Your CPA said what?

Corporate Annual Report Deadline is May 1

Corporations, LLC's and limited partnerships are required to file an annual report with the Secretary of State to keep their corporate status active. This report is due May 1st and involves a $150 filing fee. If the report is filed after May 1st the filing fee increases to $550. Sometimes the attorney who handled the incorporation will file the annual reports, especially if that attorney is serving as the corporation's registered agent. But many times the responsibility falls on the owner.

A few years ago the Secretary of State stopped sending out paper annual reports and instead it now sends a postcard with instructions for filing the annual report on-line. This really is more convenient but we have fielded calls from clients this week who seem to be having problems on the site. For this reason we wouldn't advise anyone to wait until Monday evening to get their report filed.

To file the report on-line you need your document number. This is the sequential number that the state issues to corporations when they file their articles of incorporation. If you don't know your document number and you cannot find your postcard you can look it up in the state's database. Once you know the document number you can file your report here. Just look for a button like the one pictured at the top of this post.

We work with state agencies all over the country and Florida's Secretary of State leads the nation in terms of access to information and the ability to complete filings on-line. Occasionally we'll help clients navigate the site and make their own filings or look up information. Once they find out how much is available they tend to be very impressed.

Joey Brannon is the founder of Axiom Professional Group, a tax, consulting and accounting firm in Bradenton, Florida. Mr. Brannon is both a CPA and an EA. You can find out more about Axiom by visiting www.axiomcpa.com.

Why should I hire a CPA?

Postings have been thin lately because tax season is upon us. But I thought I would take a time out to cover some recent news. On April 4th the Senate Finance Committee heard testimony from the GAO on the dark side of tax return preparation. Part of the report was covered by NBC News last Wednesday as part of a series in which they sent undercover interns into national tax prep chains to gauge the honesty and accuracy of the return preparers.  It turns out the GAO report and NBC turned up similar issues.

• Failure to report all income and even advice not to report certain types of clearly taxable income.
• Advice to knowingly fill out the return incorrectly and buy the chain’s add-on “service guarantee” to cover any deficiency later assessed by IRS.
• Incorrect reporting of more complex deductions such as the child and dependent care credit.
• Clerical errors  in filling out the return and failing to correclty sign (and taking responsibility) as a paid preparer.
• Missing deductions that could save the taxpayer significant amounts.
• Failure to correctly report and maximize education credits and deductions.

I’m not trying to bash firms like H&R Block or Jackson Hewitt. We don’t compete for the same clients so I have nothing to gain from their demise. However, I do think there should be a minimum standard for tax preparers before they can serve the public. CPA’s must complete 5 years of secondary education, pass a rigorous exam, comply with continuing education requirements, and practice at the pleasure of their state board of accountancy.

Enrolled Agents have to pass a rigorous two day exam on tax law and compliance, comply with continuing education credits and are regulated by the IRS’s Office of Professional Responsibility (which includes a review of their personal tax filings to make sure they are not cheating themselves). Workers in tax prep chains have no such requirements, nor do the countless return preparers who hang out their shingle each spring only to close up shop in May.

So what’s my beef with the world of unregulated tax preparation? I guess the biggest reason is that chain prep firms have conditioned the public to expect big refunds. Everyone thinks they are owed a big IRS bonus in April and they’re happy to get it when in fact this is the worst type of tax planning possible. The best scenario is to owe as much as possible in April while avoiding underpayment penalties. Why should IRS get to use your money all year interest free? Those who use tax refunds as a financial planning tool are on the whole undisciplined and unsophisticated with regard to their financial matters.

Additionally, the skepticism and criticism leveled at “tax preparers” often does not discriminate. CPA’s and EA’s can point to their credentials and say “come to us, we’re different than those unlicensed preparers at H&R Block.” But there are many excellent preparers who invest in their continuing education and have a wealth of experience that practice fairly and honestly and economically for their clients. For these people a national certification requirement would be a good thing, but my sense is that any standards would be so watered down it wouldn’t matter.

That leaves us with the old adage “You get what you pay for.” And this is definitely the case with tax advice. Professionals who spend thousands of dollars on educational and research resources and who spend thousands more in un-billable personal time investing in their knowledge base will command a higher fee of their clients. If you insist on being cheap you might just see your tax preparer on the nightly news.

Joey Brannon is the founder of Axiom Professional Group, a tax, consulting and accounting firm in Bradenton, Florida. Mr. Brannon is both a CPA and an EA. You can find out more about Axiom by visiting www.axiomcpa.com.

New Hire Reporting Requirements

The following article was originally printed in the March issue of Axiom's newsletter. To view the newsletter in its original format visit the Axiom web site.

In the last month we have had several clients express surprise regarding the new hire reporting law in Florida. This has nothing to do with taxes or accounting but it affects small business so we are often asked for clarification or direction when clients have questions.

