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5 Indicators Your Business Could Need a Strategic Pivot

When you encounter the word “pivot,” you may think of a politician changing course on a certain issue or perhaps a group of friends trying to move a couch down a steep flight of stairs. But businesses sometimes choose to pivot, too.

Under a formal pivot strategy, a company consciously changes its strategic focus in a series of carefully considered and executed moves. Obviously, this is an endeavor that should never be undertaken lightly or suddenly. But there’s no harm in keeping it in mind and even exploring the feasibility of a pivot strategy under certain circumstances.

5 common situations

For many businesses, five common situations often prompt a pivot:

1. Financial distress. When revenue streams dwindle and cash flow slows, it’s critical to pinpoint the cause(s) as soon as possible. In some cases, you may be able to blame temporary market conditions or a seasonal decline. But, in others, you may be looking at the irrevocable loss of a “unique selling proposition.”

In the latter case, a pivot strategy may be in order. This is one reason why companies are well-advised to regularly generate proper financial statements and projections. Only with the right data in hand can you make a sound decision on whether to pivot.

2. Lack of identity. Does your business offer a wide variety of products or services but have only one that clearly stands out? If so, you may want to pivot to focus primarily on that product or service — or even make it your sole offering.

Doing so typically involves cost-cutting and streamlining of processes to boost efficiency. In a best-case scenario, you might end up having to invest less in the business and get more out of it.

3. Weak demand. Sometimes the market tells you to pivot. If demand for your products or services has been steadily declining, it may be time to reimagine your strategic goals and pivot to something that will generate more dependable revenue.

Pivoting doesn’t always mean going all the way back to square one and completely rewriting your business plan. More often, it calls for targeted changes to production, pricing and marketing. For example, you might redefine your target audience and position your products or services as no hassle, budget-friendly alternatives. Or you could take the opposite approach and position yourself as a high-end “boutique” option.

4. Tougher competition. Many industries have seen “disrupters” emerge that upend the playing field. There’s also the age-old threat of a large company rolling in and simply being too big to beat.

A pivot can help set you apart from the dominant forces in your market. For example, you might seek to compete in a completely different niche. Or you may be able to pivot to exploit the weaknesses of your competitors — perhaps providing more personalized service or quicker delivery or response times.

5. Change of heart. In some cases, a pivot strategy may originate inside you. Maybe you’ve experienced a shift in your values or perspective. Or perhaps you have a new vision for your business that you feel passionate about and simply must pursue.

This type of pivot tends to involve considerable risk — especially if your company has been profitable. You should also think about the contributions and well-being of your employees. Nevertheless, one benefit of owning your own business is the freedom to call the shots.

Never a whim

Again, a pivot strategy should never be a whim. It must be carefully researched, discussed and implemented. For help applying thorough financial analyses to any strategic planning move you’re considering, contact us.

Giving gifts can help show gratitude and provide tax breaks

The holiday season is here. During this festive season, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good time to review the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?

Employee gifts

Many businesses want to show their employees appreciation during the holiday time. In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business.

But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit. These are items small in value and given so infrequently that they are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.

De minimis fringe benefits aren’t included in your employees’ taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.

Key point: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small they are and infrequently they’re given.

Customer gifts

If you make gifts to customers or clients, they’re only deductible up to $25 per recipient, per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4 each.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all of a customer’s team members to share) as long as the cost is “reasonable.”

A holiday party

Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.

Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of employees who aren’t highly compensated and their families. If customers, and others also attend, a holiday party may be partially deductible.

Holiday cards

Sending holiday cards is a nice way to show customers and clients your appreciation. If you use the cards to promote your business, you can probably deduct the cost. Incorporate your company name and logo, and you might even want to include a discount coupon for your products or services.

Boost morale with festive gestures

If you have questions about giving holiday gifts to employees or customers or throwing a holiday party, contact Padgett! We can explain the tax implications.

A company car is a valuable perk but don’t forget about taxes

One of the most appreciated fringe benefits for owners and employees of small businesses is the use of a company car. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees driving the cars. (And of course, they enjoy the nontax benefit of using a company car.) Even better, current federal tax rules make the benefit more valuable than it was in the past.

Rolling out the rules

Let’s take a look at how the rules work in a typical situation. For example, a corporation decides to supply the owner-employee with a company car. The owner-employee needs the car to visit customers and satellite offices, check on suppliers and meet with vendors. He or she expects to drive the car 8,500 miles a year for business and also anticipates using the car for about 7,000 miles of personal driving. This includes commuting, running errands and taking weekend trips. Therefore, the usage of the vehicle will be approximately 55% for business and 45% for personal purposes. Naturally, the owner-employee wants an attractive car that reflects positively on the business, so the corporation buys a new $57,000 luxury sedan.

The cost for personal use of the vehicle is equal to the tax the owner-employee pays on the fringe benefit value of the 45% personal mileage. In contrast, if the owner-employee bought the car to drive the personal miles, he or she would pay out-of-pocket for the entire purchase cost of the car.

Personal use is treated as fringe benefit income. For tax purposes, the corporation treats the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to personal use. If the corporation finances the car, the interest it pays on the loan is deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).

