Author Archives: Dolores Ricci-Norcott, CPA

The Glove Box Guide to Uber/Lyft Tax Deductions

The sharing community has become an industry all its own.  With the introduction of companies such as Uber, Lyft, AirBnB, Turo and many others, Americans can rent and share almost all the conveniences modern life.

Uber is a car transportation and food delivery mobile app company started in 2009 by Travis Kalanick and Garrett Camp.  Uber operates in 570 cities worldwide and growing.  Their main purpose is competition with local taxi cab companies.  Users can access the Uber mobile app to call an Uber driver to pick them up and bring them to their destination.  Most Uber drivers own their own cars and work their own hours without oversight from Uber Corporate.  Drivers can work as little as a couple hours a week to as many hours as they are comfortable with.  Fair prices are based and fluctuation due to market demand at certain times of the day and year (prices can increase during rush hour and on holidays).  Users pay the driver via the mobile app and Uber takes a modest percentage of that fair as a commission.

With the increased popularity of driving with Uber more and more people are using it to bring in a little side income.

Here is a quick pocket (glove box) guide to ensure you understand what you need to keep and use to file your tax return at the end of the year.

As an Uber driver, you will receive a 1099-K which will show the gross income for the year.  The gross income is the base fare, per minute/per miles, it is also the minimum fare and cancellation fees before commissions and fees.  The gross income includes the tolls paid by the passenger even though this is reimbursed by Uber.  Finally, this also includes the extra $.25 fee when sharing a ride with another person.  The 1099-K is the most important piece of information the accountant needs to start preparing your tax return.  A lot of drivers will look at their 1099-k and tell their accountant that they didn’t receive this much money.  Again, this is the gross amount which hasn’t taken into account fees and commissions.

The next piece of information that is of great importance is your Uber dashboard login information.  Once logged in, you can pull all of the commissions and fees that Uber has charged, throughout the year, to bring your gross income down closer to what you actually received as a driver.Let’s talk about the other expenses that you, as a driver, can deduct on your tax return.  You should have this information with

Let’s talk about the other expenses that you, as a driver, can deduct on your tax return.  You should have this information with as much backup documentation you can when you prepare your income tax return.  As a driver you are not an Uber employee, you are an independent contractor which means you can deduct more expenses than if you were an employee.  Below are some expenses (broken down by category that you can deduct.  This is obviously not a complete list so this is when you and your accountant can get creative.

Expenses to make your passengers comfortable:

  • Music apps for your passengers (Spotify, iTunes, and Pandora)
  • Floor Mats
  • Snacks for your passengers
  • Emergency tools and first aid kits
  • Technology such as hot spot services, mobile routers, dash cam etc.
  • Tourist baskets (which include water, Charlie cards, snacks, etc.)
  • Car Cell Phone Mount

Other deductions:

  • iPhone rental fee
  • Toll Transponder
  • Repair Kits
  • Jumper Cables
  • Battery Charger
  • AAA Membership
  • Auto Insurance add-ons & Liability insurance
  • Car inspection & Registration
  • Car Washes and DetailingAuto Repairs
  • Gas & OilGarage Rents – if you store your car in a garage where you need to pay a rental fee
  • Interest Payments

As an accountant the most common questions brought up are how the client is going to deduct mileage and their cell phone.  When it comes to mileage an Uber driver can only deduct mileage to get to a passenger.  If the driver gets a notification that a passenger is in one part of the city the mileage getting to that passenger is deductible.  Once the passenger is in the car, the mileage to the passenger’s destination is also deductible.

*Pro-Tip!* Mile-IQ, TripLog and Expensify are all apps to that will log the mileage you have driven.  Download one of these and use it to prepare your tax return.

As mentioned, cell phones are another hot topic for what is deductible and what isn’t.  Data used to run the Uber app, pick up passengers and used during and for Uber is deductible.  Data used not during working hours and not for work related calls is not deductible.

*Pro-Tip!* To make your life easier find a percentage of your day that you use your phone for Uber.  Multiply that percentage by your monthly bill.  Side note – if you rent an iPhone from Uber, that fee is deductible.

