If your business accepts merchant cards for payment or receives payment through a third party network such as Amazon, eBay and PayPal, you may receive form 1099-K this year. Form 1099-K is a new form that will be completed by payment settlement entities (PSE’s) such as banks, credit card companies and third party networks to report the proceeds of payment card and third party network transactions made to payees under Internal Revenue Code 6050W.

All businesses that accepted merchant cards for payment and businesses that accepted payments through a third party network that (1) exceeded $20,000 in gross total reportable transactions and (2) the total number of those transactions exceeded 200 for the calendar year, will receive Copy B of form 1099-K.

Copy B of 1099-K will include the following information:

• Filer’s Name, Address, Phone
• Filer’s Federal Identification Number
• Payee’s Taxpayer Identification Number
• Type of Filer (PSE or Third Party)
• Gross amount of payments
• Monthly amount of payments

As a business owner, you will need to compare the information provided on 1099-K to your gross receipts from that PSE and verify that the amounts track with what you will report on your taxes. Bottom line – The IRS will now have a record of your eBay, Amazon and PayPal transactions, so make sure you match up and report all income on your tax return. For 2011 you won’t have to break it out separately on your business tax return but for 2012 you will.

Look for your Copy B of 1099-K in the mail soon. PSE’s are required to provide form 1099-K to payees by January 31. You may receive the form by mail or electronically. If the PSE elects to send the form electronically, you will be required to provide consent for receipt of electronic statements. Consent can be granted electronically.

For more information from the IRS, go to www.irs.gov/form1099k
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If you’d like more information on 1099-K or other tax issues, contact me at 619-819-0252 or Online.

Dave Heistein is a Certified Public Accountant in the state of California. He is a San Diego CPA, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.

QuickBooks® SharedBooks, currently in development, will allow both clients and their accountants and bookkeepers to “share” their QuickBooks® files giving all users simultaneous access to and immediate updates of all files. Accountants, bookkeepers and their clients will continue to maintain QuickBooks® files on their hard drives but, with SharedBooks, the Intuit servers will ensure that files are synchronized automatically. Multiple users can work on the files at the same time and SharedBooks will provide the necessary controls through features such as ‘read only’ mode or ‘request access to files’ function in order to maintain data integrity.

The SharedBooks user development team will work with the Intuit® in-house product development team to ensure that customer requirements are incorporated in the product development process and help them “test” usability features.

QuickBooks® SharedBooks is intended to improve productivity for accountants, bookkeepers and their clients.

“Think of QuickBooks® SharedBooks as the Google Docs for accounting and bookkeeping,” said Dave Heistein. “I think this will be a great enhancement to the line of QuickBooks products and a real time saver for all users. I am looking forward to the release of SharedBooks in the near future.”

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About Profitwise Accounting

Profitwise Accounting is a San Diego based full-service tax and accounting firm, offering traditional accounting, bookkeeping and tax services, with a significant difference: Profitwise specializes in small to mid-size businesses and works one-on-one with individual owners and staff. We are small business accountants.

Dave Heistein is a Certified Public Accountant in the state of California. He is a San Diego CPA, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.

Contact Information

Profitwise Accounting

Dave Heistein, 619-819-0252

dave@profitwiseaccounting.com

The good news – financial statements are logical tools. Columns need to sum up and accounts need to balance. If you are left-brained, this should be music to your ears. If you tend more on the right-brained side of the equation, think of putting the statements together and the result as pieces to a puzzle and a vision into the future.

Next, let’s go over three of the key varieties financial statements for small businesses:
• Income statements
• Balance sheets
• Statements of cash flow

Income Statements for Small Businesses

The income statement answers the question, “How well did my business perform during the past year?” As a result this tool provides small business owners with a broad view of their financial status.

The income statement shows sales amounts and expense amounts for a period of time. Types of revenue and expenses are listed. (In finance, this is called disclosing revenue and categorizing expenses.) Bookkeepers spend a lot of time properly identifying and assigning expense categories for their small business, and assuring that revenue is allocated to the correct accounts. The difference between the revenue and expenses is net income. This net income is taken from each past period to calculate the retained earnings figure found on the business’s balance sheet. Using these categories, the income statement provides all the details that produced earnings for a small business.

Small Business’s Balance Sheets

The balance sheet answers the question, “What is the financial position of my business at a specific point in time?” It gives you a snapshot of your business for close examination.

