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Many business owners generate financial statements, at least in part, because lenders and other stakeholders demand it. You’re likely also aware of how insightful properly prepared financial statements can be — especially when they follow Generally Accepted Accounting Principles.

But how can you best extract these useful insights? One way is to view your financial statements through a wide variety of “lenses” provided by key performance indicators (KPIs). These are calculations or formulas into which you can plug numbers from your financial statements and get results that enable you to make better business decisions.

Learn about liquidity

If you’ve been in business for any amount of time, you know how important it is to be “liquid.” Companies must have sufficient current assets to meet their current obligations. Cash is obviously the most liquid asset, followed by marketable securities, receivables and inventory.

Working capital — the difference between current assets and current liabilities — is a quick and relatively simple KPI for measuring liquidity. Other KPIs that assess liquidity include working capital as a percentage of total assets and the current ratio (current assets divided by current liabilities). A more rigorous benchmark is the acid (or quick) test, which excludes inventory and prepaid assets from the equation.

Accentuate asset awareness

Businesses are more than just cash; your assets matter too. Turnover ratios, a form of KPI, show how efficiently companies manage their assets. Total asset turnover (sales divided by total assets) estimates how many dollars in revenue a company generates for every dollar invested in assets. In general, the more dollars earned, the more efficiently assets are used.

Turnover ratios also can be measured for each specific category of assets. For example, you can calculate receivables turnover ratios in terms of days. The collection period equals average receivables divided by annual sales multiplied by 365 days. A collection period of 45 days indicates that the company takes an average of one and one-half months to collect invoices.

Promote profitability

Liquidity and asset management are critical, but the bottom line is the bottom line. When it comes to measuring profitability, public companies tend to focus on earnings per share. But private businesses typically look at profit margin (net income divided by revenue) and gross margin (gross profits divided by revenue).

For meaningful comparisons, you’ll need to adjust for nonrecurring items, discretionary spending and related-party transactions. When comparing your business to other companies with different tax strategies, capital structures or depreciation methods, it may be useful to compare earnings before interest, taxes, depreciation and amortization (EBITDA).

Focus in

As your business grows, your financial statements may contain so much information that it’s hard to know what to focus on. Well-chosen and accurately calculated KPIs can reveal important trends and developments. Contact us with any questions you might have about generating sound financial statements and getting the most out of them.

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There’s a new IRS form for business taxpayers that pay or receive certain types of nonemployee compensation and it must be furnished to most recipients by February 1, 2021. After sending the forms to recipients, taxpayers must file the forms with the IRS by March 1 (March 31 if filing electronically).

The requirement begins with forms for tax year 2020. Payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report any payment of $600 or more to a recipient. February 1 is also the deadline for furnishing Form 1099-MISC, “Miscellaneous Income,” to report certain other payments to recipients.

If your business is using Form 1099-MISC to report amounts in box 8, “substitute payments in lieu of dividends or interest,” or box 10, “gross proceeds paid to an attorney,” there’s an exception to the regular due date. Those forms are due to recipients by February 16, 2021.

1099-MISC changes

Before the 2020 tax year, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee (in other words, an independent contractor). These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was introduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that reported NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers.

Payers of nonemployee compensation now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. But for 2020 tax returns, the due date is February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

When to file 1099-NEC

If the following four conditions are met, you must generally report payments as nonemployee compensation:

You made a payment to someone who isn’t your employee,
You made a payment for services in the course of your trade or business,
You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
You made payments to a recipient of at least $600 during the year.

We can help

If you have questions about filing Form 1099-NEC, Form 1099-MISC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

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The IRS announced it is opening the 2020 individual income tax return filing season on February 12. (This is later than in past years because of a new law that was enacted late in December.) Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing earlier this year. Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.

How is a person’s tax identity stolen?

In a tax identity theft scheme, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

The real taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Note: You can get your individual tax return prepared by us before February 12 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.

When will you receive your W-2s and 1099s?

To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2020 Form W-2 to employees and, generally, for businesses to issue Form 1099s to recipients of any 2020 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

How else can you benefit by filing early?

In addition to protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

If you haven’t received an Economic Impact Payment (EIP), or you didn’t receive the full amount due, filing early will help you to receive the amount sooner. EIPs have been paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Amounts due that weren’t sent to eligible taxpayers can be claimed on your 2020 return.

Do you need help?

If you have questions or would like an appointment to prepare your return, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

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Auditing standards require a year-end risk assessment. One potential source of risk may be a small business’s reliance on the owner and other critical members of its management team. If a so-called “key person” unexpectedly becomes incapacitated or dies, it could disrupt day-to-day operations, alarm customers, lenders and suppliers, and drain working capital reserves.

Common among small businesses

No one is indispensable. But filling the shoes of a founder, visionary or rainmaker who unexpectedly leaves a business is sometimes challenging. These risks are usually associated with small businesses, but they can also impact large multinationals.

