Are you a Material Girl/Guy?

I'm never sure when I listen to Madonna sing "Material Girl" if she thinks that being a material girl is a good thing or a bad one. But being a material girl/guy in relation to your business is definitely a good thing when you are dealing with IRS matters.
If you own a business and that business incurs a loss, the amount of the loss that is deductible for tax purposes may be limited by several factors. One factor is whether you materially participate in the business. Material participation only becomes an issue if your business is organized as a pass-through type entity (sole proprietorship, partnership, S Corporation or LLC for tax purposes treated as a sole proprietorship or partnership).

Before I discuss what factors the IRS uses to determine material participation, a little necessary background info. about pass-through entities. In pass-through entities, the profit or loss is calculated for the business as an entity and the information is submitted to the IRS but no tax is due at the entity level. The profit or loss is "passed through" to the owner(s) and included on their personal return. If a loss is passed through, it can generally be applied against other types of income such as wages, interest and dividends. That makes a loss valuable to the taxpayer because it can decrease the total amount of tax due on the return. However, if an individual does not materially participate in her business, losses are treated as "passive" losses, which mean they generally are only deductible against passive income such as rent, royalties or other businesses with passive income. Not so useful now, right?

What factors does the IRS use to determine material participation? Generally, for an individual to be considered to materially participate in a business, she must be involved in its operation on a "regular, continuous and substantial basis". More specifically, there are seven tests that the IRS uses to determine material participation and a business owner must satisfy at least ONE of the tests:

* 500 Hours: individual participates in the business for more than 500 hours during the tax year.
* Substantially All of the Work: the individual's participation constitutes substantially all of the participation in the business compared to all individuals involved in the business.
* More than Anyone Else: the individual participates in the business for more than 100 hours during the tax year and that time is not less than any other individuals involved in the business.
* Significant Participation Activity: The activity is a "significant participation activity" (SPA) and the sum of SPAs in which the individual works 100-500 hours per year exceeds 500 hours for the year.
* 5 Out of 10 Years: The individual materially participated in the activity for any five tax years during the prior ten tax years.
* Personal Service Business: If the individual materially participated in the activity for any three tax years preceding the current tax year and the activity is a personal service activity, the loss will be treated as non-passive. A personal service business is one in which capital is not a material income-producing factor. Examples of PSBs are accountants, lawyers and doctors and in the equine world, free-lance instructors and equine chiropractors.
* Facts and Circumstances: The facts and circumstances test may apply if none of the other tests are met. This test does not apply unless the individual worked more than 100 hours a year. Also, the taxpayer's time spent managing will not count if:o A paid manager participates in the business, ando Any person spent more hours than the taxpayer managing the activity.

Material participation is determined on an annual basis so you may be considered to materially participate in your business one year and not another.

Material participation is only one factor that can limit the amount of loss available to the business owner. Other factors include limitations due to basis, amounts at risk and hobby loss rules. So be sure to consult with a qualified tax advisor to understand all of the factors affecting your situation.
In The SwingBy CliveWrap UpAs the holiday season starts to amp up, golf in many ways wraps up for a short time, especially in my part of the world, the North Pole. Okay, Canada. This is my last column for 2011 and as I look forward to a potentially exciting golf year in 2012, I will leave you with some random thoughts, particularly as they relate to recent developments in the golf world.Last week
In The SwingBy Clive“Dear Clive, I enjoyed reading your book and wonder if you could answer one question? You advise unbending the right wrist to hit down. Much of what I read recommends having a bent right wrist and flat left wrist at impact. Is this a difference of opinion or are you saying the right wrist is un-bending as you hit down but is still partially bent at impact? I appreciate your
In The SwingBy CliveTiger at the Presidents CupI pretty much, deliberately, (try to) avoid writing about Tiger Woods. So much is written about him. Too much, is written about him. Worse, too much is written about him when he is not playing well. When he was on a tear, and firmly at the top of global golf, who could resist talking about him? He was amazing, his play was amazing, and his future
In The SwingBy CliveRandom Thoughts on the Presidents CupOne of my favourite golf events is the Presidents Cup, which starts this week in Melbourne, Australia. It is being played on one of my favourite golf courses, Royal Melbourne. It has been a while since I have attended a Presidents Cup – in fact the last one I did attend was at Royal Melbourne, when the Internationals trounced the US Team
In The SwingBy Clive“Dear Clive,As my downswing accelerates and my hands stay in front of the clubhead, the shaft bends. This will translate into "whip"/increased acceleration, ideally at the moment of impact. Right?So far so good. But, when I hit down and the club face takes a divot, it seems to me that there is a tiny delay. I attribute this delay to the shaft bending again as it encounters the
In The SwingBy CliveGrass ShotDid you know you can hit a bunker shot… from the grass? This is an unusual but helpful shot used around the green. It is akin to a flop shot but not quite the same thing. You find yourself in long, flattened down rough near, but well below, the putting green. You need to get the ball up high, but want it to stop relatively quickly upon landing. Before I get into the
In The SwingBy CliveBent MythThe swing instruction I am about to admonish I have heard dispensed to countless students, and I cringe each time I hear it. It concerns chipping, I was taught it at one time, and was a terrible chipper. The problem with chipping terribly is you do become convinced you are a terrible chipper. That bad chipping is your lot in life, and the only way around it is
In The SwingBy CliveTalkingSome people just do not shut up on the golf course. They talk on the tee, they talk on the fairway, they talk on the green, they talk, talk, talk. It is very annoying to other golfers on the course, and especially to playing partners whose games it can distract. But… it ain’t too good for the game of the guy who is doing the yacking, either.Someone who is incessantly

