With our current economic woes, most businesses are having problems paying their bills on time, if at all.  Over the years I have worked with a wide variety of businesses, all of which at some point have been unable to pay some or even most of their bills.  Some just try to ignore the collection calls (one of the worst things you can do!), some pay bills that they think are more important, just to find out they were wrong, and some just spin their wheels, unsure of what to do.  And in the process, wear a hole in their stomach lining with the constant stress.

Thankfully, there are things you can do to lessen the impact of this outstanding debt on your stomach lining.

1. Realize that managing debt is simply part of running a business.  Even businesses that are in fantastic shape are liable to pay some bills late just due to general cash flow management.
2. Don’t try to shuffle the debt around.  In other words, don’t pay your bills using high interest loans or credit cards.  This may seems like a good short term solution, but instead you will just get further into debt and most likely make the situation much worse than it would have been.   This also goes for those “debt consolidation plans.”
3. Sit down and review all the cash outflows you have and those you know you will have.  This includes bills from vendors, but also includes payroll and taxes.  Figure out how much you owe.  Then figure out how much money you have – how much do you have in the bank?  How much do you estimate will be coming in?  Be as conservative as possible when estimating this number.
4. Figure out which bills you absolutely have to pay to stay in business and on the right side of the law. 

- You must pay the government.  If you do not pay your taxes – payroll, state sales tax, etc. – the government has the ability to levy not only on your business accounts and property, but also your personal accounts and property, even if you are organized as a corporation.  This means you will not be able to pay ANY of your bills.

If you are incapable of paying your taxes, call the appropriate authority (IRS, State Department of Revenue, etc.) and communicate your issues.  They will set up a payment plan.

- You will also need to figure out if your state or, in some cases, your lending agency, requires you to have any specific insurance, such as workers’ compensation, unemployment insurance, vehicle insurance, life insurance, etc.  It is also advisable to keep any kind of liability insurance you may have since if something bad happens, your money issues may increase exponentially if you don’t have some kind of protection. 

- Once you have these concerns addressed, determine how much money you have left to pay the rest of your creditors.  Then call them.  If you don’t tell your creditors you are having cash flow issues, they don’t know.  Communicate as openly and freely as possible.  Explain that you intend to pay, but are having some issues with cash flow and would like to establish a payment plan.  Make sure that the payment plan works for you – do not say that you will pay something that you know you cannot – and keep a record of who you spoke with, first and last name.   Once an agreement is reached, ensure that you have it in writing.

Some of your vendors will not want to work with you.  Whether it is because of their own cash flow issues, or just because they are jerks, it will happen.  In this case, the worst thing they can do is to sue you.  Your legal liability will vary depending on how your business is organized.  If you are a Sole Proprietorship or Partnership, your business and accounts and personal accounts are for all intents and purposes one and the same, so you would be personally liable for all debts.  If you are a Corporation or LLC, your personal assets are generally protected from business creditors, unless you specifically gave up that protection when applying for credit (usually through a personal guarantee). 

No matter your liability, though, those vendors that choose to sue still won’t be able to collect a dime of that suit until you are able to pay.  However, on a positive note, this will you a clear idea of which vendors you will want to work with in the future.  If they truly want your business and are willing to work on payment solutions with you, they definitely deserve your loyalty.  If not, then you likely do not want to provide them more business once you recover.

- If none of these options are available to you, your final (and it should be your FINAL) option is to declare bankruptcy.  Bankruptcy does not mean all the debt miraculously disappears.  If you choose to file for personal or business bankruptcy in an effort to protect your assets from your creditors, not only will you have it on your credit history for 10 years, but if you file Chapter 7 your assets (except for property that is exempt under state or federal law) can be sold off to pay any debt that is not eligible for discharge.  Under Chapter 13 bankruptcy (or Chapter 11 for businesses) you propose a repayment plan for all or part of the debt over the next 3-5 years.  You won’t lose any property this way, but you must repay the debt using your income.

Long story short, you will have to pay back what you owe.  It’s just a matter of if you do it now through working with your creditors or later through paying off high interest loans or loss of your assets and inability to gain funding due to a bankruptcy declaration. Obviously, these recommendations will not work for everyone, and I strongly suggest you discuss your particular concerns with a professional familiar with your specific situation.  However, if you prioritize and communicate, you are far more likely to make it through any economically rough times than if you stick your head in the hole in the ground and pray that any issues resolve themselves.

Generally speaking, how your business is organized is going to dictate how you will be paying yourself as a business owner.

Sole Proprietorship or Partnership
If your business is a sole proprietorship (someone who owns an unincorporated business by himself or herself) or partnership (the relationship existing between two or more persons who join to carry on a trade or business), the money you pay yourself is recorded in a draw account.  You are not allowed to expense a salary or any personal withdrawals made from the business. 