On the other hand, if the owner-employee buys the auto, he or she isn’t entitled to any deductions. Outlays for the business-related portion of driving are unreimbursed employee business expenses, which are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if the owner-employee finances the car personally, the interest payments are nondeductible.

One other implication: The purchase of the car by the corporation has no effect on the owner-employee’s credit rating.

Careful recordkeeping is essential

Supplying a vehicle for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use needs to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.

Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. (You may even be able to transfer the vehicle to the employee when you’re ready to dispose of it, but that involves other tax implications.) Contact Padgett today! We can help you stay in compliance with the rules and explain more about this fringe benefit.

A cost segregation study may cut taxes and boost cash flow

Is your business depreciating over 30 years the entire cost of constructing the building that houses your enterprise? If so, you should consider a cost segregation study. It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow.

Depreciation basics

Business buildings generally have a 39-year depreciation period (27.5 years for residential rental properties). In most cases, a business depreciates a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property — including equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.

Frequently, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases, the distinction between real and personal property is obvious. For example, computers and furniture are personal property. But the line between real and personal property is not always clear. Items that appear to be “part of a building” may in fact be personal property. Examples are removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, decorative lighting and signs.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. These include reinforced flooring that supports heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment and dedicated cooling systems for data processing rooms.

Identifying and substantiating costs

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.

Speedier depreciation tax breaks

The Tax Cuts and Jobs Act (TCJA) enhanced certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other changes, the law permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

In addition, the TCJA expanded 15-year-property treatment to apply to qualified improvement property. Previously, this tax break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And the law temporarily increased first-year bonus depreciation from 50% to 100% in 2022, 80% in 2023 and 60% in 2024. After that, it will continue to decrease until it is 0% in 2027, unless Congress acts.

Making favorable depreciation changes

It isn’t too late to get the benefit of faster depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return you file, that will result in automatic IRS consent to a change in your accounting for depreciation.

Cost segregation studies can yield substantial benefits, but they’re not the best move for every business. Contact your Padgett advisor to determine whether this strategy would work for your business. We’ll judge whether a study will result in tax savings that are greater than the costs of the study itself.

8 Tax Deductions Every Small Business Owner Should Know

As a small business owner, managing your finances is crucial to ensuring the success and growth of your venture. One of the most effective ways to optimize your financial strategy is by understanding and leveraging the various tax deductions available to you. By taking advantage of these deductions, you can significantly reduce your tax liabilities, increase your bottom line, and keep more of your hard-earned money. In this blog post, we’ll delve into the top tax deductions that every savvy business owner should be aware of.

1. Business use of your home

Running a business from home? You’re in luck. The home office deduction allows qualifying taxpayers to deduct a portion of their home-related expenses when part of their home is used exclusively for business purposes. This includes expenses like rent, utilities, insurance, and property taxes. To qualify, you must have a designated space used solely for business activities and meet specific IRS criteria. Qualified taxpayers can use the simplified method or regular method of calculating their home office expense deduction. Remember, accurate record-keeping is key to support your deduction claims.

2. Business use of your car

If you use your car solely for business purposes, you may deduct the entire cost of owning and operating it, although there are some limits to this deduction. However, if you use the car for both business and personal use, you can only deduct the expenses related to its business use. There are two main methods for calculating deductible car expenses: the standard mileage rate method and the actual expense method 

Under the standard mileage rate method, you can deduct qualified business miles using the rate provided by the IRS. Under the actual expense method, you’ll need to calculate the precise expenses associated with operating the car exclusively for business purposes. This generally includes costs such as fuel, oil, maintenance, tires, insurance, registration fees, licenses, and even depreciation directly linked to the portion of total mileage driven for business miles. Please note that what the IRS considers commuting miles is not tax deductible; only business miles are. Reach out to your advisor to make sure you’re classifying your miles correctly!

3. Supplies and equipment

Your taxable income could be reduced significantly by deducting expenses related to supplies and equipment. The cost of supplies, such as office supplies, cleaning materials and other consumables crucial for day-to-day operations, can be deducted as legitimate business expenses. Equipment purchases, such as computers, machinery and essential tools, however, must be deducted over time through depreciation unless they qualify to be deducted in full. To ensure you can substantiate these deductions, it’s essential to maintain precise records and keep track of receipts. By making the most of these deductions, you can effectively manage your business finances and optimize your tax liability, ultimately contributing to the financial health and long-term sustainability of your venture. Remember to consult with a tax professional or accountant for tailored advice based on your specific business circumstances.

4. Cost of goods sold

As a small business owner, you can benefit from deducting the cost of goods sold (COGS) as a tax deduction. COGS encompasses the direct expenses associated with producing or acquiring the products you sell, such as raw materials and inventory purchases. By deducting COGS, you have the opportunity to lower your taxable income and potentially reduce your tax liability. It’s important to maintain accurate records to potentially claim this deduction.