The balance sheet is the tool which reveals what you own (your assets) and what you owe (your liabilities). The difference between these two is your small business’s net worth; by having revenue left after paying expenses you create net worth. The balance sheets reveals where the earned money is kept or spent. For example: how much is held in bank accounts, used for the purchase of other types of assets, or spent on equipment and inventory?

Borrowed money is also tracked using the balance sheet. These funds do not add to your small business’s net worth; they are listed on the balance sheet as a liability because they must eventually be repaid. However, using this tool business you can track how borrowed funds were deployed. For example: the borrowed amounts added to assets by increasing the bank account, equipment or inventory.

Inputs for the balance sheet include:
• Bank account balances
• Equipment purchase prices
• Inventory costs
• Amounts paid for buildings and improvements
• Balances owed by customers
• Credit card balances
• Amounts owed to suppliers
• Mortgage balances
• Total owed on lines of credit
• Unpaid payroll liabilities.

The accuracy of your balance sheet inputs results from reconciling the numbers for assets and liabilities, or checking the data with other, independent sources. Examples include checking bank balances on the balance sheet with statements from the bank. Credit card balances are compared to statements from the card company. The inventory balance is compared to an occasional physical count. Loan balances are verified periodically with lenders. Other accounting techniques are employed by bookkeepers to verify balances in accounts receivable and payable.

Statement of Cash Flows in Small Business

The Statement of Cash Flows answers the question, “How much cash did my business generate and spend during the past year?” This statement provides the details on cash in vs. cash out.

The flow of cash is categorized by operating activities, investing activities, and financing activities. The Statement of Cash Flows is a helpful tool in predicting what future cash flows will be, identify potential cash position weaknesses, and preparing for these challenges before they become a problem.

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If you’d like more information on the preparation or interpretation of financial statements for your small business, contact me at 619-819-0252 or online.

Dave Heistein is a Certified Public Accountant in the state of California. He is a San Diego CPA, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.

The calendar in QuickBooks 2012 allows users to quickly see all pending events in a single view. This includes not only a to-do list but also upcoming deadlines for bill payment and submission of invoices.

One of the new features in QuickBooks 2012 reporting permits sharing of customized reports with other users in an online library. Another feature is the ability to apply existing Excel formatting to refreshed reports. There’s no more need to shift around rows in Excel when updating saved reporting formats. QuickBooks 2012 already has a library of over 1,000 custom reports.

Purchasers of the new small business accounting software have access to a Document Center to store and manage contracts, proposals, correspondences, and receipts. This permits attaching documents to lists inside QuickBooks. For example, a client file listed in QuickBooks 2012 can now have a memo, saved email, or contract attached. A vendor file can have the W-9 linked as an attachment. An employee name may contain attached employment documents.

Another new feature in QuickBooks 2012 is a center for tracking sales leads that has a similar look as the Customer Center, which was first created in earlier versions. Users can easily convert a name in the Lead Center into a customer with a single click. Intuit also provides a QuickBooks add-on for synchronizing with Salesforce, the web-based customer relationship management service. The QuickBooks Lead Center can store plenty of basic CRM data. The synchronization eliminates duplication of data entry into Salesforce.

The Document Center and Lead Center are modeled after popular features of Customer Center, Vendor Center, and Report Center in past QuickBooks versions. The Premier edition of QuickBooks 2012 also centralizes all inventory tasks in a new Inventory Center.

Users of QuickBooks 2012 can create time sheets in batches for multiple employees working the same hours. In addition, the Premier edition of QuickBooks 2012 permits time and expense billing in batch invoicing. This is an expansion of the batch invoicing for routine items introduced with QuickBooks 2011.

QuickBooks Pro 2012 has a suggested retail price of $230. The suggested retail price of Premier editions – including several industry-specific programs – is $400.

Intuit also has a QuickBooks 2012 Accountant edition. This is the solution for professional bookkeeping services that offers enhanced financial reporting. New features for the Quickbooks 2012 Accountant edition are an Accountant Center for easier navigation, the ability to create a small data file for a specific date range, and a function to copy features in an existing customer file into the set up of a new customer data file. With these new feature, Quickbooks 2012 remains a key staple in small business accounting software.

California has adopted a new law placing it at the forefront of efforts to collect online sales tax from online sales in the state. As of July 1, 2011, the new California sales tax requires online retailers to collect sales tax if the company has any business presence in California. This includes online sales tax applicable not only to companies based in California, but also any company with business affiliates in the state. Thus, the new taxation of online sales impacts the operation of California’s affiliate marketers, as their relationship with online companies opens those companies to the online sales tax.

