New FASB Accounting for Revenue Recognition

New FASB Guidance on Lease Accounting

FASB Foreign Currency Accounting

When did you become a resident of the US for tax purposes?

Establishing you as a resident or non resident of the US can make a big difference to your US tax liability and the amount of work you and your CPA have to do.

Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax accounting rules, not financial accounting principles, and includes almost all income from whatever source

The US is one of only two countries in the world tax that tax non-resident citizens on their worldwide income.

Let’s deal with the simple issues first

If you are citizen or green card holder of the US, you are subject to US tax on worldwide income and it doesn’t matter if you ever set foot in the US.

If you are undocumented in the US you are still subject to the tax laws that apply to residents with a requirement to report income from all sources worldwide.

Now it starts getting complicated

Substantive Presence Test

You are also a resident of the US if you meet the “substantive presence test”.  You meet this test if you have been resident in the US for 31 days in the current year AND 183 days in the immediate previous two years.  These 183 days are calculating the actual days in the current year, plus 1/3 of the days in the preceding year and 1/6 of the days in the year before that.

OK so far, now lets deal with some exemptions

There are special rules if you are a resident of Canada or Mexico and compute regularly to the US to work.

You do not count days if you are in the US working as an exempt individual such as an employee of a professional government, teacher or a professional athlete. This also applies to immediate family members of these people.

Closer Connection to a Foreign Country

Even if you meet the substantial presence test, you can be treated as a nonresident alien if you:

• Are present in the United States for less than 183 days during the year,
• Maintain a tax home in a foreign country during the year, and
• Have a closer connection during the year to one foreign country in which you have a tax home than to the United

Tax home.  

Your tax home is the general area of your main place of business or employment, regardless of where you maintain your family home. Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual.

If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

Establishing a closer connection. 

You will be considered to have a closer connection to a foreign country than the United States if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States.

In determining whether you have maintained more significant contacts with the foreign country than with the United States, the facts and circumstances to be considered include, but are not limited to, the following.

1. The country of residence you designate on forms and documents.
2. The types of official forms and documents you file, such as Form W-9, Form W-8BEN, or Form W-8ECI.
3. The location of:
1. Your permanent home,
2. Your family,
3. Your personal belongings, such as cars, furniture, clothing, and jewelry,
4. Your current social, political, cultural, professional, or religious affiliations,
5. Your business activities (other than those that constitute your tax home),
6. The jurisdiction in which you hold a driver's license,
7. The jurisdiction in which you vote, and
8. Charitable organizations to which you contribute.

It does not matter whether your permanent home is a house, an apartment, or a furnished room. It also does not matter whether you rent or own it. It is important, however, that your home be available at all times, continuously, and not solely for short stays.

When you cannot have a closer connection. 

 You cannot claim you have a closer connection to a foreign country if either of the following applies:

• You personally applied, or took other steps during the year, to change your status to that of a permanent resident, or
• You had an application pending for adjustment of status during the current year.
• 
  

Effects of Tax Teaties

The rules given here to determine if you are a U.S. resident do not override tax treaty definitions of residency. If you are a dual-resident taxpayer, you can still claim the benefits under an income tax treaty. 

A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. 

The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence (tie-breaker rule). 

If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax. 

First Year of Residency

If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date.

There are also certain rules that apply to specifying the actual date of residency.

Deciding if you are resident or non-resident of the US can make significant changes to the preparation of your tax return.

Contact us at www.mottramcpas.com for help with resident and non-resident tax services.

Business’ fail because the right questions are not asked and researched.

It's often said that more than half of new businesses fail during the first year. According to the Small Business Association (SBA), this isn't necessarily true. The SBA states that only 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10. The SBA goes on to state that only 25% make it to 15 years or more. However, not all of these businesses need to fail. With the right planning, funding and flexibility, businesses have a better chance of succeeding.

We know the facts and we’ve seen the lists but you have to be a detail freak to avoid being a failed business statistic.

Let’s suppose you have the right personality, you have proven management and leadership qualities and on top of that you understand that cash control is critical. 

With all these important attributes in-place what can go wrong?

Well, honest errors in decision-making can go wrong. 

These errors have their origin in the following areas.