5. Business related meals

Despite the changes brought about by recent tax reforms, meals continue to hold value. Business-related meals, whether with clients or during business travel, may still be deductible. However, it’s essential to maintain proper documentation, such as receipts and records that establish its business purpose. Remember, meals must meet the criteria of a qualified expense for it to be considered deductible. It’s also worth noting that the regulations governing these deductions have become stricter, so it’s advisable to collaborate with your advisor to stay informed about the latest rules.

6. Employee-related expenses

Having employees involves various costs, many of which are deductible. This includes wages, bonuses, payroll taxes and benefits like health insurance. Ensuring proper worker classification (employee vs. contractor) is vital and the first step in avoiding scrutiny.

7. Travel expenses

Expenses for business travel can quickly accumulate, but many of these costs are deductible. This includes transportation, lodging, most meals and incidental expenses. Keeping records and receipts is essential to substantiate your claims and establish its business purpose as opposed to a family vacation with a bit of work sprinkled in.

8. Health insurance premiums for owners

For small businesses, covering the health insurance premiums of its owners and their families can be a significant expense. The IRS allows for different ways to deduct these premiums depending upon your business’s tax entity type. Meeting the eligibility criteria is essential to claim this deduction.

Conclusion

Navigating the realm of small business taxes can be complex, but the potential benefits are undeniable. By being aware of these top tax deductions, you’re better equipped to make informed financial decisions that can have a positive impact on your business’s bottom line. However, tax laws and regulations change, so staying up to date is crucial. Consult with a tax professional to ensure you’re maximizing your deductions while staying compliant with the latest rules. By strategically utilizing these deductions, you can pave the way for a more financially efficient and prosperous small business journey. 

Remember, the information provided here is intended for general informational purposes only and should not be considered as professional tax advice. Contact your local Padgett advisor for personalized guidance tailored to your specific situation. Find your nearest Padgett advisor here!

What the ERC Pause Means for Small Business Owners

When properly claimed, the Employee Retention Credit (ERC) is a refundable tax credit designed for businesses and tax-exempt organizations that continued to pay their employees while experiencing workforce disruptions due to the COVID-19 pandemic. Unfortunately, the intricate filing process associated with this credit inadvertently created an opportunity for corrupt specialty firms to prey on small business owners, making deceptive claims about eligibility. 

With the rise in fraudulent ERC claims, the IRS announced an immediate halt to processing new claims through at least the end of the year. IRS Commissioner Danny Werfel states, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in.”

Depending on your filing situation, we’re going to cover what to expect and what you should do next as a small business owner. 

What if I have already filed an ERC claim?

If you have already filed an ERC claim, the IRS will continue to process your claim, but at a greatly reduced speed. The IRS will be reviewing more than 600,000 claims, so expect processing times to be 180 days (about 6 months) or longer. The IRS may even ask for more information, so be prepared to receive this request. 

If you believe that your claim is fraudulent, the IRS is working on offering a withdrawal option for those who have filed an ERC claim but have not yet had it processed. As cited by the IRS, “This option, which can be used by taxpayers whose claim hasn’t yet been paid, will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees.” However, if you have willfully filed a fraudulent claim, withdrawing it does not exempt you from potential criminal investigation. 

In the event that your ERC claim has already been processed and you have received an improper ERC payment, you are required to pay it back with possible penalties and interest. Per the IRS, they are “developing new initiatives to help businesses who found themselves victims of aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment.” Remember, this program is not finalized, but the IRS plans to release more information in the fall. 

What if I am in the process of filing for the ERC?

The IRS encourages anyone being pressured by promoters to apply for the ERC “to immediately pause and review their situation while we (the IRS) look to add new protections and safeguards to stop bad claims from ever coming in.” Commissioner Werfel also states, “Businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”

This would also be a good time to review the IRS list of red flags when it comes to aggressive ERC promoters as well as the IRS ERC eligibility checklist. 

What are my next steps?

Considering the complexity of the ERC, it’s never been more important to partner with a trusted tax professional. As small business owners ourselves, we know how scary this situation can be, but you don’t have to face it alone. At Padgett, we prioritize our relationships with our clients and are here to help you every step of the way. With over 50 years of collective experience and expertise in filing ERC claims, we’re prepared to answer any questions you may have regarding your ERC filing status. Connect with us today for reliable guidance and advice. 

How Padgett Helped Drive Shahrukh Siddiqui’s Journey to Success

Shahrukh Siddiqui began his entrepreneurial journey with a Mexican restaurant in Mobile, Alabama before making the transition to managing Credit America Auto Sales. He embarked on this journey in 2019 alongside his family, aiming to offer customers quality used vehicles and an unparalleled buying experience. “While each industry has its own challenges” he says, “I chose to venture into auto sales because I was looking for something new.” It may not have been a straight path to auto sales, but the one constant across Shahrukh’s businesses was Padgett. 

Shahrukh began his relationship with Saty Putcha, owner of Padgett Mobile, nearly 25 years ago when he was establishing his restaurant in 2010. “Saty and I actually met through playing tennis together” he recalls, “Padgett helped me form the LLC, start the business, and fill out all the paperwork. They handled my payroll, corporation tax returns, and personal tax returns as well.” When he made the move to Credit America Auto Sales, he knew he needed to continue to work with Saty and Padgett Mobile. “It’s a cash intensive business” Shahrukh explains, so finding the right partner to handle his finances was crucial. 