Since 1996 every employer in Florida has been required to report new hires to the state. This information is used to track down dead beat parents who are not paying their court mandated child support payments. It is possible that if one of your employees is in this situation you will be contacted by the Department of Children and Families to initiate garnishment of the employee's wages for child support.

While reporting is mandatory it is not enforced very well and the New Hire Reporting Center’s efforts are not publicized or coordinated with other agencies that have more teeth (Florida Department of Revenue for instance). This isn’t necessarily bad because it allows the Center to take a more collaborative role with businesses and encourage them to ‘do the right thing’ for kids who may be dependent on a child support check that never comes.

Employers are required to report new hires within 20 days of hire. The information that must be included is the employers name, address and FEIN and the employee’s name, address, social security number and date of hire. This information can be filed electronically through the Center’s web site or it can be filed in paper with the office in Tallahassee.

If you are not in compliance with the new hire reporting law you should report any employees hired within the last 180 days and then continue to report new hires within the 20 day deadline. The Center’s web site mentioned above provides a lot of helpful information including frequently asked questions that cover most of the situations we have run into with clients.        

Choose Your Measures Wisely

The following article was originally printed in the March issue of Axiom's newsletter. To view the newsletter in its original format visit the Axiom web site.

We talk about goals with every new client, but just as important we talk about what kinds of measures we will use to mark our progress toward achieving those goals. Often the same goal will result in entirely different measures for two different clients. Let me give you an example.

I recently met with two new clients on the same day who each expressed their long term goal as financial independence. However, one of them was willing to put everything else in life aside for a period of 24 months in order to jump start a new business. If successful the business will sell for enough money to provide a modest retirement at age 40. Once that is accomplished my client will have the freedom to go back to school and train for an entirely different career in which she has always had an interest.

The other client is purchasing a series of business investments that will yield supplemental income and provide modest capital gains. This client will continue a successful professional career while trying to diversify his earnings stream to the point where his financial future will not entirely depend on selling his professional practice.

In the first case all of our efforts will be focused on achieving a maximum valuation of the business for eventual sale. In the second case our due diligence in vetting potential investment opportunities will focus on not jeopardizing the current professional practice and guaranteeing at least a minimal amount of income yield. The metrics we will use to measure success in each case are vastly different.

Like so much of what we do this seems like common sense, but over and over again we hear clients taken aback by our approach. The bottom line is that focusing on profitability, or free cash flow, or net assets or any other measure can be misguided depending on what the client wants to accomplish. A focus on short term profitability could erode the liquidity and eventual sales price of a business looking for an exit strategy. A focus on capital appreciation could result in a short term cash crunch that puts pressure on an existing professional career.

So the point is this: when you talk about goals with your CPA make sure you also talk about how you will measure your progress toward achieving those goals. The measures you choose will direct daily decisions and your ultimate success depends on what you do today.

View the Axiom Professional Group, P.A. home page   or visit the Axiom web site articles page (both links will exit the blog site).

 

Use Net Worth to Measure Your Progress

Your net worth is the result of a simple equation: what you own minus what you owe equals your net worth. In accounting terms we call what you own 'assets' and what you owe 'liabilities'. The difference is known as 'equity' or net worth. I will use these terms here and you should learn them so you can speak intelligently to your banker or accountant about increasing your net worth. There are a couple of ways to do this.

First, you can increase what you own. A bigger bank account, a more expensive house, a larger investment portfolio; these would all increase your net worth. However, it's possible to increase what you own and at the same time increase what you owe so in essence you have taken two steps forward and two steps back. In fact, there are few situations besides winning the lottery or receiving an inheritance that will affect only one side of the net worth equation. Most of the time when you add significantly to the asset side you are also adding to the liability side (think of buying a house, you get a big asset and also a big mortgage to go with it). Smart investors know this is their only choice so they add things to the asset side that will increase in value while taking on liabilities that grow at a smaller rate. In accounting terms this means their assets appreciate at a rate greater than the interest on the loans used to acquire them. Think of your house mortgage. If the interest rate is 6.5% and the housing market in general is appreciating at 9.5% your net worth should increase each year by about 3% of the value of your home.

Now focus on the second side of the equation. Reducing your liabilities (what you owe) will also increase your net worth. Again, the problem is that reducing liabilities in almost all cases means giving up assets so it would seem little is done to increase your net worth. However, smart decisions here can increase your net worth. Think of credit card debt. If you owe $10,000 and the credit card has a finance charge of 12% you can use $10,000 of cash to pay the card off and during the next year you will save $1,200 in finance charges. In this case your net worth went up even though all you did was trade $10,000 in assets for $10,000 in reduced liabilities.

