Dealing With Clients in Financial Distress

Managing receivables is difficult in the best of times, and these challenges have been made even more difficult by the current economic environment. But there are several steps your CPA firm can take.

Get a handle on billing issues at the outset. First, send out invoices in a timely manner. Invoices are more likely to be paid when the value of your services is still fresh in mind. The earlier an invoice goes out, the earlier it will get paid. Second, if your client has certain requirements or guidelines for processing payment, find out what they are upfront (this can be particularly important for companies requiring the electronic submission of invoices, which is becoming more prevalent). Third, provide clear explanations of the work performed and, if the invoice is likely to draw complaints for being out of line with estimated costs, a phone call to the client with an explanation before the invoice goes out can help eliminate surprises.

Many companies have a 30- or 45-day payment policy. Consider having the client agree to a shorter time frame. This is especially important when the client is experiencing financial difficulties.

Whether or not your client is facing financial difficulties, when your work is expected to take several months, you should have your client agree to progress billing. The shorter the period covered by the billing, the better. But be prepared to stop work if bills are not paid on time. When your client is weak financially, consider an advance retainer agreement.

FOLLOW UP REGULARLY

Once the invoice is out and becomes overdue, follow up regularly. Don’t just send a balance overdue notice. Speak directly with your client and try to get an explanation for any significant outstanding balance, which may provide some guidance as to how concerned you need to be. Also, it is more difficult to avoid a personal phone call than a standard form letter.

Consider setting reserves for any anticipated uncollectible amounts. This is an art, not a science, and the amount reserved may depend on the client’s financial condition, payment history, whether any amounts are disputed and myriad other factors. Also consider setting an across-the-board reserve for all receivables based on collections history. For example, if in any given year the firm is unable to collect 3% of total billings, consider reserving 3% of total receivables.

WATCH FOR RED FLAGS

Throughout the engagement, keep a lookout for red flags that payment problems may be ahead. Is the client hinting at financial difficulty, complaining about work product or more aggressively demanding that your firm adhere to a budget? Did the firm’s large corporate client recently submit a Form 8-K with the SEC stating that it is unable to make a large loan payment coming due? If a client is in jeopardy of declaring bankruptcy, consider timing issues. For example, payments made 90 days before the bankruptcy filing are typically considered preferential payments (or preferences) and, subject to certain exceptions, the bankruptcy trustee may sue your firm for repayment. If your firm holds a retainer, consider when it’s best to apply it to any outstanding balance.

Also determine whether any significant engagement milestones are approaching, such as a deadline for an audit report. And then consider whether your firm should stop work or at least inform the client that you will need to do so if an outstanding balance is not brought current.

CONSIDER DISPUTE RESOLUTION OPTIONS

When disputes elevate to the level of client dissatisfaction or where there is even the possibility of such elevation, consider having a colleague sit in on meetings or calls with the client to discuss overdue fees. Some firms have a designated workout partner who fills such a role, or it may be done on an ad hoc basis. Either way, that colleague can help diffuse difficult situations, represent the “firm’s” position and oftentimes mediate a beneficial resolution. If litigation ever develops, it may be helpful to have a second person as a witness to conversations with the client.

As part of the collections process, clients may request discounts. If the discount is based on dissatisfaction with service, consider obtaining a release of liability in connection with any reduction in fees. Restructuring payment terms is a frequent request by clients in economic dire straits. If the firm and client agree to new payment terms or the scope of the engagement is revised due to budget issues, it is advisable to document these new details in an amended engagement letter or agreement.

If legal action becomes necessary, weigh the pros and cons. A common response to many collection lawsuits is a counterclaim accusing the CPA of malpractice. This brings additional costs and expenses. Careful consideration must be given before suing a client, who is soon to be (if not already) a former client.

If legal action is required, be sure to review the engagement agreement. This is, in essence, the contract on which the firm would be suing. For example, does the engagement letter provide for the recovery of attorneys’ fees, are fee disputes subject to arbitration, and is the firm entitled to interest on unpaid amounts? These answers may dictate whether legal action makes sense. Also consider with your legal counsel whether to include such clauses in engagement letters. Keep in mind that, if you perform services requiring independence, unpaid bills, for example, from a prior year’s audit would make your firm not independent to perform the next year’s audit.

Communication is one of the keys to collection. Keep clients informed and address any potential collection problems upfront. This may be the easiest way to prevent them from becoming actual collection problems.

by Jason M. Rosenthal, Esq.

