If you engage in a trade or business that loses money, you need to be able to prove that you were really trying to make money, if you want to deduct the losses. Activities that at least superficially appear to have some element of fun about them are inherently suspect. The appeal of anything having to do with caring for large animals escapes me, but then didn’t everybody want to be a cowboy at some point in their upbringing ? The owners of JK 3 Star Ranch, LLC had to face this type of scrutiny from the Montana Department of Revenue. The case went to the State Tax Appeal Board. The Montana State Tax Appeal Board seems to be sending the same two word message that the United States Tax Court sends in these cases – Business Plan.
The owners of JK 3 Star Ranch, LLC are Kelly and Jodeen Duryea. They had purchased a 242 acre ranch with a goal of raising Scottish Highlander cattle as a source of retirement income.
The hardness of life in the Scottish Highlands is proverbial. Samuel Johnson made much of it:
Mr. Arthur Lee mentioned some Scotch who had taken possession of a barren part of America, and wondered why they would choose it. Johnson: “Why, Sir, all barrenness is comparative. The Scotch would not know it to be barren.”Boswell: “Come, come, he is flattering the English. you have now been in Scotland, Sir, and say if you did not see meat and drink enough there.” Johnson: “Why yes, Sir; meat and drink enough to give the inhabitants sufficient strength to run away from home.”
That is the attraction, perhaps even the romance, of Scottish Highlander cattle. They take longer to mature, but they apparently are really good at scrounging nourishment from relatively barren land. Montana is not quite as far north as Scotland, but it lacks the tempering effect of the gulf stream, so you can see why these hardy cattle are a good fit for that region.
In 2011, the couple brought in Walter Congdon, an expert, to help them become more profitable. He testified at their hearing:
Mr. Congdon testified that Highland cattle are a hardy breed that matures slowly, compared to typical cattle raised in Montana. The cattle will feed only by grazing, will not eat grain, and take about twice as long to mature for marketing, requiring 30 to 40 months, compared to 22 months for Hereford and Angus steers. The fact that they are not grain-fed makes their meat very popular with specialty restaurants and consumers seeking low-fat meat without grain, who are willing to pay premium prices for the beef.
The stakes were pretty high:
The issue before us is whether or not the cattle-raising operation at the Duryea ranch was a business or a hobby. In treating it as a business, the Duryeas have deducted more than $615,000 against other income over the five years under audit and the annual losses from the ranch more than doubled in that time.
The agent who handled their audit found that they kept good records, but had a serious problem with how thorough their business plan was.
Mr. Ahlers found that the ranch books were well-maintained but that other aspects of the business were lacking. The business plan for the ranch was vague, incomplete, and lacked a marketing strategy, which he considered a significant failing for a business producing a “niche product” like Highland beef. He also pointed out that the Duryeas had not consulted experts or professionals for assistance in the ranching activity during the first five years in question in this case, and the hours spent working on the ranch by the members of the Duryea family, all with full-time jobs outside the ranch.
Although the Tax Appeal Board went through the full nine factor analysis, it pretty much bought into the agent’s analysis emphasizing things like:
Jodeen Duryea handles the marketing responsibilities for the ranch. She testified that she markets the cattle “basically by word of mouth” to those who are interested. They have also advertised their beef in the Highlander Association newsletter.
(Apparently you can order some here. I understand it is supposed to be pretty tasty.)
The Taxpayers’ own testimony described their decision to raise Highlands as based on a few conversations and Mr. Duryea’s conviction that the longhaired cattle are ideally suited to the cold climate of Montana.
The Board’s finding on the ninth factor struck me as rather odd:
The final element in the test is the degree of personal pleasure or recreation derived from the activity. Taxpayers testified that they did not enjoy raising cattle and did not regard the cattle as “pets.” However, the purpose of the purchase of the ranch was to provide a retirement home for the Duryeas, which is a strong personal enjoyment element not present in most business investments.
Usually the personal pleasure element is more immediate as opposed to deferred gratification.
Some Practical Tax Planning Observations
I am kind of skeptical that this decision is really right. From my cursory research about the breed, it would seem that you would expect to not be making money for at least quite a few years. What is not clear to me is how much of a federal tax problem, the Duryeas will end up having. In my experience, the states more frequently ride on the federal audits, but the communication does go both ways. This one strikes me as a very close case, so the United States Tax Court might have gone the other way on it, but let’s assume for analytical purposes that this was a federal tax case. Let’s further assume that there will ultimately be a reasonably profitable business. That means that $615,000 of deductions have been blown away. Knowing that, what could have been done differently ?