As an Uber driver, remember, you are a subcontractor.  This means your accountant will fill out a Schedule-C for you to report all income and expenses.  As a Schedule-C, you are a sole proprietor which means you’ll have to pay self-employment taxes on your income.  Self-employment taxes are Social Security, Medicare, and Federal Withholdings.  However, as a sole proprietor, you will also receive a deduction for half of the taxes on the front of your 1040.  You can deduct self-employed health insurance and contributions to your SEP-IRA.  You should discuss this further with your accountant upon starting your venture as an Uber Driver.

Dan Norcott, EA

Dan Norcott is an Enrolled Agent and specializes in small business and individual income tax return preparation.  Contact us if you need any additional information regarding the “sharing economy” or small business taxes or accounting.

Don’t let late payment happen to your business

As a small business owner, you’ve experienced getting paid late. You are not alone experiencing this key cash flow challenge.

40 percent of invoices are paid late on average of 48 days.

80 percent of small businesses experience the fear of their sustainability when invoices are paid late.

Getting paid late slows business growth, reduces productivity and increases stress. It can lead to problems making payroll, difficulty paying bills, and increased borrowing.

Especially small businesses gets hit harder

Small businesses are more likely to regularly get paid later than big companies and they have fewer cash reserves to cover the late income. You probably also have a harder time chasing debtors, because:

  • You’re not scary
    When your customers get a lot of bills at once, they will deal with the big guys first. Corporations have a reputation for enforcing penalties and referring unpaid invoices to debt collectors – so they tend to get paid before you.
  • You may not have an accounts department
    Small business often don’t have a dedicated resource for chasing debtors. As a result, you won’t always know who owes you, or how late they are. And you’re probably not contacting those clients to follow up on payment.
  • You don’t have time
    Chasing debtors takes time, and a lot of it. You have to check your books, find out what’s unpaid, and decide what to do about each outstanding invoice. Then you have to compose a well-thought-out email (or make a call) that treads the fine line between being polite and being firm. It’s a complete distraction from your core business.
  • You’re nice and there’s nothing you can do about that
    You might find it hard to press late-paying clients for personal reasons. Perhaps you worry about bringing financial tension into a working relationship. It can feel awkward and uncomfortable, even if you know you have every right to be paid.

Late payment isn’t a necessary evil. Businesses can and do get paid on time every day, and they achieve it through some very simple, practical steps that you can start taking tomorrow. Most are small tweaks to how you already do business.

1. Change and modernize your payment terms

Many businesses ask for bills to be paid within 30 days but that’s really just a tradition from the pay-by-check era. You may still have clients that pay that way, of course, but many will use instant payment platforms like electronic funds transfer or credit card. Set short payment terms and you’ll be surprised how many will settle their bill instantly.

Consider offering new customers invoice payment terms of 7 days (net 7). They may want to negotiate for more time – and you should try to be flexible – but starting off at 7 days will help set an expectation of prompt payment.

And remember that many debtors pay invoices at least two weeks after the due date. So if you actually need payment within 30 days, you should set your payment term to 14 days.

2. Encourage on-time payment with incentives.

If you’ve been clear about your invoice payment terms and a customer has missed the deadline, you can charge a late payment fee. You’ve probably seen invoices with language like this: “Late fees are assessed after the due date, at the rate of 1.5 percent per month.”

Not surprisingly, late fees aren’t very popular with clients so you could get some kickback. A more positive approach might be to offer a discount for prompt payment. It doesn’t need to be much. The lure of saving money is a powerful motivator, even if it’s just a few percent discount. You can present it like this:

Total due: $4,022

Save 5% if paid by 7 December: $3,821

  1. Detail and itemize your invoice

List the details of the goods or services in a way that makes sense to the client. If they have to contact you for clarification, you could miss the payment window and be forced to wait for the next “check run.”

Be sure to include:

  • a description of the work or product you sold
  • the date the work or product was delivered
  • the quantity of product or hours of service involved

And don’t forget to state:

  • your payment terms (how long the client has to pay you)
  • the invoice due date
  • any prompt payment discounts or late fees

Some clients will have very specific requirements for the details you include on the invoice. So ask up front. It’s important housekeeping that could make a big difference to your cash flow.

4. Don’t delay – invoice quickly

Your client can’t start to process your bill until they have it, so get your invoice into their system as soon as you can. It’s good for them to receive it while your work is still fresh in their mind. Your admin will be smoother, too. You can finish the work, send the invoice and close the job all at once. There’s less chance you’ll forget to send the bill.

