Archive for category Accounting
Determining your sales tax liability when you operate in more than one state is always complicated. Now it has gotten even trickier. Last week the US Supreme Court made, what I consider, a monumental decision in the case of South Dakota v. Wayfair, Inc. (Wayfair). This decision could turn small businesses, especially e-commerce businesses, upside down and have far reaching effects on how buy and sell products and services. At issue is whether a state can require an online retailer to collect and remit sales tax in a state where it does not have physical nexus. Prior to this decision, a company was only required to collect and remit sales tax in a state where it had either property or payroll, referred to as physical nexus. Now, solely having sales in a state could create nexus.
Let’s go back a bit in history, say a little over a week ago. Prior to Wayfair, a business only had to worry about those states where it had a physical presence in determining its tax nexus. Physical presence has long been the means for determining the taxability of sales in a state since the 1960s. This ruling was upheld and solidified in 1992 when the US Supreme Court ruled in the case of Quill Corp. v. North Dakota (Quill). In Quill, the US Supreme Court ruled that the catalogue retailer was not required to collect and remit sales taxes to the State of North Dakota because it lacked physical presence in that state. Wayfair has changed this in South Dakota and is expected to change this in a multitude of states.
In 2016, South Dakota passed a law requiring online retailers, with sales in the state of more than $100,000 or more than 200 transactions annually, to collect and remit sales taxes. In the wake of revenue shortfalls in many states, it is not a surprise that states will look for, and find, alternative revenue sources. This is the path that South Dakota took. As soon as they passed the law, the state sued four retailers, including Wayfair, Inc., for not complying with the law and won their case. This is huge!
Will other states follow suit? Most likely. Could this reach farther than just e-commerce? Maybe. We’ll have to keep a close eye on this issue as it unfolds. Whether you are an online retailer, SaaS based technology company, brick and mortar store selling occasionally online, or a company that just provides services to its customers, you need to keep a close eye on what other states will do in the wake of the outcome of Wayfair.
By Susan Nieland, CPA
Time for a shout-out to entrepreneurs and small business owners!
According to the Small Business Administration, “Small Business is BIG!”. The 28 million small businesses in America impact the economy by providing approximately 55% of the all jobs and are growing steadily while big businesses are downsizing. Small business accounts for 54% of all sales. This is HUGE! There is a lot riding on the shoulders of small business owners. Entrepreneurs and small business owners have many of the same concerns as big businesses, but have fewer resources and often tackle these issues alone. Small business owners’ concerns can range anywhere from the balance in their bank account, to the impact of a potential increase in the minimum wage on their profits, to the rising cost of healthcare, to the best way to minimize their tax liability, to name just a few.
Don’t go it alone, get yourself a Trusted Advisor.
As an entrepreneur and small business owner, you probably find this a difficult concept to get your head around let alone actually do. You know your business better than anyone because you built it from the ground up. How can you bring in an outsider and trust them, really trust them, with the most intimate details of your business? How can you be sure that they will hold your finances, bank balance and trade secrets in strict confidence? All valid concerns, but I am here to caution you against holding out and going it alone. A trusted advisor, like a CPA, can be a valuable asset to you and your business. Before you start objecting by saying that a CPA is too expensive, or that you only need them at tax time, or that they don’t understand you and your business, let’s take a closer look, then at the end you decide.
What is a CPA?
A Certified Public Accountant, CPA, is someone that has passed a rigorous exam, maintains a certain level of continuing education and follows a professional code of ethics. CPAs are more than just accountants that balance the books. CPAs often serve in many different roles in corporate America, big and small. They not only help companies with their income taxes and tax compliance, they have an intimate knowledge of accounting principles and provide companies with financial planning, forensic accounting, management consulting, corporate governance and estate planning to name a few. With their wealth of experience and knowledge, a good CPA can offer objective, non-biased views and advice to small business owners that is invaluable. Sure, CPAs know the numbers inside and out, but they also have an ability to see beyond the numbers and into the truth about what is going on in your business. It is this ability to see into what is driving business today, projecting where the business is going in the future and effectively communicating this to you in an honest and truthful manner that often places a CPA in the role of Trusted Advisor.
