Tools Every Accountant Needs

This blog was originally published to JBowmanAccountant.org.

You may not have thought about it, but accountants all need certain tools to do their jobs right. Many of the tools used by accountants are to make the job easier and provide ways of offering better services. Below is a list of a few of the most important things every accountant should have.

Reliable Computer

Invest in a quality computer because it is the one that takes on most of your work for you! Having a fast, reliable computer will allow you to run multiple programs at once. It also gives you the peace of mind that you will be able to do your job effectively.

Tax Software

Tax software eliminates the need to file taxes by hand and saves you a ton of time and headache. Investing in a great tax software will help you serve more clients at a more efficient rate. Plus, tax software will catch any mistakes you may make and gives you the option to correct them. Doing so can save your client a lot of money.

File Encryption

Adding a layer of security to the confidential and sensitive information found on most of the files you have will ensure clients that their information is safe. By having file encryption in place you will be able to email sensitive materials without the risk of the wrong person getting a hold of that information.

Scanner

In order to convert paper files into easily accessible electronic files, you will need a scanner. You can get a traditional scanner/printer combo or even a file scanner specifically for scanning documents and sorting them. These special document scanners often can scan both sides of a double sided documents at the same. They also turn your bulky paper documents into easily accessible PDFs.

Gear Up

You can have the best computer all the software in the world, but nothing beats old school gear. Have a great calculator handy for crunching numbers. Also have plenty of writing utensils and notepads around for note taking. Being able to do the thing the “old fashioned” way never hurts. You may not always be able to rely on technology and having the tools to complete the job are important.

4 Things You Should Know About The R and D Tax Credit

This blog was originally published to JBowmanAccountant.org.

The Research and Development Tax Credit benefits almost any business, no matter the size, age, or industry. Since 1981, this incentive has offered reimbursement for innovative and highly-technical businesses. Here are four things you should know about the R&D Tax Credit.

It is available for many industries

From aerospace organizations to wineries and vineyards, several industries can reap the benefits of an R&D Tax Credit. Organizations within these industries must pass a four-part test to affirm that their research activities qualify for an R&D Tax Credit. The four parts of the test are:

  1. Technological in Nature – “Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.”
  2. Permitted Purpose – “Activities must be performed in an attempt to improve performance, reliability, or quality of a new or existing business component.”
  3. Eliminate Uncertainty – “Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.”
  4. Experimentation – “All of the activities must include a process of experimentation including testing, modeling, simulating, systematic trial and error.”

It covers a variety of expenses

With all of the activity that goes on in a given business, it can be difficult to track your direct and indirect R&D expenses. However, taking note of those expenses is essential for receiving the appropriate tax benefits. As a rule, the major expenses that qualify are salaries and supplies and materials. For salaries, employees who work in R&D or directly manage those in R&D are covered. Supplies and materials covers anything from nails to computers.

It offers unique benefits to smaller companies

If your small company has gross receipts for five years or less that average less than $5 million, your company may be eligible for an R&D Tax Credit. This is the case even if your company does not owe any taxes, and the covered amount can reach up to $250,000 of a payroll offset. If your small business does not have credit for offsetting payroll taxes in a given quarter, you can carry that credit into a different quarter. However, to do this, you must not exceed the $250,000 limit.

It undergoes regular updates

The R&D Tax Credit does not behave exactly as it did over a quarter of a century ago. As industries and economies evolve, the R&D Tax Credit does, too. In particular, the removal of the Discovery Rule in 2003 redefined research activities as those that would be “new to the taxpayer” rather than “new to the world.” More recently, the Protecting American from Tax Hikes (PATH) Act ensured that small, mid-size, and startup businesses could benefit from R&D Tax Credits.

John J. Bowman, Jr. is an accountant and tax professional based out of Pittsburgh, Pennsylvania. Follow him on Twitter for more blog updates!

The 3 Best Personal Finance Software Options for 2017

Personal finance software can assist you in managing your finances. The software tracks your transactions and warns you about potential problems. Personal finance software organizes your finances daily, which allows you to relax and avoid stress. Here are the best available personal finance software programs

YNAB

The acronym YNAB stands for You Need A Budget, and the software is designed to help people who are budgeting. YNAB wants users to take every dollar that they earn and give that dollar a job. Users can find out exactly what every spent dollar went towards. YNAB can help you manage your immediate expenses; such as mortgage or rent, as well as your discretionary expenses; such as dining out. YNAB is a good choice for people who have constant expenses.