A more conservative tax strategy for a side business that has “hobby loss” exposure might be to capitalize as much as possible of your early expenditures. This is a fairly complicated area. There is the election under Code Section 195 and there is the perennial question of whether something is a repair or a capital expenditure. I generally don’t give “audit lottery” advice, but one piece of audit lottery advice that I do give is that a Schedule C or a 1065 with lots of expenses and no revenue is very ugly. To the extent you defer expenses, you give up a current cash flow benefit, but you will probably have less exposure if you are deducting them against actual revenue.
The other conclusion I have reached from studying these cases is that documenting the business plan and regularly modifying it are absolutely critical, if your endeavor has hobby loss exposure. In many of the cases, I can see that the business plan might be relatively easy to do in one’s head. You can figure out your burn rate and know what the payoff would be if your ship comes in, perhaps in the form of one of your ten horses turning into a first class stud. Write that stuff down and keep it updated, documenting what you do when things don’t turn out as you planned. It is conceivable that the exercise might actually help you be profitable, but regardless, it is crucial to winning an audit. Remember that revenue agents are trained as accountants, but work for a bureaucracy, not private business. Schedules with numbers on them have much more impact than you telling them stories.
Thoughts On The Beef Business
I can say with confidence that no animals were harmed in the production of this post, but that did not prevent me from becoming a bit disturbed. Pictures of Highlander cattle make me think of them as majestic creatures. Reading about how to do serious business involving them is troubling. Consider this quote from the infallible source:
In order to address this market, Highland beef producers commonly run commercial Highland suckler cows with a ‘terminal’ sire such as a Shorthorn or Limousin bull. This allows the hardy Highland cow, grazed upon the rough hillsides of her natural environment, to produce a cross-bred beef calf featuring the tender beef of its mother on a more modern carcass of high commercial value at slaughter, thus rendering a gross margin from her grazing that would have been impossible from other breeds in that environment.
From a pure business perspective you need to be able to look at the picture of that shaggy brown creature with horns and think “meat machine”.
This is particularly troubling to me since, thanks to my covivant, a vegetarian diet is quite feasible for me. I have developed quite a taste for seitan, which in a well spiced chili, casserole or spaghetti sauce becomes virtually indistinguishable from ground beef. Tofu, on the other hand – well don’t get me started. Seitan’s role as transition protein source for meat lovers is confirmed by the fact that none of CV’s five adult children like it very much. Despite all that, when in a restaurant with various subsets of CV’s brood, I’ll still order meat and, in our refrigerator there is a tightly sealed container of cold cuts, since I just can’t abide cheese sandwiches.
Why People Think The Beef Business Is Fun And An Excess of Sentimentality
The ranch business is suspect as a ”hobby loss”, in part, because almost everybody wanted to be a cowboy at some point in their life. Since I just watched it, I can’t help but share with you a final reflection on the allure of the cowboy life, which was probably pretty miserable in reality. This clip is not from a cowboy movie. Rather it is from the greatest bromance ever made:
I think baseball player came after cowboy in terms of my boyhood career choices. The sentimentality is getting to be too much. Next thing you know, I’ll be telling you about a 12 year old boy in a box seat in Shea stadium watching Jim Bunning pitch a perfect game. The senior order clerk sitting next to the boy had probably scored the tickets from a client who happened to get particularly good execution in a then much less efficient stock market. The senior order clerk had just over a year left to live. The game was on Father’s Day.
One of the most important aspects of becoming a government contractor is complying with a welter of federal rules and regulations. For Defense Department contractors, the Defense Contract Audit Agency (DCAA) is a major source of contract rules and guidance.
The DCAA performs all the contract audits for the Department of Defense (DOD) and provides accounting and financial advisory services on contracts and subcontracts to DOD components that are responsible for acquisition and contract administration. Though this agency doesn’t certify contractors as “compliant,” following its recommendations and guidance allows you to remain compliant with federal law and be prepared for audits.
