LLC Filing as a Corporation or Partnership

An LLC is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return (a disregarded entity”). LLCs can file Form 8832, Entity Classification Election to elect their business entity classification.

A domestic LLC with at least two members is classified by default as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation

And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

If the LLC is a partnership, normal partnership tax rules will apply to the LLC and it should file a Form 1065, U.S. Return of Partnership Income. Each owner should show their pro-rata share of partnership income, credits and deductions on Schedule K-1 (1065), Partner’s Share of Income, Deductions, Credits, etc. Generally, members of LLCs filing Partnership Returns pay self-employment tax on their share of partnership earnings.

If the LLC is a corporation, normal corporate tax rules will apply to the LLC and it should file a Form 1120, U.S. Corporation Income Tax Return. The 1120 is the C corporation income tax return, and there are no flow-through items to a 1040 from a C corporation return. However, if a qualifying LLC elected to be an S Corporation, it should file a Form 1120S, U.S. Corporation Income Tax Return for an S Corporation and S corporation laws apply to the LLC. Each owner reports their pro-rata share of corporate income, credits and deductions on Schedule K-1 (Form 1120S).

Accounting Methods

Is cash or accrual accounting better for your business?

Bookkeeping methods: Accrual vs. Cash Accounting
The cash method and the accrual method (sometimes called cash basis and accrual basis) are the two principal methods of keeping track of a business's income and expenses. In most cases, you can choose which method to use.

These methods differ only in the timing of when transactions, including sales and purchases, are credited or debited to your accounts. 

Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid. The cash method is the more commonly used method of accounting in small business.

Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction.

The accrual method applies the matching principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense.

Accrual vs. Cash accounting

Determining the Transaction Date

With the accrual method, sometimes it's not easy to know when the sale or purchase has occurred. The key date is the job completion date.

Income recognition. You do not record the income in your books until you finish a service, or deliver all the goods a contract calls for.

Expense recognition . Likewise, you don't record an item as an expense until the service is completed or all goods have been received and installed, if necessary. (If a job is mostly completed but will take another 30 days to add the finishing touches, technically it doesn't go on your books until the 30 days pass.).

There are potential timing differences (accrual or deferral) in recognizing revenues and expenses under accrual basis.The four types of timing differences

  • Accrued Revenue: Revenue is recognized before cash is received.
  • Accrued Expense: Expense is recognized before cash is paid.
  • Deferred Revenue: Revenue is recognized after cash is received.
  • Deferred Expense: Expense is recognized after cash is paid.
Accrued vs deferred revenue/expense

Choosing an Accounting Method

Most small businesses (with sales of less than $5 million per year) are free to adopt either accounting method.

You must use the accrual method if:

  • Your business has sales of more than $5 million per year, or
  • Your business stocks an inventory of items that you will sell to the public and your gross receipts are over $1 million per year. Inventory includes any merchandise you sell, as well as supplies that will physically become part of an item intended for sale.

Advantages and disadvantages of the accrual method. While the accrual method shows the ebb and flow of business income and debts more accurately, it may leave you in the dark as to what cash reserves are available, which could result in a serious cash flow problem. For instance, your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven't paid you yet.

Advantages and disadvantages of the cash method. And though the cash method provides a more accurate picture of how much actual cash your business has, it may offer a misleading picture of longer-term profitability. Under the cash method, for instance, your books may show one month to be spectacularly profitable, when actually sales have been slow and, by coincidence, a lot of credit customers paid their bills in that month.

Tax Implication

The most significant way your business is affected by the accounting method you choose involves the tax year in which income and particular expense items will be counted.

For instance, if you incur expenses in the one tax year but don't pay them until the following tax year, you won't be able to claim deductions for them in the year you incur the expenses if you use the cash method. But you would be able to claim them that year if you use the accrual method, because under that system you record transactions when they occur, not when money actually changes hands.

Once you have set up your accounting method, you must generally get IRS approval before you can change to another method.

Guide on Cloud Computing

August 9, 2012

With the rise of cloud computing and constant availability of mobile devices, there’s been a big shift in the way tech-savvy practices compile, analyze and deliver financial data for clients. Most accounting practitioners have known that there are significant advantages to automating their business processes and adopting digital technology. But just now the accounting firms have a roadmap to guide them through the process of using cloud computing.