1.    Not investigating the market

2.    Business Plan Problems

3.    Too little financing

4.    Bad location, Internet Presence, Marketing

5.    Rigidity

6.    Expanding too fast.

It is easy to keep this list in your mind but each item can stretch into a very broad topic and leave everything very mushy in your mind..

It seems to me, you make the list work when you take a narrower view of each item on the list, at least initially, and then dig very, very deep into each one.. 

The list doesn’t attempt to explain what you can do to avoid the pitfalls of each. You have to do challenge yourself to ask all the questions and promise yourself to answer all the questions fully.

You often need a trusted mentor or advisor to help you with this part. Not to tell you want the answer is, but to help you formulate the questions and then sign-off on the completeness of the information you need to collect. This will form the basis of your  decision-making.

Asking the penetrating questions and not stopping until you have gotten all the facts that counts.

For example, when a business fails you can go back and ascribe broad causes from the list above. For sure you will see the cracks in the foundations of the business were clear well before the business succumbed.

Take “too little financing”. When the business finally closes, of cause there was “too little financing” to keep the doors open. However, was the demise set in motion much, much earlier when a plan to commit funds to an investment hadn’t been thought through well enough and the business could not afford to have lost that money when the project partially or completely failed.   Well the unfortunate decision to proceed resulted from insufficient depth of study.  The company was weakened by not going into sufficient detail in a combination of  areas incluing  “not investigating the market”, “business plan problems “and probably “too little financing”.

It’s asking the right questions at a detailed enough level that really counts, exhaustively collecting information and then completing the decision-making work implied in each item on the list.

We know how much your business means to you, your family and the employees, vendors and customers that relay on you.

It is our passionate mission to have your small business survive and prosper and not be an early statistic to failure.

We have a wide range of tools including decision-making processes that will keep your company healthy and alive.

Contact us for a free consultation. 

Will a CPA offer a start-up business free services?

I recently invited two young tech entrepreneurs to lunch. I wanted to know the role a CPA provided in the start-up of their various ventures.

I was somewhat deflated to hear that they had never consulted with a CPA when beginning their new ventures.  They did say it would have made sense for them to consult with a CPA and even said they wished they had had a CPA advising them from the beginning.

Yah …….but they didn’t actually do it, right?

So why didn’t they and does that mean there is no market for CPA services in the highly active technology start-up world?

I pondered the question and it seems the answer may be simple…….there was start-up activity but no real business start-up. There was a business idea, there was a decision to do market research, a decision to develop a business, a website launched, even product software design started…….but……there was no actually business started.   

These tech entrepreneurs may have formed a company, obtained a tax identification number, opened a bank account, spent money but unless they had repeatable sales of any significance or had significant sales contracts in-hand…….there is no business, there is no start-up business.  It’s a project, a bobby activity or a business in the making.

 This doesn’t mean they don’t need CPA services. They agree this was an important time to seek the advice of a CPA. However, the high cost of the CPA services, the need to conserve funds and the risk in the entrepreneurs mind that there may never be a real business means that a simple return on investment calculation in the mind of the entrepreneur fails the test and the decision to call on a CPA is deferred.

There are a growing number of extremely motivated individuals that are developing mobile software application so solve known and unknown problems. There is a tendency for the CPA anxious for new clients to interpret these efforts to be business start-up activities when they are not. Even when the developer has formed a company, opened a bank account, obtained an EIN and has a website that describes and announces the App, it is still far from a business.

 It most cases the software developer has no successful track record or even worked in a company that has developed and launched successful Software Apps.

However, all may not be lost for the CPA or the Entrepreneur.

A thinking CPA may be willing to provide some time to assisting the entrepreneur at no cost, such as a 1 or 2 hour presentation on  what is needed to start a business successfully. This might include tax implications of the different business legal structures, the importance of a business plan, how to price products and services, how to manage cash flow, the operational outsource cost model plus a whole lot more. The CPA may also be willing to invest a few hours of his time to outline general direction and provide reference sources. The CPA may also be willing to be on call when the entrepreneur or partners have financial questions.

The CPA is prepared to do this because he wants to acquire the future tax, accounting and consultancy work.  This work may be worth many thousands of dollars for a successful company over a number of years.  For the CPA the free time he or she is willing to invest has a positive ROI if he has confidence the entrepreneur has proven business start-up experience, a well articulated business model , necessary start-up funding and effective leadership that portends well  for success.