Nowadays, you don’t have to wait until you’re back in the office to invoice. With the right business software, you can send invoices from your phone. Smart accounting software allows you to send invoices on the road, from your mobile.

5. It is ok to chase payments

This is the advice you didn’t want to read. In small business, you can’t assume invoicing is done once the bill is out the door. You’re going to have to follow up and make sure the debtor’s processing it.

But this is where you can get really smart. Smart business software will chase the debtors for you. In fact it will do everything, including:

  • sending your invoice electronically
  • reporting back when the invoice has been opened
  • telling you whether it’s been paid or not
  • alerting you when the due date is approaching, and sending a reminder to the client
  • warning you when payment has been missed, and sending follow-up emails to the client

You can decide how to escalate late invoices by presetting different messages to be sent out at each stage.

At a certain point, you’ll want to make a call. The smart systems will tell you when to do that, too, pulling up the client’s payment history so you can have an informed conversation.

Accounting software allows you to send pre-written invoice reminders whenever you like.

Xero invoicing

Affordable automation

At about $30/month, these sorts of systems only need to save you about 15 minutes a week to pay for themselves. In reality, they’ll probably save you hours. Plus they’ll help you get revenue in the door, which could completely change your cash flow outlook.

As a bonus, invoicing software is often also accounting software. So for no extra charge, you get a bunch of other tools for tracking money in, money out, and helping handle your taxes.

Prompt payment is in your control

It’s no fun chasing debtors and it’s probably not what you’re good at. Yet it’s part of life for most small business. Unfortunately, you can’t – and shouldn’t – rely on your clients for prompt payment.

However, you can take control of the situation with just a few changes to how you invoice. These steps will improve cash flow and, if you automate them, your late payment headaches will diminish. You’ll spend less time chasing money and more time making it. The choice will be yours.

Most Important Day to Remember in May!

jumpstartHere is a list of all of the holidays in May, including one very important day!

(Yes these are all real…surprisingly)
May 1st: Loyalty Day
May 2nd: Scurvy Awareness Day
May 3rd: Hug Your Cat Day
May 4th: Star Wars Day
May 5th: Cinco De Mayo
May 6th: National Nurses Day
May 9th: National Lost Sock Memorial Day
May 10th: Clean up Your Room Day
May 10th: Mother’s Day
May 11th: National Twilight Zone Day
May 13th: Frog Jumping Day
May 14th: National Dance like a Chicken Day
May 17th: National Pack Rat Day
May 22nd: National Buy a Musical Instrument Day
May 23rd: Lucky Penny Day
May 25th: Memorial Day
May 26th: Sally Ride Day
May 29th: End of Middle Ages Day
May 30th: My Bucket’s Got a hole in it Day

May 19th: National Accounting Day!

Yes! That’s right! It’s a day to show how much you appreciate (and love) your accountant!

Really make your accountant feel good about themselves that day (most of us are hideous trolls that live under bridges)!

After a long tax season and a long year of audits work papers, monthly accounting and bookkeeping, payroll, corporate taxes, board meetings, budgeting, financial statement compiling, software implementation, etc. a little appreciation goes a long way!

Not only will we be patting ourselves on the back on May 19th but we encourage you to pat US on the back as well! We also accept: phone calls to say thanks, cake, puppies, kittens, funny hats, hugs, and the occasional compliments on our looks (we don’t get to see the sun too often)

Happy Accounting Day everyone!

–Dan

Don’t Fall for an IRS Scam

donotirsThe IRS issued another warning recently that they do not initiate phone calls with taxpayers to collect tax information or payment.

I have always told my clients to call me if they are contacted by the IRS before giving them any information or making a payment.

As good as that information is I’m sure that people panic when they get a call from the “IRS”.

I read an editorial in our local newspaper over the weekend written by a certified financial planner that they attempted to scam. I was surprised as to how sophisticated they are.

Basically he received a phone call from an individual that claimed to be an IRS agent. Caller ID on his phone had a 202 area code and identified the caller as “IRS”. The caller gave him her name and IRS identification number. She then told him that he was delinquent on his tax return and numerous attempts to collect the funds were unsuccessful. She indicated that all his accounts were frozen and that a sheriff would subpoena him that evening and he would be arrested. He could then post bail. She asked the name of the attorney that would be representing him.