Consider the stock price fluctuations that Apple experienced following the death of innovator Steve Jobs. Fortunately for Apple and its investors, it possessed a well-trained, innovative workforce, a backlog of groundbreaking technology and significant capital to continue to prosper. But other businesses aren’t so lucky. Some small firms take years to fully recover from the sudden loss of a key person.

Factors to consider

Does your business rely heavily on key people, or is its management team sufficiently decentralized? The answer requires an evaluation of your management team. Key people typically:

Handle broad duties,
Possess specialized training,
Have extensive experience, or
Make significant contributions to annual sales.

Other factors to consider include whether an individual has signed personal guarantees in relation to the business and the depth and qualification of other management team members. Generally, companies that sell products are better able to withstand the loss of a key person than are service businesses. On the other hand, a product-based company that relies heavily on technology may be at risk if a key person possesses specialized technical knowledge.

Personal relationships are also a critical factor. If customers and suppliers deal primarily with one key person and that person leaves the company, they may decide to do business with another company. It’s easier for a business to retain customer relationships when they’re spread among several people within the company.

Ways to lower your risk

Your auditor’s risk assessment can help determine accounts and issues that may require special attention during audit fieldwork. The assessment can also be used to help you shore up potential vulnerabilities.

Training and mentoring programs can help empower others to take over a key person’s responsibilities and relationships in case of death or a departure from the business. Likewise, a solid succession plan can help smooth the transition.

Also consider external replacement options. This exercise can help you understand how much it would cost to hire someone with the same knowledge, skills and business acumen as the key person. In addition, a key person life insurance policy can help the company fund a search for a replacement or weather a business interruption following the loss of a key person.

We can help

Key person risks are a real — and potentially significant — possibility, especially for small businesses with limited operating history and charismatic, innovative leaders. Contact us to help identify key people and brainstorm ways to lower the risks associated with them.

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During the first few weeks of the COVID-19 pandemic, many business leaders and senior executives reported a sudden rush of energy and a profound sense of teamwork, which carried them through those opening days. Freed from their normal daily routines and energized by adrenaline, many business leaders found this to be an incredibly productive time where priorities became clear, decisions were made faster, and most employees stepped up to work in hectic, but harmonious, ways.

Managing through a crisis can feel very meaningful and energizing. But now, many months later, we are experiencing the second wave of COVID-19, and gone are those adrenaline-filled days of the early pandemic. Instead, that intensity has been replaced by “pandemic fatigue.” According to Merete Wedell-Wedellsborg in an article in the Harvard Business Review, many leaders and managers have reported experiencing a loss of agency, determination and energy. Stress incidents are on the rise and people’s emotional reactions are becoming more polarized. And this is even before we consider the recent events in our nation’s capital.

Pandemic fatigue is a natural response to this long, drawn-out crisis. What was originally a sprint has turned into a marathon, and as any runner will tell you, they require two very different skill sets. Dealing with stressful circumstances over a long period of time requires different coping strategies than the short-term fight or flight response we experienced in March and April. Just as a marathon runner needs to build up their endurance and stamina, business leaders need to develop the psychological stamina necessary to lead through the last mile.

Even as the vaccine appears as light at the end of the tunnel, how can you navigate your organization through the home stretch and come out successfully on the other side? There are a few key steps you can consider as you look to answer this question.

First, consider bounded optimism. While it is important that leaders display optimism and hope, it is just as important that it be grounded in reality. As the vaccine is currently being administered, this concept is more important than ever. Bounded optimism cautions against thinking a vaccine will return life to normal in only a short period of time. It will take months for enough people to be vaccinated and even then, we will still need time to process what has happened to our lives during the pandemic. One of a leader’s critical roles is to not only inspire hope, but also to temper that hope with a realistic expectation that resonates with his/her employees. This approach helps maintain a leader’s integrity, while encouraging positivity in the workplace.

Secondly, it is important to remember compassion. Your employees likely need more warmth and comfort than they might have prior to the pandemic. Leaders need to be serious about the mental health of their employees and commit to intervening when necessary. Organizations should consider a more holistic and inclusive form of listening than they are typically accustomed to. One way to create a space for employees to share how they are really doing, is for leaders to voice their own feelings of discomfort, which can send the powerful message that, “it’s OK to not be OK.”

Finally, although the moment calls for compassion, it also calls for a little more edge and collective defiance against the cruelty of the virus. You want your employees to think that “enough is enough!” and rise to fight the fatigue. Employees are tired of hearing that “we will get through this.” It’s time to think about raising the bar and challenging your employees. By adding a little edge, you can help restore some of your organization’s energy. Another way to get the energy flowing is by never accepting that meetings and interactions should become stale or boring. For example, according to Merete Wedell-Wedellsborg, the LEGO Group has a goal to “Energize Everyone, Every Day” as a central leadership principle of their organization. Energy is not a given; it must be generated internally. Always look for ways to shake things up so that meetings and daily work do not become tiring and repetitive.