Shahrukh admitted that the early years of a business are never easy. He was committed to providing his customers with top-notch quality and service. Whether it was assembling a dependable human resources team or ensuring that the right personnel were in place for thorough vehicle inspections, it proved to be a formidable task. That’s why continuing his relationship with Padgett felt so important. He had developed trust and a strong rapport with Saty. He emphasizes that even though Padgett serves other clients, “I still feel a personal connection with them. The team is very personable, and I value our one-on-one discussions about my business.” 

While Shahrukh has found reliability and consistency with Padgett, the journey as a small business owner hasn’t always been easy. For the first five years of running Credit America Auto Sales, he sometimes felt like he wouldn’t succeed. He spent up to 14 hours a day at work and hardly took any time off making sure his business was moving forward. His advice to other small business owners is to “keep your expenses low and, in the car business, don’t overpay for your car. Make your money when you buy the car, not when you sell the car.” He adds, “Pay attention to the interest rate you’re paying. While some interest rates may seem low, pay attention to the fees as well.”   

With Padgett at his side, Shahrukh can shift his focus from managing finances to being a strong business owner. “Padgett frees up my time to do what I like, which is buying and selling cars. Otherwise, I would be spending my time keeping my books straight if I did not have them helping me. They’re just a great bunch of people. They go above and beyond to take care of me and my business.” 

Whether you’re looking to start an LLC like Shahrukh or are looking for a reliable financial partner, Padgett’s team of experts can help you through it all. Find your local Padgett office today to get started! 

11 Accounting Mistakes to Avoid as a Small Business Owner

As a small business owner, juggling various responsibilities is a given. From managing day-to-day operations to overseeing marketing strategies, your plate is undoubtedly full. However, amidst all these tasks, one aspect that deserves your undivided attention is accounting. Proper financial management is the cornerstone of a successful business, and avoiding common accounting mistakes can save you from unnecessary headaches down the road. In this article, we’ll explore some of the most prevalent accounting mistakes small business owners make and provide insights on how to avoid them. 

1. Mixing Personal and Business Finances

Imagine trying to untangle a ball of yarn that’s woven together with another ball of a different color. This is the visual representation of mixing personal and business finances. While it might seem convenient, it’s a recipe for disaster. Mixing the two can lead to confusion, inaccurate financial records, and even legal issues. To avoid this mistake, open a separate business bank account and use it exclusively for business-related transactions. This separation not only simplifies accounting but also presents a clear picture of your business’s financial health. 

2. Lack of Proper Record Keeping 

In the digital age, meticulous record keeping has never been easier. Neglecting this crucial aspect can result in missed deductions, errors in financial statements, and, what the IRS stresses the most, significant hurdles during tax time. Dedicate time to organize and maintain accurate financial records. Utilize accounting software to track income and expenses consistently. Not only will this streamline your financial management, but it’ll also offer invaluable insights into your business’s financial performance.

3. Neglecting Expense Tracking 

Every penny counts, especially for small businesses. Failing to track all business expenses can lead to missed tax deductions and an incomplete understanding of your company’s financial standing. Create a comprehensive system for recording and categorizing expenses. Keep receipts and bills organized, and regularly reconcile them with your financial records. This practice ensures that no deductible expense goes unnoticed and provides a clear overview of your spending patterns. 

4. Ignoring Financial Statements 

Financial statements are your business’s financial report card. Ignoring them can lead to poor decision-making due to a lack of insight into your company’s financial performance. Regularly review your income statement, balance sheet, and cash flow statement. These documents provide a snapshot of your revenue, liabilities, and cash movement. Analyzing them helps you make informed decisions, identify areas for improvement, and plan for future growth.

5. Failure to Reconcile Bank Accounts 

Unreconciled accounts are like puzzles missing critical pieces. Neglecting to reconcile bank and credit card statements with your financial records can result in discrepancies that are challenging to track down and rectify. Take time each month to reconcile your accounts, ensuring that every transaction aligns accurately. This practice not only minimizes errors but also maintains the accuracy of your financial data. 

6. Misclassifying Expenses 

Properly categorizing expenses is more than just neat organization; it’s a necessity for accurate financial reporting. Misclassifying expenses can lead to skewed insights into your business’s financial performance and potential missed tax deductions. Familiarize yourself with common expense categories and allocate each expense accurately. This practice ensures that your financial statements reflect your business’s reality. 

7. Delayed Invoicing and Collections 

Delayed invoicing and poor collections practices can wreak havoc on your cash flow. Ensure that you send out invoices promptly and follow up on overdue payments. Implement clear payment terms and policies to maintain a healthy cash flow. Consistent invoicing and diligent collections efforts help you avoid cash crunches and keep your business operations running smoothly. 