He attempted to contact his attorney and accountant, neither of whom was available since it was a weekend. The number he called back answered as if they were an IRS office. He then called the police department who reassured him that it was a scam; the officer indicated that it had also happened to his father. He then listed the steps they would take to get money from the individual.

I’m sure it’s difficult to maintain composure when you are threatened but remember, the IRS does not initiate conversations with taxpayers via phone calls or e-mail.

If you’re not sure, just take down their name and phone number and
check with me, the IRS or the local police department.

QuickBooks Online – Billing Your Customers for Expenses

Many companies will incur expenses that they need to charge their customer for. In QuickBooks Online this is an easy task.

For example, an IT company has recently set up a new server at their client’s office. They purchased the server ahead of time and need to bill the customer for it.

When you enter vendor bills, make sure that you link the customer to the bill.

expenses1

If you notice above, the server that was purchased from Computers by Jenni was purchased for Dukes Basketball Camp and will be billed to them.

Now that you’ve spent the money, you need to bill Dukes for the server. When you bill Dukes, an option will pop up that will remind you to bill them for the server you purchased. You add it to the invoice, change the amount if you need to and you’ve billed your customer for the charges you’ve incurred on their behalf.

But, what if you forget? There’s an easy way to make sure that you don’t forget to bill your customer for expenses you spent on their behalf. Run the “unbilled charges” report.

Go to Reports/All Reports/Review Sales/Unbilled Charges.
There you’ll see everyone that you need to bill include Dukes Basketball Camp for the server you bought them.

expenses2
It’s that easy!

If you have any other questions regarding QuickBooks, QuickBooks Online, Xero or Sage50, send me an e-mail at dolores@f5accounting.com. If I think it’s something that will help other users, I’ll post the steps necessary.

The Affordable Care Act – What You Need to Do By October 1, 2013

There has been much discussion regarding the Affordable Care Act and a lot of misinformationUS Health Logo regarding employer requirements. Whether we agree with it or not, it is now the law and there are requirements and reporting that small businesses are required to do by October 1, 2013.

I have spent some time coming up with the following summary that explains your requirements if you are a small business or non-profit that employs less than 50 full-time equivalent employees (FTE’s) (11 in Massachusetts).

There are two classes of employers – those that employ over 50 FTE’s and those that employ fewer than 50 FTE’s. Those that employ over 50 FTE’s are not required to report until 2015.

This information is for those that employ up to 50 FTE’s. It is applicable to employers covered by the Fair Labor Standards Act which means that if you have at least one employee and at least $500,000 in annual dollar volume of business you are covered by the Act.

The law does not require small employers to provide coverage to their employees but it does require them to provide notice to all current employees by October 1, 2013 and to new employees after that date.

So, if you don’t have to provide coverage you your employees, what do you have to notify them of? Basically you have to advise them that they may be eligible for a premium tax credit if they purchase coverage through the Marketplace and you also have to advise them that if they do purchase through the Marketplace they may lose the employer contribution (if any) to any health benefits plan offered by you, the employer. If you offer health insurance to your employees, you must include a standard “Summary of Benefits and Coverage” form explaining your plan and what it costs.

The Department of Labor has provided employers with two sample notices they may use to comply with the rule – one for employers who do not offer and another for employers who offer a health plan.

I wrote a blog post a while ago discussing the Health Care Credit that employers with less than 25 FTE’s are entitled to. If you employ less than 25 FTE’s with an average salary of less than $50,000 and pay 50% or more of their health insurance you are entitled to a 35% tax credit on your tax return. In 2014 this credit will go up to 50% if you participate in the Small Business Health Options Program (SHOP).

Beginning 2014 all taxpayers must be covered by health insurance or face fines. Most states (including Massachusetts, Rhode Island and Connecticut) have already created health insurance agencies through which taxpayers (including self-employed individuals) can purchase affordable health insurance. There are exemptions from the requirements to obtain minimum essential coverage.

What are the exemptions to purchasing health insurance?

1. Religious conscience. You are a member of a religious sect that is recognized as conscientiously opposed to accepting any insurance benefits.