Instead of paying yourself a salary and paying employment taxes through Forms 941 and 940, you would generally pay self employment taxes on the net profit of the business at the end of the year. 
- For a sole proprietorship, this would be reported on IRS Form 1040 Sched C (or Sched C-EZ). 
- For a partnership, it would be reported on IRS Form 1065.

In addition, you will need to make estimated tax payments throughout the year if:
- you expect to owe at least $1,000 for the year after subtracting your withholding and refundable credits, or
- you expect your withholding and refundable credits to be less than the smaller of:
    -  90% of the tax to be shown on your annual tax return, or
    -  100% of the tax shown on your previous year’s tax return, covering all 12 months.

Corporation
Corporate officers who perform services for a corporation (either LLC, S-Corp, or C-Corp) are considered employees. As an employee of a corporation, you are required by the IRS to pay yourself “reasonable compensation”. Reasonable compensation in defined in Publication 525 Chapter 2.

This means that you must issue yourself (and any other corporate officers which perform services for the corporation) a paycheck and pay all the associated employment taxes on the appropriate schedule and file all Forms 940 and 941 as applicable. If you do not, the IRS may determine that adjustments must be made to the income and expenses of tax returns for both the corporation and an individual shareholder if the officer is substantially underpaid (or overpaid) for the services provided and you may be subject to interest and penalties.

Always double check with your CPA, of course, to ensure that you are recording things accurately for your particular business, but in general, the above is a good rule of thumb when figuring out how to pay yourself for the work you perform for your business.

My journey into bookkeeping began early in 2002 while working as an Office Manager with a Department of Defense subcontractor based in Bothell, Washington. I’ve always worn numerous hats in the business world and as my position progressed I stepped in to manage their accounting system. I took this step to not only help them gain a clearer control of their books, but to also partner with them in making more informed business decisions based on solid financial information.  I helped streamline expenses, reduced overhead costs by 10% the first year, and developed an efficient method to track specific job costs.

I also began to work with another firm as a contract bookkeeper – a business relationship that I still maintain, and one that started me down the road to my independent bookkeeping business.

In 2004, I moved to San Diego where I worked as a Staff Accountant for a local internet service provider.  While there I managed the accounts payable and receivable departments, sales commissions, and assisted the controller with the annual third-party financial audit.

I returned to Seattle in late 2005 to complete my degree at the University of Washington. During this time I resumed work with the Department of Defense subcontractor.  My experience as Quality Manager and Facility Security Officer provided me with invaluable audit experience and process authorship, as well as knowledge of yet another aspect of business management in preparation for my future pursuit of an MBA.

Dedicated Balance was launched in 2008 to offer clients the benefit of my well-rounded experience in business, as well as the bookkeeping world.  Through partnerships, Dedicated Balance seeks to offer an experienced eye with a variety of businesses— from sole proprietorships to publicly owned corporations and everything in between.  Every project that I undertake is given undivided attention to ensure a client’s needs are met, their expectations are exceeded and their business continues to be successful.  The name of my business is my driving mission: Dedicated Balance is the dedication that I show to my clients – to not only balance their books – but also their business.

Many clients that I work with have home offices and personal vehicles that they use for business purposes and there is often confusion as to what can be expensed to their business.

The following information regarding what you are able to expense to your business is found in IRS Publication 535.

Home Offices
You may be able to deduct expenses for using a portion of your home for business purposes. These expenses may include mortgage interest (or rent), insurance, utilities, repairs, and depreciation. 

To be able to claim those expenses you must:
- use the portion of your home (generally figured by the percentage of square feet that is dedicated to business use vs. total square feet) that you are claiming exclusively and regularly for administrative or management activities for your business, and
- that portion of your home must be either your principal place of business (i.e. you have no other fixed location where you conduct substantial administrative or management activities); or a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or a separate structure (not attached to your home) used in connection with your trade or business.

If you are claiming a portion of your house that you are using regularly either for the storage of inventory or product samples, or as a daycare facility, then you generally do not need to meet the exclusivity test.

If you have more than one business location, your principle place of business is based on the following factors:
- the relative importance of the activities performed at each location, or
- consider the time spent at each location.

Personal Vehicles
If you use your car exclusively in your business, you are able to deduct all car expenses.
If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.

Generally, commuting expenses between your home and your business location (if you are not running your business in your home) are not deductible.

You have the option to deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees.

Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. For 2010, the standard mileage rate is 50 cents a mile for all business miles driven before January 1, 2011.

If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.

You now have the ability to schedule an appointment with us online at Schedulicity.com.

Simply click here to go to our page, register, and start scheduling appointments!

If you need an appointment that will be longer than the preset times, please send us an email at summer@dedicatedbalance.com to let us know and we will adjust the times accordingly.

Welcome to the blog for Dedicated Balance.  Here we will post tips and information for you and your bookkeeping dilemmas.  Please, keep in mind that we will not provide any legal tax advice, only general information on the day to day bookkeeping processes for running your business.

Please feel free to ask any questions related to bookkeeping and we will answer them as soon as possible!

Thanks for joining!