Putting Profit First While Planning for Expenses

In July, Michael Michalowicz, who writes books about entrepreneurship (which I have heard are very good; “The Pumpkin Plan” is fall-163496_1280on my to-read list) wrote a blog post titled “Take Your Profit First, Always.”

The gist of the post is, instead of looking at profitability as “Income minus Expenses = Profit” you should flip the formula. “Income minus Profit = Expenses.”

Pay yourself first, then spend money on expenses. As the author says:

In practice, as deposits from sales come in a predetermined percentage, for example 15%, is immediately transferred to a separate profit account. The remainder is available for the business leader to run business as usual. The business owner will see his available cash (which has had the profit already deducted) and make decisions accordingly. The new equipment purchase may be delayed, or a more cost effective alternative may be found. A new hire won’t be made because the money is not there, and perhaps the entrepreneur will conclude was unnecessary in the first place.

As Mr. Michalowicz correctly points out, most of us who own businesses make decisions based on how much cash is in the bank today. By flipping the profitability formula, it forces the business owner to pay themselves first (or at the very least, to leave a reserve in the bank).

Caveats

This is a great way to look at things. In fact, when I shared this article on Twitter, I stated that it was brilliant advice. But there are some cautions.

ONE: New businesses typically have legitimate expenses that are true business needs. You might have to accept a lower profit margin at first in order to get your business going. Note the key phrase is “true business needs.”

TWO: The real point of all this is: business owners need to put thought into major expenses. This means looking at the numbers and determining if you can really afford to hire an employee, or buy equipment, or upgrade software. Maybe it’s worth it to spend the money. Maybe it can wait. And maybe it’s not worth it at all.

Image courtesy of PublicDomainPictures on Pixabay

When Does the “1099s to Veterinarians” Rule Start?

My blog post in January about issuing 1099s to incorporated veterinarians has become one of the most popular posts I’ve ever www.irs.gov pub irs-pdf f1099msc-page-001written. It’s generated phone calls, e-mails and questions. The most-common question is: when do we need to start issuing 1099s to incorporated veterinarians? When does this rule start?

The answer is: there’s not a “start date” to this rule. The IRS’s guidance was in a letter ruling that simply said “yes, 1099s should be issued to incorporated veterinarians.”

In other words, the IRS says it’s how things have always been.

Which brings up a question of: what about prior years? I suppose the IRS would say the technical answer is to file the 1099s late. That seems like crazy talk to me. I would lean towards starting to issue the 1099s from the time of the IRS ruling (December 2013) and forward.

What Responsibilities Do Tax Preparers Have in Assessing ACA Penalties?

Robert Flach at his “The Tax Professional” blog asks the following question regarding Affordable Care Act penalties assessed on tax clause-370928_1280returns against people who do not carry health insurance:

What is our legal responsibility as tax preparers when it comes to calculating the new convoluted and potentially expensive Obamacare penalty for clients who are not covered by health insurance?

Or perhaps a more inclusive question –

Are we as tax preparers legally required to assess a client an IRS penalty “up front” when preparing a tax return?

It appears from Robert’s statements elsewhere that he’s “not gonna” when it comes to calculating the penalty on tax returns he prepares. Robert also says he doubts the penalty will apply to any of his clients anyway. I’m in the same situation. I estimate that I might have literally 1 or 2 clients who this will apply to (and it may be 0).

I agree the ACA penalties are convoluted and potentially expensive. But I disagree with a preparer saying they’re “not gonna.”

Just because we think a law is stupid doesn’t mean we don’t deal with it. I think a lot of the things the government makes me do are stupid … but I do them because I don’t want to lose my license!

This reminds me of an ex-client who was operating a business in multiple states. I discovered that he had never filed tax returns in those states nor collected sales tax like he was supposed to. When I told him about this, he launched into a profanity laced tirade toward me about how much he hates the government and how unfriendly the government is to small businesses.

His exact words to me, regarding collecting sales tax, were: “F@ck it. I’m not doing it. I’m not gonna serve as a f@cking collection agency for the G@ddamned government.”

I parted company with that business after that exchange. I understand the anti-government sentiment. I really do. But you can’t just ignore the law.

If “I’m not gonna” was a concerted effort of AICPA or NAEA telling the IRS “Our members aren’t going to calculate this penalty,” then there might be some traction. If either organization were to say this, I would support it and would jump on the “I’m not gonna” bandwagon.

But the lone preparer saying “I’m not gonna” isn’t going to change the world, they’re just going to make problems for themselves and for their clients.

So are we as preparers required to calculate the penalty on people’s tax returns? Probably.