The first year that I prepare a tax return for a client, it isn't unusual for me to get a lot of receipts for deductions for clothing related to their job or business. Many times, I have to be the bearer of the bad news that the cost of most of the clothing is not tax deductible. The types of clothing that are tax deductible are very limited and I use what I call the "Department Store Rules" as general guidelines to determine what is and is not deductible. My "Department Store Rules" are 1.) Can you buy something similar to your potentially deductible clothing item in a department store? 2.) Would most people feel comfortable wearing this item of clothing into a department store? If the answer to either question is "Yes", chances are that the cost of the clothing is NOT deductible. So on the "NOT deductible list would be items such as:

Sports bras
Muck boots
Favorite polar fleece jacket even if that jacket is manufactured only by an equestrian clothier
Extra warm coat you wear when you are giving lessons, teaching a clinic, judging, etc.

You get the idea.

So what is deductible?

Protective/Safety Clothing: hard hats, riding boots, chaps, riding gloves, protective vests and any other type of protective clothing not suitable for everyday wear.

Show Clothing: breeches, top hat, hunt jacket, etc IF the showing is a business expense (e.g. you are showing your clients' horses, sale horses, etc) AND the item of clothing is not suitable for everyday wear (e.g. your lucky show socks, the T shirt you wear under your show coat ...).

Something you can do to expand this rather narrow window of what is deductible very slightly is to have some of your regular business-use clothes embroidered with your logo or otherwise use them as a marketing device. For a trainer who frequently coaches at horse shows, you could have your baseball cap and jacket embroidered with your business logo and the cost of the clothing and the embroidery would normally be deductible. Don't go over the top on this idea and have everything in your closet embroidered or the IRS could disallow all of the deductions. Weigh the cost of the tax savings you gain by getting the deduction and the possible marketing benefits against the cost of the embroidering to see if the idea works for you.

Remember that for any expense to be deductible it must be a business-related expense, ordinary (common and accepted in your type of business), necessary (helpful and appropriate to your business) and you must have documentation (receipts) that you actually incurred the expense.

So on your next trip to the tack shop, remember my "Department Store" Rules and you'll know how much of your purchase should be tax deductible.

In The SwingBy CliveChip While InjuredA friend has had to give up golf, just for a while, following surgery on his leg. He has commented a few times that he is looking forward to getting back to the range, and that that opportunity is approaching.As you likely know, the legs must bear a bit of movement, and weight, in the golf swing so practicing while enduring any kind of leg injury or
Kids in your officefrom NelsonImagine the scene. You get a phone call. It's a prospect. You go "yes! my marketing is working". You are having a good conversation and then your children start screaming in the background. The prospect hangs up.Ouch! Has it happened to you? Well, it happened to me!When you have kids, it's really hard to run a business at home. Not only you have to worry about

Protecting Yourself Against Data Theft
by Michael Ehart, CISSP, etc.

There has been a rash of reporting of data theft lately that has a very strange effect of causing many to become complacent about their data protection measures because, after all, their system is working.