The DCAA performs three kinds of audits: pre-award, post-award and internal control audits. A contracting officer can request that the DCAA perform an accounting system audit when a contractor:
Submits a proposal for a cost-type contract
Is awarded a cost-type contract, or
Submits a proposal under a firm-fixed-price contract with progress payments
Here are some aspects of what’s known as “DCAA compliance,” and how you can avoid — and prepare for — audits.
Cost Accounting Requirements
All DOD contractors must comply with the DCAA Cost Accounting Standards (CAS), which are meant to create consistency in pricing and accounting practices. To meet these standards, your accounting system must be standardized and able to separate accounting functions such as timekeeping and accounts payable. It must also be able to address the needs of each type of contract in which your business participates.
Unlike other costs, labor is not supported by external documentation or physical evidence to provide an independent check, so you must emphasize to your employees that they are responsible for accurately recording time charges.
Your internal controls for labor charging should meet the following criteria:
Responsibilities for labor-related activities should be kept separate.
Supervisors who are accountable for meeting contract budgets should not be able to initiate employee time charges.
Procedures must be evident, clear cut and reasonable.
Controls must be continually maintained and verified, and violations must be promptly and effectively remedied.
If a company awards a subcontract that is required to follow the DCAA cost accounting standards, that company is also responsible for its subcontractor’s compliance. If the DCAA audits a contractor, it will audit most or all of that company’s subcontracted work as well. Subcontracts at locations with no government prime contracts are also subject to audits.
Small Businesses and the DCAA
To pass a DCAA pre-award audit, a small business must have an operable accounting system (although it does not have to currently be in use). The business must be able to demonstrate this new system to the auditor and be ready to implement the system prior to incurring any costs on the government contract.
Here are a few places you can find more guidance on DCAA audits for small businesses:
The Obama Administration has made small businesses a priority since the day the president stepped into office. He has cut taxes for small businesses 18 times and has raised the position of SBA administrator to Cabinet-level. Under President Obama, SBA has improved opportunities for small businesses to start and grow. SBA has supported over $130 billion in lending to more than 225,000 businesses and nearly $380 billion in federal contracts went to small business over the past five years. Small businesses are a big part of this economic recovery.
President Obama wants to build on that solid foundation. The FY 2015 federal budget submission builds on SBA’s proven track record of assisting America’s small businesses by increasing and improving access to capital, federal contracting opportunities, entrepreneurial development, and disaster assistance. The budget submission also focuses on America’s long-term competitiveness by improving the entrepreneurial ecosystem to ensure small business owners and entrepreneurs are well positioned to take advantage of new opportunities and new markets as the economy improves.
President Obama’s budget submission will give SBA the capacity to:
support more than $32.5 billion in small business financing;
deploy nearly $4 billion in long-term investment capital;
provide over $1 billion in loans to disaster victims;
facilitate access to over $80 billion in federal contracting;
counsel and train over one million small business owners through a nationwide network of resource partners;
increase support for exporters, start-ups, veterans, and supply chains;
continue in to waive upfront and annual fees on all 7a small business loans of $150,000 or less;
continue to waive upfront fees on SBA Express loans to veterans between $150,000 and $350,000, and a 50 percent waiver of upfront fees on all non-SBA Express loans to veterans above $150,000;
expand the Impact Investment Initiative to include loans to innovative, advanced manufacturing businesses; and
propose how to help bridge the financing gap to scale up advanced manufacturing technologies through the Opportunity, Growth, and Security Initiative
At SBA, we know there is more to do and we will keep fighting to help small businesses every day so they can start, succeed and grow. This budget submission ensures that America’s 28 million small businesses have access to the tools they need to support our growing economy and a strong middle class.
It’s hard to believe with all the options we have for sharing contact information electronically, that the good old-fashioned business card is not going away any time soon. According to a survey by global crowdsourcing marketplace Designcrowd, a whopping 87 percent of Americans still exchange business cards when they meet someone for the first time.
If you think this is an empty gesture done out of habit, think again. More than two-thirds of survey respondents say business cards are useful because they either enter the information into their smartphones or file the cards in a Rolodex. In fact, Designcrowd says the number of business card design projects created on its website grew by 357 percent last year.
Personally, I can see the benefit of quickly exchanging a card along with a handshake, as opposed to fumbling with your smartphone to input someone’s information. Clearly, lots of businesspeople feel the way I do and are churning out business cards.