Affiliate Marketers

There are an estimated 25,000 affiliate marketers in California, operating websites in California that earn referral fees for directing customers to the online retailer. These websites, such as Savings.com and Ebates.com, provide coupons and services for comparison shopping. According to Performance Marketing Group, $1.9 billion of advertising revenue was generated last year by California affiliates of online retailers. These affiliate marketers are seeing their range of offerings decline as a result of the new online sales tax law. Amazon.com has already dropped arrangements with California-based websites to carry advertisements and links to its products to avoid the online tax. Other online retailers, including Overstock.com and e-commerce jewelry retailer Blue Nile, have also terminated their connection to California based affiliate marketers as a result of the tax. These termination notices are reportedly causing significant sales declines for California’s online affiliate marketing websites.

Shoes ‘R Us is a prime example of a small affiliate marketer operating in California. The founder, Nick Loper, began his affiliate marketing career by establishing a website, writing a blog to draw attention, and earning revenue as readers clicked on an ad that linked to a site where they made purchases. Mr. Loper reports that as a result of the new online sales tax ShoesRUs.com has lost 70 percent of his company’s revenue. The website states that the domain name is for sale and Mr. Loper has indicated that he is moving to Nevada.

Impact of New Sales Tax Online

By some reports, over 70 affiliate marketers have already left California to avoid the new sales tax. Some appear to have moved operation of their websites to other states; states which seem welcoming to these businesses and are eager to gain the business taxes that California has always collected from affiliate marketers. Other affiliates are considering new business models, such as payment based upon click through activity rather than commission on sales.

From the state’s point of view, California reported that sales tax collections for July were 12.5 percent below forecasts. This $139.4 million shortfall appears to confirm fears that the new online sales tax legislation will fail to raise tax revenue and leave shoppers with fewer options from Californian websites. If consumers turn to other sources, affiliate marketers and other online companies must resort to job cuts despite an already depressed California employment market in order to survive.

Both governments and affiliate marketers are watching California closely for the effect of the new law – particularly the reaction of Amazon, which has vowed to collect sales tax only if there were a federal solution, rather than a patchwork of state-by-state laws. Supporters of the new tax rule say that it levels the playing field by forcing big out-of-state retailers to collect sales tax on goods sold in California just like brick-and-mortar stores, and seven other states have passed similar laws for a sales tax levy of online commerce. Many physical location retailers long complained they had an unfair disadvantage by charging sales tax that effectively created higher prices for consumers. But thousands of affiliate website operators now say that the effect of the new online sales tax causes small business website affiliates to struggle. Consumer choices have been reduced because online retailers like Amazon and Overstock have cut off Californian affiliates. Meanwhile, the sales tax isn’t hurting Amazon as much as an entire segment of California’s Internet entrepreneurs.

Meanwhile, companies are waiting to see if a ballot initiative backed by Amazon succeeds in rolling back the new sales tax law in an election next year.

The situation is different if you purchase items to resell on eBay that were not acquired for personal use. When you engage in active trading, you either have a business or a hobby. Your income tax situation can benefit if you have a business, because you can claim business tax deductions. In other words, business losses are deductible against other sources of income.

A business tax deduction is created when you deduct ordinary and necessary business expenses that exceed your revenue. The expenses you may deduct from sales income include internet provider fees, shipping costs, digital camera, computer expenses, and maybe even a home office. Demonstrating that an activity is a legitimate business with an expectation of profit permits deduction of losses in the years when there’s no profit.

When determining whether you have a hobby or business, keep in mind that you may only have a hobby when merely selling occasionally. The IRS generally distinguishes a legitimate business as an activity that produces a profit in three out of five consecutive years. If you don’t meet that test, the IRS deploys subjective measures to determine if your activity is really a business. To prove you have a business usually requires maintaining business-like records. Another factor indicating that you are engaged in a business activity is whether you depend upon the income from it to pay your living expenses.

Failing to sell regularly and constantly on eBay likely means you have a hobby. The income from a hobby is still subject to income tax. But you can only deduct expenses up to the amount of income. There are no business tax deductions, and hobby losses are not deductible.

Qualifying as a business activity is therefore a good deal for income tax purposes. But there is a downside to operating a retail business: the small business tax. That is, retailers have to collect sales tax. Most states exempt residents from collecting sales tax who are not operating a business. That’s why occasional sellers at, say, a garage sale don’t collect sales tax.

Many eBay sellers have a large number of customer ratings. Several have ratings from over 10,000 customers. If that’s your situation, it’s an indication you’re unlikely to qualify for sales tax exemption as an occasional seller.

