An elusive standard in closely held businesses

Businesses, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

A company organized as an S- or a C-corporation, reasonable compensation becomes an important concept.  Generally, on audit, the IRS will look to see if salary to owners is too high (for C-corporation owners) or too low (for S-corporation owners)

Companies structured as an unincorporated sole proprietorship, a partnership, or a LLC, reasonable compensation is not something to be concerned about.  That’s because, such business entities are generally taxed as partnerships, and the income owners or partners earn from them is subject to personal income tax and self-employment tax.

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Good budgets are worth the time and trouble

Working with small and middle market businesses with few or limited cash resources, a good budget can be the difference between financial success and fiscal challenge-or the business’s inability to expand to its full potential.

Budgets prepared by closely held companies vary widely from no written budget at all (“It’s all in my head.”), to fairly detailed and accurate ones.  In the case of business valuations, an ownership interest depends on what the business will accomplish in the future, while reasonable estimates of the future assists in arriving at a value. 

A budget functions as an action plan.  In essence, it is the translation of strategic plans into measurable quantities that express the expected resources required and anticipated returns over a certain period.  It is an adaptable tool for management to achieve its goals and objectives.

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Single workflow, single solution

The accounting industry is no different than most businesses, it is faced with economic volatility, changing regulations, and adjusting client expectations.  It's not business as usual anymore.

Future-ready businesses are defined with a combination of process, best practices, and constantly implementing a path of continuous improvement.  Those factors point to a need for flexibility in order for a company to be ready for the future, including such characteristics as:

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IRS using client back-up files from QuickBooks

A long-standing debate in many audits has centered on records – and the preferred format of those records – provided by the taxpayers.  The IRS gets more serious about using electronic books, such as back-up copies of accounting software, in audits. 

Many small businesses use off-the-shelf accounting software, with reportedly more than 85 percent using QuickBooks.  Today, most small businesses store all or part of their information electronically.  The IRS maintains broad authority to examine electronic records to establish the taxpayer’s correct tax liability.

The IRS prefer reviewing and assessing the original books of entry – not translated or interpreted version – to evaluate audit trails and reliability of records.  In addition, the description of electronic books and records also included taxpayer websites, e-commerce activities and web marketing material.  Such information is useful for audit trails in tracing income such as e-payments.

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