Why Do I Need a CPA?
A CPA can help guide you through the treacherous waters you encounter in running and growing your business. They understand business at a level that is different than non-CPAs. One of the main issues debated during the upcoming US Presidential campaign was whether to raise the minimum wage, and if so, by how much. A CPA can provide you with visibility into the impact such a change could have on your business. Are you looking to grow your business, but need to find capital to fund your growth? A CPA can provide guidance on the type of capital that is right for your business, help you obtain this capital by providing solid financial statements and show you the impact this will have on your business through insightful and easy to read forecasting models. Need to make sure you are complying with all the payroll, sales and income tax laws? A CPA well versed in tax laws can easily help you navigate through these complex issues, as well as help you to avoid costly penalties as a result of missing important filing deadlines. These are just a few examples of where a good CPA can provide value to you and your business.
How Do I Choose the Right CPA?
Now that you see the value a CPA can bring to the table and are convinced that you need one, how do you go about finding one? Here are some tips on finding a CPA that is a good fit for you.
- First, understand what your greatest need is right now. Is it tax related? Do you need help keeping up with your books and records so that your tax accountant can get your taxes done? Do you need help figuring out how to fund your business growth? Once you know what you need, you can get referrals from business associates, attorneys or other CPAs to start your search for your CPA.
- Now that you’ve been referred to a CPA you’ll want to make sure that they have an active license (you can look them up on the state licensing website, for Florida it’s http://www.myfloridalicense.com), their communication style is compatible with your own and they have the experience that you need.
- You’ll also want to make sure that you get along with the CPA you ultimately choose, and actually like them. If you don’t like the CPA personally, even if they are known for being the best in their field, you probably won’t use them or trust them.
- Most reputable CPAs will be members of the American Institute of Certified Public Accountants and/or their state society of CPAs. These organizations have strict rules of membership and monitor their members regularly. Make sure the CPA that you work with is a member of one or more professional organizations.
Once you’ve found a CPA that you’d like to work with, don’t hesitate to take it slow. You may want to start out with a small project to see how well you work together before engaging them on a larger scale. A reputable, and good CPA will understand and will be happy to work with you. It’s your business so make the CPA earn your trust first!
Don’t Go It Alone! Get your Trusted CPA Advisor!
The success of your business relies on you! The growth of the American economy relies on small businesses and entrepreneurship. Don’t go it alone! Bring a Trusted CPA Advisor along with you!
Susan M Nieland, CPA
Imagine you are in your board room, you’re a startup. You’ve received your initial funding. You’ve got a great idea for a new, break-through, and innovative product. You’ve built a prototype and done an I nitial consumer test. The results are great and now you’re ready to continue building your product to make it ready for market. You are so excited, but all of a sudden your palms start to sweat. Your investors start asking questions about your financial results. “Oh no! What now?” Then they ask the dreaded question, “When will you turn a profit?”. You think, “I’ve just started my company. I haven’t launched my product yet. How can I be profitable when my product’s still in beta testing, my customer base is small, and I have very little revenue?” Then you think “Well, there must be some way we can show a profit”.
This is what I call the danger zone. This is where we may be tempted to create new ways to define standard accounting and business terms. Let’s step back for a moment. What does “profit” really mean? Merriam-Webster defines profit simply as “money that is made in a business, through investing, etc., after all the costs and expenses are paid: a financial gain”. Simple enough. Right? Well, not really. For some businesses, gross profit (revenue less direct selling expenses) is the key measure of profitability. In other businesses, they may look at the “bottom line” which starts with gross profit, then takes into consideration marketing and operating expenses, income taxes and depreciation expense. Still others may look at EBITDA (earnings before interest, taxes, depreciation and amortization) as a measure of profitability. These are all good measurements, but let’s go back to the definition provided us by Merriam-Webster. Profit, is money, or rather income, earned by a business after all expenses and costs are deducted. When discussing “profits” or “profitability” with your investors it is critically important to not only be consistent in your reporting of profits, but to also be open and honest in your communications. To me, this means reporting revenue and expenses in accordance with generally accepted accounting principles. This will most likely not be a reflection of the actual cash you have in your bank account, but you can bet that if you have a positive “bottom line” your bank account will reflect this.