In a book “10 Steps to a Digital Practice in the Cloud: New Levels of CPA Firm Workflow Efficiency” published by the American Institute of CPAs, the authors describe the 10 steps for getting a digital practice up and running:

  • Get the right technology infrastructure to leverage the cloud.
  • Provision enough Internet bandwidth, both wired and wireless, to operate effectively.
  • Select the right mix of desktops, laptops, mobile devices and software to function in a productive, effective way.
  • Install the right scanning systems to aid the shift to a paperless office. 
  • Deploy a document management system to maximize efficiency with digital records.
  • Use trial balance working paper software, if the firm performs many of these engagements.
  • Transform the firm’s Web site into a full-fledged client portal.
  • Maximize productivity with workflow software.
  • Offer clients cloud-based accounting systems.
  • Have the right plan and tools in place to ensure data security and speedy disaster recovery.

This brand-new resource will help firms leverage technology through automating data processing in order to work as efficiently and profitably as possible, and focus all efforts on services that will increase the value brought clients.  Leveraging technology and moving to the cloud will improve the quality, efficiency, and profitability of the services.

Accounting System 

Accounting rests on a set of concepts for identifying, recording, classifying, reporting, and interpreting transactions and other business events relating to enterprises. While a transaction involves a transfer or exchange between two or more entities, an event generally is the source or cause of changes in assets, liabilities, and equity. 

The process of recording, classifying, and summarizing financial transactions into a usable form that provides financial information about a business or an individual is known as bookkeeping

Accounting System is organized set of manual and computerized accounting methods, procedures, standards, and controls established in order to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for management decisions. Regulatory requirements may exist on how a particular accounting system is to be maintained.

Accounting systems also include industry-specific applications. A retail accounting system, for example, has different requirements than in other industries. Legal accounting system has other specific requirements as well, including the tracking of time spent by attorneys, dollar amount of time billed out based on an hourly rate and the utilization rate of each attorney. 

Not-for-profit accounting has its own specific set of reporting requirements. For example, funds must be tracked so that donations designated for specific purposes are properly spent. The system should also be able to produce donation statements that report on amounts contributed by individual donors.

While implementation of accounting system was previously a paper-based process, in this age of computers most businesses use computers and accounting software. This computerized accounting system is also referred to as accounting information system (AIS). It is a computer-based system that collects and process transaction data and then disseminates the financial information to interested parties. The accounting information system combines traditional accounting practices with modern information technology resources. Information technology infrastructure (hardware) and computer program (software) are employed to operate the accounting system and process data.

Delaware Serves as a Corporate Tax Haven

July 1, 2012

1209 North Orange Street is the legal address of no fewer than 285,000 separate businesses. Its occupants, on paper, include giants like American Airlines, Apple, Bank of America, Berkshire Hathaway, Coca-Cola, Ford, General Electric, Google, JPMorgan Chase, and Wal-Mart. These companies do business across the nation and around the world. Here at 1209 North Orange, they simply have a drop-box.

Delaware: Corporate Tax Haven

Big corporations, small-time businesses, rogues, scoundrels and worse have turned up at Delaware addresses in hopes of minimizing taxes, skirting regulations, plying friendly courts or, when needed, covering their tracks. Federal authorities worry that, in addition to the legitimate businesses flocking here, drug traffickers, embezzlers and money launderers are increasingly heading to Delaware, too. It’s easy to set up shell companies here and use the banking system, no questions asked.

In these troubled economic times, when many states are desperate for tax dollars, Delaware stands out in sharp relief. Officials in other states complain that Delaware’s cozy corporate setup robs their states of billions of tax dollars. Officials in the Cayman Islands, a favorite Caribbean haunt of secretive hedge funds, say Delaware is today playing faster and looser than the offshore jurisdictions that raise hackles in Washington. And international bodies, most recently the World Bank, are increasingly pointing fingers at the state.

Business has been the business of Delaware since 1792, when the state established its Court of Chancery to handle business affairs. By the early 20th century, the state was writing friendly corporate and tax laws to lure companies from New York, New Jersey and elsewhere. Most of the businesses incorporated here are legitimate and many are using all legal means to reduce their tax bills.

Nearly half of all public corporations in the United States are incorporated in Delaware. Last year, 133,297 businesses set up here. And, at last count, Delaware had more corporate entities, public and private, than people.

Delaware is a great place to reduce a tax bill. Delaware today regularly tops lists of domestic and foreign tax havens because it allows companies to lower their taxes in another state — for instance, the state in which they actually do business or have their headquarters — by shifting royalties and similar revenues to holding companies in Delaware, where they are not taxed. In tax circles, the arrangement is known as “the Delaware loophole.” Over the last decade, the Delaware loophole has enabled corporations to reduce the taxes paid to other states by an estimated $9.5 billion.

