BUSINESS ACCOUNTING AND TAX SERVICES

Accounting Services

Every business has the need to keep an accurate and timely set of books.  This may be a difficult task for some business owners because:

• Keeping track of business documents and entering them into accounting software is not one of their skill sets.
• They lack the time to keep “the books”.

We offer a variety of accounting services based on your needs. We can do all of your accounting chores or just certain aspects of your accounting. We can design accounting services based on what your business needs and what your budget allows.

Tax Services

All businesses have tax reporting obligations.  Some of your compliance requirements may be:

• Business federal and state tax returns
• Sales tax returns
• Property tax returns
• Payroll tax returns
• Secretary of State filings
• 1096/1099 tax returns.

We have systems in place to meet all of your filing requirements.  We proactively reach out to you to obtain the information needed to comply with your tax deadlines.  Our goal is to take this chore off of your list.

Financial Analysis

All of these numbers and documents entered into a software program can result in invaluable information for how your business is doing.  We can assist you in establishing a dashboard for your company which will keep you apprised of how you are progressing with your business goals.

Tax Planning

One of our value services is tax planning.  We have created systems for preparing tax projections which result in tax reduction and deferral.  The key to effective tax planning is to start about five months in advance of year end.  It is imperative that accounting records be up to date and that the business owner is invested in the tax planning process.

AUDITED, REVIEWED AND COMPILED FINANCIAL STATEMENTS

Our financial statement services comprise all three levels of assurance depending upon your company’s needs.

• Audited Financial Statement

Only a Certified Public Accountant can perform an audit. This is the highest level of service and includes confirmation of selected assets and liabilities by outside third parties and an investigation of the internal controls of the entity.

REASONS FOR AUDITED FINANCIAL STATEMENTS

1. If fraud or other irregularity is suspected.
2. Loan agreement with a financial institution may require an audit.
3. May be a requirement of a merger or sale.

• Reviewed Financial Statement

The main difference between audited financial statements and reviewed financial statements is that in an audit engagement a study of internal controls and assessment of risk are required as well a third party confirmation.  This is not required in a review engagement.

REASONS FOR REVIEWED FINANCIAL STATEMENTS

1. Reviewed financial statements may be called for when the owner is preparing the business for sale at some point in the future. 
2. Loan agreement with a financial institution may require a review.
3. May be a requirement of a merger or sale.

• Compiled Financial Statement

This is the lowest level of service provided and is a good choice when a business owner is looking for consistent financial statements reported on a regular basis for help in managing their business.

REASONS FOR COMPLIED FINANCIAL STATEMENTS

1. Owner wants reliable comparative information available on a regular basis.
2. Owner wants to use information to manage business.
3. Owner is preparing the business for sale at some point the future.

CHOOSING A FORM OF BUSINESS

Deciding what form of business to choose can seem like a difficult task.  There are many legal and tax ramifications that need to be understood. Below are short descriptions of the most common forms of business.

• Sole Proprietorship

A sole proprietorship is the easiest type of business to establish.  This is a good choice for a small business with no significant liability issues.

• Limited Liability Company

An LLC is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. LLC is a state legal designation.  The member(s) can choose to be taxed as sole proprietorship, if there is only one member, or a C corporation, S corporation, or a partnership.

• Corporation

A corporation is more complex and generally suggested for larger, established companies with multiple employees. A corporation will limit the liability of the shareholders.

• Partnership

There are several different types of partnerships, which depend on the nature of the arrangement and partner responsibility for the business. In general, partnerships work well for real estate holdings.

• S Corporation

An S corporation is a hybrid of a C corporation and partnership. It allows for pass through of income and expenses.

Choosing a form of business is best done with the assistance of an attorney and a CPA.

There are pros and cons to each form of business relating to tax ramifications, bookkeeping, costs of tax returns and entity maintenance, and the future needs of the business.

COMPARISON CHART

Attribute	Sole Proprietorship	Partnership	C Corporation	S Corporation	LLC
Personal Liability	HIGH	HIGH	LOW	LOW	LOW
Ease of Set-Up	Easy	Need Attorney	Need Attorney	Need Attorney	Need Attorney
Best Use	Small Business	Unequal Interest	Larger Business	Has Need for Retaining Cash	Need Options for Capital Structure
# of Owners	1	2 or more	unlimited	100 shareholders	Depends on choice of tax entity
Tax Form Filed	1040 Schedule C	1065	1120	1120S	Depends on choice of tax entity

CHECK THE BOX REGULATIONS

In most situations, an entity formed as an LLC should elect to be taxed as an entity other than an LLC filing as a partnership to avoid the gross receipts fee.

