Tax Season Is Here - Part 2 - Annual Reports, Taxes/Fees as well as S-Elections

It’s hard to believe that we’re almost three weeks into the New Year. Things are moving quickly and tax time will be here before you know it!

Last week we talked about making sure you get your 1099 forms filed on time.This week we’re focusing on making sure your company’s annual reports and/or annual tax/fee are filed and paid. The requirements vary by the state, but most states require LLCs and corporations to file an annual report and a fee or tax with the Secretary of State. Some states (e.g., New York, New Mexico, Indiana, Alaska, Iowa, Nebraska, Washington D.C.) require filing only every two years. One state, Ohio, does not require annual reports for most companies. Another state, Pennsylvania, used to require filing every 10 years, but will now require annual reporting starting in 2025. Most other states (e.g., North Carolina, Delaware, Nevada, Tennessee, Florida, etc) require annual reports and allow filing and payment online.

In many states, the annual report and/or fee are due by April 15; however, some are due earlier while others base it around the date your company was officially formed. You should check the rules for your state to know for sure. Regardless, it makes little sense to wait for a deadline and it’s easier to pay it now and be done with it!

Another deadline that’s worth knowing is when LLCs can choose to be taxed as an S corporation. Many people choose to form an LLC for their business because they’re simple to start and can, when owned by an individual, file taxes on a Schedule C just like a sole proprietorship. The downside is that all income is subject to self employment taxes. As an LLC grows and gets employees, it may make more sense to shift to an S corporation to reduce the tax burden. For existing businesses, this change can be made before the first 2 months and 15 days of the current tax year for which you want it to take effect. This means there are still about 7 weeks to make this decision.

While lower taxation sounds attractive, it does come with some requirements which may change how you’re currently doing business and may increase your costs. The first big requirement is that everyone, even owners, are paid as employees. If the company already has employees, this means adding the owners as W-2 employees. If the company just uses contractors and owners just take money from the company as needed, it may help to work with a payroll company to make sure things are done properly and reported correctly to the IRS.

Some owners may choose to not pay themselves in an LLC, but the IRS states that S corporations must pay officers “wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While there may be a temptation for an owner of an S corporation to choose a minimum wage to avoid taxes, the IRS is well aware of this and reacts accordingly. This is why it helps to work with companies that specialize in payroll work.

The second big requirement is that the company must file tax forms separately from the owner. If the LLC has a single owner, this means filing a Form 1120-S. For those who filed on their own, this is a bit more complicated than filing a Schedule C with their taxes and usually means using a tax preparer at somewhat higher expense. If the LLC had multiple owners already or they used a tax preparer already, it mostly means changing from one form to another.

Electing to file as an S corporation does not require changing how you’re already registered with the state. This filing is instead done with the IRS by filing a Form 2553. The tricky part is you must FAX the form to the IRS. For those without FAX machines, there are options. It is important, though, to speak with a professional to make sure that this decision is right for your company. Brightleaf would be happy to help your company see if this transition makes sense.

Tax Season Is Here - Part 1 - Filing The Right Form-1099

Which Form 1099 to file?

Happy 2024! A new year is an exciting time for business. New opportunities. New ways to help customers and clients. But this is also the time where business owners need to put things together for the previous year's taxes.

Many new business owners aren't aware that the first forms must be filed in January. The first things they'll need to file are 1099s to individuals and most companies who received at least $600 in non-employment income or other payments during the year. Types of payments include services provided, commissions, rent, interest, dividends, and other similar payments. Vendors that are incorporated (e.g, either a C-Corp or an S-Corp) will not require a 1099, but sole proprietors, independent contractors, partnerships, and most LLCs will.

1099-NEC - For Nonemployee Compensation. This is intended for contractors or other service providers who were paid for their work, but are not considered employees and who won't receive a W2 for their services. The company is required to have copies submitted to the individual or vendor paid as well as to the IRS by January 31, 2024.

1099-MISC - Used for other miscellaneous payments such as rents, prizes and awards, awards paid to an attorney, and other payments. The company is required to, in most cases, have copies submitted to the individual or vendor paid by January 31, 2024; however, if there are "substitute payments in lieu of dividends or interest" or "gross proceeds paid to an attorney, they aren't due until Feb 15, 2024. The IRS must receive their copy by February 28, 2024 if provided on paper or by April 1 if eFiled.

