Small Business Planning Articles
1099 PATR Reporting for Calendar Year 2010
By: Charles L. Telk Jr., CPA, Partner | email
January is the month that 1099’s are prepared and distributed. As a cooperative, the form 1099 PATR is used to report information to your patrons. The following are items typically associated with cooperatives and should be reported as described:
Box 1 – Patronage Dividends: Report the total amount of qualified patronage to each member in this box.
Box 3 – Per-Unit Retain Allocations: Report the total amount of per-unit retain allocations paid to each member during calendar year 2010 in this box. Per-unit retain allocations include amounts paid to patrons for grain. We suggest that you report the gross amount prior to deductions for storage, drying, etc. Remember that even if your cooperative has a fiscal year, you report the total paid during calendar year 2010.
Box 6 – Domestic Production Activities Deduction: Report the amount of section 199 domestic production activities deduction that you have distributed to your patrons during the 2010 calendar year in box 6.
Got Enough Retained Savings?
By: Dave Thomsen, Partner | email
In the early days of cooperatives, the normal practice was to operate at break-even, and if you made a profit, the member business portion of that profit was allocated back to members. Little, if any, was retained. But if you ask a banker today, he’ll say, “you can never have enough retained savings.”
There has to be a happy medium.
Over the years we have seen cooperatives with allocation policies in place that led from little being retained, to retained amounts equal to regional investments– until the Farmland write down when everyone realized that if all regional equities were lost, all retained savings would be lost as well. The next goal was to increase retained savings to an amount equal to regional investments plus an “additional amount.” That’s basically where we are today. So, now we contemplate what that “additional amount” should be.
There may not be an easy answer to that question. You could do a complete turnaround and start allocating a higher percentage of your earnings, but that could have a negative impact on your balance sheet by reducing working capital and increasing cash requirements for future equity redemptions. Then again, you could continue on your present course and see where it leads.
Some of you have said you can’t divide up that concrete elevator you built, so retained savings should grow to an amount equal to regional investments plus fixed assets. We’ve also brought up the topic of non-qualified patronage dividends with many of you, whereas the balance sheet will basically remain intact while some of the non-allocated retained savings become allocated. But, you must then decide what to do with that equity as a part of your equity redemption policies– redeem or permanently hold? As we said, there is no easy answer; however, it may be time to start some serious discussion on the issue.
From new clients, to those we have been serving for over forty years, we have worked with you to build your balance sheets, including building retained savings. This will continue to be our goal as we continue to work together to answer the question “How much retained savings is enough?”
Cooperative Trends Expected in 2011
By: Dennis Gardiner, Partner | email
What we expect to see in 2011…
- Use of 100% bonus depreciation.
- Continued investments in capital improvements, particularly grain storage.
- More interest in non-qualified patronage allocations.
- With the quick build-up over the past few years of retained earnings, we anticipate seeing more time spent in the board room or board retreats addressing the member’s equity mix of the cooperative’s balance sheet.
- Considerable time and money being spent in complying with OSHA standards.
Cooperative Trends of 2010 – What We Have Seen
By: Dave Thomsen, Partner | email
What we have seen in 2010…
- Clients were more profitable in 2010 compared to 2009. Depending on year end, local savings was much better in 2010 than 2009, but not back to record 2008 levels.
- Increased grain and agronomy volumes, lower prices.
- Agronomy margins improved and were closer to historical averages, prices stabilized.
- Wet 2009 harvest led to substantially higher grain drying revenues in 2010, however grain quality became an issue.
- Clients with November 2010 through January 2011 year ends saw an excellent fall fertilizer season that will increase local savings.
- With lower prices, borrowing was down, and with low interest rates, interest expense was down, sometimes less than half of 2009 totals.
- Accounts receivable ageing generally improved.
- Build, build, build! Many clients spent substantial dollars for fixed asset additions, primarily grain and liquid fertilizer storage facilities. It appears these additions have been good investments.
- The recent trend to build retained savings and the company’s balance sheet continued, aided by the benefits of the gross domestic production deduction (Section 199).
- More clients began to allocate the benefits of Section 199 to their patrons. This was largely caused by the cooperative’s inability to use all of the benefit due to lower earnings.
- Some clients have begun to allocate a mix of patronage and Section 199.
An Important W-9 Rule Every Business Must Follow
By: Charles L. Telk Jr., CPA, Senior Tax Adviser | email
We would like to remind our clients of the importance of the new W-9 rules set into effect by recent tax legislation. We cannot stress enough that your attention to this new rule is crucial.
RULE: It is the responsibility of every person, business or entity to have a signed, legible copy of form W-9 on hand for every person, business or entity that it issues a check to. This includes all cooperative members as well. This means that any non-employee you issue money to needs to fill out a W-9 for you to keep on record, regardless of the amount of money you issue them or the number of times in a year that you do so. Yes, that means you could have a lot more W-9 forms to deal with. Unfortunately, there are no exceptions.