YNAB only allows you to budget money that you have actually earned, which forces you to plan around the money you presently have and not the money that you’ll receive in the future. YNAB will stop you from overspending by taking money out of another category to cover costs. YNAB encourages people to think of any extra money as finances that can help future expenses. By helping users put money aside for future expenses, YNAB believes that it is enhancing the financial security of its users. YNAB offers free webinars to help people understand how the software works.

Mint

One of Mint’s most popular features is its easy setup. The dashboard makes everything clear, so users can easily transition from one column to the next one. Mint recognizes that most people have flexible budgets, so users can set up a budget that makes sense with their expenses. Mint’s budgeting system allows users to make different categories for every expense that you have. Once you have paid for all of your expenses, the rest of your income goes into a category known as Everything Else.

Mint’s budgeting system lets users clarify when the expense will be due, so you can budget every month until the expense is due. You can set aside money every month to help plan for any long-term financial goals. That money will be taken out of your available budget.

Personal Capital

Personal Capital looks at the total net worth of its users through calculating all of their current assets and then subtracting any liabilities. Personal Capital lets users compare their spending during the current month to spending in previous months. Personal Capital shows users how their investments are doing by giving them a breakdown of their individual stocks, as well as an index of any money that has been accumulated or lost. You can seek a breakdown of your finances in both real dollars and percentages.

5 of the Best Accounting Books

If you are an accounting student or even if you are a veteran professional accountant, it’s important to keep learning about the industry. The easiest way to learn outside of the classroom is to pick up a book. Yet with so many accounting books out there, where should you begin? Below are some of the tops accounting books that you should read.

Accounting Made Simple: Accounting Explained in 100 Pages or Less Mike Piper

Accounting Made Simple prides itself on explaining some of the most important accounting concepts in simple-to-read language. The book is currently the best selling accounting book on Amazon—a testament to its popularity with readers. In its pages, you’ll find information about things like the accounting equation and financial statements.

Accounting All-in-One For Dummies Kenneth Boyd

The Dummies series of books are great for people who need a brief, yet in-depth, overview of a subject. Accounting All-in-One is a great resource for people who have to learn accounting basics in a short period of time, like small businesses or one person startups. When you’re finished with this book, it’s a great resource to keep on the shelf. This book is written in a similar easy-to-read style like Accounting Made Simple.

Barron’s Accounting Handbook – Joel G. Siegel Ph.D.

Barron’s Accounting Handbook is written by two finance professors. The book covers just about every accounting topic that is worth studying. One of the best features of the book is its A-Z dictionary of important terms to know. The dictionary alone makes the book worth the price.

The Tax and Legal Playbook: Game-Changing Solutions to Your Small-Business Questions – Mark J. Kohler

Even if you are not a small business owner, this is an important book to own—especially since you will most likely help small business owners at some point during your career. The chapters that discuss tax are particularly useful to business owners. Many readers note that the book is not only informative but entertaining as well due to the examples it presents from the real world.

A Random Walk Down Wall Street – Burton Gordon Malkiel

Burton Gordon Malkiel is a Princeton economist. While his book doesn’t specifically focus on accounting, accountants will find its advice on investing very useful. Although it’s written by an academic, it’s easy to read. The book’s main point is that it’s incredibly difficult to “beat the market” unless you have a stroke of luck to assist you. Here is an interview with the author that highlights the main ideas of the book.

Tax Filing Tips for Married Couples

If you got married on or before December 31 of last year, then you and your spouse will have to do your taxes a little bit differently this year. Keep reading to learn some of the top ways that getting married affects your taxes.

Filing Status

Now that you’re married you can no longer file with a single status. You either have to choose Married Filing Jointly or Married Filing Separately. For the majority of married couples, Married Filing Jointly is more beneficial than Married Filing Separately. The latter status usually gives you access to more beneficial deductions and credits.

Tax Bracket

Your tax bracket determines the tax rate that you will be responsible for. It’s likely that your tax bracket will change now that you’re no longer filing as single. Couples who file jointly often face a higher tax bracket since their incomes are combined.