The CPA also has to feel that the entrepreneur will consider the CPA a very strong candidate to be signed-up for exclusive fee paying work down the road.

During this business development stage the CPA is unlikely to provide customized written work or advice that would be billable in the normal course of the firm’s normal business hours. However, as previously mentioned the CPA may often be willing to make a presentation and take short telephone calls, even respond with texts or a short email, be on an advisory committee or be a financial mentor.  These limited more generic services are valuable to the business start-up.

So there you have it…….forming a business is most likely not a start-up business. The CPA who is anxious for new clients can establish an early relationship with what maybe a potential client. The CPA can allocate limited time at little or no charge if the CPA has evaluated the entrepreneur and the new venture with a more likely probability of success than not. In this way the CPA improves his ROI on time allocated to the venture and is able to establish  an early relationship that very often will be sufficient to secure fee based work down the road.

Start a Business - Follow these Steps

The world is changing rapidly. The availability of technology, the way we buy products and services, the ease of accessing specialized skills anywhere in the world, the declining cost of launching a new business.

All of these factors create opportunities for new entrants to the market and make this one of the best of times to consider starting your own business. Starting your own business, will require well developed leadership skills, hard work, discipline to see a task through, rapid evaluation of what is working and what is not and a whole lot more.  But for those who have the drive to succeed and the energy to work long hours, the rewards are well worth the investment in time and money.

Here are the steps you need to take to make your new business a success.

Problem solve your business idea.

Create a shortlist of business ideas. Make sure you are really knowledgeable and passionate about each of them or you have found a gap in the marketplace that needs to be filled. Wherever your interests lie, it's almost guaranteed that there's a way to turn it into a business.

Another option is to open a franchise of an established company. If you choose to go this route, a lot of the legwork has been done for you. The concept, brand following and business model are already in place; all you need is a good location and the means to fund your operation.

Once you've narrowed your list of ideas down to one or two, do a quick search for existing companies in your chosen industry. Learn what the current brand leaders are doing and figure out how you can do it better. If you think your business can deliver something other companies don't or deliver the same thing, but faster and cheaper, you've got a solid idea and are ready to create a business plan.

Prioritize the shortlist of business ideas by into viable business models. To accomplish this, identify revenue sources, the customer base, products, or services and details of how the business will be financed for each idea. This translates the business idea into a preliminary business model.

Know your business solution and your customer inside and out. Ensure you are passionate about what you are starting because you will be spending all your time with it.

Now for the Business Plan.

Now that you have your idea in place, there are a few important questions you need to ask yourself. What is the purpose of your business? Who are you selling to? What are your end goals? How will you finance your startup costs? All of these questions can be answered in a well-written business plan.

A business plan helps you figure out where your company is going, how it will overcome any potential difficulties, and what you need to sustain it.

The basic sections you will need to cover are:

1.    What your business is about and how you will accomplish your goals.

2.    Your extended goals, and how you will fill your market's needs.

3.    Your research on your target market.

4.    Organization and management of your company.

5.    Your service or product line, including copyright information and R & D activities.

6.    Strategies for market penetration and growth.

7.    Estimated costs and funding request (if you need financial assistance).

Know how much you will need to finance the business.

Starting any business has a price, so you need to determine how you're going to cover those costs. Do you have the means to fund your startup, or will you need to borrow money?

If you are planning to make your new business your full-time job, it's wise to wait until you have at least some money put away for startup costs and to sustain yourself in the beginning before you start making a profit.

Startups requiring a lot more funding up-front may want to consider venture capital. This is money, usually in the amount of several million dollars, provided to a fledgling company by a firm or business with the expectation that the backers will have a hands-on role in running your business.

Alternatively, you could use an angel investor, a private individual that will provide up to about $1 million for a project, or launch an equity CrowdFunding campaign to raise smaller amounts of money from multiple backers.

Using a home equity loan or a small business credit card to finance your startup is a viable solution, but it isn't recommended. A credit card is best used as a means to keep your business on course, or to make big-ticket purchases you wouldn't otherwise be able to afford.

Decide on the legal business structure.

Before you can register your company, you need to decide what kind of entity it is. Your business structure legally affects everything from how you file your taxes to your personal liability if something goes wrong.