The point here is not an elementary lesson in home economics. The point is the need to focus on net worth when setting financial goals. Too often I hear people set targets for increased savings, a bigger home, a larger bank account, but to focus on these goals to the exclusion of net worth is very nearsighted. Net worth is the only measure that takes a holistic view of your situation. Therefor it is the tool you should use to measure long term progress toward your goals.

One final point, when we work with clients who are struggling to increase either their personal net worth or the equity in their business there is one rule we spend a lot of time drilling into their heads.  More money will not fix the problem! People don't believe me when I tell them this but it is true. The person who is financially secure on a $30,000 salary will be financially secure on a $210,000 salary. But a person who cannot survive on $30,000 will have just as much trouble making ends meet when he's making seven times as much. Businesses that can't make it on $1,000,000 in sales will not be able to make it on $2,000,000. The reason is that financial security and success requires discipline and discipline is a function of spending and investment. Don't get caught in the trap of thinking more money will fix your problems, business or otherwise. It will only reveal another set of issues that mask the real problem, your lack of discipline.

View the Axiom Professional Group, P.A. home page   or visit the Axiom web site articles page (both links will exit the blog site).

The Power of Forecasting

A big part of my job is helping startups take a great idea and turn it into a viable business. In that role there are few tools I use as often as financial forecasting or modeling. Mention financial forecasting and most people just glaze over. Worse, many business owners never see the need for building a financial forecast. They will establish sales targets and cost budgets but going that extra step to build a comprehensive financial model is seen as so much black magic reserved for SBA loan analysts and venture capital gurus.

Another area often confused with financial modeling and forecasting is business plans. You can jump online and find dozens of companies willing to build a business plan for you, even though they know nothing about your business. Don’t get me wrong I think a well written business plan is a great asset. The problem is that most of them are a bunch of pie in the sky narrative fluff that’s worth less than the paper it’s printed on. The fact that SBA loans and soft credit lines are approved on the basis of these things is stupefying.

So what does a good forecast look like? It depends. I’m a strong believer in customized solutions and for that reason forecasts often key on different areas depending on the user’s needs or concerns. For instance, startups are most concerned about the capital it will take to get an idea off the ground. Investors in expanding businesses want to see forecasts of ROI and payback periods. Banks are often looking for net margins and ratios compared against industry norms. Each of these requires a different format, but they all have a fundamental process in common. Every forecast has two basic elements.

1. An analysis of currently available facts.

2. A prediction of future events and conditions.

A model heavy on analysis with little or no focus on future events is just a rehashing of what has already happened. By the same token a prediction with no analysis or basis in facts is just hot air. To build a meaningful, relevant forecast you must have both.

The first step I take when building a model is to understand the source of revenue. What generates sales, what is the pricing rationale, is it supported by current market conditions, what is the market size, are assumptions about penetration or market capture reasonable….and on and on and on. Building a good model involves questioning every assumption about revenue. Closely associated with this, but not nearly as difficult is estimating the cost of producing those revenues. These are the direct costs or cost of sales. How much raw material and labor are required or how much will the product cost to purchase from someone else?

The second step is to estimate the fixed costs of the business. This requires leg work. If you assume $5,000 per month for rent where is the space located, who did you talk to, is this a negotiated rate or an initial offer from the landlord, is it a triple net or all inclusive lease, is there an escalation clause, when was the last time CAM charges increased, etc, etc. In a good model every expense is questioned, attacked and ultimately justified on the basis of facts, not guesses.

It goes without saying that models are a lot of hard work and can be expensive to build when you hire someone who knows what they’re doing. The alternative, however, is to start spending your own money with only a foggy notion of the eventual outcome. To most people that doesn’t sound like a very smart way to do business.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).

A better way to read blogs

If you're reading this you may be pretty familar with blogs and the best ways to keep up with what's happening in them. If not check out this article. It was immensly helpful to me and made blogs less a curiosity and more an efficient way to keep up with new information.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).

Welcome

Welcom to Axiom's new Blog. My name is Joey Brannon and my company, Axiom Professional Group, P.A. was founded in the summer of 2005. In addition to being a husband, father, aging athlete and marginal fisherman I am also a CPA. I have been practicing public accounting for ten years and after serving all kinds of clients in all kinds of situations I decided the time was right to hang my shingle. Our practice focuses on closely held businesses and helping their owners get more out of life. Consulting, tax planning, accounting systems, compliance, budgets, reporting...they all boil down to helping someone sleep better and face the next day with greater perspective, focus and clarity. That is our role.

The blog was started as a repository for all those random tid bits of information that fall between the cracks. We send out an email newsletter every month but between issues we field dozens of questions and encounter some pretty interesting scenarios. Here we will share some of those experiences and supplement our newsletter offerings with some lighter fare.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).