Choose to be taxed as a C Corporation or an S Corporation

ENTITY CLASSIFICATION

Beware of the LLC Gross Receipts Fee

LLCs classified as partnerships: pay an annual tax $800 as well as the LLC fee based on total California gross income.

Example:  A business has gross receipts of $2,500,000 but has an operating loss of $50,000. California tax is $800 plus $6,000.

ESTIMATED TAX PAYMENT

 If you have a total California annual income of $250,000 or greater, you must make an estimated fee payment by the 15th day of the 6th month of the current taxable year.

THEFT PREVENTION

The U.S. Commerce Department has estimated that 30 percent of business failures result from employee theft.

Most small business owners I know depend on a few key people to do lots of different things in their company.  The accounting department often consists of one person who opens the mail, bills the customer, does the payroll, posts payments to customer accounts, pays the bills, and possibly signs the checks.  This is often true in all departments of the company.  Employees have access to vehicles, charge accounts with vendors, inventory supplies and gas cards.

The owner comes to trust his employees and, as a result, begins to think that they would never steal from him or her.  The owner becomes complacent in protecting his or her assets and as a result, "opportunities" become available for" trusted" employees to steal or embezzle.

Once your financial records have been altered, discovering problems is extremely difficult. Most standard accounting practices are not designed to uncover internal problems such as embezzlement.

Depending on your CPA to protect against acts of one employee is a dependence that is false comfort. The CPA is not involved in the day to day operations.  They will not be as familiar with vendor and customer names as the owner and employees are.  The CPA will not be examining source documents.   A review or compilation engagement is not designed nor intended to uncover or search for defalcations.  For this reason, an employee who tampers with a number of small accounts over an extended period will usually escape detection.

Employees can quickly assess that there is a lack of internal control and that there are "holes" in the accounting system, controls of inventory and other assets. There are some basic things that the small business owner can do to reduce the opportunity for such fraud. The challenge is to build a series of “checks and balances” to verify that transactions are accurate.

The best way to avoid and or detect fraud is to consider your internal controls and correct for weaknesses. Fraud or embezzlement will be more difficult when there is a separation of duties between asset handling and recording functions. For example, receiving and depositing checks is asset handling.  Recording the receipt of the check against the customer balance is recording.

The following business practices can help you minimize potential internal control problems:

Implementing some basic controls and then following through on the procedures will greatly reduce the chance that you and your business will be the victim of theft or embezzlement.  Please contact us if you need some help in designing internal controls to safeguard your business.

A SHORT HISTORY OF ACCOUNTING

Accounting has been an important part of the development of human society.  Early archeological finds have been found in the ancient city of Jericho.  Clay artifacts called “tokens” dated from the 10th millennium B.C.E. have been discovered.  These tokens are thought to represent inventory such as sheep, cattle, grain, or weapons. Archaeologists discovered that an inscribed envelope could be matched to the tokens enclosed.  A specific envelope could relate to the "account" of a “business man” or an inventory of a specific tribute payment. It could represent the obligation of this tribute. The envelope could be handed to the debtor and returned with the actual payment in kind, a Stone Age voucher system.

The Italian Renaissance fueled a paradigm shift in human development.  Art, science, math, and business took great leaps forward. Venice was the business cradle of Europe. Merchants invented and used double entry accounting. 

Fra Luca Pacioli was born in 1445 in Tuscany.  He was a mathematician and friend of Leonardo da Vinci.  He wrote and taught mathematics, theology, architecture, games, military strategy and commerce.  In 1494, Pacioli published his book “Summa de Arithmetica, Geometria, Proporationi et protionalita” (The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality).  One section was dedicated to the description of double-entry accounting.  The Summa was one of the first books published on the Gutenberg press; it became an instant success and was translated into other languages. The Summa made Pacioli famous and he is known as “The Father of Accounting.”

The Industrial Revolution started in about 1750.  The British took the lead in productivity. This was the time of invention: the cotton gin, the water frame, new methods for smelting iron, the steam engine, and many more.  The factory system was invented for the textile industry. With all this activity, there was a need for sources of capital and thus the term “retained earnings” was born. As every good business person knows, controlling the cost of an enterprise can be challenging. Businesses in the 1750’s experienced the same kind of challenges.  In the years 1770-1772, a depression hit the economy. Demand dropped, inventories rose, and prices needed to be cut.  At the same time clerks were embezzling funds.

Joshua Wedgwood, the famous potter, saw the need for running a more efficient operation.  He examined the books, discovered inefficiencies and fraud.  He realized the need to control overhead. He became a proficient cost accountant. He instituted processes and procedures and daily and weekly reporting.   He discovered that product lines had different gross profit margins and could market his products accordingly.  Wedgwood’s factory survived while other endeavors went out of business.