accounting needs. Please call us at 630-953-4900 if you’d like to discuss how any of these provisions affect you.
These are certainly trying times and we want to reiterate that Cray Kaiser is here for you. As things continue to evolve in light of the COVID-19 pandemic, we at CK are taking additional precautions for the benefit of our team members and our clients.
Effective immediately:
We want to remind our clients of our portal access and your ability to safely and securely share your information with our team. We ask that you email efile@craykaiser.com to request your portal access. This will eliminate the need for you to drop off your tax information at our office.
Thank you for your patience and understanding during this challenging time. We wish you, your family, and your business health and safety. We will continue to support you as best as we can while keeping each other’s health a priority. If any changes occur during the course of the next few days, we will update our website.
Please note that this blog is based on laws effective March 31, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
In reaction to the ongoing pandemic, Congress is continuing to pass legislation with the anticipation of rebounding our struggling economy. Late last week, Phase 3 of this effort was passed by Congress and signed by President Trump. This latest piece of legislation is referred to as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). CARES is one of the largest stimulus bills to get signed and impacts individuals, businesses and certain non-profits. It includes tax law changes, expanded unemployment benefits, and business loans, some of which have forgivable features. As guidance and regulations for CARES become available, we will provide continued updates of the key provisions.
Business loans have caught the attention of many in recent days and this is an area we wanted to further clarify. The U.S. Small Business Administration (SBA) is administrating loans under economic injury disaster loans (EIDL) and through payroll protection loans (PPL) provided by CARES. Although both programs target small businesses and nonprofits (generally less than 500 employees), there are certain key provisions for each of these loans that do vary significantly, and we wanted to detail those for you. Please click here to read more.
These are certainly trying times and we want to reiterate that Cray Kaiser is here for you. As things continue to evolve in light of the COVID-19 pandemic, we at CK are taking additional precautions for the benefit of our team members and our clients.
Effective immediately:
We want to remind our clients of our portal access and your ability to safely and securely share your information with our team. We ask that you email efile@craykaiser.com to request your portal access. This will eliminate the need for you to drop off your tax information at our office.
Thank you for your patience and understanding during this challenging time. We wish you, your family, and your business health and safety. We will continue to support you as best as we can while keeping each other’s health a priority. If any changes occur during the course of the next few days, we will update our website.
Please note that this blog is based on laws effective March 26, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Illinois taxpayers received welcome relief on March 25 as Illinois largely followed the Internal Revenue Service guidance on the April 15, 2020 tax deadline.
The 2019 income tax filing and payment deadlines for all taxpayers who file and pay their Illinois income taxes on April 15, 2020 are automatically extended until July 15, 2020. This automatic relief applies to all individual returns, trusts, and corporations. These taxpayers will automatically avoid interest and penalties on any taxes due that are paid by July 15, 2020. Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020, same as payments due to the Internal Revenue Service.
Note: This does NOT impact the first and second installments of Illinois estimated payments for 2020 taxes that are due April 15 and June 15. Taxpayers are required to estimate their tax liability for the year and submit quarterly installments as normal.
Further guidance from the IRS regarding the federal tax filing extension:
These are certainly trying times and we want to reiterate that Cray Kaiser is here for you. As things continue to evolve in light of the COVID-19 pandemic, we at CK are taking additional precautions for the benefit of our team members and our clients.
Effective immediately:
We want to remind our clients of our portal access and your ability to safely and securely share your information with our team. We ask that you email efile@craykaiser.com to request your portal access. This will eliminate the need for you to drop off your tax information at our office.
Thank you for your patience and understanding during this challenging time. We wish you, your family, and your business health and safety. We will continue to support you as best as we can while keeping each other’s health a priority. If any changes occur during the course of the next few days, we will update our website.
As your year-end reporting is being finalized, you may be asking yourself, “what can I do in 2020 to streamline my financial reporting process?” This is a common question we hear at Cray Kaiser and one worth spending a few minutes discussing.
Each month your company processes many transactions consisting of invoices, deposits and disbursements. The completeness of these transactions is confirmed once the bank and credit card accounts are reconciled. However, as you work with your accountant at year-end, many discoveries take place. As adjusting journal entries are recorded, operating results vary significantly from what was represented in your bank balance. But by taking a few extra steps each month, you can alleviate this issue by gaining consistency in financial reporting, identifying variances more efficiently and streamlining your year-end closing procedures.
Here are a few items to consider as you determine your monthly closing procedures:
Generating financial statements at the start of your monthly close process will allow you to identify the accounts you will need to devote additional time to for that month. The pre-close financial statements should consist of both a comparative balance sheet and income statement. By running these financial statements in comparative form by month and year, you will be able to quickly identify balances that are irregular and may need to be further analyzed.
The pre-close balance sheet should serve as your reconciliation checklist each month. Each account represented on the balance sheet should be reviewed to determine the appropriateness of the balance held at month-end. In many cases a reconciliation, report, or supporting documentation should exist to verify the balance. For instance, adjusted balances on the bank reconciliations should agree to the balance sheet account and accounts receivable and payable aging reports should agree to the balance sheet.
Unusual transactions such as assets containing credit balances and liabilities containing debit balances should be reviewed as these could represent misposted transactions and corrections may need take place at the transaction level.
The use of standard recurring journal entries can assist in recognizing expenses in the proper period. For example, as invoices for insurance premiums and other prepaid expenses are posted into a balance sheet account, the period the expense relates to should be identified. This period would identify the number of months an amortization journal entry needs. Setting up the amortization as a recurring journal entry will help ensure this transaction is recorded consistently each month. You can also mark the standard journal entry to end at a specific time period, thus reducing errors on the backend once the amortization period has ended. Most accounting systems allow for standard recurring entries (memorized transactions). These entries can also be set up for items such as depreciation and accruals for expenses paid at interim dates (i.e. interest, bonuses, etc.).
The end of your monthly close process should allow for a cursory review of the month-to-month variances as reported in the post-close financial statements. These variances should be supported by the reconciliations you performed, or in the case of the income statement, would allow you to drill down to understand the transactions that occurred during the month.
Each month you may discover certain extraneous transactions that occur outside the normal business cycle. These should be documented in a memorandum or executive summary that will help you in future months as you start to trend your business activity and operations.
Initiating a month-end close process such as the one listed above will provide a roadmap to assist you in understanding your business cycle, minimize year-end reporting surprises and help you make decisions throughout the year. Please contact Cray Kaiser if you would like additional assistance in setting up your monthly close process or reviewing your year-end reporting.
Please note that this blog is based on laws effective March 21, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
As the coronavirus event has moved rapidly, markets keep reacting sharply, and people are learning to be adaptable, our elected officials are trying to blunt some of the extreme reactions with the Families First Coronavirus Response Act (H.R. 6201). Click here to read more details about this Act.
These are certainly trying times and we want to reiterate that Cray Kaiser is here for you. As things continue to evolve in light of the COVID-19 pandemic, we at CK are taking additional precautions for the benefit of our team members and our clients.
Effective immediately:
We want to remind our clients of our portal access and your ability to safely and securely share your information with our team. We ask that you email efile@craykaiser.com to request your portal access. This will eliminate the need for you to drop off your tax information at our office.
Thank you for your patience and understanding during this challenging time. We wish you, your family, and your business health and safety. We will continue to support you as best as we can while keeping each other’s health a priority. If any changes occur during the course of the next few days, we will update our website.
