Tax Season Recap 2015: What a Strange Season, Part 2 (Trends I Noticed)

mind-544404_1280
Image courtesy of user johnhain on Pixabay.com

In Part 1 I laid out how tax season went for me in general. Having a salivary gland removed from my mouth was the highlight – if you can call it that – of my season. Here in part 2, I’ll talk about the trends I noticed.

In no particular order:

  • Couples in same-sex marriages got bit by changes to their withholding in 2014 — the first full calendar year after the DOMA ruling. I’m going to write an entire blog post on this topic at some point. Some of my clients in same-sex marriages owed THOUSANDS of dollars on their 2014 returns, after getting thousands of dollars of refunds in prior years, all because their paycheck withholding changed from using the “single” rates to using the “married” rates for withholding.
  • In general, refunds seemed smaller for most people. I haven’t had a chance to fully analyze this to see if it is reality or just my perception.
  • I set up more payment plans (Form 9465 installment agreements) for clients than ever before.
  • I have more tax returns than ever on extension, so “tax season” isn’t really over.
  • The ACA wasn’t really that big of a deal. I keep reading all these horror stories online about accountants saying this was the “worst season ever” because of the ACA. Yes, it meant asking more questions and possibly filling out more forms, but I don’t get what was so horrific about it from a tax-preparation standpoint.
  • It’s become nearly impossible to find times to meet with people. Their schedules — and mine — are busier than ever. Thankfully, many people welcomed my new and improved secure website for file exchange, which helps negate the need for face-to-face meetings.
  • On the other hand, some clients violently rejected my suggestion that they use technology to work with me. “Violently” is only a slight exaggeration. Some people got downright nasty about the suggestion that they use the secure website. Those doing the rejecting were not always older people – plenty of young people who seem tech-savvy were nasty about the idea too.
  • Client turnover was higher for me this year. I gained a lot of new clients but also lost a lot of price-sensitive clients. This isn’t a bad thing, necessarily, but just something I noticed.
  • The IRS e-file system was pleasantly fast this year. E-file confirmations would come back in a matter of a few hours.
  • Strangely (but refreshingly) — I had 0 identity theft cases this season.

Breakeven Analysis for Small Businesses, Part 1

school-433560_1280This is an excerpt from a presentation I give to entrepreneurs about breakeven analysis and managing cash flow.

—–

What is breakeven analysis? Here’s how I define it:

Break-even analysis is determining the point at which you are selling enough of your product or service to cover your production costs and overhead.

In other words, the point at which you’ll be selling enough to stay in business!

Much of this discussion will focus on businesses that sell products, but I’ll address service providers and not-for-profits later on.

Know Your Costs

You need to know your costs before you can do a break-even analysis. For this analysis, there are two types of costs:

  • Variable costs: costs that “vary” depending on the level of production (for a business that “makes something”). Examples: materials and supplies.
  • Fixed costs: costs that do not vary depending on the level of production. Examples: rent, salaries.  Often called “overhead.” Note that salaries and wages are usually a fixed cost unless you tie wages to production (as in a commission).

What about utilities? For your typical small business, utilities will usually be a fixed cost. If you have some means of effectively monitoring the electricity used by machines in production, then it could be a variable cost.

The Basic Break-Even Formula

The formula is a two-step process:

ONE: Calculate your contribution margin. Contribution margin is the amount of money each unit of sales will “contribute” to covering fixed costs.

The calculation is:

Sales Price – Variable Costs = Contribution Margin

TWO: Determine the breakeven point with the following calculation:

Fixed Costs / Contribution Margin = Number of units of sales needed to break even

Example:

Company X sells widgets for $15 each. It costs them $10 to make each widget.

Their fixed costs are $50,000.

Step 1: Calculate contribution margin

$15 sale price per unit – $10 variable costs per unit = $5 contribution margin per unit

Step 2: Calculate breakeven

$50,000 fixed costs / $5 contribution margin = 10,000 units.

Company X needs to sell 10,000 widgets at $15/each in order to breakeven. They’ll start turning a profit at 10,001 units of sales.

At this point, the typical small business owner has many questions, in particular about how to determine costs, sales price and units of sales. Hang in there, we’ll get to those things.

Image courtesy of Sandid on Pixabay.com

Tax Season Recap 2015: What a Strange Season, Part 1

Me, looking totally thrilled the day after having a salivary gland removed from my mouth. Notice the stylish gauze wrap around my neck.
Me, looking totally thrilled the day after having a salivary gland removed from my mouth in late March. Notice the stylish gauze wrap around my neck.

Another April 15th has come and gone. What a year.