Form W-9 is the non-employee equivalent of form W-4. The information contained on a W-9 form for each person, business or entity is used to determine if you will need to file a 1099 form for them.
PENALTY: Even if you think you won’t need to issue a 1099 to a certain person, business or entity, you are still required to have their completed and signed W-9 on file. If you don’t, you run the risk of the IRS disallowing your related tax deductions, and assessing you taxes, penalties and interest.
You should review your contractor, vendor and member files to make certain that you have a signed, legible form W-9 on file for each of them. If any W-9 forms are missing, you need to obtain them. Have your contractors, vendors and members fill them out now.
As we discussed in prior newsletters, there is no valid excuse for a vendor to not provide a signed W-9 form. Should you have any questions regarding this issue or any others, please call us so we can help.
1099 Issues From the Past Resurface
By: Gardiner Thomsen CPAs | email
Recently, the IRS began sending out notices related to tax year 2008 1099 forms. These notices detail problems with 1099 forms that our clients have filed, including incorrect or missing FEIN’s, incorrect names on the 1099’s, and other issues. Generally, a penalty for each occurrence is imposed, which could potentially total thousands of dollars for the client.
Now is a good time to review your internal accounting procedures in regard to non-employees. Before issuing a check to anyone who is not an employee, you should obtain a signed W-9 form. The information contained in a W-9 form is what you use to determine if a 1099 is required, and then to prepare form 1099 if it is required.
There are several common excuses that individuals and/or businesses use in order to avoid providing a W-9 form, for example:
- “I’m a corporation, you don’t need to issue me a 1099.” In actuality, it is the W-9 form that communicates this information. You need them to provide you a signed W-9.
- “I’m with the city/county/state/federal government, you won’t need to issue me a 1099.” Every government agency, from federal to a small city, has a FEIN. You need them to provide you a signed W-9.
- “My organization is a non-profit agency. We don’t pay tax.” Every non-profit agency has a FEIN. You need them to provide you with a signed W-9.
- “I take the funds that you pay me and then pay my employees, relatives, church, etc., so you don’t need to issue me a 1099.” The person/organization that you issue the check to is the person that you need the signed W-9 for, and if necessary, the 1099 issued to. If they redistribute the funds, they will need to determine to correct course of action to take regardless of your proper reporting.
- “I’ve been doing business with you for 25 years and I’ve never provided a W-9.” Situation’s like this are the reason why the rules are changing. You need them to provide you a signed W-9.
All of these excuses are invalid. The ideal policy regarding W-9 forms should forbid the issuance of a check to anyone, member or patron, who has not provided you with a signed W-9 form. Penalties are also imposed for incorrect or illegible 1099 forms, so you must have a zero exception policy. It takes resources to try to obtain the correct information after the fact, so get a signed W-9 form prior to anyone expecting payment. If you have any questions, please contact us.
Red Flags Rule Enforcement Extended
By: Gardiner Thomsen CPAs | email
The Federal Trade Commission (FTC) has issued regulations known as the “Red Flags Rule” requiring certain entities such as creditors and financial institutions to develop and implement a written Identity Theft Prevention Program. Municipal utilities and governmental entities that defer payment for goods or services are considered creditors for these purposes.
The program should include policies and procedures to identify, detect and respond to patterns, practices or specific activities that indicate the warning signs or “red flags” of potential identity theft in day-to-day operations. It should also state how to mitigate the risks of identity theft and evaluate the program to address new risks. The program must be approved by the governing body, and should include information about training staff and monitoring the work of the entity’s service providers. All members of the entity’s staff must be familiar with the Red Flags Rule and compliance procedures.
Enforcement of the rule has now been extended to December 31, 2010, while Congress considers legislation that would affect the scope of the included entities.
A handbook on developing an Identity Theft Prevention Program and information about compliance is available at http://ftc.gov/redflagsrule. A fill-in-the-blank form for businesses and organizations at low risk for identity theft is available at http://ftc.gov/redflagsrule and offers step-by-step instructions for creating a written Identity Theft Prevention Program. The form can be filled out online and printed.
If you have any questions about the Red Flags Rule or would like further assistance on developing an Identity Theft Prevention Program, please contact us, we would be happy to help.
Blue Ribbon Panel Looks Into Separate GAAP For Private Companies
By: Gardiner Thomsen CPAs | email
Until recently, U.S. generally accepted accounting principles (GAAP) have long been considered universally acceptable for both publicly and privately held companies. However, there have been growing concerns about the specific needs of privately held companies which must report to a narrower range of financial statement users, such as lenders, venture capitalists, and insurers. Current GAAP and standard-setting processes have been viewed as too complex to be useful for private companies and do not benefit the users enough to justify the costs of compliance. Because of this, the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Foundation (FAF) have created a Blue Ribbon Panel to explore how the GAAP and standard setting process are meeting private company needs.