Cultivating the necessary resilience to propel your team through the end of the pandemic requires a different kind of leadership and unique appeal to your employees. Compassion is more critical than ever, but a little edge and energy can go a long way. Remember that you are not alone, and that the resiliency needed to help you and your organization fight through pandemic fatigue, is within you.

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COVID-19 has shut down many businesses, causing widespread furloughs and layoffs. Fortunately, employers that keep workers on their payrolls are eligible for a refundable Employee Retention Tax Credit (ERTC), which was extended and enhanced in the latest law.

Background on the credit

The CARES Act, enacted in March of 2020, created the ERTC. The credit:

- Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter,
- Was subject to an overall wage cap of $10,000 per eligible employee, and
- Was available to eligible large and small employers.

The Consolidated Appropriations Act, enacted December 27, 2020, extends and greatly enhances the ERTC. Under the CARES Act rules, the credit only covered wages paid between March 13, 2020, and December 31, 2020. The new law now extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021.

In addition, for the first two quarters of 2021 ending on June 30, the new law increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the CARES Act). And it increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules).

Interaction with the PPP

In a change retroactive to March 12, 2020, the new law also stipulates that the employee retention credit can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren’t forgiven.

What’s more, the new law liberalizes an eligibility rule. Specifically, it expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.

We can help

These are just some of the changes made to the ERTC, which rewards employers that can afford to keep workers on the payroll during the COVID-19 crisis. Contact us for more information about this tax saving opportunity.

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Your accounting and development departments are central to the continued financial health of your not-for-profit. So what happens when communication between these two functions break down? It could result in conflict between staffers, inaccurate financial statements and, in a worst-case scenario, the forfeiture of grant funds. Here’s how you can encourage collaboration.

Note different accounting methods

Make sure staffers understand that accounting and development typically record their financial information differently. Development may use a cash basis of accounting, while accounting records contributions, grants, donations and pledges in accordance with Generally Accepted Accounting Principles (GAAP). This means that they produce numbers that vary but that nonetheless are both correct.

Let’s say a donor makes a payment in March 2021 on a pledge made in December 2020. The development department will enter the amount of the payment as a receipt in its donor database in March. But accounting will record the payment against the pledge receivable that was recorded as revenue when the pledge was made in December. Receipt of the check won’t result in any new revenue in March because the accounting department recorded the revenue in December. Both departments’ figures for March 2021 (and for December 2020) will be accurate, but they’ll disagree with each other.

Enforce clear protocols

Your nonprofit should try to reconcile its accounting and development schedules at least monthly. It also needs clear protocols for communicating important activity — or both departments, and your organization, could experience negative consequences.

If, for example, development fails to inform accounting about grants on a timely basis, the latter won’t be aware of the grants’ financial reporting requirements and could forfeit funds for noncompliance. If the accounting department doesn’t record grants or pledges in the proper financial period according to GAAP, your organization could run into significant issues during an audit — which could jeopardize funding.

Prioritize communication

Schedule meetings so that accounting representatives can educate development staff about what information it needs, when it needs it and the consequences of not receiving that information. For its part, development should provide accounting with ample notice about prospective activity such as pending grant applications and proposed capital campaigns.

Development should also present status reports on different types of giving — including gifts, grants and pledges. This is especially important for those items received in multiple payments, because accounting may need to discount them when recording them on financial statements.

Two-way road

Whether your nonprofit can count its staffers on two hands or has hundreds of employees, coordination between departments can easily break down. Contact us about establishing policies and procedures that promote the efficient communication of financial information.

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The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the Federal Government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which includes other laws within it.

Business meal deduction increased

The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.

As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.

The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.

Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.

Therefore, to be deductible:

The food and beverages can’t be lavish or extravagant under the circumstances, and
You or one of your employees must be present when the food or beverages are served.

If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

PPP loans

The new law authorizes more money towards the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans:

Clarifications of tax consequences of PPP loan forgiveness. The law clarifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the law makes clear that taxpayers, whose PPP loans or other obligations are forgiven, are allowed deductions for otherwise deductible expenses paid with the proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.
Waiver of information reporting for PPP loan forgiveness. Under the CAA, the IRS is allowed to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. (The IRS had already waived information returns and payee statements for loans that were guaranteed by the Small Business Administration).

Much more

These are just a couple of the provisions in the new law that are favorable to businesses. The CAA also provides extensions and modifications to earlier payroll tax relief, allows changes to employee benefit plans, includes disaster relief and much more. Contact us if you have questions about your situation.

View Your Financial Statements Through the Right Lens

The New Form 1099-NEC and the Revised 1099-Misc Are Due to Recipients Soon

One Reason to File Your 2020 Tax Return Early

Assessing and Mitigating Key Person Risks

Leading Through Pandemic Fatigue

Can Your Business Benefit From the Enhanced Employee Retention Tax Credit?

How Well Do Your Nonprofit’s Development and Accounting Departments Communicate?

New Law Doubles Business Meal Deductions and Makes Favorable PPP Loan Changes