8. Tax Deadlines and Compliance 

Missing tax deadlines or failing to comply with tax regulations can result in penalties that dent your finances and disrupt your operations. Create a system to track tax deadlines and obligations throughout the year. Set reminders for filing dates and ensure that you’re up to date with any changes in tax laws that may affect your business. You can use Padgett’s tax deadline calendar as a resource

9. Inadequate Tax Planning 

Taxes are a certainty in business, but the amount you pay doesn’t have to be a surprise. Failing to set aside funds for taxes throughout the year can lead to cash flow issues when tax payments are due. Develop a tax planning strategy in consultation with a tax professional. This approach helps you manage your cash flow more effectively and prevents last-minute scrambling to cover tax bills. 

10. Cash Flow vs. Profit Misunderstanding 

Profitability and cash flow are not synonymous. A business can be profitable on paper but struggle with day-to-day expenses due to poor cash flow management. Understand the distinction between the two and develop strategies to manage both effectively. This ensures that your business remains financially stable in the long run. 

11. Seeking Professional Help 

It’s natural to want to handle everything in your business, but certain tasks, like accounting, benefit from professional expertise. Don’t hesitate to consult with accountants or financial advisors. An accountant’s insights can help you make informed financial decisions, navigate complex tax regulations, and set your business on a path to financial success. 

Avoiding these common accounting mistakes is essential for the financial health and longevity of your small business. Additionally, staying on top of tax deadlines, embracing professional advice, and managing cash flow effectively will contribute to your business’s resilience and growth. Remember, proper accounting isn’t just about numbersit’s about making informed decisions that drive your business forward. Reach out to your local Padgett office to partner with a trusted advisor today.  

Tax Audits Demystified: How to Prepare and Respond as a Small Business

As a small business owner, the term “tax audit” might strike fear into your heart, conjuring images of auditors poring over your financial records with a fine-tooth comb. While tax audits can be intimidating, understanding the process, being proactive in your tax compliance, and knowing how to respond can help ease the stress. In this article, we’ll demystify tax audits, provide tips to reduce audit risk, and guide you through steps to take if your small business is audited.

What is a Tax Audit?

A tax audit is an examination of your financial records and tax returns by the Internal Revenue Service (IRS) or state tax authorities to ensure the accuracy of your reported income, deductions, and credits. Per the IRS, audits can be conducted randomly, but more often they are triggered by certain red flags, discrepancies, or patterns that catch the attention of tax authorities. 

Reducing Audit Risk

While audits can happen to anyone, there are steps you can take to minimize your audit risk: 

  1. Accurate Recordkeeping: Maintain thorough and organized records of your financial transactions, including receipts, invoices, bank statements, and expense reports. This transparency can provide a clear trail of your business activities. 
  2. Consistency: Ensure consistency in your reported income and deductions from year to year. Drastic changes can raise eyebrows and trigger audits. 
  3. Classify Expenses Correctly: Properly categorize your business expenses. Misclassifying personal expenses as business expenses can lead to an audit.
  4. Reasonable Deductions: Claim only legitimate business deductions. Exaggerated or questionable deductions can invite scrutiny. 
  5. Hire a Professional Accountant: A certified tax professional can help ensure accurate tax filing and adherence to tax laws, reducing the chances of errors that might trigger an audit. 
  6. Report All Income: Ensure you report all income, including cash payments. Omissions can lead to serious consequences if discovered. 

Steps to Take If Audited

Even with precautions, audits can still occur. If your small business receives an audit notice, follow these steps: 

  1. Stay Calm: Don’t panic. An audit notice doesn’t necessarily mean you’ve done something wrong. It’s a routine procedure to verify your records. 
  2. Read the Notice Carefully: The notice will outline the scope of the audit, the years under review, and the specific documents requested. Understanding the requirements is crucial. 
  3. Gather Documentation: Collect all requested records, including financial statements, receipts, invoices, and relevant tax returns. Having organized records will make the process much smoother. 
  4. Consult a Professional: If you don’t already have a tax professional, hire one now. They can guide you through the process, help you understand your rights, and represent you before the tax authorities. 
  5. Cooperate and Respond Promptly: Respond to the audit notice within the specified timeframe. Cooperation with the auditor is key. Provide only the requested information but be thorough and honest. 
  6. Be Prepared to Explain: Be ready to explain any discrepancies or unusual entries in your records. A logical and honest explanation can go a long way in resolving issues. 
  7. Understand Your Rights: Familiarize yourself with your rights as a taxpayer during an audit. These rights include the right to representation, the right to appeal decisions, and protection against unfair treatment. 
  8. Appeal if Necessary: If you disagree with the audit findings, you have the right to appeal within the IRS or through the courts if necessary. Your tax professional can guide you through this process.

How Padgett Can Help

While tax audits may seem daunting, they are a part of maintaining a fair and accurate tax system. At Padgett, we can help you maintain accurate records and prepare you for the process, enabling you to navigate audits with confidence. Contact us today to find your local Padgett advisor.

How to Manage Social Media for Small Business: 12 Tips

Social media is ubiquitous. We stay connected to friends, keep family updated, and even get our news from social media. It can often feel like a “personal” thing though. By its name alone, it seems like something for after-business hours. Right? In this modern online world though, social media is an important tool for small business owners to take advantage of.