If it wasn’t for health problems that required surgery in the middle of the season, I would actually say that this was a pretty good season.

I was more efficient than ever this season. I got work done faster than ever — even with having to have surgery on March 23rd … to remove a salivary gland.

Yep, that’s something you don’t hear about very often.

I’ve had on and off infections for years in a gland along my left jaw. In late November, a lump developed there. A CT scan showed a stone had developed in the gland. Like a kidney stone, but in a salivary gland.

After a few months of watching and waiting, the gland started acting up. Like, flaring to the size of an orange when I would eat.

So the decision was made to take the gland out, and I wanted it DONE, even if it was in the heat of tax season. It’s good I had it done, because the surgeon — who was expecting to find a slightly swollen gland — instead found a gland swollen to 5-times the normal size.

I suppose that’s “too much information” territory, but that was my tax season.

Other than the surgery, my season went smoothly. There were the usual issues here and there with getting info from clients, and a few clients were surly or price-sensitive. But it wasn’t too bad overall.

That was my tax season. It’s not really over, because I have more returns than ever on extension.

In Part 2 on Tuesday Thursday, I’ll talk about trends I noticed.

Basic Overview of Iowa Sales Tax for New Business Owners

dollar-499493_1280Questions about sales tax commonly arise from people new to self-employment. Here’s a very basic overview of sales tax in Iowa.

The general rule on sales tax in Iowa is:

  • If you sell products, you probably need to collect sales tax.
  • If you provide a service, you probably don’t need to collect sales tax.

Of course, there are exceptions to these rules. Some product sales are exempt from sales tax. And some services are subject to sales tax. The Iowa Department of Revenue website is the best resource for determining if you need to collect sales tax on your product or service.

If You Need to Collect Sales Tax: The Basics

Sales tax is not a company expense. Instead, it’s a tax you collect from your customers and send to the state.

The basic sales tax rate in Iowa is 6%.

So if you sell something for $1, you’ll collect $1.06 from the customer. The $1 is yours and the $0.06 is the state’s.

Submitting Sales Tax to the State

Iowa has an online system for sales tax deposits. The state no longer accepts paper filings.

The process seems daunting to many people I talk to who are thinking about starting a business, but it’s actually straightforward.

You start by registering for a sales tax permit from the state. They’ll send you a permit number. Also included in that mailing will be your Business eFile Number (BEN). You’ll need the BEN in order to set up your online account, which you use to file your sales tax permits and submit your sales tax collections.

How often you file and pay depends on how much sales tax you’re collecting:

  • Less than $120 of sales tax collections per year: file and pay once a year
  • $120 – $6,000 of sales tax collections per year: file and pay quarterly
  • $6,000 – $60,000 of sales tax collections per year: file and pay monthly
  • $60,000+ of sales tax collections per year: file and pay twice a month

Put another way, using a 6% sales tax rate, you can have sales of up to $100,000 per year and be a quarterly filer. Once you reach $100,000 of sales, you’d become a monthly filer, and at $1,000,000 of sales you’d file twice a month.

Beware of Local-Option Sales Tax

Some localities in Iowa assess a local sales tax of 1% as well (thus making the total sales tax 7%). You can get more information about local-option sales taxes on this page on the Iowa Department of Revenue website.

Image courtesy of user Geralt on Pixabay.com

Tips for Choosing Bookkeeping Software

software-417880_1280A common question business owners have is: how do I choose a bookkeeping system?

There’s not a one-size-fits-all answer.

For small startups, an excel spreadsheet may be adequate. Indeed, I tell people NOT to spend money on QuickBooks (or other software) if they are a side business or they don’t have much going on.

But at some point, a business might grow beyond the point of a spreadsheet being adequate.

So how do you choose software?

There are plenty of choices — QuickBooks is not the only option. Here’s a list of programs I’ve worked with and/or heard of:

  • Quickbooks
  • Xero
  • Wave Accounting
  • Sage 50
  • Freshbooks
  • InAcct

I use QuickBooks and am a member of the QuickBooks ProAdvisor program (and am working on becoming a certified QuickBooks Pro). I really don’t like QuickBooks, but if you’re going to work with small businesses, you have to know QuickBooks.

I’ve been searching for a good alternative to QuickBooks. But I have yet to find one that is really better, so QuickBooks is what I use and what I recommend.

That being said, I also encourage small businesses to at least explore the alternatives to QuickBooks.

One key point: software is great, but plugging numbers into a computer doesn’t make a person a bookkeeping expert. Even if you keep your own books, I recommend having a relationship with an accountant to help you review your books periodically.

Image courtesy of user Geralt on Pixabay.com