Tag: tax preparation

The Small Business Guide to the Updated Revenue Recognition Standards

On December 15th of last year, new revenue recognition accounting standards went into effect for public companies. On December 15th of this year, non-public entities with fiscal years beginning after this date will be subject to these updated revenue recognition standards as well. Since these standards are considered to be the largest shift accounting has seen in recent years, we want to go over exactly what they are, as well as what they mean for small businesses.

Understanding the Updated Revenue Recognition Standards

The new standard requires companies to recognize revenue when transferring goods or services to customers in an amount to which the company expects to be entitled. Given the complexity of that statement, it’s helpful to think in terms of a five-step process. Those steps are identifying the contract, spelling outperformance obligations, determining the transaction price, allocating the transaction price and recognizing revenue by performance obligation.

Given the challenges that have always been associated with accounting for revenue, it’s not surprising that many businesses have found that in addition to needing to modify existing financial reporting systems, these changes are being felt beyond the accounting department and affecting things like debt covenants, contracts, taxes, IT and sales departments.

How These Updated Standards Will Affect Small Businesses

All companies that report using U.S. GAAP are required to adapt to the new standard. Non-public companies typically have a choice of using GAAP or another reporting method. A recent survey shows that 78% of larger businesses have at least started to analyze the impact of the new standards, but many have not completed the assessment or taken steps toward implementation.

As far as adopting the standards for your own business, there are a few things to keep in mind. The first is choosing a transition method. Your business can opt to use either a full retrospective transition method or a modified retrospective transition method under the new standard. You’ll also want to take a look at the projected implementation costs for this entire process.

Finally, if your business needs expert help dealing with these updated revenue recognition standards or any other aspects of your accounting, Donohoo Accounting Services can help. We have over 20 years of experience helping clients handle a wide variety of financial challenges. Get a free consultation by contacting us online or by calling 513-528-3982.

How are “bonuses” taxed? Different than regular wages?

As an employee, getting a raise is exciting for a few important reasons. Not only does it validate what you’re contributing to the company, but it also means getting a bigger paycheck every two weeks. Getting a bonus is also a great validation of what you’re doing at work every day. While a bonus comes with plenty of excitement, it can also create a little confusion. The reason that type of confusion is so common is people aren’t sure what effect a bonus will have on their tax filing.

 

What Does the IRS Think of Bonuses?

Supplemental income is the label that the IRS uses to classify bonuses. This label is used for other benefits like payouts for accumulated sick leave, severance packages, moving pay and vacation pay. So you have your regular salary, and then anything else you receive goes in the supplemental income category. While that information is helpful, it doesn’t fully answer the question of how bonuses are taxed at the federal level.

 

Flat Rate vs. Aggregate Taxes

The most common method employers choose for taxing bonuses is flat rate. As long as a bonus is separated from regular income and under one million dollars, it will be taxed at a rate of twenty-five percent. In the event that a bonus does exceed one million dollars, the tax rate goes up to 39.6 percent.

While most employers go with the flat rate method to handle the taxation of bonuses, there is another option available. Known as aggregate taxing, this approach involves adding bonuses to the latest paycheck and taxing the entire amount together. Not only can this method be a little more complex to process, but another reason it’s not as popular is it often results in a higher withholding, which means an employee will be left with a larger tax burden. It’s important to note that regardless of which method is used, bonuses are also subject to Social Security and Medicare taxes.

 

How Bonuses Are Taxed in the State of Ohio

On top of making sure your bonus is properly accounted for when you file at the federal level, it’s also important to understand your state obligations. According to the Ohio Department of Taxation’s website, “the rate is at least 3.5% percent. Ohio Administrative Code 5703-7-10 provides that withholding agents must withhold at least 3.5% on supplemental compensation such as bonuses, commissions, and other non-recurring types of payments other than salaries and wages.”

If you have any additional questions about bonuses or other tax issues, you can reach Donohoo Accounting Services by calling 513-528-3982.