Consumers now rely on local groups to get purchasing advice. They’re influenced by ads and reviews on every social network they’re a part of. Most networks now have built-in shopping platforms. Many small business owners choose not to take advantage of social media networks for their business for a host of reasons. They’re too busy. Social media is intimidating or confusing with the constant changes and increasing complexity. Or, they just don’t like social media! Whatever your reasons, we have a few (relatively pain-free) recommendations for the average business owner.

  1. Just create a page
  2. In searching the web, many potential clients or customers may find your social media page before they find even your website. Often, consumers will look to social networks when they have questions about a business rather than checking a website. Currently, having a page on a few of the major social networks is a baseline expectation from your customers. Take that expectation seriously and start building your page. Make sure you’re using a clear and crisp logo, updating your profile picture, cover photo, business description, and contact info. If you have all the pieces ready to go, building your page will take less than an hour.

  3. Learn the platform you’re on
  4. Not every platform is the same. There are technical differences like the number of characters, but more importantly, users expect different styles of content on each platform. Facebook is highly interactive. LinkedIn is for business – posts perform well if they feature business advice and acknowledge the accomplishments of others. Twitter is super short form. Instagram is highly visual and a little more casual. Hashtags aren’t really for Facebook, but definitely for TikTok. Understand the audiences, interaction styles, and cadence that works best on each platform. Don’t feel like you must be on every one, just identify which networks best fit your audience and bandwidth, then start there. Adjust your style to suit the platform.

  5. Make it informative
  6. As previously stated, your customers may find your social page before they find your website. Consider – does your current page create the kind of first impression you want them to have? Make sure to keep your basic information like hours of operation up to date. Then, use your posts to create an informative experience akin to your website. Focus on regularly reintroducing your business and the value you offer. Introduce staff and update visitors on how your business may be recognizing upcoming holidays.

  7. Make it personal
  8. Posts featuring real people and their stories typically have the strongest performance. Take advantage of this trend by creating posts that talk about your staff and your clients. Then, tag those individuals to increase your reach. You can take this concept of staying personal further by considering your personal social profile. As a business owner, it is hard to separate yourself from your business. Embrace that concept and become the figurehead for your business. Techniques could include: Using your personal profile to reshare posts from your business page. Inviting your personal connections to follow your page. Adding a personal or behind-the-scenes style perspective to the content your share.

  9. Stay consistent
  10. The key to having a strong social presence is staying consistent. Not only will the social algorithm fail to show your content to your followers if you maintain a spotty posting schedule, but you also won’t be building your reputation and value to your customers. Before you start posting, consider all of the factors that will impact your ability to publish content, then choose how often you can realistically post each week. Once you’ve made that commitment, don’t deviate from it. You can slowly ramp up or back off slightly, but a sudden absence will hurt your page.
    You also want to stay consistent with the style of your content. Try to adhere to a consistent color palette and font with your posts. Remember, if a client visited your website, they’d get a cohesive impression of your brand, and playing around with too many styles on your social platform will feel disjointed.

  11. KISS – Keep it simple silly
  12. A part of staying consistent is setting realistic expectations for your social media plan. Don’t feel like you have to do it all! Start small and simple, then ramp up as you further understand the platforms you’re on and your bandwidth increases. It’s far more important to remain consistent than to post four times a day for a week, and then not at all for two months. It’s ok if you don’t have a videographer on staff to produce your videos. You don’t need to participate in every trend or create a work of art for every post to create a solid social media presence.

  13. Look for inspiration
  14. Do NOT copy content or ideas from other pages! DO look to pages you enjoy, content you respond to, or businesses with similar products or services for inspiration. Paying attention to these other pages may help you come up with your own posts. Look for trends you can participate in or a selling point that differentiates you. Understanding what your peers are doing and building off that will only strengthen your social presence.

  15. Engage
  16. Social media was developed around the concept of interaction and connection. That means your pages and posts will perform more strongly when you operate like a real person interacting with others. Make every effort to respond to every comment a post receives. If you can encourage an ongoing conversation in the comments, even better! Create posts or content that encourage your followers to comment or share with others. If you receive messages, respond to them as quickly as possible; within a few hours is recommended. It’s possible to program in templated responses to common questions. This can make the process of responding quicker, easier, and more on-brand.

  17. Join groups
  18. On your personal profiles, begin joining groups where your audience may be active. This could be a mom’s group for your childcare business or a local community exchange. Don’t spam group members but respond to requests for business recommendations or information that may be relevant to your business. Think about it as providing value to the group you’re a part of rather than advertising.

  19. Be authentic and timely
  20. Growing your social media following should be a core goal of building a social media plan. And nothing will make your followers lose interest in your page like a steady stream of advertisements. Your content should feel entertaining and informative – like a real person posted it, not a faceless corporation. You can achieve this through a mixture of content scheduled in advance and raw photos or videos posted right as the moment happens. For instance, Padgett will post a photo of a staff outing one day and a well-researched blog about an upcoming tax change the next.