Exemptions and Standard Deduction

Married couples get to claim two exemptions instead of the one that single individuals get to claim. The standard deduction is highest for married couples who file jointly. This year the standard deduction is $12,600 for joint filers and $6,300 for married couples who file separately.  The standard deduction is subtracted from your income that you are taxed on. Therefore, the higher the standard deduction the better.

W-4

After getting married it’s usually a good idea to change your W-4. Whenever you start a new job you are required to fill out Form W-4. The form tells your employer who how tax to withhold. Changing your status to married might lessen the amount of taxes you have to pay. The IRS provides a helpful withholding calculator that you can use to determine whether you should fill out a new W-4.

First Home

A number of married couples buy their first home as a result of their combined incomes. The mortgage interest that you pay can be deducted from your taxes if it is itemized. If the two of you already own a home, lived in it for two years, and sell it while married, you can exclude up to $500,000 of the money you made on the sale. Read this article to learn more.

Standard Deduction or Itemizing?

Depending on your financial situation it might be better to itemize rather than claim the standard deduction. Most married couples who own a home find it more beneficial to itemize since itemization allows deductions for mortgage interest. Every married couple’s situation is different, so it might be a good idea to speak with a tax professional when deciding on which option you should choose. To learn more take a look at this article.

Which Tax Software Should You Use?

It’s January, and that means that employers have begun to give employees their W2 forms. When it comes to filing your taxes, you should consider your options. Do you want to meet with a professional, or would you rather use a tax software? This article focuses on tax software. Below is a breakdown of three of the most popular tax software options.

TurboTax

TurboTax is one of the most popular names when it comes to online tax software. The software is easy to navigate, and the instructions are straightforward which makes it a great choice for taxpayers who are using tax software for the first time. Furthermore, the software allows you to import documents from over a million employers and financial institutions. The bottom line is that TurboTax is one of the most user-friendly tax software options that are available. With TurboTax it’s never an issue to go back and update your entries, so you don’t have to worry if you forget to add something. One of the only cons with TurboTax is its price. There’s a fee for using the online version and a fee for getting a state tax return. Plus if you have certain investments you might have to use TurboTax Premier which is more expensive than their basic version.

H&R Block

H&R Block’s tax software is just as easy to use as the TurboTax software. One of the best features of Block’s software is the checklists it provides. For example, one checklist makes sure you don’t forget to provide all of the required tax forms before you submit your filing. Block also provides “Learn More” links that answer most of the questions you will have when completing your taxes. The cost of using Block is similar to TurboTax; however, unlike TurboTax, you don’t have to pay more if you have investment income. One of the only downsides of Block is its search feature. It doesn’t always provide the best resources to help you get the answer you’re looking for.

TaxAct

TaxAct is one of the most inexpensive software on the market. However, if you decide to itemize you may have to pay more than you would otherwise. Still, the software offers a great deal when compared to competitors. Compared to competitors’ software, it’s not as easy to update your filing if you realize you forgot to add information. TaxAct probably isn’t the best choice for taxpayers who have never used tax software before. Other programs do a better job of hand-holding. The software has some reassuring security features, though. If you leave the program open but aren’t active, it will automatically log you out after a couple of minutes. Ultimately, TaxAct is the best software to use if your biggest concern is affordability. The software’s “Price Lock Guarantee” means that once you pay for the program you won’t have to pay more—even if you purchase it in January and wait until April to submit your filing.

Cash vs Accrual: Which is King?

There are two methods by which most accounting is done and by which income is reported to the IRS. There is the Cash method and the Accrual method.

These two things are basically the methods of business keeps track of its income and expenses. They have to do with the timeframe in which debits and credits are made. Which method a business uses is entirely up to them. However, it is important to understand how each one works.

Cash

The cash method is the common way in which small business tracks their debits and credits. With this method, income is not counted until cash is actually received, and expenses are not counted until they are actually paid.

Accrual

The accrual method is income that is counted when the sale occurs. It is also the method by which expenses are counted when the goods or services are obtained. In this method, you don’t have to have money in hand or actually pay money out, to record a transaction.

Choosing a method

As stated, you are free to choose whichever method you want for your business, with some exceptions. NOLO.com states that the exceptions are as follows:

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.

Cash: Pros and Cons

Pro: provides a more accurate picture of how much actual cash your business has and you can deduct expenses in the year they are paid instead of having to wait until the related revenue is earned and reportable.

