Business & Finance Blog

A credit application is a great way to avoid granting credit to bad risks–but only if it asks the right questions and all the blanks are filled in. The application is given during “the honeymoon period,” the most friendly period, so this is the best time to ask important, revealing questions. Credit is based on trust, but trust is more reliable when you get the right answers on a well-designed credit application.

Make sure your credit application asks:

• The legal form of the prospect’s business. Are you dealing with a corporation, partnership or individual? If it is a corporation, it’s crucial to know the correct legal name-down to the last comma and period. (See below for details.) Check with the state to determine the correct corporate name and to see if the corporation is “in good standing”-that its corporate charter is still on the state’s active files.

If it is a partnership or sole proprietorship, get each owner’s home address and SSN (if the customer goes out of business, you need to find the owners quickly to ask for payment), whether each owner previously owned another firm and, if so, what happened to it. You may want to ask if the firm is adequately capitalized, rather than depending only on credit reports.

• Who at the customer’s firm has authority to sign contracts, place orders and sign checks? This may or may not be the same person. Knowing who can sign checks allows you to telephone the right person for payment right away.

• Two creditors currently extending the greatest credit and permission to contact them to confirm that payments are being made according to terms. Much more effective than just asking for “credit references” (which allows the prospect to be very selective). Make sure that your application includes a statement giving you the right to contact the references.

• The date on which the prospect’s business began. Unfortunately, few applications ask this. Because a large percentage of businesses fail in the first few years, the firm’s age is important. How quickly would you extend $100,000 in credit to a firm that opened last month? Professor Bruce Kirchoff, New Jersey Institute of Technology, reports that about 18% of all new firms fail during the first 8 years, 26% survive only because of a change in ownership and 28% voluntarily go out of business without losses to creditors.

• “Was this firm previously part of another company?” This wording is important. A “yes” should prompt an investigation into why the separation occurred. Sometimes, profitable companies spin off an unprofitable division in a way that prohibits the parent from being called for payment.

• “Is a written purchase order required?” If it is, your firm can comply from the outset rather than arguing with the customer later.

• A statement making the person signing the application liable for lying. For example: “I warrant that the foregoing information is true and correct, and realize it will be relied upon in the granting of future credit.” If the application is signed personally and turns out to be materially (seriously and substantially) false, you may be able to pursue the signer personally even if the credit your firm granted was to a corporation.

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A TRW Business Credit Services and Credit Research Foundation study found the following indicators of which customers or prospects are likeliest to pay:

· The most powerful predictor of payment performance is payment record (current and past).

· Credit ratings based on financial strength have no bearing on future payment performance.

· Revenue is not a good indication of good payment performance.

· The greater the firm’s net worth (total assets less liabilities) and time in business, the likelier it is to pay. Building real net worth takes years.

· Most businesses fail in the early years, so the longer a firm is in business, the more confident you can be of receiving timely payments.

· The higher the percentage of accounts a customer has paid within 90 days, the greater the likelihood you will receive prompt payment.

· A predictor of future poor payment is the number of accounts past due 90 or more days.

Source AIPG.ORG

In addition to your responsibilities at year-end, you have to deal with the usual last-minute crises.

By Dec. 1, 2008

• Remind employees that if there has been a change in their filing status (marriage or divorce) or number of dependents (birth, adoption, child turning 21), that they may want to file a new W-4 for 2009.
• See that employee paycheck names/SSNs match those on their SS card and/or W-4.
• The Special Accounting Rule. Your firm may elect to treat taxable noncash fringes (i.e., personal use of company cars) provided any time in November-December 2008 as paid in 2009. (If you make this election for tax year 2008, you must notify affected employees no later than Jan. 31, 2009.)

Before Dec. 31, 2008

• Do not apply the EITC to wages paid after this date unless you have a new W-5. Paychecks dated 2009 are 2009 wages, even if earned in 2008.
• Check each employee’s SS withheld. If anyone exceeded the 2008 limit of $6,324.00, make adjustments/refunds before making the final payroll tax deposit for tax year 2008. Leave enough time to make adjustments and make refunds.
• If you use a payroll service, consider asking for an adjustment run before you close out 2008 and run your W-2s. Verify and correct:
  • relocation expense reimbursements;
  • manual or voided paychecks that have not been put in the system;
  • personal use of company vehicles;
  • company-paid educational assistance; and
  • other taxable items paid via accounts payable.
• Check each employee’s Social Security withheld. If anyone exceeded the 2008 limit of $6,324.00, make adjustments/refunds before making the final payroll tax deposit for tax year 2008. Leave enough time to make adjustments and make refunds.

Source: AIPB.ORG

People who are awaiting an economic stimulus payment or who have yet to file can avoid common errors that may delay their payment. They also can use the IRS Web site to answer most common questions.

The Internal Revenue Service, which is still issuing economic stimulus payments, has been studying trends and common issues in filing errors and questions posed by people calling its customer service telephone lines.

The most common question posed to the IRS is from people wondering when they will receive their stimulus payment. The question can be answered easily by going to IRS.gov and using the “Where’s My Economic Stimulus Payment?” Web tool.