  21. Take advantage of tools and resources
  22. The internet is full of educational resources on social media. You can find scheduling templates, content calendars, and posting tips for every industry and skill level. There are even free courses on managing social media on networks like LinkedIn. Websites like Canva offer a free design tool with a wide range of templates and graphics for creating posts. Use these professionally developed templates to create beautiful posts with minimal effort. Apps on your phone allow you to easily edit photos or shoot videos.
    And most importantly, remember that if you HATE social media, you don’t have to be the one to manage it. Think about delegating the responsibility to an employee. Just remember to give them the time and resources they need to help.

  23. Find a partner
  24. This may all sound like a lot to manage, but it doesn’t have to be. Setting aside as little as fifteen minutes a day to focus on social media can be effective. However, if you’re ready to take further advantage of social media, like exploring ads, consider finding a professional to work with. We speak regularly about the value of finding a partner in your business finances. The same can be said for your social presence.

How Padgett helped Holly Crumley become a top-dog entrepreneur

Holly Crumley had always loved animals, and eventually, she channeled that love into starting a business focused on animals. After running a dairy farm for years, Holly began Cavaliers by Crumley which breeds, trains and sells Cavalier King Charles Spaniel puppies. “I traveled all over the world,” Holly says. “About 20 years ago, I finally found the right place to purchase the dogs and begin the breeding business.” Her business later expanded with the opening of a pet resort in 2007, and she then added a guardianship program to her breeding business.

With such a unique business model, it was crucial for Holly to have an accountant who truly understood her business. That’s where Janet Kaup of Padgett Gainesville came in. “Janet found us about 30 years ago,” Holly says. “She was building her Padgett business and came to the farm one day and asked if she could be of assistance to us. We didn’t have a good accountant then, so it took off from there.”

Since then, Janet has been by Holly’s side as she has built her business. “Janet has become like a sister to me,” Holly continues. “I’ve always depended on her to lead me in the right direction. It’s just imperative to have an accountant who understands the type of business you’re involved in.”

“It’s also important to hire good people,” Holly continues. “We offer incentives for our employees, helping them put their kids through college, helping people learn how the business works and other things. My employee retention is great; Janet has helped me manage my employees and offer a simple retirement plan. We have a tax card to help people with medical expenses and things like that. I have very committed, loyal employees.”

Having a strong support system is key to Holly’s hectic day. “It’s a constant business; it doesn’t end,” she says. “It’s seven days a week. It’s a 24-hour job, and not a clean job either… I get up and let the dogs out, feed and clean up for them. Then we have social media to deal with, returning phone calls and emails. The business I’m in, communication doesn’t stop with the sale of the dog.”

Despite her busy schedule, Holly also prioritizes education, both for herself and her employees. “School’s never out for the pros,” she says. “It’s important to stay on the cutting edge, always be on top of new developments.” She encourages them to attend leadership events, learn the business, and stay informed on industry updates. Luckily, staying up to date on every in and out of the tax system isn’t something that Holly has to add to her plate. She relies on Janet and her Padgett team for that.

“I did everything the wrong way first,” Holly adds, “so I’ve learned how to do a lot of things right. I learned all my lessons the hard way. I’ve been lucky to have a great accountant. Janet took it upon herself to make it important that we were taken care of. I feel confident about my taxes.”

If you need an accountant or tax professional on your business’s team, Padgett can help! Contact us today.

What is an IRS audit, really?

Especially since the passing of the Inflation Reduction Act that provided $80 billion in funding to the IRS, many small business owners have been concerned about the possibility of having their finances audited. While most of the funds are dedicated to improving taxpayer services, it is true that some of the funding will be used for enforcement and audits.  

So, what does that mean for your business, and how can you avoid being audited in the future? 

What is an IRS audit? 

An IRS audit is an examination of your tax returns, financial records, and other documents to ensure that you have reported your income and deductions accurately and in compliance with the tax laws. Receiving an IRS notice doesn’t mean you’re being audited, and an IRS audit is not the same as other types of business reviews. An IRS audit is conducted by the government, and it can result in penalties, interest and even criminal charges if it uncovers fraud or other serious issues. 

But don’t panic—audits are not a common occurrence. Last year, only 0.38% of returns were audited by the IRS, according to USA Today. It’s also unlikely that taxpayers making less than $400,000 in annual income will be targeted for audits. 

What are the different types of audits? 

While the prospect of an IRS audit may seem daunting, it’s important to remember that not all audits are created equal. There are several types of IRS audits that you may encounter as a small business owner. Here are the most common ones: 

  1. Correspondence Audit: This is the most common type of audit, and it can be conducted entirely by mail. The IRS will request specific documents or information from you, and you will have a deadline to provide the requested materials. This type of audit is usually focused on a single issue, such as a missing tax form or a discrepancy in reported income, and most commonly occurs with charities and nonprofit organizations. 
  2. Office Audit: An office audit is conducted in person at an IRS office. During an office audit, an IRS agent will review your financial records and ask you questions about your tax returns. This type of audit is typically focused on one or two specific issues, such as a deduction that the IRS believes may not be valid. 
  3. Field Audit: A field audit is the most comprehensive type of audit, and it involves an in-person visit from an IRS agent to your place of business. During a field audit, the agent will review all of your financial records and ask you questions about your business operations. This type of audit is usually reserved for larger businesses or more complex tax issues. 
  4. Taxpayer Compliance Measurement Program (TCMP) Audit: This type of audit is relatively rare, and it is typically used to measure compliance rates across a larger population of taxpayers. The IRS will select a random sample of your returns and conduct a comprehensive audit of those returns to measure your compliance with the tax laws. 
  5. Specialized Audit: A specialized audit is conducted by an IRS agent with expertise in a particular area, such as international tax issues or employee benefit plans. These audits are typically reserved for businesses with complex tax issues that require specialized knowledge. 