So how can you make your business cards stand out from the crowd? Here are some trends to consider in business card design for 2014 and beyond.
Incorporate QR codes. QR codes haven’t quite panned out as digital marketing tools, but they can work for business cards as an interactive lead generation tool. If your company sells B2B products or services or is in an industry with lots of tech-savvy, early adopters, a QR code might be worth a try. To make the most of a QR code, make sure it goes to a special landing page on your website where the user can learn more about your business and contact you for more information. For instance, it could be an About page with a video about your business and a click-to-call button or a form they can fill out to get a call from a sales rep.
Focus on branding. Your business card should convey your brand at a glance. This means your logo should be prominent and the overall feel of the card should harmonize with the rest of your marketing materials in terms of colors, fonts and images. The cleverest card in the world won’t do its job if the message it conveys doesn’t jibe with your brand.
Spend more on quality. Generic business cards are a dime a dozen (or 250 for $10), but they blend in and convey a “blah” message that your business is just like everyone else’s. By spending a little more on high-quality elements such as handmade or textured paper, rounded corners, colored edges or embossed print, you can convey an image of quality that makes your business cards—and your business—memorable.
Keep it simple. Business cards packed with information, images and multiple colors look dated and tacky today. Today’s trendy business cards feature clean lines and clear, legible fonts inspired by the “flat design” trend currently popular in website design. Flat design is characterized by a minimalist look. Instead of shadows or 3-D effects, flat design features strong lines; solid, saturated blocks of color; and creative use of typography.
Choose the right font. Clean, sans-serif fonts fit into the flat design trend. They look modern and are easier to read. Use fonts at least 12 point or larger. Also consider how your fonts stand out against the color of your card—if they’re too similar, the card will be hard to read. In contrast to minimal fonts, another hot trend is fonts that look handwritten; these can work great for a business that prides itself on unique, quirky or artisanal products.
Both sides now. How do you reconcile simplicity with the need to include your business website, office and cell numbers, email and tons of social media handles on your card? Try keeping the front of the card clean with just your logo or other image, your name and your business name, then putting the details on the back.
Get professional help. Sure, you can pick your business cards using an online template, but it’s worth spending a bit more to get something uniquely yours. There are dozens of crowdsourcing business card sites where you can get graphic designers to compete for your project, or talk to colleagues to get recommendations for a good designer in your area.
What matters most about your business card is that it reflect your brand and your industry. Here are some cool examples of creative cards I’ve seen:
Business cards made out of cloth for an apparel designer
A travel agency with business cards shaped like luggage tags
Pet groomer business cards shaped like dog tags
Business cards embossed with 3-D seeds for a landscaper
A photographer featuring one of her photos as the background for her business cards
You get the idea. Get creative, and your cards will get results! Once you’ve got your cards, check out this post for ideas on how to use them.
If you run one of the 14+ million home-based small businesses in the United States, congratulations. You’ve got lower overhead, a shorter commute and the opportunity to be more productive than your office-based competitors.
Still, working from home isn’t all eating peanut butter out of the jar and wearing your fuzzy slippers. There are plenty of pitfalls that can distract you from getting your work done. Here we look at 10 ways to ensure you’re set up for success in your home office.
1. Carve Out a Workspace
Not every entrepreneur is fortunate enough to have a spare room to turn into an office. That’s okay. You can use part of a room separated by a curtain or even a closet. The point here is to ensure you have a dedicated space that is only for work.
2. Set Up Your Day
The more routines you have, the more you’ll get done. If you have small children at home with you while you work, plan to work when they nap or when they’re quiet; otherwise you won’t be productive. Plan out your work hours; they don’t have to be 9 to 5, but they should be fairly consistent. Also, consider your attire. Some people love working in pajamas or sweats. Other people (like me) get more done by getting dressed in “business casual” – for some reason getting dressed to be seen by the world makes me feel more professional, even if it’s just me.
3. Figure Out When You Work Best
Part of those routines you need to set up involve determining when you’re most productive. Some people are night owls, and some are early birds. Some need quiet time without phones and instant messages, so getting up early avoids that. You might need complete quiet in your home office. Whatever your needs, don’t fight against them.