First Year Tax Deduction Strategies for Your Startup

 

Over the last few years, the startup landscape has absolutely exploded. Some of the factors that have contributed to this explosion are decreasing technology costs, increased awareness about startups and access to more sources of capital. But even though there are more startups than ever before, successfully growing a startup into a meaningful company remains a significant challenge. For every success story shared in the media, there are dozens, if not hundreds, of untold stories about startups failing.

Although we could spend all day talking about why growing a startup is still very hard, we want to focus on a specific topic that all founders need to care about. That topic is expenses. Whether your startup is bootstrapped or you have some form of outside funding, keeping a close eye on expenses is a must for making it through the challenges you will inevitably encounter as you work to grow your startup.

There are plenty of stories of startups that had traction but were cut short due to running out of money. So if you want to have the best chance of success, you need to have the funds to stay around. In addition to knowing exactly what your startup is spending money on every month, you should be aware of your tax situation. Doing so will help you avoid getting caught off guard by an unexpected tax bill. This awareness will also give you the ability to make strategic decisions about the deductions your startup takes during its first year.

With that in mind, we want to highlight three deductions that can really help your startup during this time:

Equipment

Depending on your specific startup, equipment may make up a significant percentage of your expenses. If that’s the case, you’ll want to take full advantage of the equipment deductions that are available. A great starting resource for knowing exactly what and how much you can deduct is our Section 179 guide.

2. Startup Costs

As a first-year startup, the IRS allows you to take a $5,000 deduction for startup costs. Examples of qualifying costs provided by the IRS include ads and salaries, as well as travel and other necessary costs for securing prospective distributors, suppliers, or customers. The one caveat to this deduction is your total startup costs must be $50,000 or less.

 

  1. Organizational Expenses

If you structure your startup as a partnership or corporation, you can deduct an additional $5,000 for organizational costs. Just keep in mind that the same rule of limiting your total startup costs to $50,000 or less applies to this deduction as well.

We hope the deductions we highlighted help your startup reduce its tax obligations at the end of its first year. And if you want more hands-on help with your taxes, you can easily contact Donohoo Accounting Services for a free consultation.

Do Nonprofits Need to File Annual Tax Returns?

Many nonprofits are exempt from paying federal taxes. As a result of this exemption, there are often questions around whether or not this type of organization needs to file an annual tax return. Even though a nonprofit may not have to pay any taxes with the federal government, they generally are required to file an annual tax return.

The specific return that most nonprofits need to file is Form 990. This form is specifically designed for organizations that are exempt from federal taxes. The purpose of this form is so the IRS can understand how a nonprofit is handling its operations. This form can also be used by members of the general public to understand the specifics of a nonprofit they may be interested in supporting. By looking at the different elements of Form 990, which include information about a nonprofit’s mission, programs, and finances, it’s possible to be aware of any potential red flags.

More Information About Form 990

Just as individuals may need to file different types of tax returns, there are different versions of Form 990. The specific version that an organization is required to file depends on its size. Larger nonprofits with gross receipts of more than $50,000 file Form 990 or 990-EZ, while smaller nonprofits with gross receipts of less than $50,000 file Form 990-N (e-Postcard). And private foundations need to use Form 990-PF.

If your nonprofit does need to file this form, the due date is the 15th day of the 5th month after the end of your organization’s taxable year. So for an organization that follows a standard calendar year (January 1 – December 31), May 15th would be the annual due date.

Exemptions and Penalties

Although the majority of nonprofits are required to file a version of Form 990, there are certain organizations that are exempt from this requirement. Those organizations include most faith-based organizations, religious schools, missions or missionary organizations, as well as subsidiaries of other nonprofits. Government corporations are often exempt from needing to file, as are state institutions that provide essential services. Nonprofits should always consult directly with the IRS if they have any questions about whether or not they’re required to file.

The reason it’s crucial to know if you need to file Form 990 is the failure to do so three years in a row will result in an automatic loss of tax-exempt status. Over the last five years, more than half a million nonprofits have lost their tax-exempt status for this very reason. Given that the IRS has no appeal process for automatic revocations due to failure to file an appropriate Form 990 for three years, this is an issue that needs to be a top priority for your organization.

For expert help with your nonprofit tax return preparation, contact Donohoo Accounting Services by calling 513-528-3982.