2. Health care sharing ministry. You are a member of a recognized health care sharing ministry.

3. Indian tribes. You are a member of a federally recognized Indian tribe.

4. No filing requirement. Your income is below the minimum threshold for filing a tax return. The requirement to file a federal tax return depends on your filing status, age and types and amounts of income

5. Short coverage gap. You went without coverage for less than three consecutive months during the year.

6. Hardship. The Health Insurance Marketplace, also known as the Affordable Insurance Exchange, has certified that you have suffered a hardship that makes you unable to obtain coverage.

7. Unaffordable coverage options. You can’t afford coverage because the minimum amount you must pay for the premiums is more than eight percent of your household income.

8. Incarceration. You are in a jail, prison, or similar penal institution or correctional facility after the disposition of charges against you.

9. Not lawfully present. You are not a U.S. citizen, a U.S. national or an alien lawfully present in the U.S.

If you have any questions regarding the law, please feel free to contact me. If you know another business owner that would benefit from this information, pass it along to them, send me their e-mail or have them sign up for my blog.

 

Why You Need Financial Statements

Balance Statement and Cash FlowWe’ve all heard that “cash is king” and it is when it comes to running your business. You need to make sure you have enough to pay your payroll and your suppliers. As I mentioned in a previous post, you need to manage your cash to remain a successful business.

But, just as important as cash in your business to operate, your periodic financial statements need to be reviewed and analyzed.

There are three statements business owners should focus on: the Balance Sheet, the Income Statement and the Statement of Cash Flows. Most small business owners will focus on the Income Statement but the Balance Sheet and Cash Flow hold a wealth of information also.

The Balance Sheet shows your financial position at a certain date. You can see “what you own” and “what you owe”. Investors and banks will focus on your balance sheet and calculate ratios such as your current ratio and quick ratio just as much as they focus on your Income Statement and so should you.

The Income Statement shows your revenue and expenses for a particular time frame – for example year to date, quarterly and a comparison to prior years.

Lastly, the Statement of Cash Flows will compare your cash at the beginning of the period and separate it into cash used for operations, investing and financing.

Financial Statement analysis is not as difficult as you think. Depending on your business there are a few ratios that will be the most valuable to you and those are the ones you should focus on first.

Many small businesses will not ask for financials from their accountant because they feel it is an unnecessary expense. But, with the real time nature of small business accounting products such as Sage 50, Xero and QuickBooks there is no reason not to have them. And we love to explain them!

Who Ever Thought Accounting Could Be Beautiful?

Other than accountants, that is.
We at F5 Accounting are on the leading edge of “beautiful accounting”!  We are proud to say that we have recently become one of the first firms locally to become Xero certified consultants.

What is Xero and why is it beautiful?
We are firm believers in cloud based technology.  In our experience we find that it is less expensive to maintain and gives you security that you cannot always get with desktop software.  Although you are paying a monthly fee to either host or use the software, you have eliminated the need to buy a server, possibly upgrades to the software and an IT person to install it.  It also allows for remote access to your financial information.  Additionally, you always have backups so you never lose your data.  Naturally, you have to pick your hosting company carefully to insure that this is the case.

Xero is different.
You are not paying a hosting company to host the software;  Xero is an on-line accounting software product.  Founded in New Zealand, Xero has recently entered the United States market and is growing leaps and bounds.  It’s been called the “Apple of Accounting” and is funded by heavy-weights such as Peter Thiel, co-founder of PayPal.

Xero has a beautifully designed user interface that appeals to entrepreneurs that are creative but not necessarily in the financial area.  It sports a clean dashboard of important small business numbers like cash balances, get-to-the-point reporting, and intelligent bank feeds that almost code themselves.

We like Xero because it allows for collaboration with your financial advisor – F5 Accounting.  We can monitor your financial information, you can leave us notes within the application and the software currently allows for unlimited users.  Also, your financial advisor can spend more time advising you on the numbers and less time on data entry.  This saves you money because we can work on a higher level – helping you grow your business.

As much as we think Xero is beautiful accounting, it is not for every type of business.  The Xero interface is especially appealing to entrepreneurs and business owners who aren’t accounting savy but know it’s important to have a handle on day to day operations in their business.  Here are just a few of the types of businesses that use it: graphics designers, ad agencies, startups of all kinds, personal care business owners, technology businesses and many more B2B and B2C businesses.