If you own the business entirely by yourself and plan to be responsible for all debts and obligations, you can register for a sole proprietorship. A partnership, as its name implies, means that two or more people are held liable as business owners. These are easiest types of businesses to form, and the only difference is the number of people contributing resources and sharing the profits and liabilities.

If you want to separate your personal liability from your company's liability, you may want to consider forming a corporation. This makes a business a separate entities apart from its owners and therefore, corporations can own property, assume liability, pay taxes, enter into contracts, sue and be sued like any other individual. If you decide to make your business a corporation, you'll need to choose C or S. The main difference between these is the income taxing, with an S corporation owner only being taxed on a personal level. 

One of the most common structures for small businesses, however, is the limited liability corporation (LLC). This hybrid structure has the legal protections of a corporation while allowing for the tax benefits of a partnership. Any lawful business can form an LLC, with the exception of businesses in banking, insurance or a few other specific professional service operations.

It is up to you to determine which type of entity is best for your current needs and future business goals.

Register with the government and IRS.

To become an officially recognized business entity, you must register with the government. If you are registering as a corporation, you'll need an articles of incorporation document, which includes your name, business purpose, corporate structure, stock details and other information about your company.

Otherwise, you will just need to register your business name, which can be your legal name, or a fictitious "Doing Business As" name (if you are the sole proprietor) or the name you've come up with for your company. You may also want to take steps to trademark your business name for extra legal protection.

After you register your business, the next step is obtaining an Employer Identification Number (EIN) from the Internal Revenue Service. While this is not required for sole proprietorships with no employees, you may want to apply for one anyway to keep your personal and business taxes separate, or simply to save yourself the trouble later on if you decide to hire someone else. The IRS has provided a checklist to determine whether you will require an EIN to run your business. If you do need an EIN, you can register online for free.

Regardless of whether or not you need an EIN, you will need to file certain forms to fulfill your federal and state income tax obligations. The forms you need are determined by your business structure.

It is also important for entrepreneurs to consider their intellectual property, and be absolutely certain that they own it before going ahead with their business.

If you are working with other people, be sure you understand who really owns your concepts and ideas familiarize yourself with the basics of the patent laws that have changed dramatically over the past few years which is now a first-to-file system.

Build your team.

Unless you're planning to be the sole proprietor and employee of your business, you're going to need to hire a great team to get your company off the ground.

Figuring out how the team will work together is critically important. Defining roles and responsibility, division of labor, how to give feedback, or how to work together when not everyone is in the same room will save you a lot of headaches down the line.

In the early stages of your business and until revenue and profitability have reached a repeatable level it is highly recommended that you outsource as many operational activities as possible.  This approach is made easier in the last 10 years with advances in making technology accessible to small business that was exclusively available to large businesses in the past.

Have a Brand and advertise it!

A great startup idea won't do you any good if people don't know about it. While there's still a lot of value in word-of-mouth advertising, you're going to need to do more than just tell your social circles that you're starting a business. Before you start selling your product or service, you need to build up your brand and get a following of people ready to jump when you open your business.

A company website and social media profiles are practically essential for any small business in today's world. Create a logo that can help people easily identify your brand and be consistent in using it across all of your platforms. Use social media to spread the word about your new company. You can even use it as a promotional tool to offer coupons and discounts to followers once you launch. Be sure to keep these digital assets up-to-date with relevant, interesting content about your business and industry as well.

When you have your business product or service and brand, get out into the market and testing your product or service to get feedback from real customers.

Once you have your first few clients, work with them to find the common truth in your customer base.

Now grow your business!

Your launch and first sales are only the beginning of your task as an entrepreneur. In order to make a profit and stay afloat, you always need to be growing your business. It's going to take time and effort, but you'll get out of your business what you put into it.

Collaborating with more established brands in your industry is a great way to achieve growth. Reach out to other companies or even influential bloggers and ask for some promotion in exchange for a free product sample or service. Partner with a charity organization and volunteer some of your time or products to get your name out there.

There are also a lot of great tech tools available to help small businesses reach the next level of growth.

Starting a business can be risky and challenging, and we have not covered all the issues that need to be addressed in your particular, but armed with the proper tools and information, you are on the road to entrepreneurship.