Posted by Federal Way CPA on October 28, 2013 · Leave a Comment
If you are engaged in leasing property to obtain income, it is crucial that you ensure a number of fees and services are adequately arranged and documented for IRS considerations. We will look at these expenditures.
Insurance
Just as in the majority of premiums, it’s usually pre-paid in advance for a certain amount of time. Scenario: You obtained insurance on the property in March 2012 for $1200. April 2012 to March 31, 2013 would be the policy duration of this insurance policy. As the insurance coverage period does exceed the current tax year, you must apportion and identify the insurance premiums applicable to the present year only and then carry forward the balance for the upcoming reporting period. With this scenario the allowed insurance premium tax deduction could be $900 (9 months April to Dec 2012) or $100 per month of qualified rental property use.
Note that many Insurance carriers routinely combine premium packages among personal and business clients at a discounted charge. You have to ensure that you just allocate the part which is relevant for your business rental property from this tax deduction. The personal and non business use could be deductible on your personal tax return. You can include Title insurance in the Cost Basis of the rental property, since it is not an allowable expenditure.
Cleaning and Maintenance
If it’s applied to ongoing cleanliness and upkeep of general places, then day-to-day repair of the rental property is an allowed expenditure. These expenditures are also restricted to the days which have been tax deductible rental property days rather than personal use days. To make sure that the rental property is in fine shape and working order, you can do what various other property owners do, and hire a local contracted company to take care of the property. This can consist of such professional services as cleaning windows, dusting, cleaning home appliances and general maintenance. Structural maintenance and alterations will not be allowed, so have to be listed in the property’s Cost Basis.
Repairs
Once in a while, there could be some need to mend a home appliance, touch up a little painting, or some kind of activity which does not demand significant reconstruction of the property structure. Depending on the leasing duration, you’ll be able to write off these kinds of essential and typical costs.
Do not ever include any kind of times which will be considered to be personal use days, since expenses are only allowable in relation to the earnings of the property. Only those expenses in which are directly related to the authorized leasing time frame are allowed.
- On the Internal Revenue Service’s internet site, you will find the a variety of reports you’ll need. Reference IRS Publication 527 for more information.
Bellingham CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Federal Way CPA on October 17, 2013 · Leave a Comment
The use of your own private vehicle and other transportation may be deducted as expenses dependent on if they’re typical and needed. Various expenditures you may be able to write off are expenses such as traveling to receive rental payments as well as to perform maintenance on the rental premises. Commuting is not tax deductible. Additionally, you are unable to deduct the expenses of traveling to make improvements to your property. That’s typically recoverable under a cost recovery process such as depreciation.
Actual Expenses
Here you log all expenditures related to deductible travel in connection with the leased residence. IRS Publication 463, Chapter 5 specifies the way these expenditures must be reported and supported with invoices and receipts. Certain software applications can be purchased with iPod, Quick Books, Mint, and so on, which can help you keep track of these files; nevertheless, you still must have a touchable record to validate all write offs. You are required to report this with either Schedule C or Schedule E along with all necessary supporting documents. For people who have multiple rental properties, your business expenses must be allocated to each individual residence where the costs accrued. Do not include any non-business use or any other sort of vehicle use other than that which is in connection with the rental property.
Mileage Method
Here you may deduct your actual distance driven. For example, if you journeyed twelve hundred miles in the course of 2012, you’d implement the actual standard mileage rate of $0.55.5 per mile in line with present taxation rates and deduct your total.
Use of local transportation such as Zip Cars, metro bus companies, and car rental must have a principal connection to the real estate property and will include documents to back this. If employing public transit, it is advisable that you keep track of all fare expenses. It is also a good idea to keep a business account for rental cars and Zip Cars in order to show how the utilization is completely business relevant.
Quick Note: You can obtain the different documents outlined in this information on the IRS’s webpage. For additional information please check with IRS Publication 527.