Robert mentions that he never calculates the underpayment penalty on client tax returns. But that’s okay because the instructions to the Form 1040 specifically state, regarding the underpayment penalty:

Because Form 2210 is complicated, you can leave Line 77 blank and the IRS will figure the penalty and send you a bill.

Perhaps the IRS will have similar instructions for the ACA penalties. If not … I think we’ll need to calculate the penalty on tax returns we prepare.

Image courtesy of Geralt on Pixabay.com

From the Archives: Taxpayer Identity Theft — Part 18

It’s a holiday week, so I’m re-posting popular blog posts from the past.

This post never gets old, because it’s a story that needs told to as many people as possible — the saga of Wendy Boka and her identity theft nightmare with the IRS.

Below is Part 18 of the series. It’s the most-popular entry in the series, and also the happiest because it tells about finally getting the case resolved.

Remember, you can find all parts of Wendy’s saga in one convenient location on this website.

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Originally published August 2, 2013

It’s over! It’s finally over!

On Thursday, August 1, Wendy received a check in the mail from the IRS for her 2010 income tax refund. We didn’t start celebrating until after she took the check to the bank on Friday and it got deposited with no problems.

The bank did accept the check and we can now call this unfortunate case “closed.”

850 days.

Two years, 3 months, 28 days.

That’s how long it took the IRS to process Brian and Wendy’s 2010 tax return.

I tried submitting the e-file on April 11, 2011. It rejected because someone had already filed a return using Brian’s Social Security Number. This set off a series of ridiculous misadventures with the IRS that has finally ended now. I won’t itemize all of the extreme IRS incompetence in this blog post, because  the sordid details can be found in the other 17 parts of this series.

I celebrated with a measure of some fine Templeton Rye.

At least it’s over.

I’ll probably do a few more wrap-up blog posts on this topic. And Wendy and I will both be sending letters to our Congressmen.

In the meantime, it’s time to celebrate!

From the Archives: Issuing 1099s to an Incorporated Veterinarian

It’s a holiday week, so I’m recycling popular blog posts from the past.

This post, from January of this year, has quickly become one of the most-read stories on this blog:

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Originally published January 20, 2014

It’s 1099 season! Typically a 1099 must be issued by a business that pays $600 or more to a person who provides contract labor or services to the business during the year.

An exception applies to payments made to corporations. Generally, payments to corporations do not require the issuance of a 1099. There are two exceptions to the “no 1099 to a corporation” rule:

  1. Payments made to law firms. Law firms must receive a 1099 for payments made for legal services in excess of $600.
  2. Payments made for medical services.

How about payments made to veterinarians? Do veterinarian services fall under the definition of “medical services?”

According to the IRS, the answer is … yes. Per Letter Ruling 201349013:

Generally, yes. Payments made by a taxpayer in the course of the taxpayer’s trade or business to an incorporated veterinarian must be reported to the IRS to the extent the payments aggregate to $600 or more per year. Incorporated veterinarians are not exempted from the reporting requirement by Treas. Reg. Sec. 1.6041-3(p)(1) because veterinarians are “engaged in providing medical and healthcare services” for the purposes of Treas. Reg. Sec. 1.6041-3(p)(1).

To be clear: this only applies to BUSINESSES (and not-for-profits) that make payments to veterinarians in the course of conducting business (so farmers, ranchers, pet stores, zoos, etc.). Private citizens who take the family pet to the vet don’t need to issue a 1099 to the vet.

It may seem strange to think that veterinarians would fall under the definition of “medical and healthcare services,” but the IRS says it’s consistent with prior rulings in which the phrase “medical and healthcare services” is not necessarily limited to services performed on humans:

Congress and the IRS have historically included veterinarians in the field of medical and healthcare services, and specifically excluded veterinarians when exclusion was intended. For example, in Rev. Rul. 91-30 the IRS determined that veterinarians are in the “field of health” and should be included within the meaning of “similar healthcare providers” akin to doctors, nurses, and dentists, for purposes of defining a Personal Service Corporation. As an example where Congress intended to exclude veterinarians from a consideration of what is considered “medical, Congress specifically limited the definition of “medical device” in IRC Sec. 4191(b)(1) to devices “intended for humans.” Under Treas. Reg. Sec. 1.6041-3(p)(1) the language does not limit the terms “medical” or “healthcare” to services intended to treat humans. Accordingly, we conclude that a corporation providing veterinary services is “engaged in providing medical and healthcare services,” for purposes of Treas. Reg. Sec. 1.6041-3(p)(1), and is therefore not excepted from the information reporting requirement of IRC Sec. 6041 as a corporate payee.