Article Source: Journal of Accountancy

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Built-in Gains Tax

The Tax and Accounting office of Certified Public Accountant can assist you in choosing the right legal form for your business. Choosing the proper business entity is a complex matter, which should be handled by an accountant professional. Many C corporations who are tired of the double taxing drawback – income is taxed to the corporation as it is earned and then again to you personally when it is paid out in compensation or dividends – choose to covert to an S corporation. However, in trying to avoid this double tax predicament, business owners might run into built-in gains tax.

The built-in gains tax can blindside business owners who convert from a C corporation to an S corporation. In some cases, the conversion may not even be worth the price of admission. Nevertheless, with some advance planning from a professional certified public accountant, you may be able to minimize the impact of the built-in gains tax or discover additional tax benefits through a C corporation continue with you current business structure.

A corporation may owe income tax at regular income tax rates on a net recognized built-in gain occurring within the 10 years following a conversion to S corp status. The amount of the tax is based on the difference between the fair market value of property sold or otherwise disposed of and the basis of the property at the time of the conversion. The built-in gains tax generally applies to a corporation if:

• It was a C corporation prior to the S corporation election
• The election was made after 1986
• It has a recognized built-in gain within the 10-year recognition period; and
• The net recognized built-in gain for the tax year doesn’t exceed the net unrealized built-in in gain minus the net recognized built-in gain for prior years in the recognition period (to the extent such gains were subject to tax).

The built-in gains tax is computed by applying the highest corporate tax rate to the S corp’s built-in gain for the year. Currently, the top tax rate is 35%.

Nevertheless, the situation may not be as awful as it appears. For starters, any net operating loss (NOL) carryforward in a year in which the corporation was a C corporation may be deducted against the net recognized built-in gain of the S corporation. In addition, your firm may use capital losses carried forward from prior years to offset the built-in gains tax. Finally, excess business credits carried over from prior years may reduce the tax liability on built-in gains.

If you are contemplating a switch to S corporation status, it is important to have a professional accountant evaluate your situation and provide you with an in-depth analysis. Tax law is an extremely complicated area, especially the tax rules concerning a conversion from a C corporation to an S corporation status. Take advantage of a tax expert, like Emil Estafanous, CPA and don’t pay extra tax than what the law requires. Contact the Tax and Accounting office of Certified Public Accountant, Emil Estafanous at (562) 868-6333 and he will be glad to provide you with assistance for all your accounting and tax needs.

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Plan Ahead: New 1099 rules

The new health insurance legislation imposes significant new tax reporting requirements. In essence, you will have to report most annual payments for goods and services exceeding $600 — including payments to corporations — on Form 1099. Fortunately, the new 1099 rules will not be in effect until 2012. This gives you plenty of time to adjust your accounting procedures and prepare for the strike of new paperwork.

Under current law, a business must report on Form 1099 compensation (commissions, fees, etc.) paid to an individual, such as an independent contractor, if the annual amount exceeds $600. The same rule applies to interest, rent, royalties, annuities and income items paid to a single recipient.

Both the recipient and the IRS receive a copy of the 1099. It must include the annual amount of the payment, contact information about the recipient and the recipient’s Taxpayer Identification Number (TIN).

However, these reporting rules generally don’t apply to payments made to a corporation. Also, your business doesn’t have to issue 1099s when it purchases goods.

New law changes: Beginning in 2012, the new Patient Protection and Affordable Care Act of 2010 changes the current reporting rules in three ways.

1. Payments to corporations: The reporting exemption for corporations no longer applies.

2. Payments for goods: The reporting requirement is generally extended to payments for property such as merchandise, equipment, raw materials and the like.

3. Payments of gross proceeds: At this point, it’s not exactly clear what “gross proceeds” covers. The IRS is expected to issue guidance shortly.

These three new law requirements will likely affect you on both ends of the spectrum. As a payer, you may have to churn out significantly more 1099s and obtain the TINs of each recipient. As a recipient, you could be bombarded with forms and you must supply the payers with your own TIN.

Tax Specialist, Emil Estafanous, CPA can help modify your business accounting procedures to accommodate the new reporting rules. Do not wait until the last minute to implement changes. Get a head start by calling the Tax and Accounting office of Certified Public Accountant, Emil Estafanous for a consultation.

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Tax incentives for employing a spouse

A common approach used by many business owners is to hire their spouse as an official employee. Hiring your spouse as an official employee can have some disadvantages; however, there are least six tax benefits you can receive from taking this approach.

The following tax benefits may be applicable to you:

1. Retirement plan contributions deduction in the full amount. Within generous limits and if all tax law requirements have been met, contributions made on behalf of your spouse can be deducted by the company.
2. Taking a salary. If you are operating a C Corporation, any wages you pay to your spouse would have stayed with the company. Assuming your corporation is in a higher tax bracket than your personal tax bracket, you will save tax overall if your spouse draws a salary.