Con: may offer a misleading picture of longer-term profitability. You also need to report revenue as soon as payment is received, which means you may end up paying tax on the gross amount if your deductible expenses aren’t reported until a future tax year.

Accrual: Pros & Cons

Pro: shows the fluctuation of business income and debts more accurately.ou can deduct expenses in the year you receive the underlying service or property and become liable for payment, even if you don’t actually make payment until a future tax year.

Con: Does not show accuracy in which cash reserves are available. In addition, you will have to report income in the year your customers have a legal obligation to make payment, not at the time of actual payment. Because of this, you may end up paying tax on money you didn’t receive during the tax year.

Again, most small businesses function well on the cash method. This is the easiest to track and manage. However, there was a recent article written by Forbes in the Entrepreneur section of its website that might interest those considering the accrual method. It discusses some little known tax advantages of this method. You can find that article here.

No matter what method chosen, it is important to be knowledgeable about the choices available. Both cash and accrual have their advantages and should be considered with care.

The Documents You Need To Provide Your Tax Accountant

When you meet with a tax accountant it is important to bring all the necessary documents in order to get the most out of this meeting. There is a long list of important documents necessary to prepare your tax return. I recently found this article, which I thought would be important to share. Whether you have been to an accountant before or you just need a refresher, here is a comprehensive list of documents that you need to bring to make the most of your visit.

Documents that show all your income for the year. These documents may include:

  • W-2s from your employers
  • 1099-MISC forms (self-employment income)
  • 1099-INT (interest) and 1099-DIV (dividends) forms
  • 1099-B forms (shows brokerage trades in stocks and bonds)
  • K-1 forms (income from a partnership, small business, or trust)
  • 1099-SSA (Social Security received)

Expense Documentation

It is important to bring written documents, such as a spreadsheet or bank statement, for any income not reported on a W-2 or 1099 form. This income could include other self-employment income, rental income or alimony.

You will also want to bring the necessary documentation for any contributions to your traditional or SEP-IRA, moving expenses, college expenses, medical and dental expenses, real estate taxes, gifts to charities and churches, and daycare or childcare costs.

Note: Some expenses are reported to you. For example, mortgage interest is reported on form 1098 and student loan interest is reported on form 1098-E.

Lastly, if you paid estimated taxes, bring a summary of your estimated federal and state tax payments as well as any canceled checks.

What to do if you are missing documents:

  • If you are missing your Form W-2, you can ask your employer to send you a new copy. Some employers may charge a small fee for this service but all employers are required by law to keep copies of your W-2 forms for at least four years.
  • If you are miss your Form 1099, your bank may have tax documents available on their website or you could get a copy mailed to you by contacting customer service.
  • To report stock trading and dividend activity, investment brokers can mail you copies of Form 1099-B and 1099-DIV. You can also try to download a copy from the brokerage website.
  • For consultants or independent contractors, if you earned more than $600 then you will need a 1099-MISC to report this income. Your client is required to send you this document, but even if they did not send it, you are still required to report this income.
  • For other types of 1099 forms, you should contact the organization responsible for issuing the tax form.

How to obtain copies of your tax documents from the IRS

  • Online: You can request a copy of your Wage and Income transcript for this link.
  • Mail: You can mail or fax Form 4506-T to the IRS. This form will allow you to your income documents, including: Form W-2, Form 1099 series, Form 1098 series and Form 5498 series transcript.

Note: Your tax accountant will be able to request copies from the IRS as well. You will likely want to contact the institutions shown on the IRS transcripts to obtain a copy of the original documents as well.

Frequently Overlooked Tax Deductions & Credits

Every year, millions of dollar in unclaimed and undelivered tax refunds stack up in the IRS bank account. The rightful owners of this money, often times, do not even know the money is waiting for them or how to claim it. In an effort to help you get all the money you deserve back into your pocket, I offer 9 frequently overlooked tax deductions and credits that you should familiarize yourself with going into the next tax season.

1) Job-Hunting Costs

If you spend time looking for a job during the year (as long as it is not your first job) then most of the expenses incurred while job-hunting can be deducted from your taxes. These expenses include: transportation costs (56 cents a mile for driving), parking, tolls, cab fares, food and lodging, employment agency fees, and cost of printing resumes, business cards, postage, and advertising.