Those are the most common 1099 filings for businesses, but other forms include:

  • 1099-INT - For taxpayers who've earned more than $10 in interest in the tax year. Businesses that send these out are typically banks, brokerage firms, or other investment firms.

  • 1099-DIV - For taxpayers who received dividend income during the tax year, usually as cash payments paid to investors for owning stock or equity shares.

  • 1099-B - Goes to taxpayers listing transactions from a broker (e.g., sales from stocks, commodities, and other securities are the most common; however, it also includes bartered transactions through an exchange.)

  • 1099-G - Sent by local, state, and federal government to recipients of refunds or some benefits like unemployment.

  • 1099-K - Issued by payment companies, online marketplaces, or payment apps for goods or services provided during the year. A $5,000 threshold is planned for 2024.

  • 1099-PATR - These report cooperative patronage dividends and dividend payments associated with farms.

  • 1099-R - Taxpayers who receive pension distributions or payments from a taxable retirement plan or IRA will receive this form.). This can also apply to certain annuities and life insurance contracts.

  • 1099-S - Provided for real estate transactions to show realized proceeds and gains from selling commercial/residential properties or land.

  • 1099-SA - Sent to individuals who receive distributions from health or medical savings accounts as well as Medicare Advantage Accounts.

If you're a self-employed taxpayer who earned less than $600, you may not receive a 1099–NEC; however, you're still expected to report that money as income on your tax return. If you've just started a side business or you've been in business a while and some of this is new to you, please reach out to us at Brightleaf Consulting Group. We're happy to help you learn more about what's required for small businesses and put your mind at ease about what to file and when!

- John Thrush

Get Your New Year Off to a Flying Start

Happy New Year! The holiday season is officially over and it’s time to get moving again! Here are a few suggestions to get things moving in January.

Reconnect with people

There were almost certainly people with whom you couldn’t connect last year because your schedules didn’t line up. This includes existing or potential customers and clients, existing or potential partners, vendors, suppliers, etc. And yes, people are going to be busy catching up, but now is the time to get on their calendars if you aren’t already. Make a list of all the people that you tried to contact and then reach out to schedule a time to talk or even meet in person. It may be a bit harder to remember the people who tried to contact you when you didn’t have time to speak, but you can always look through the call list on your phone or check your emails. You may be surprised to see who you forgot!

Set Your Goals For The Year

If you don’t have goals for your company, it’s like getting into the car without selecting a destination first. Think of goals as the direction. How quickly you reach the destination depends on the speed and effort you apply to that direction.

Try to stick to goals you expect to achieve this year. It’s good to have multiple short term goals so you can show forward momentum and stay positive. Reaching a certain revenue number or completing a certification course by a certain date are a few examples. It may also help to build better work habits by setting recurring goals like responding to all emails or phone calls within a certain period of time.

Real long term goals may take years to reach, so it’s a good idea to start with your ultimate goal and work backwards to set those smaller goals. Back to the car analogy, these smaller goals become stops on the map to the final destination. And, just like a map, there are multiple ways to get to the same place. If you find one of those goals isn’t going to be possible, think about a different goal on a different path that could get you to the same place.

If you need help setting goals, the SMART system created by George Doran, Arthur Miller and James Cunningham is a time-tested system that’s proven extremely useful. This acronym stands for Specific, Measurable, Achievable, Relevant, and Time-Bound. If you’ve never used it before, it’s worth reading about more to use it more effectively.

Focus your team

It’s easy to get bogged down in your own tasks as a manager and to forget that your team is relying upon you to not only manage the company, but to lead them as individuals and as a team. Being a leader isn’t easy, but it can be made easier when your team knows what they have to do and why what they do is important. This also helps them realize why they are important to the company and to each other as a team. This clarity will help both you and your team to focus their efforts and improve results.

Among the first things to focus the team upon is understanding the company goals. Again, if everyone knows the intended destination, they have a better understanding of what is required to get there. One way that can help is to have the team work together to develop the goals. How this is implemented depends on the size of the company… whereas a small company may involve many of the employees, a larger company may only have key leaders involved.