Here’s how to avoid common mistakes:

• File only one tax return - People should file only one 2007 tax return. It takes the IRS up to 12 weeks to process paper returns and issue the stimulus payments. However, some people are filing more than one tax return in an effort to receive a stimulus payment, which could further delay their stimulus payment. The IRS is concerned there will be more multiple filings as the October 15 deadline approaches for filing a return in 2008.
• List qualifying income - Some people are listing their monthly income instead of annual income.  People must list their annual amount of qualifying income to be eligible for the minimum payment of $300 ($600 married filing jointly.) The qualifying income required by law is at least $3,000 in benefits from Social Security, Veterans Affairs and Railroad Retirement, earned income and/or combat pay.
• Review Your Tax Liability - Some people who have either small amounts of tax liability or no tax liability are getting smaller stimulus payments than they expected or none at all. Generally, the law provided for a maximum stimulus payment of $600 ($1,200 for married couples) or an amount equal to a taxpayer’s tax liability, whichever was less. Tax liability is the net amount of federal income taxes paid after deductions and credits. If people had no tax liability but had at least $3,000 of “qualifying income” from specific sources, they would be eligible for $300 ($600 for married couples.) There also is a $300 payment for each qualifying child.
• Amended return - Generally, people cannot file an amended return solely to get an economic stimulus payment unless they are a retiree, veteran or have other  “qualifying income.” While amended returns will be processed to correct the income, deductions and income tax as appropriate, the economic stimulus payment amount will not be adjusted based on an amended return. If people do not receive a payment this year, they can claim it when they file their tax return in 2009.
• Use Most Current Address - People must use their most current address in order to receive a timely payment. People who change addresses after filing should complete Form 8822 and a change of address card with the U.S. Postal Service. If the postal service is unable to deliver the payment, it is returned to the IRS.

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Contributions to flexible savings accounts (FSAs) face the “use it or lose it” rule: Balances not spent by the deadline are forfeited by the employee. Balances used to reimburse qualified medical expenses are tax free.

Traditionally, FSA balances had to be spent by the end of the plan year (usually December 31) to avoid forfeiture. In 2005, the IRS allowed employers to extend the deadline 2½ months (usually March 15), at their option.

Employers should alert employees to the deadline for their plan. Employees also should be aware that eligible expenses are broader than many realize. A doctor’s prescription or recommendation is not required for an expenditure to be eligible. Medical expenses that can be reimbursed from an FSA include:

· nonprescription drugs

· elective noncosmetic surgery

· dental checkups and surgery

· corrective eye surgery

· flu shots

· programs and aids to stop smoking

· weight-loss programs

· co-pays, deductibles, and co-insurance payments

· prescription eyeglasses and sunglasses

Source: AIPB.ORG

The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or is engaged in as a hobby.

Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

Taxpayers may need a clearer understanding of what constitutes an activity engaged in for profit and the tax implications of incorrectly treating hobby activities as activities engaged in for profit. This educational fact sheet provides information for determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit.

Is your hobby really an activity engaged in for profit?

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income.  Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

What are allowable hobby deductions under IRC 183?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

• Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
• Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
• Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

Source

When your company’s debt is forgiven, you include the cancelled amount in gross income for tax purposes. The exception is cancellation of a debt to the extent that the payment would have been a deduction.

Problem: SmallCo uses a consulting firm from it which it obtains services on credit. SmallCo has trouble paying its debts, but is neither bankrupt nor insolvent, so the consulting firm forgives part of its invoice to SmallCo. If you are SmallCo’s bookkeeper, how do you book the cancellation?

Solution: The solution depends on SmallCo’s method of accounting:

• If SmallCo is on the accrual basis, it includes cancellation of the debt as income because, under the accrual method, expenses are recognized when incurred, not when paid.

• If SmallCo is on the cash basis, it does not include the debt cancellation in income because payment for the services would have been a deductible business expense.

Source

Is your auto worth less than the loan balance you have to repay on it?  If so, you are “upside down” in the world of the auto trade.  And that’s not a good place to be.

Unfortunately, that situation has become more common as consumers sought longer-term loans in order to get their monthly payments down to an affordable level.  Loans of up to seven years-that’s 84 months.-are now being offered to some buyers.

The average length of a new car loan from an auto finance company was 63.1 months in April 2008, up from 53.8 months in April 2000, according to the Federal Reserve’s report on consumer credit.

To stay upright, try to limit an auto loan to the number of years you plan to own the vehicle.

I just got back from the grocery store.  My goodness, Downy Softner is 9 bucks now.  Here are some tips on how to save money on groceries.

1. Use coupons
2. Buy in bulk (Costco)
3. Cut back on eating out
4. Plan ahead, cook ahead and freeze
5. Bring lunch to work
6. Buy cheaper or knock-off brand.

Times are tough lately and you are for sure not saving at the gas pumps.  To make it, it’s important to find ways to cut back on money.  Here are 5 ways to cut your auto insurance bill.

1. Increase your deductible - While this may save you money per month, you need to make sure that you have the money for the deductible should you have an accident.
2. Drive safely - Taking extra precautions while driving, staying under the speed limit and avoiding sudden stops and starts can help save on gas. Most insurance companies give discounts if you are accident-free for X amount of years.
3. See if you qualify for discounts - You may qualify for discounts by purchasing home and business insurance policies from within the same company.  Additionally, there are also discounts if you drive low miles, have multiple vehicles or your kids get good grades in school.
4. Reduce Coverage - Consider reducing your coverage if you are driving an older vehicle.  According to the Insurance Information Institute, it may not be cost effective to carry comp and collision on cars worth less than 10 times the amount you would pay for that portion of your coverage.  Try keeping the coverage, but raising your deductible.
5. Shop for a new provider - It’s always good to shop around every couple years.  In today’s world, there is usually a competitor out there that may give you a better deal.  Never hurts to look!