In addition to the costs of funding the standard-setting process and educating financial statement preparers, other issues raised by the panel are: whether a separate set of standards would be useful for private companies; if simplified standards would be useful for all companies, both public and private; or if giving private companies the option of complying with either a new set of simplified standards or reporting as a public company under the current set, would be useful. The panel, made up of various groups including lenders, investors, owners, preparers, auditors, and regulators, is most concerned with putting the decision making process in the hands of the users. The panel will meet throughout the year to discuss these issues in depth and make recommendations on how to better serve the financial reporting needs of both publicly and privately held companies, as wells as the preparers and users of those financial statements.
Gardiner Thomsen will be following this issue and will keep you up to date on any progress or changes that will affect your company. In the meantime, if you have any questions, please don’t hesitate to contact us.
New Health Care Law Calls For Expanding Form 1099
By: Gardiner Thomsen CPAs | email
Hidden within the 2,409-page document known as the Health Care Reform Law, is a provision intended to close the “tax gap,” the estimated $300 billion difference between tax revenue that is collected by the government and that which is not, presumably because of unreported business income. In a nutshell, the government intends to crack down on business income reporting in order to help pay for health care reform, and it will have an eagle’s eye on small businesses.
Beginning on January 1, 2012, this provision requires any U.S. business, large or small, public or private, to issue a Form 1099 to any entity to which it pays more than $600 for goods and services rendered for business purposes within it’s fiscal year. For example, the IRS will expect a lone freelancer to obtain tax information from a large corporation such as Wal-Mart and send the company a Form 1099 because he/she purchased more than $600 in office supplies during the year.
While these increased reporting requirements may improve tax compliance, they undoubtedly increase the cost of compliance. This is a major concern for smaller businesses because that cost can be largely disproportionate to the tax-saving incentives also found in the Health Care Law.
These new reporting requirements are sure to bring on massive amounts of paperwork and issues in information security, but businesses have ample time to prepare. Enforcement begins for fiscal years beginning on or after January 1, 2012. Here are some of the things small business owners should keep in mind before they implement new reporting procedures:
- Obtain a TIN (tax identification number) from any entity to which you may have to submit a Form 1099. It might be good practice to obtain a TIN from anyone you exchange money with as audit compliance may require that information for every sale regardless of amount.
- Look into obtaining software that can help you keep better track of your transactions.
- Consider consolidating purchases and negotiating volume prices with suppliers in an effort to cut down the number of Forms 1099 that you will have to send out.
- Adapt your business to qualify for new tax credits that could help offset the cost of additional reporting requirements, or at least help make the increasing cost of health insurance more affordable.
If you have any questions about how your business can best maneuver through the compliance and reporting obstacles imposed by the new Health Care Law, please call us. Gardiner Thomsen can help analyze your business situation, implement reporting procedures and navigate the sea of tax-saving incentives to make sure you have a smooth transition.
Health Care Law, Payroll, and Your Bottom Line
By: Gardiner Thomsen CPAs | email
The new health care law that president Obama signed into effect this year carries with it several new financial requirements, most of which will significantly effect small business owners. While certain tax breaks are also included in the legislation, business owners still need to be aware of the changes they will have to make in their business policies in order to offset the costs associated with the new law. Listed here is a summary of some of the measures in the new legislation that we consider to have the greatest impact on you and your business.
- Businesses that purchase more than $600 of goods and/or services from any one person or business in a fiscal year must send a Form 1099 to that person or business.
- Employers with more than 50 full-time (30+ hrs/wk) employees will be required to provide a minimum portion of the cost of health insurance premiums for each employee, either through the employers health plan or a voucher that the employee can use to purchase health insurance elsewhere. Noncompliance may result in a fine of $2000 per employee. Even if the employer provides coverage and contributes to the employee’s premium, if any employee receives a premium assistance tax credit, the employer will also have to pay the fine.
- All insurance plans will be required to allow coverage of dependents up to the age of 26.
- All business owners will be subject to new expanded federal income tax requirements on payments of fixed or determinable income or compensation.
- Contributions to savings accounts designed specifically to help pay for medical expenses with pre-tax dollars will be capped at $2500, annually indexed for inflation.
- An additional .9% Medicare tax on earned income and 3.8% Medicare contribution on certain unearned income will apply for individuals with an AGI over $200,000 ($250,000 for joint filers).
- The threshold for deducting unreimbursed medical expenses will increase from 7.5% to 10% of AGI, but will be waived for those ages 65 and older through 2016.
In addition to these measures, which will go into effect over the next 4 years, numerous other mandates will indirectly cause a substantial impact on the financial position of small businesses, mainly by increasing costs related to health care that employers are required to provide. Excise taxes are soon to be imposed on the sale of medical devices, drug makers, and the insurance industry; Medicare coverage (and expenses) will be expanded; private health insurance will be commoditized; and penalties of up to 2.5% of taxable income will be imposed on individuals who don’t carry coverage.
This article only summarizes some of the key implications that health care reform will have on your business. To learn more about how this will impact your business in the immediate future, as well as over the next four years and beyond, please give us a call. We are prepared to help you develop a strategy to efficiently manage your business costs and maximize your tax savings.