4. Have an Ergonomic Set Up
You need a comfortable chair with good back support, a decent computer monitor you can easily see and a keyboard at the right height to avoid awkward pressure on arms and wrists. Don’t forget your eyes. Your computer should be at the right distance to see without strain; if necessary, see your eye doctor for “computer glasses” that are made for viewing a computer properly. Two monitors also can help productivity (less time spent jumping between applications), so if you can afford an extra monitor, by all means try it out.
5. Use Smart Tools
There are so many free or affordable software programs and apps for small businesses! Find the ones that help you do more. A few options:
It can be tempting to fold the laundry that’s in the middle of the floor, but pretend you’re at an office and ignore it. It’s important to designate certain hours for work, and certain hours for home life. Occasionally, it’s fine to take a break and run an errand, but don’t let it encourage you to procrastinate on a project.
7. Get Out of the House
Many people can’t bear being alone all the time in their home offices. Fortunately, we’ve become a mobile society, and you’ll always see plenty of people at your local coffee shop working on their laptops. Get a change of environment. Try working from a park or restaurant, if you can be productive there.
8. Find Support in Person or Online
It can be nice to meet other home-based entrepreneurs too. Find a local meetup of people like you or a local event where you can share your stories and find support in your small business endeavors. If you spend any time on Twitter or other social media sites, you’ll find plenty of folks who, like you, are working out of their homes. #HomeBiz is a great hashtag to follow to find content and conversations geared toward people like you.
9. Keep Learning
Find as many opportunities as you can to develop your business and industry knowledge. This can come in the form of online webinars, Twitter chats, in-person conferences, seminars, books, blogs and magazines.
10. Meet Regularly With Staff
If you have employees who also work from their homes, make a point to meet once a week or month so you reap the benefits of face-to-face time. While it’s completely possible to work virtually, nothing can make up for that in-person relationship-building time.
Most small businesses make charitable donations. In fact, surveys have shown that about 75 percent of small business owners donate some portion of their profits — about 6 percent on average — to charitable organizations each year.
As we’re in the midst of the holiday season (and tax season looms), many small business owners are likely considering charitable contributions and wondering how such donations might impact the bottom line in terms of tax deductions. First, it’s important to choose the right charity and avoid certain pitfalls that could leave you in a bind.
Choosing the right charity
Only certain types of contributions qualify for a deduction (more on that later), so if getting the tax benefit is part of your goal, it’s important to properly research any organizations to which you plan to donate. However, you might also think about other potential benefits (aside from the great feeling you get from helping others) such as how the donation aligns with your public relations strategy for corporate social responsibility and how meaningful a volunteer project or fundraising initiative might be for employees.
Ensure the donation is paid in full by the end of the tax year and reported through Form 1040, Schedule A
Take your deduction, but remember that the IRS limits the amount of charitable donations that can be considered tax-deductible to 50 percent of your adjusted gross income
Keep records — you’ll want them in the event of an IRS audit. Generally, an organization should give you a written statement if it receives a contribution from you
Charitable giving boils down to determining your strategy, properly researching the organization to which you wish to donate and following the IRS’ guidelines for giving. Do those three things, and your small business will be well on its way to giving back.
If you have at least one employee, you’re responsible for payroll taxes. These include withholding federal (and, where appropriate, state) income taxes and FICA tax from employees’ wages as well as paying the employer share of FICA tax and federal and state unemployment taxes. The responsibility is great and the penalties for missteps make it essential that you do things right.
1. Misclassifying workers
Perhaps the hottest audit issue today is misclassifying workers. There’s incentive to treat workers as independent contractors rather than employees because payroll taxes and employee benefit costs are high; a company’s only tax responsibility for an independent is issuing a Form 1099-MISC if payments in the year are $600 or more.
You don’t have the freedom to select the label for the worker; classification depends on whether you have sufficient control over the worker. This essentially means having the right to say when, where, and how the work gets done. Having an independent contractor agreement is helpful in showing that you and the worker do not intend any employer-employee relationships, but it doesn’t bind the IRS, who is not a party to the agreement.
Find information about worker classification from the IRS. When in doubt, consult your tax advisor.
2. Not using an accountable plan for employee reimbursements
If you normally pay for travel, entertainment, tools or other business costs for employees, you’re wasting employment tax dollars if you don’t use an accountable plan. With this arrangement, you deduct the expenses but avoid all payroll taxes on reimbursements; employees do not have any income from reimbursements.