States generally require your business to collect sales tax on transactions with buyers who live in the same state where you operate. There is a place on the eBay listing template to enter a sales tax rate for your state. Sales tax is then calculated and added to the sale price when a buyer lives in your state.

If you don’t use this eBay feature, then any sales tax you owe to your state is payable from the sale amount you receive. You still owe the sales tax even if you didn’t collect it from the customer. That requires a calculation to back out the tax from your sale.

There are three ways to use eBay as a sales avenue. Firstly, you can simply sell items you originally acquired for personal use. This can include property you purchased, inherited, or received as a gift. Selling a first edition of Melville that you bought in 1979 or grandma’s diamond necklace you inherited in 1988 is a lot different than selling items you recently acquired specifically for resale.

When you buy stuff that you plan to sell, you are a trader. Doing this as a hobby is the second type of eBay seller. If you trade often enough, you’re probably engaged in a business activity. That’s the third type of eBay seller.

When considering taxes on eBay sales, don’t think you’re off the hook from owing the US Treasury if you don’t have a business. The Internal Revenue Service considers everything you own as a capital asset. Selling it for a gain is therefore a taxable event. You owe capital gain tax and possibly a lot of it if the item is classified as a collectible for tax purposes.

This means you have to know the acquisition date and cost basis for all of your stuff. The capital gain is the difference between the sale proceeds and the cost basis. So keep track of how much you paid for that 1953 Mickey Mantle baseball card or the toy James Bond spy kit. You even need to know how much Mom paid in 1967 for that Star Trek lunch box you found in the attic. All will be subject to a capital gain tax.

The cost basis for items given to you is a little tricky. If you inherit something, your cost basis is the value on the decedent’s date of death. If it’s something extremely valuable, you might want an appraisal as of that date. Your best chance to obtain a fair market value is from the estate executor. A value is probably listed on the probate papers. It may be worth it to find an expert in the field, to help you with your eBay accounting needs.

When you receive something as a gift from a living person, be sure to obtain the giver’s costs basis. Getting grandfather’s 1964 Mustang as a birthday gift also means obtaining his original $2,100 cost basis. In that case, expect a considerable tax on your eBay sale. But at least you have some basis to subtract from the sale proceeds. Don’t use a zero cost basis just because the property cost you nothing. That just causes you to owe even more capital gain tax.

Don’t bother reporting on your income tax return any losses from selling personal items. Losses on the sale of personal-use property are not deductible. Pay capital gain tax on the items you sell for more than your cost basis and forget about the things you sell for less than cost basis.

The situation is different if – instead of selling property you held for personal use – you sell items on eBay that you purchased for resale. I’ll detail that type of eBay tax in another blog post!

Independent Contractors vs Employees

Regardless of what a professional relationship is called, a business has an employee when certain conditions are met. The IRS provides a general rule that independent contractors work without supervision regarding when and how to accomplish specific assignments. The payer in such situations only controls what results are expected from the work.

The various states also provide guidance on defining an independent contractor arrangement. An independent contractor basically has a large degree of control over how a job is performed, provides the tools and supplies necessary for a job, and does not receive benefits that are traditionally employee entitlements.

A business produces an annual Form 1099 for an independent contractor indicating the total amount paid for the year. The form is sent to the federal government and a copy is received by the independent contractor. An employee receives Form W-2 annually indicating gross compensation and taxes withheld.

Employment Taxes

Federal law requires employers to deduct certain taxes from employee compensation. No taxes are deducted from payments to independent contractors, who are self-employed and responsible for payment of their tax obligations. Payroll deductions from employee pay include federal income tax liability determined from IRS tables on the wages paid. The other deducted federal payroll taxes are the employee portion of Social Security and Medicare contributions under FICA.

Most states and some municipalities require withholding of taxes for their jurisdictions. An employer with workers located in various states is responsible for state taxes and local employment taxes in each locality where employees are present.

Employers are required to remit all withheld taxes. In addition, there are other employment taxes paid from an employer’s own funds, such as matching amounts for FICA. Payment of employment taxes is the responsibility of an employer. This is true even for taxes that should have been withheld from employees but were not. The IRS will assess back taxes plus penalties on compensation paid by businesses that was improperly classified as contract labor. Such payments are deemed disguised wages.

Personal Responsibility

The usual protection of individuals from personal responsibility for obligations of a corporation does not apply to payroll taxes. The IRS may assess a penalty for recovery of unpaid payroll taxes on any person who has authority over the financial decisions of a corporation.