3. “Back to school” advantages. Education expenses acquired to improve an employee’s job skills are deductible by the company and tax-free to the employee. Therefore, your company can plan to send your spouse “back to school” on either a part-time or a full-time basis.

4. Travel expenses. In general, you cannot deduct the travel expenses attributable to your spouse if he or she accompanies you on a business trip. On the other hand, if your spouse is an authenticated company employee and is going for a valid business reason, his or her travel costs — including airfare, lodging and 50% of meal expenses — may be deducted.

5. Health insurance coverage. If you are currently paying more to cover your spouse under your company health insurance plan, hiring your spouse shifts the expense to your company. Typically, your company can deduct the full cost of the health insurance paid for your spouse, just as it can for other employees.

6. Other benefits. Similar to health insurance, your spouse is entitled to the same group-term life insurance coverage as other employees in the company. The first $50,000 of employer-paid group-term coverage is tax-free to an employee.

In addition, depending on your form of business, you may also be entitled to new tax breaks for hiring a spouse under the Hiring Incentives for Restoring Employment (HIRE) Act. Hiring your spouse may have other tax-related implications, which is why you should always consult a tax specialist. Seeking advice from a tax accountant professional, like Emil Estafanous, CPA can minimize your taxes. For additional details, please contact the Tax and Accounting office of Certified Public Accountant, Emil Estafanous at 562-868-6333 and his accounting staff will be glad to discuss the particulars of your situation and your no-cost, no-obligation Free Consultation.

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A Smart Way to Payoff Debt

It is important to acknowledge that many individuals are in debt, therefore you among many struggle to get rid of it. However, debt is not essentially a negative thing. Wanting to be free of debt is an excellent goal. But since debt will probably be present for most of your life, an even better goal is to learn how to manage your debt.

Start paying off your debt the smart way by using the following tips:

It is vital that you know where you stand. Calculating your debt will let you assess your financial situation. As dreadful as it might seem, make sure to include all debt like credit cards, loans, mortgage, employee advances, car payments, even add the interest you are paying in your calculation.

Don’t be discouraged! Think by taking this conscious step you are closer to decreasing your debt and learning how to manage it. In addition, keep in mind that by doing this you will discover ways to breakdown  your debt into manageable portions while retrieving additional money to relieve your total debt.

Determine which debt is costing you more money. Some debts are more expensive than others. Unless you’re getting payday loans (which you shouldn’t be), the worst offenders are probably your credit cards. Here’s how to deal with them.

• Try not to use credit cards. Don’t cut them up, but take them out of your wallet. Place them somewhere where you will only be able to access them in an emergency, like a drawer.

• Review the interest rates you are paying on your credit cards and begin paying off as much as you can with the one that has the highest interest; make minimum payments on the other credit cards. When that one is paid off, work on the card with the next highest rate.

• Make sure not to close existing cards or open any new ones. Doing this will impact your credit rating negatively.

• Avoid additional fees by paying on time, absolutely every time and remember that even one late payment can lower your FICO score.

• Go over your statements.  Many times you don’t realize what you are being charged for.  For example, you might be charged for that magazine subscription you canceled. It is important to review all your charges, especially with fraud being on the rise.

• Lastly,  make an effort to call your credit card companies and ask the if they can lower your interest rates. Many times this won’t work but it doesn’t hurt to try.

Always try to make any additional efforts  to withdrawal from debt. Get a second job if you can and use this income only to pay off high-cost debt. Substitute high-cost family activities with free or low-cost ones. Sell high-value items that you can live without. Remember, if you don’t have the cash for it, you probably don’t need it. You’ll feel better about what you do have if you know it’s owned free and clear. Start using coupons religiously. Calculate the money you’re saving and use it on your debt.

Follow as many of these steps as possible and you will begin notice your debt decrease every month.

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Health care credit for businesses

The IRS has issued guidance to help small business owners cope with new requirements in the monumental health care legislation. (IR-2010-38)

Under the new health care law, a small business is eligible for credit for contributions used to purchase health insurance for its employees. To qualify, the business can’t have more than 25 full-time employees with average annual wages above $50,000. The contributions must be made under an arrangement requiring the employer to make nonelective contributions to health insurance offered to enrolled employees equal to at least 50% of the premium cost.

Beginning in 2010, a small business can claim a credit equal to 35% of the cost of its qualified employer contributions. In 2014, the credit increases to 50% of the contributions if the employer participates in a state-run insurance exchange.