Stay true to yourself, your employees, and your vision. If you’ve got a product or service that is unique in the market and it’s a product that your customers want, then profit will follow. There is no need to “play” with the calculation of profit. It is best to know what your income is and the expenses you incur to develop and deliver your product and run your business.
Susan Nieland, CPA
Here we are again, back on the road to revenue. You’ll remember that we are working our way down the revenue road looking at ASC 606 (that’s accounting lingo for “Revenue from Contracts with Customers”). Up to this point we’ve covered the first three stops on our five stop journey, with the five stops on the road being:
- Is there a contract?
- What do we need to deliver under that contract?
- What is the selling price we’ll get?
- How do we allocate the selling price to different items we’ll deliver under the contract?
- How do we ultimately recognize revenue?
We’ve taken a deeper look into what a contract is, how to determine what our performance obligations are and how to determine the price we’ll end up getting as a result of entering into the contract. Now, it’s time to take a look at how we slice up, or allocate, the selling price between the different performance obligations or items we are selling to our customer.
How do we allocate our selling price? Why is it important?
Let’s look at each of these questions individually. Under our current guidance, which we call ASC 605-25, “Revenue Recognition, Multi-Element Arrangements”, we allocate revenue based upon relative selling price. This is very similar to the new guidance where we will be allocating revenue based upon relative standalone selling price. This is where things can get a little dicey and confusing. In its simplest form, it can be quite easy. The standalone selling price is basically what we would sell the product or service to by itself. When we only have to deliver one thing (whether that “thing” is a piece of hardware or a service we perform for our customer), the entire selling price is allocated to the one deliverable. There are often cases when we bundle items together for sale, and this is when it can become a bit complex. If we have to deliver more than one good and/or service to our customer under our agreement, we are then required to carve up our selling price into sections and allocate a piece of the selling price to each deliverable based upon their standalone selling price relative to the total of all standalone selling prices that we are delivering to our customer under the contract. Think of it like this:
|Contract Price||X||Product A’s Standalone Price||=||Allocation of Contract Price to Product A|
|Total Standalone Price for all Products Sold|
Let’s step through an example:
Say you developed a software product and you license it to companies in the automotive industry. You have sold this product to customers in this industry on a standalone basis for $50,000. You also offer software installation services for those customers that would like to use your professional services division to install the software on their servers. You typically sell these services for $250 per hour. In addition, you offer annual maintenance agreements that cover software updates and support. Customers can purchase these alone, but typically purchase them with the software and renew them on an annual basis for $10,000. Now, you’ve got a new customer that wants to purchase the software, 100 hours of implementation services and one year of annual maintenance. You decide to sell this bundle of products and services for $75,000. If you sold each of these items individually your selling price would be $85,000, but because you want to land this important deal, you offer your customer a $10,000 discount for the bundle. Your $75,000 contract price, and $10,000 discount, would be split up like this:
This post is not intended to be all encompassing, but to give you an idea of some of the complex issues you may encounter with the new revenue recognition rules. “Why does this matter?” you say. It matters, because you will recognize the revenue for each of these products at different times. That’ll be covered in the next post.
Thank you for traveling down the revenue recognition road with me to our fourth stop. At our next stop will be looking at how we recognize revenue. Stay tuned!
Please feel free to comment on my post or reach out to me with comments or questions.
Susan Nieland, CPA