Note: Beware of scam calls impersonating the IRS! If you are selected for an audit, the IRS will only notify you by mail, not by telephone.  

What should you do if you’re audited? 

No matter the type of audit, you have the right to be represented by a tax professional, so make sure you choose one who is qualified to represent you. If you are notified of an IRS audit, it’s important to respond promptly and professionally. Ignoring or delaying an audit can only make the situation worse. Instead, gather the requested documents and information and work with your tax professional to respond to the IRS’s requests. 

It’s also important to remember that an audit does not necessarily mean that you have done something wrong. The IRS uses algorithms to screen returns for potential red flags and sometimes selects random returns for closer review. However, the IRS has stated it will be auditing more employment tax returns in the future because of the possibility of false or incorrect Employee Retention Credit (ERC) claims. If your business has received this credit, make sure to have all the necessary documentation, like employee, wage, and eligibility information, to support the claim under audit.  

If you have been selected for an audit, it’s not necessarily a reflection of you or your business. That being said, there are steps you can take to reduce your chances of being audited. First and foremost, make sure that you are reporting your income and deductions accurately and in compliance with the tax laws. By maintaining accurate records, reporting your income and deductions correctly, and working with a tax professional throughout the year, you can reduce your chances of being audited in the future. 

If you need a tax professional, Padgett can help! Contact your local office today.

Teamwork made Jenna Speight’s dream work

Jenna Speight has always been fashion-forward, but she struggled to find a way to turn her passion into a profit. After changing her college major several times in search of the right path forward, her hairstylist suggested cosmetology school. “It was a lightbulb moment for me,” Jenna says. “I called a school the next day, and within four weeks, I was enrolled.”

Though she was now on the right path, it wasn’t always easy. But the difficulties opened other doors for Jenna: “I worked at a few salons, and there ended up being a lot of drama that made me consider leaving the industry. It was either leave or start my own salon. So, I decided to open my own salon.”

Jenna opened Rue 62 Salon in April 2011, but the challenges wouldn’t stop there. Less than a year later, she discovered she was expecting twins. “It was a bit overwhelming as I was trying to build my new business,” she says. “One baby I could manage, but when I found out it was two, I really had to adjust my expectations.”

Thankfully, she was surrounded by a strong team of supportive employees who helped the business grow. “Choosing who I can work with has been essential,” Jenna adds. “[My twins] are absolutely a blessing, and my team has been key in our success.”

Years later, when COVID-19 forced her business to shut down for several months and implement expensive safety protocols upon reopening, Padgett Barrington joined Jenna’s team. She had received a PPP loan, and her previous accountant was not equipped to handle the challenging tax situations that came with it. “I needed someone more informed,” she says, so she reached out to Dave Gribben. “He had amazing reviews and his office was only half a mile from my house.”

“He’s always been super responsive, very thorough, and great at explaining things,” she continues. “He made my tax process more understandable, and introduced me to more options for government assistance, like the ERC, which was absolutely essential to help us get out of a tight spot.”

Jenna credits her strong support system with helping the salon succeed despite the challenges life continued to throw her way—including being diagnosed with breast cancer in December 2021. “That changed everything,” she says. “I didn’t work in the salon for 7 months, and I would go weeks without talking to anyone. The cancer journey has really re-prioritized my life and really drives home the point that the girls on my staff can weather any storm.”

“They’re like family,” she adds. “One of my stylists had twins as soon as I came back, and another had her first child when the first returned. Through it all, we’re stronger than ever. I think that’s due in large part to who I’ve hired. I have the most incredible group of women.”

Jenna knew opening a small salon wouldn’t make her a millionaire, but believes the experience of working with a team of incredible people has been priceless.

“My best advice, the best thing I have done as an owner, is hire the right people,” she says. “I have a staff that will really step up and have my back, who will keep the salon surviving and thriving. Having a tax preparer who is professional and responsive and has my best financial goals in mind, somebody who treats me with respect… has been extremely helpful, not just to my business, but to my self-esteem.”

“I absolutely, even 12 years in, still look at the tax return and don’t understand it,” Jenna continues. “It’s not something I could do on my own. Having a great bookkeeper who keeps track of things for me has been a huge burden lifted off of my shoulders. If another small business owner is anything like me and doesn’t have an MBA or a business degree, having a good accountant is essential.”

 

If you need an accountant or tax professional on your business’s team, Padgett can help! Contact us today.

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