Top Five Tips for Safeguarding Your Business Records

  1. Scan, scan, scan. Businesses have so much paper.  Scanning
    andComputer Lock digitally archiving files achieves two purposes:  cuts down on storage space and makes it easy to locate.
  2. Have a back-up plan.  Whether you scan or keep your data on your computer, make a backup and make sure that backup is in two places.  Also, cloud backups are inexpensive so consider that option.
  3. Shred but pay attention to the statute of limitations. Don’t just shred tax return documentation to eliminate paper.  Make sure you understand how long you need to keep your records before you shred them.  For most tax returns the statute is three years after the due date of the return, or three years after the return was actually filed, whichever is later.  The difference is forms 941 which specifically set the statute at three years from April 15 of the year following the year for which the return was due or 3 years after the date the return was actually filed, whichever is later.
  4. Create a system and schedule it. Figure out which of your records should be saved ahead of time.  Then create a system and a schedule for shredding, filing and scanning, and train your employees how to follow it and stick to it.  Although it’s important to follow that system, review it on a regular basis to make sure it still makes sense.  Technology changes as do your employees so be flexible.
  5. Protect those passwords. Use a password management program such as lastpass or clipperz.  Don’t store your passwords on a piece of paper under your keyboard or on a sticky note attached to your monitor.  And set up passwords in your accounting system even if you’re the only user.  You have confidential data in your accounting system and you really need to protect it.  Also, don’t forget to encrypt those files that you scanned in #1.

BONUS #6

Use the cloud. Many people tell me they don’t want to use the cloud for their finances because it’s not secure.  The reality is that we use it every day.  We use it to access our banking information, pay our payroll or sales taxes on-line and report payroll to the payroll service.  The list is endless.  What is less secure is the confidential data we keep on our servers or in our desk.  Plus, there’s the added bonus that your accounting software is always backed up (see #2).

Using products such as bill.com, Xero, QuckbooksOnline, etc., will keep the detail information connected at the transaction level.  And for an additional peace of mind you can always backup your cloud service annually to your own backup system.

Naturally you need to check out hosting or cloud services but the benefits are many.  Those services have to maintain a certain level of security.  Most will also have redundant backups in different parts of the country.

Taxes and the Defense of Marriage Act

Seal_of_the_United_States_Supreme_CourtLast week, in a 5 to 4 decision, the Supreme Court found that Section 3 of the Defense of Marriage Act (DOMA) violates the equal protection clause of the Fifth Amendment of the US Constitution.  The ruling applies to people of the same sex legally married under the laws of their state.

If you didn’t already know, this decision was a tax decision.  It was not a decision stating that same sex couples had a Constitutional right to marriage that would override the state law.

The case that was brought to the Supreme Court U.S. v. Windsor.  This was a same sex couple married in Canada in 2007.  They registered as domestic partners in New York City where they made their home.  In 2009, one spouse died and because of DOMA the survivor did not qualify for the unlimited marital deduction under the Internal Revenue Code.  The executor (the survivor and sole beneficiary) of the estate paid $363,000 in federal taxes that was not due.  This case went through many lower courts until it finally made it to the Supreme Court where it was found that it violated the Constitution.

The ruling opens up many tax advantages and disadvantages.
As in the Windsor case, married couples (if they live in a state that recognizes same sex marriage) will now qualify for the unlimited marital deduction.  But, on the other hand, they will also be subject to the marriage penalty and will not be entitled to other advantages they may have had when filing single.

One of the biggest impacts of the ruling though is in the area of employee benefits.
Because of DOMA, an employer that allowed an employee to add their same sex spouse to the employer’s health plan had to impute the income effect of the benefit and add it to the employee’s taxable wages.  This is no longer the case and may result in refunds of not just income tax but also payroll taxes.

The decision opens up the door to many tax issues that need to be resolved.
The President has asked Federal agencies, including the IRS, to act quickly to revise their regulations.  In the meantime, if you live in a state such as Massachusetts that allows same sex marriage, you may want to amend your tax return to get the benefits you’re entitled to.  As for other states, such as Rhode Island where same sex marriage will be legal this year, we are watching for regulations.