The problem is that there is no way to know if your data is bulletproof. You can only be certain when it is not, and you have evidence that your security has been breached. The vast majority of data theft is undetectable and unprosecutable, because unlike physical theft the stolen data is still there. If someone sneaks into a museum in the dead of night, dressed in spandex and night goggles and makes off with a Bottecelli, in the morning there is a big square of unfaded wall, an empty nail, a light dusting of tracked-through laser-detection talcum powder and no painting. 

The problem with stolen data is that most of the time there is no way to know that your system has been breached, or if it has been, that anything is missing because nothing is actually missing.
So what do you do to keep your data secure? The threats come in three flavors, and there are steps that you can take to protect yourself from each one.

1. The Barbarians at the Gates. There are people out there who don't like you. There are people out there who don't care about you, but want what you have. And there are people out there who don't care about you, or what you have, but want inside just because they can. These are the folks that firewalls were invented to thwart, and I assume that you have covered this loophole. Firewalls, encryption, strong passwords, and some sort of Intrusion Detection System (IDS) cover you there. If you don't understand or like this stuff hire someone who does. A competent IT security consultant can set up security for most small offices in a few hours of system hardening. Do make sure that the contract includes some basic training for your users concerning the changes and best practices.

2. The Enemy Within. Far more likely to cause you grief is the viper cherished in your bosom. No one knows for sure, but I would guess that the retail model applies here--- 90% internal theft. After all, who else holds the keys to your kingdom? Training, monitoring, set usage policies and careful terminal check-out procedures can help, but you never know. If you have 20 employees and they all seem perfectly content, either you are the shining example all other bosses should aspire to or at least 5% of your workforce is adept at hiding their dissatisfaction. I know which one seems most likely to me.

3. Stupid is as Stupid Does. And Stupid seems to be doing more than his fair share lately. Data theft is the classic crime of opportunity. "It was just laying there, so I took it." Or "The web site was unsecured" or "The safe was left open" or -one that I recently was asked about- "I left the box of records in the back seat, and someone borrowed my car." I love consulting, but dang, please make it harder for me, will ya? No more post-it notes with passwords conveniently stuck to the monitor, or so cleverly stuck under the keyboard. No more backup tapes on a shelf behind your desk, or stacked on top of the server. No more shared passwords for the entire office. 

Once again, if you don't know about this stuff contract someone who does. It is so very much cheaper and less stressful to spend a few bucks and a few hours hardening your system and providing a few hours of common sense training for your crew than it is to learn about your data disclosure from the guy with good hair and too many teeth holding the mike and standing sideways in your lobby so his cameraman can get a good shot.

Michael Ehart is a Certified Information Systems Security Specialist (CISSP) and carries certifications as a HIPAA Professional and HIPAA Security Specialist (among other things). Visit Michael Ehart's HIPAA blog Comply With Me

Spring is getting closer. Time to freshen up the financial management of your company. Also tax time fast approaching. Tasks that needn't be complicated as long as have a full service accountant involved.Whatever your business and requirements I am familiar with more than 20 years experience.Springing your business - legal, retail, property management, non profit, construction, hospitality,

Famous Last Words... My tax situation is pretty simple

Several years ago, I met a woman who was involved in carriage driving. I remarked on how well behaved her horse was and asked who trained her. The woman said that she got the horse from a family who bought the filly as a yearling and trained her themselves. They had never owned a horse before and decided that as a family project, they would buy a horse and train it to drive. Their only resource for how to train the filly was a book that they bought on raising and training horses.
A lot of you who are reading this are probably cringing, thinking of all the ways this experience could have gone terribly wrong. 99% of the time, it wouldn't have a happy ending. Horses are complicated and some of the time most of us need assistance from professionals who know how to do the job right.
Most of us wouldn't try to do electrical wiring or writing our own legal contracts. So why do so many people do their own tax returns?

It isn't uncommon when I first meet a prospective client or speak with an attendee at a seminar that they tell me that their tax situation is pretty uncomplicated. But when we go on to discuss the situation further, it can prove to be anything but straightforward. As I start to explain the intricacies of some of their tax issues, I hear "How am I supposed to know that?" or "This is more complicated than I thought".

Quoting U.S. Representative Spencer Bachus from AL:

"With its 6,000 pages and 500 million words, the complexity of our tax code is the prime source of frustration and anger felt by millions of Americans toward their government."

CPAs and Enrolled Agents spend a significant portion of time staying informed about current tax law. How can someone who only prepares one tax return once a year be aware of all of the issues that can affect their tax situation?