This test for individual liability rests upon control over corporate payment obligations, regardless of a person’s business title. Responsible individuals essentially possess the status to knowingly pay other creditors with funds that are reserved for payroll taxes. The IRS may rely upon the income and assets of any responsible individual to satisfy unpaid payroll taxes. In fact, the IRS may pursue several individuals for the same tax assessment.

For more advice on how to best structure your employee payroll vs. independent contractor status, schedule a free consultation with an expert accountant focused on San Diego’s small businesses.

Bill Rounds is a California attorney and focuses his practice on privacy issues.  He teaches people how to control how much of their private information is available to the public at HowToVanish.com. 

Data Is Vulnerable

Data is valuable. Information is power. Even more so now, in this age of vast databases and huge computing power to analyze that data. The data that you use in your business is no exception. You have everything from details about customers and clients, agendas from business meetings, emails, negotiation strategies, the recipe for your secret sauce, and lots of other stuff. All of this information is at risk of snooping and theft.

Customer data can include identifying information, appetizing for identity thieves and credit fraud. The internal documents of your business are valuable to your competitors, or even an unscrupulous third party who might profit from selling it to a competitor. And it is surprising how easy it might be to get a hold of that data. Free programs can be downloaded that almost do it for you. Whether it is snooping on a wireless network signal, breaking through simple password protected networks, or just an accidental disclosure of data, unless you have a very sophisticated IT department, you are probably at some risk.

Protect Sensitive Data With Encryption

Fortunately the solution is not only free, but it’s easy. If hiring (or beefing up) a full IT department is not your idea of fun, TrueCrypt is a free program that you can use to encrypt documents. I know encryption sounds like super secret spy stuff, but it is much easier than you might think. If you can email, you can encrypt. It can be a very important way to manage sensitive internal data and documents. Plus, if you lose a USB drive or something, your encrypted data will not be compromised.

Knowing that their data is safe with your company can keep your customers very, very happy. Just take a look at the reported data breaches for the past year and the amount of sensitive consumer data that was compromised in the hands of some very recognizable names. It would be very bad PR to show up on that list.

Smartphones Can Be Trouble

Lots of employers provide phones for their employees. It can be very good for business. But remember that smartphones can be a treasure trove of sensitive information. Not only do they have the ability to contain documents (which you should now know how to encrypt) but they can also be a gateway to easy eavesdropping.

Bluetooth functions are great, especially when you live in a state that requires hands-free talking while driving, but it is also extremely easy to hack into the signal and eavesdrop. Employees should be aware that sensitive calls, if made on a cell phone at all, should not be made with a bluetooth set.

It is inevitable that a phone will be accidentally left somewhere, or even stolen. What was bad news for Apple might be bad news for you too. To prevent this kind of problem, allow for remote locking of the phone. This means that you can access the phone from anywhere and lock it down, no matter who has it or what is going on with it. This prevents data from being compromised both accidentally and intentionally or by a rogue, disgruntled former employee who happened to hang on to their phone.  Most phones will have this feature.  If not, you can get some inexpensive software from companies like Norton or McAfee that give you this capability.

Exposed Emails

The third thing that can be dangerous to your business are emails. Email is notoriously unsecure. It is sent around the internet in plain text form, meaning anyone who sniffs out your internet usage (something that is easy to do), can see all of your emails. Email is a lot like sending a post card, anyone who handles it can read it. Imagine if a competitor were to get a hold of all of your emails and the emails of your business.

To prevent this, use encrypted email services. Hushmail is a free and simple solution that provides free accounts and paid accounts that have more storage. You can also use GnuPG to encrypt your own emails. It is a little bit more complicated to use, but it’s still free and you might even be able to integrate it with your existing company email system.

Conclusion

There is a real threat to any data that you store. The more you store the higher that threat. That includes the data of your customers and clients. Protecting that data makes business sense. The cost is very low and the protection given is very high. Not only can it avoid disasters, it can improve the satisfaction of your own customers and clients. Satisfied customers are return customers.

Author Bio:

Bill Rounds is a California attorney and focuses his practice on privacy issues.  He teaches people how to control how much of their private information is available to the public at HowToVanish.com.

I heard recently that the IRS and and other local tax authorities are now requesting the actual QuickBooks Data file from small businesses under audit. The IRS has now trained their agents to review the electronic copy of your books and records. So now more than ever it’s important to make sure small businesses are maintaining accurate and correctly doing their books. Haphazardly done books could have huge negative consequences as a result of an audit.

Small business owner beware.