Even better: If a small business employs 10 or fewer full-time employees with average annual wages of no more than $25,000, it can claim a 100% credit. The credit percentage phases out, but not below zero, if the employer exceeds either of these two limits.

The new guidance clarifies that this calculation doesn’t include sole proprietors, partners in a partnership, more-than-2% shareholders in an S corporation and individuals owning more than 5% of another business. Family members of these individuals are also excluded.

The new health care credit is available to eligible small businesses in 2010. If you have questions regarding the new health care credit, do not hesitate to contact our office. We can provide the assistance you need and determine whether you qualify.

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Take Action

Do-It-Yourself Promotion

Stay in the same spot these days, and pay raises are almost nonexistent.

Your best defense? Position yourself for a higher paying job. Your tool for a promotion? A well-planned strategy, says Bob Nelson, author of “1001 Ways to Take Initiative at work.”

In lean times, fattening your paycheck takes more ingenuity. Be proactive and carve out opporunities with these tips.

• Take a hard look at your job. Ask yourself why it was created.Focus on the job’s essential needs.
“Consistently address those needs and go beyond them,” Nelson said.

Rank according to how they affect the company’s bottom line and long-term goals. Focus on the
high-priority tasks and do them better than anyone else could.

Look for role models. Who are the stars in your organization? “Study them, learn what makes them tick” and follow their examples, Nelson said.

• Develop a long-range view. Decide where you want to be in a year, three years and five years. Map out a plan for getting from here to there.

• Strut your stuff. Volunteer for assignments and key spots on teams or committees whether or not
they’re related to your department.

Redefine your jobs boundaries and “gradually increase the scope of tasks assigned to you, “Nelson said.

“What tasks could you take over for your manager? Suggest projects that could improve your job and help you learn in the process. Volunteer to be the liaison to other departments to help solve joint problems or to improve communication between departments.”

The hidden benefit? Gaining entree into ttre firm’s greener pastures.

• Solve problems. “Start in your own area and expand outward. Look for ways to save money, improve service or streamline processes,” Nelson said.

Have a plan to follow through. “Suggestions can sound like complaints if there’s no plan for their implementations.”

‘Think through the costs and benefits” of each idea , and involve key people who can help bring it about, Nelson advised.

“What allies and opponents do you have for achieving the goal? Could you make use any favors to gain others’ support? If your idea makes sense, why hasn’t it been done before? Think through the questions and objections your proposal is likely to receive. Develop a sound response for each,” he said.

• Beat rivals by managing time. At the end of the day, prioritize the next day’s tasks. Arive a half hour early so you can tackle key jobs uninterrupted.

“Focus on doing the work that you’re uniquely qualified to do. If possible, delegate the rest to coworkers,” Nelson said.

• Boost your marketability. “Are you delivering more value to your employer than you were three to six months ago? If so, what is the evidence?” Nelson asked.

Ask the tough questions:” What have I learned on the job in the last three to six months? What can I learn in the next six months that will boost my value and pave the way for a promotion or a better job?”

Take action on a plan to acquire those skills.

Author: Cord Cooper

2010 Best of Norwalk Award

Press Release (Article Source)

Emil Estafanous, CPA Receives 2010 Best of Norwalk Award

U.S. Commerce Association’s Award Plaque Honors the Achievement

NEW YORK, NY, May 18, 2010 — For the second consecutive year, Emil Estafanous, CPA has been selected for the 2010 Best of Norwalk Award in the Tax & Accounting Services category by the U.S. Commerce Association (USCA).

The USCA “Best of Local Business” Award Program recognizes outstanding local businesses throughout the country. Each year, the USCA identifies companies that they believe have achieved exceptional marketing success in their local community and business category. These are local companies that enhance the positive image of small business through service to their customers and community.

Nationwide, only 1 in 70 (1.4%) 2010 Award recipients qualified as two-time Award Winners. Various sources of information were gathered and analyzed to choose the winners in each category. The 2010 USCA Award Program focuses on quality, not quantity. Winners are determined based on the information gathered both internally by the USCA and data provided by third parties.

About U.S. Commerce Association (USCA)

U.S. Commerce Association (USCA) is a New York City based organization funded by local businesses operating in towns, large and small, across America. The purpose of USCA is to promote local business through public relations, marketing and advertising.

The USCA was established to recognize the best of local businesses in their community. Our organization works exclusively with local business owners, trade groups, professional associations, chambers of commerce and other business advertising and marketing groups. Our mission is to be an advocate for small and medium size businesses and business entrepreneurs across America.

Press Release (Article Source)
SOURCE: U.S. Commerce Association

CONTACT:
U.S. Commerce Association
Email: PublicRelations@us-ca.org
URL: http://www.us-ca.org