2) Moving Expenses For New Job

If you moved over 50 miles away from your old home than you can qualify for moving expensed deductions. You can deduct the cost of moving yourself and your household goods to the new location. A few of the larger eligible deductions include: 23.5 center per mile while driving your car, parking and tolls, and lodging. This deduction is available even if you do not itemize.

3) Sales Tax

You have the option to deduct sales taxes or state taxes off your federal income tax. The sales tax deduction is especially important if you live in a state that does not impose a state income tax. However, even if you have to pay state taxes, the sales tax break may be the better deal if you made larger purchases (such as a car or engagement ring).

4) Child-Care

You are eligible for a tax credit worth between 20% and 35% of what you pay for child care while you work. A tax credit is even better than a deduction! It is also legal to list the cost of a babysitter as a charitable contribution on your tax return if you can document that you were volunteering while the babysitter was performing their duties.

5) Energy-saving Home Improvements

If you install qualified residential alternative energy equipment then you can be eligible for a credit of up to 30% of the total cost of such systems installed through 2016. This can include things such as a solar hot water heater, geothermal heat pump, or wind turbines.

6) Lifetime Learning Credit

The Lifetime Learning credit can provide students up to an additional $2,000 a year. You are eligible to take 20% off of the first $10,000 you spend on education after high school in an effort to give yourself a new or improved skill. While this deduction phases out at higher income levels, it does not discriminate based on ones age.

7) Health Insurance Premiums

In some cases, insurance premiums can be deducted from your taxes. Medical expenses usually need to exceed 7.5% of your adjusted gross income in order to be deducted. However, if you are self-employed and responsible for your own health insurance cover then you can actually deduct 100% of your premium cost. This will be taken off your adjusted gross income as opposed to an itemized deduction.

8) Self-employed Social Security

If you are self-employed and forced to pay the full 15.4% Social Security tax on your own, then you can write off half of what you pay. This deduction can be found on the face of the 1040 form, therefore, you do not need to itemize to take advantage of this deduction.

9) Out-of-pocket Charitable Deductions

You can write off out-of-pocket expenses incurred while doing charity work. For instance, if you make food for a soup kitchen or fundraiser, you can deduct the cost of ingredients used to make the food. It is important to save the receipts or itemize the cost inc case you are audited.

 

 

Online Streaming Services Usher In New Form Of Taxes

The city of Chicago has recently announced that they will begin targeting online databases and streaming entertainment services with a new “cloud tax.” This new tax will affect users of online streaming service such as Netflix and Spotify.

The new tax is composed of two recent ruling made by the city of Chicago’s Department of Finance. The first, covers “electronically delivered amusements” and the second covers “nonpossessory computer leases.” These rulings are essentially extensions on existing laws to include an extra 9 percent tax on certain types of online services. It is assumed that first of these ruling will affect services such as Netflix and Spotify and the second will affect services such as Amazon Web Services or Lexis Nexis.

Consumers of such services should not worry just yet about increased payments, as Netflix has already begun making arrangements to add the tax to the cost charged to its Chicago customers. This means that while the tax is technically levied upon customers of these services, the companies are likely to actually carry the burden of the tax.

This new “cloud tax” is likely to be just the beginning and online streaming services recognize that they need to prepare for this to be a trend utilized by more areas across the country in the future. As these massive online streaming services have taken vast entertainment resources and moved them online, it has made it a challenge for cities that have previously relied on tax from the sale of these entertainment services at local businesses. The “cloud tax” is a move to fight back against the loss in tax revenue due to the online streaming services.

Many have already voiced their displeasure with this new tax. After the announcement was made, Michael Wynne argued that the tax violates the Federal Telecommunications Act and the Internet Tax Freedom Act, intended to prevent discrimination against services delivered over the internet. In his response, Wynne stated “I could do that same activity of research using books or periodicals without being tax, so it seems like I’m being picked on because I chose to do it online.”

This “cloud tax” is clearly a response by cash-strapped cities to the continuing loss of tax revenue from sales previously made in brick and mortar stores. Online services are swallowing up business that use to be conducted within the city but is now happening online. Before the rise of these services, people would consume entertainment at video rental outlets and music stores – which paid local property taxes along with municipal sales taxes – and now these entertainment outlets have become irrelevant with the birth of online services. The cities clearly are looking for a way to make up the difference in lost tax revenue, and the new “cloud tax” seems to be the prevailing option.