Here is a sample of questions that I've heard recently:


1. Is the scholarship I received taxable?

2. How much of my Social Security benefits are taxable?

3. I surrendered my life insurance policy for cash. Does that affect my taxes?


1. If I give my employees gifts for Christmas, is the cost deductible?

2. If I am a one person S Corporation, can I set up a health insurance plan for myself that is non-taxable to me and deductible for the corporation?

3. What is a Section 179 deduction?

If something is wrong on your tax return, it may be a red flag to the IRS which can trigger an audit or it may increase the amount of taxes you pay or decrease the amount of your refund. But it's not something you realize at the time. It can take years to discover the problem which could translate into amending the tax returns for all the years involved.

There are certainly people other than CPAs and Enrolled Agents who can correctly prepare a return. And there are tax returns that are fairly simple and straightforward for the average taxpayer to prepare. How do you know if that's your situation?

1. You can hire a tax preparer to review your prior year return to see if you have any potential problems.

2. You can hire a tax preparer to prepare your return this year. Compare it to what you did last year (assuming your situation has not changed significantly) and see what the differences are.

3. Schedule a consultation with a tax preparer and explain your business or personal situation. They may be willing to point you toward tax issues specific to your situation.

Tax returns done wrong can be a costly problem to remedy. Get expert advice and then decide whether preparing your tax return yourself is the best alternative for you.

Finance and Accounting Support in Franchise Systems

Finance and Accounting Support in Franchise Systems

There has always been somewhat of a love/hate relationship between franchise operators and their franchisees.  While many entrepreneurs elect to leverage a known brand, documented operating procedures, and combined purchasing power that is often a benefit of a franchise operation, the reluctance to “open the books” to the franchisor is largely based upon a fear that “big brother” will use the information to take advantage of the business owner.  

Logic would indicate that both parties would recognize the validity of sharing financial and business performance data for the benefit of the entire system, where benchmark data and performance comparisons can become the basis of tremendous business intelligence.  But some franchisors, as their networks expand in size, find that their success in selling units begins to outweigh their concern for individual unit performance, and the brand value creates sufficient momentum to overcome a few bad business experiences.  Especially in larger systems, the franchisors don’t often consider the benefits of providing back-office and accounting support for their franchisees, because they simply don’t feel they have to. Reliance on quality accounting and financial data, however, may begin to take on an entirely new meaning, given the nature of the economy right now. 

High unemployment and low consumer confidence have caused spending decreases which have impacted even the strongest of established businesses.  With credit markets being as tight as they are, business owners are unable to obtain the financing required to expand their businesses when required, to new locations or with additional personnel.   The 2010 Franchise Business Outlook[1]  suggests that, even as the economy starts to recover, franchised small businesses will continue to face these financing struggles.  The forecast is for “a slow recovery with marginal increases in the number of establishments, jobs and output.”

Looking to Washington for help, a number of small business organizations, along with The International Franchise Association, are “calling upon Senators to include more provisions in new job creation legislation to help small businesses access credit.” [2] The fear is that if credit access for small business isn’t made available now, the best opportunity to create sustainable business and subsequent job growth will be lost.  Reliance by small businesses upon credit is unquestionable.  

According to the IFA, “the depletion of [SBA loan] funds last fall is proof that the SBA programs were, and continue to be, critically important for our nation’s credit-worthy entrepreneurs”.  However, without sound business accounting and provable data, even the most business savvy entrepreneur may find their business “unbankable” and must therefore rely upon personal credit guarantees to support business growth.

Possibly the strongest point in the argument for franchisors facilitating accounting and financial management assistance to the franchisee centers on Item 19 of the FTC and state Franchise Disclosure Documents (FDD)/Uniform Franchise Offering Circular (UFOC).  Item 19 is the Earnings Claim, which are estimates or historical figures detailing sales, expenses, and income a prospective franchisee might realize as the owner of a particular franchise.

The Earnings Claim is often considered to be the single most important factor in buying a franchise.  As with purchasing any business, it is critical to have a realistic and supportable projection of sales, expenses, and profits earned.  Particularly in a case where a potential new franchisee has no experience running a business, or no applied experience in that particular type of business, the earnings claim becomes the only guidance available.  Unfortunately, the only source for this information is the franchisor itself, which often introduces doubt as to the veracity of the data.  It is difficult to determine which could raise more doubt about the sincerity of the franchisor: using unverifiable data, or not providing an earnings claim at all.