To be an accountable plan, the employer must formalize the arrangement and set reasonable times for action (the following times are reasonable to the IRS but you can adopt shorter time limits for action):
The reimbursable expense must be business related.
Advances cannot be made before 30 days of the expense.
Employees must account for the expenses within 60 days of the expense.
Employees must return excess reimbursements to the employer within 120 days of the expense.
You are required to maintain payroll records and have them available for IRS inspection. These include time sheets, expense accounts, copies of W-2s and other payroll records. Usually, you should keep information for at least four years.
You should also retain copies of Forms I-9, which shows an employee’s eligibility to work in the U.S. States may also have certain hiring forms that should be retained (e.g., E-verify forms). Details about retaining I-9s can be found at the U.S. Citizenship and Immigration Department.
4. Choosing to pay creditors before the IRS
When a business gets into a cash crush, it may be tempting to pay the landlord, vendor, or utility company before the IRS; don’t! As a business owner, you are a “responsible person” who remains 100% personally liable for “trust fund” taxes (amounts withheld from employees’ wages). This is so even if your business is incorporated or is a limited liability company.
Best strategy: Set aside cash to cover payroll taxes so you won’t use these funds for any other purpose. Find more information about the trust fund recovery penalty from the IRS.
5. Failing to monitor payroll company activities
Many small businesses use outside payroll companies to handle the job of figuring withholding as well as transferring funds to the U.S. Treasury to cover payroll taxes. However, some of these companies may not do their job, by error or intentionally. As an employer, even if you use an outside payroll company you remain responsible for payroll taxes.
Best protection: Monitor your tax account to see that funds are being deposited on time and in the correct amount. If deposits are made electronically using EFTPS.gov, you can easily see activities in your account.
Stay on top of your employer responsibilities to avoid any penalties or entanglements with the IRS, the Department of Labor, or your state’s agencies.
Business credit reports play an integral role in credit risk
assessment and company research. Access to detailed information about a
business such as background info, financial data, payment trends, company size,
payment history and public filings provide the necessary details lenders,
suppliers, investors and potential business partners need.
Your company credit reports and scores are constantly changing
based on a variety of factors, including payment history, number of trade lines
and outstanding balances. It’s essential to keep a close eye on your reports
and watch out for changes that could affect your ability to acquire credit.
It’s vital to build and maintain business credit reports you can
proud of. Did you know potential business partners and investors may evaluate
your company credit files to acquire background information on your business,
evaluate financials and review what other companies you’re working with?
Building and improving the depth and diversity of your business
credit reports will have lasting benefits financially and provide greater
financing opportunities. While it may take time to build business credit that
has depth and diversity, it’s equally important to take the time to manage and
protect the good credit your company has already established. To accomplish
this you should monitor your reports on a regular basis.
Here are five reasons to build strong business credit reports:
1. Creditworthiness – Lending institutions, creditors and
suppliers will check your business credit reports prior to extending or
increasing your company’s line of credit. Additionally, they monitor your
reports routinely to assess your company’s ability to pay and may adjust credit
terms prior to financial difficulties emerging.
2. Customer acquisition – It’s not uncommon for potential
customers to check a business’s credit record to see if a company is a legal
and credible business before working with them. This is not an unusual practice
in today’s business environment.
3. Partnerships & joint ventures – Various other companies could evaluate
your reports if they are thinking about collaborating with you. For example, by
recognizing one of the most creditworthy companies, a business could supply
first-time consumers a line of credit at very little risk.
4. Insurance premiums – Company insurance policy costs are
based upon information acquired from your company reports. Insurance companies
make use of business credit reports for underwriting insurance policies.
Factors that play a role in just how they forecast danger include industry
classification, payment trends, trade experiences, and debt to credit ratios.
5. Government contracts – Federal government departments also assess
company credit records for companies wanting to do business with the
government, collecting taxes, and fulfilling government deals. For instance, in
order to obtain a federal contract your company must be registered to start
marketing to government agencies. This registration process includes getting a DUNS number from
Dun & Bradstreet.
It’s crucial to keep track of the health of
your business credit reports as it is the basis for decisions other businesses,
lenders, suppliers, government agencies, insurance firms and consumers make
concerning your company. Monitoring your reports is important so you should
regularly check and ensure details regarding your company are accurate and up