It doesn’t take a lot to incorporate a company in Delaware, tax experts say. Shell companies, those with no employees, no assets and, in fact, no real business to speak of, are remarkably easy to establish here, and it doesn’t always matter who you are or what business you are in.

It provides the anonymity that most offshore jurisdictions do not offer. That is exactly what troubles law enforcement agencies and some in Congress who are trying to rein in Delaware. The state is seen as an onshore alternative with regulations more lax than such well-known offshore tax havens as the Isle of Man, Jersey and the Caymans, which require greater disclosure. Even more, a Delaware registration allows a business, legitimate or not, to open a bank account anywhere in the world with the patina of an American address.

Delaware serves as a domestic tax haven, much like the Cayman Islands serves as an offshore foreign tax haven, and offers a similar level of tax avoidance. American corporations find the Caymans alluring for many reasons. There, they can operate in relative secrecy, attract more foreign customers, avoid regulation and enjoy a low tax rate. In one respect, however, Delaware is even better than the Caymans. At some point, American companies have to bring back their foreign profits from the Caymans and pay federal taxes.  But in Delaware, the state tax savings through the Delaware loophole are permanent.

QuickBooks POS is Integrated with GoPayment

June 8, 2012

Intuit has integrated its mobile payment processing application GoPayment with the latest version (2003) of QuickBooks Point of Sale (QuickBooks POS) software. The two solutions will now be able to communicate with each other, syncing both inventory and financial data from PC to mobile or vice versa.

QuickBooks POS software is designed for small retailers as tracking and management tools they need to effectively run their business. Retailers can track inventory and set automatic re-order points, manage customer's contact information and send personalized emails and gift cards, access business reports to get unique insight into how the business is doing, track employees' hours and pay commissions, and manage and monitor business results for up to 20 stores from one location

Intuit GoPayment
Intuit GoPayment launched back in summer 2009, and now competes with Square and many other light POS solutions.

A free GoPayment app comes with a card reader which plugs into the audio jack of an iPhone, iPad and iPod Touch as well as popular Android devices. Users can then swipe a card to process a payment, send an email or text receipt with a map of where the transaction took place, and automatically charge the correct sales tax using geolocation.

Sales and inventory data from GoPayment integrates with QuickBooks Point of Sale, storing all current sales and inventory data in one location. Users can also automatically populate inventory items within QuickBooks Point of Sale into the GoPayment app, eliminating the need to do it manually.

By integrating QuickBooks Point of Sale with GoPayment, Intuit is trying to liberate retailers from their cash registers so they can better serve their customers and ring up more sales both in the store and on the go.

Mobile Credit Card Processing in Your Pocket

March 21, 2012

Mobile Credit Card Processing in Your Pocket

Accepting credit cards payments is notoriously complicated and expensive. You needed to set up a merchant account with a bank, you had to buy or lease a card reader, and you had to pay a setup fee, subscription fees, fees on every sale you made, and lots of hidden fees. It’s no longer the case when it comes to accepting a credit card payment directly on your mobile devices; you have more options these days. A swarm of Credit card processing apps for smartphones and tablets has rendered the process easier and cheaper. 

The options are Square , Intuit  GoPayment , PayAnywhere, and PayPal Here. While Square, GoPayment, and PayAnywhere have been recognized and established for some times, the PayPal Here is just emerged last week. PayPal Here comes from a well-enough known name that it could be a serious competitor for the two current mobile credit card readers.

These newer services can provide any small business a simple, economical way to accept payments via credit card. They will send you a small credit card reader or scanner when you sign up for a new account. You simply plug the card reader, which can fit in your pocket or bag, into your smartphone or tablet and launch the accompanying free app, and you’re ready to accept credit card payments for your goods or services. 

Each service offers free apps for iOS (iPhone, iPod Touch, and iPad) as well as for Android. Intuit’s GoPayment also supports some BlackBerry phones. Since the scanner plug into the headphone port, they are compatible with almost any phone that can run the app. 

All of the apps require an Internet connection to work. You have no option to take information and run it at a later time. Make sure that you always have a stable and secure Internet connection, especially if you take payments in the field or at events.

These mobile payment processing services offer pay-as-you-go plans, in which you pay only a fixed percentage fee per transaction with no separate transaction fee or monthly fee.

All apps transfer money automatically into your registered bank account.