Another item to help focus will be establishing how to communicate more effectively with each other. Whereas some companies and employees are effective verbally, it’s very difficult to hold people accountable for conversations alone. Conversely, because email can get overwhelming, it’s very difficult to communicate everything over email. When you add in texting and instant messaging or other channels, a lot of communications can get lost in the shuffle. Ultimately it may require combinations of things: if a text or meeting is used to communicate an objective, it may be followed up with an email to document what was communicated and/or a calendar notice to set a due date for a deliverable. Another option is to use project management software (e.g., Nifty, Trello, or Clickup) that helps to improve team communication and keeping on schedule. This can have a learning curve to work effectively, but can work wonders when used correctly.

Create A List Of Answers To Seek

To stay competitive requires understanding your company as well as its place in the market and industry. This means understanding your customers’ changing needs and buying habits, general consumer trends, what new advancements are expected, changes in regulations that may require changing your offerings or how business is done, and hundreds of other details that you can’t possibly have the time or ability to research without giving up on your other responsibilities. So what do you do?

Instead of spending the time answering every question you have, first determine what answers you need to know to remain competitive. From there, figure out what questions you can ask to get those answers. Some questions are easy to figure out: if you need to know how many items to order, you should ask how many you think you will sell. Other answers may require a lot of questions: knowing customer trends that affect your business may require asking if people are buying mostly online or in-person, what is popular, what is outdated, are changes seasonal or annual, and any number of questions.

Once you have these questions listed, consider which of them can be delegated to your team. Some may be quick tasks while others may turn into full projects. 

Commit to learning

Many of the most respected business leaders are successful for being in the right place and doing the right thing at the right time. Part of that may be luck, but more often than not it’s because they knew where to be and what to do before they got there. How they knew is because they got informed. More often than not, this means reading or otherwise consuming that information.

Reading the news is generally a good idea; however, it’s also worth checking if the source is reliable, especially if it’s online. Fortunately, search engines make it easy to do this and compare them with each other when something sounds off. It’s generally a good practice to read multiple sources about the same topics to stay level headed.

There are a number of good sources for current business information (e.g., The Economist, Business Week, Forbes, Entrepreneur, Inc.). These are great sources for a variety of information; however, if you’re in a specialized industry, there are likely industry publications or websites that provide more curated news or other content for that industry. And while many of these provide some articles for free, you may want to invest in a subscription to one or two if you find yourself returning to it more often.

If you need to really focus on a subject, books are probably the best option to learn a great deal in the least amount of time. A few books that have information that can help people learn more about how to be more effective at work and in life are:

Can you think of some books that you’ve found useful for your business or for life in general? Who do you think would benefit most from them?

- John Thrush

It’s The End Of The Year… Do You Know Where Your Business Is? 4 Things To Focus On As The Year Comes To A Close

Look forward to 2024 by reviewing 2023 and planning for the future

It’s the holiday season! This means family, friends, presents, and time off; however, business owners and managers have other considerations. They need to make sure everything is completed for the year that’s about to end while also getting prepared for the new year. Here are 4 things that business managers and owners should focus on in the last weeks of the year.

Review This Year's Goals and Achievements

Spend some time reviewing the goals you had for the previous year, reflecting on your company’s performance, and comparing your budget to the actual numbers. What goals did you achieve and where did you fall short? How did you perform better and where could you have done better? Where did you slide away from your budget and where could your spending have been better allocated? What limitations are there keeping you from having more impact? Are there ways to be creative about these limitations and turn them into advantages?

It is important to remember when comparing goals and budgets to the actual performance to not get discouraged about things not going according to plan. Many variables can’t be controlled which will disrupt even the best made plans; however, the process of planning is intended to help managers think through these variables and figure out ways to respond to various situations. If the year brought about unexpected challenges, you now know something else to consider in the coming year.

Review the Financials and Determine Profitability

Tax time is coming sooner than you think, so having an idea of how the business did financially is of tremendous importance. To get an accurate read on this requires diligence in keeping tracking of revenue and spending. This is easier if all spending is done through business bank accounts and cards, but can quickly become complicated if you’re reimbursing employee expenses or using personal credit cards. Something else that can complicate things greatly are using online payment tools like Paypal or Venmo if funds stay in the application rather than being moved directly to bank accounts.