When a franchisor elects to provide services to their franchisees, such as back-office accounting support or financial management oversight, then the opportunity to obtain data for the earnings claim, performance benchmarking, and royalties verification become realistic goals.  Further, the ability to verify and substantiate the data can prove invaluable in a tough franchise market where buyers want good, verifiable information, and Item 19 helps sell units.

Offering accounting support to small business owners isn’t a new concept, but the technology to facilitate a truly seamless relationship has only become available in recent years.  As Internet and Web-based application services emerged on the market, businesses flocked to them in order to gain the benefits of anytime, anywhere access to applications and data.  However, the poor performance and lack of features left some business users without the tools they needed to handle all their requirements efficiently, so many returned to manual or local PC-based systems. 

Application hosting approaches offer a technology model which adapts trusted and proven software and systems to a cloud-based, collaborative online working model.   This technology model allows the businesses to continue use of applications with the functionality required to support the business, but improves the IT environment by managing and securing the systems within a secure facility, and utilizes the resources of the service provider to facilitate the ongoing management and support of the systems.  

Owners are able to retain their investments in software applications and processes, while introducing new efficiencies and flexibility in their working model.  The evident benefits are the ability to access information from any location, to have multiple locations work seamlessly together, and to allow outside accountants or other service providers to work seamlessly in the organization.  

Application hosting services also offer centralized management and administration, professionally-secured systems, and deliver reduced costs of IT management, predictability in ongoing IT costs, and an improved ability for the business owner to focus on the business.  Further, the solutions delivered allow for the integration of data with reporting systems designed to assist in the translation, analysis, and comparison of data from a single business to an entire franchise system.

In summary, the franchisor market must look more closely at the fiscal management and reporting systems of their franchisees, and provide avenues to better-address accounting and bookkeeping responsibilities in order to gain credible performance data and useful benchmark metrics.   Only through the ongoing participation of accredited accounting and financial personnel can the business financial data provide the information – and the insight – required to support aggressive business growth in this difficult economy.   

The key is seamless integration, and the technology solution is the cloud-enabled model.


[1] Report that measures the economic impact of franchising in the United States, prepared by PricewaterhouseCoopers (PwC), and commissioned by the International Franchise Association Educational Foundation.

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How the new year going for all you so far ?January hasn't been very busy for many but spring is just round the corner.Meaning it is time to freshen up your financial management for your business. Whether it is a restaurant, law practice, retail store, construction company, manufacturer or non profit. Whatever your business call me. Contact at http://tjkfinancialaccounting.comWith more than 20

Equine Accounting: Qualified Joint Venture for Husband and Wife Operations

At many horse farms, the revenue from the farm represents the primary source of income for both the husband and the wife. In order to receive credit for their income for purposes of calculating future Social Security benefits, many couples have resorted to changing their form of taxable entity from sole proprietorship to a partnership or S corporation. This results in an initial expense for legal costs as well as additional fees for preparation of more complication partnership or S corporation returns each year. However, there is another less expensive and less complicated option: the qualified joint venture.

Beginning in 2007, an unincorporated business that is jointly owned by a married couple may elect to be treated as a qualified joint venture. The couple must file a joint tax return. Each spouse must "materially" participate in the business and the business may not be owned in the name of a "state law entity" - an LLC or LLP.

Each spouse must report their share of the all of the business income and deductions and each will receive credit for purposes of Social Security benefits calculation. The division of income and deductions between the couple should be based on each spouse's interest in the business. Generally, this can be calculated based on time and/or funds invested in the business. So each spouse would include in their jointly filed Form 1040 a separate Schedule C or Schedule F, with their share of income and expense as well as a separate Schedule SE to report self-employment tax. In most cases, this division of income does not increase the amount of tax due.

If, however; Spouse 1 substantially controls the management of the business and Spouse 2 is under the "direction and control" of Spouse 1, an employment type of relationship exists and would not meet the criteria of a qualified joint venture. Spouse 2 should be considered an employee and is subject to income tax and FICA (Social Security and Medicare) withholding. As the employer, Spouse 1 is responsible for FICA taxes but not Federal Unemployment Tax.

Why is this important to know? If you and your spouse are planning to spend a considerable percentage of your working life on the farm, you need to be sure that each spouse is accumulating wages that are included in calculating future Social Security benefits. We don't like to think about the possibility of losing our spouse but especially in the case of a family with children, it's important to plan in advance to minimize the economic impact of the death of a spouse.