If the company didn’t do well financially, this is where it becomes more important to look at expenses and see where it may make sense to trim for the coming year. Evaluating any regular or automatic expenses is a perfect place to start. Memberships intended for business development not getting the desired results could be allowed to expire. Software subscriptions should be reviewed to see if you’re paying for more features than you need or even using them at all. Another tip for software is to find out if you’re paying for subscriptions to software that duplicates features.

Labor is almost always a substantial expense and wanting to make cuts is a typical response, but it’s important to first look at labor to see how well it’s being used and how much revenue is being generated. Sometimes people are being paid too much, but one of the biggest mistakes a company can make is cutting employees without understanding how the organization will function if those skills or knowledge are no longer available - this is often seen when companies cut back on employees in sales or tech support.

If financial performance was better than expected, it may make sense to do some end of year spending. This could mean upgrading your computers or buying other items to increase productivity or capabilities, but it could also mean giving your employees a holiday bonus to reward them for helping the company get to where it is.

Determine and Document Company Goals

Running a company without goals is like going on a vacation without choosing a destination. Setting even basic goals provides direction while also helping determine the speed and effort needed to achieve the goals. If you’re unable to achieve the goals you set, you can look at how you fell short in the past to get insights on how you need to adapt. Are different skills needed? Do you have the right people in the right positions? Do you need new or different people? Are you targeting the right customers or clients? Do you need to find new ways to reach those people?

While there are many ways to set goals, it is usually good to start with your ultimate goal and work backwards with step goals. Many companies choose to do this with 5, 3, and 1 year goals. Sometimes it makes more sense to start with 1 year, 6 months, and 3 months if your company is new or you’re pivoting.

Another helpful way to set goals is making sure they adhere to the SMART system created by George Doran, Arthur Miller and James Cunningham. This acronym stands for Specific, Measurable, Achievable, Relevant, and Time-Bound. If you’ve never used it before, it’s worth reading about more to use it more effectively.

If your company appears to have hit a ceiling and can’t seem to meet or exceed certain goals, it’s sometimes helpful to work with a consultant. They can help you find out if the goals being set are the right ones and see if what you’re looking at is a problem or just a symptom of something else that’s preventing progress.

Create your Company Budget

While setting goals, it will be natural to think about how to afford the steps needed to make them happen. Even so, it helps think about your goals before figuring out how to afford all of the steps to make those things happen. It’s important to remain optimistic as well as ambitious when thinking about the future. Focusing on limitations can limit both optimism and ambition, so challenge yourself to look past the money a bit at that stage.

Ultimately, how to pay for the steps to achieve your company’s goals will have to be addressed. Many larger organizations often use past budgets with marginal increases to set the subsequent budgets. Smaller organizations are far less likely to do this, especially if they have goals to grow, but also because they have less of a budget and need to be more careful in how they use their available funds. Using the goals should help greatly in how to prioritize funds to achieve the desired outcomes.

If you have a previous budget, you’ll generally know what categories exist already. If you’re working on your first budget, some things you’ll want to address are:

  • Payroll and Contractors

  • Marketing and Advertising

  • Depletion and/or Unpaid Invoices

  • Insurance

  • Interest

  • Professional Services (e.g., legal, accounting)

  • Office Supplies and Expenses

  • Rent or Lease

  • Repairs and Maintenance

  • Taxes and/or Licenses

  • Travel

  • Meals and Entertainment

  • Utilities

Managers are often surprised where money actually goes during a company’s first year of operations. While some spending is unavoidable, using a budget and checking against it periodically can be an eye opening experience. It can also be an invaluable exercise if only to prepare you for the second year’s budget.

Working on these 4 things near the end of the year can help build some structure around reviewing the past and planning for the future. If you find it overwhelming, you’re not alone. This is especially true in times of stress. This is why it’s a good idea to work with a third party that can help you look at things from a different perspective and help you make decisions with less emotion attached to them. If you find yourself in this situation, Brightleaf Consulting Group is happy to help with finding solutions to your challenges and to help get your company back on track or to shift it onto a new one.