Federal Way CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Federal Way CPA on October 9, 2013 · Leave a Comment
Being a property manager, to accurately record and report your own rental income to the IRS, you need multiple Revenue Service tax forms which will be outlined inside of this article. As is discussed in this article, the tax documents needed will be different, depending on the kind of authorized entity that is the owner of the property (individual, partnership, corporation, or LLC). Read the page titled Best Rental Property Ownership, included with this Guide, for more concerning legal entity property ownership.
Quick Tip: All the forms mentioned just below are accessible on the IRS’s webpage, at: http://www.irs.gov/Forms-&-Pubs. The various required documents are found in any tax preparing programs, if you use one of them.
Individual Ownership
Shared rental property ownership with a significant other, joint tenancy with right of survivorship, and tenancy in common would be included in this.
Form 1040. First, you’ll require Form 1040, the form used by all independent tax payers. Found on line 17 of the first page of Form 1040 is the total rental income or loss, subject to taxes. Please note that as a landlord with rental property activity, you aren’t permitted to take advantage of shortened Forms 1040A or 1040-EZ.
Schedule E. A certain addendum to Form 1040 that you need to be familiar with is Schedule E. It has numerous functions, and the use that is meant for your needs is reporting of rental income and expenses. The one element of Schedule E you have to fill out is the part entitled as “Part 1″. A few critical notes to keep in mind: if you ever own the rental property mutually with a partner who is not your husband or wife, report only the earnings that you collected plus the expenditures that you sustained. Don’t forget, , that you have to keep track of your expenditures concerning rental and non-rental use if you are renting a portion of your personal residence, or whenever you only rented for part of the year. View the set of articles entitled Tax Deductible Rental Property Expenses, available with this Guide, for further advice.
Form 4562. Form 4562 must be used to calculate depreciation on your rental, which you can deduct on line 18 of Schedule E. For more information, look at the article titled, Depreciation Expenses for Rental Property, which is included in this Guide.
Partnership/Corporate Ownership
For example a general or limited partnership or S corporation.
Form 1065/1120-S. The tax form a collaboration employs to report all its business activities is Form 1065, that you must use if you have a collaboration. An S corporation utilizes Form 1120-S to report its company activities. The net rental profits or deficit are going to be reported on Schedule K, line 2 of Form 1065 or 1120-S (Schedule K is embedded in those forms).
Form 8825. This tax form acts similar to Schedule E, but is for partnerships and S corporations. It is actually in essence similar to Schedule E. Be sure to report complete sums of all profit and costs incurred by the partnership or corporation (they are allotted to each partner or shareholder later on).
Schedule K-1. The total leasing profits or loss as a result of each shareholder or business partner is reported by this tax document, according to the ownership interest of that shareholder or partner. Each partner gets their own K-1 and will have to report the details of their K-1 on their Form 1040, Schedule E, Part II.
Limited Liability Company (LLC) Ownership
A single owner LLC is really a disregarded entity for tax objectives, so that you can file just as if you’re an independent owner (look above). A multiple-member LLC may choose to be taxed as either a partnership or as an S corporation (notice above).
Renton CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Filed under Landlord's Tax Guide · Tagged with 1120-S, Corporate Ownership, Form 1040, Form 1065, Form 4562, Form 8825, Individual Ownership, LLC, Partnership Ownership, Schedule E, Schedule K-1
A large number of business owners are leery of home office deductions, concerned that these deductions are more likely to inspire an IRS audit. The IRS claims there is no legs to this. In any case, follow the rules and you should have no concerns.
The key to this deduction is that owners of rental properties may claim this write-off if they are active, which is to say you must do more than cashing checks. If you consistently spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.
If you meet the criteria for being an active rental property management the next requirement is that you must regularly use the office space exclusively for running your business as a rental property manager.
Additionally, you must meet one of the following requirements:
1. Your home office is used as your primary place of business.
2. You must have no other location from where you run the administrative end of your property managment rental business.
3. This space also serves as meeting location for clients.
4. You use some other structure on your property to conduct business.
After you have applied these threshold tests and determined that the work area in your home does in fact meet the requirements for the home office deduction, you will have to look into what kind of expenses can be written off. There are direct and indirect types of home office deductions. Direct expenses solely benefit the home office area of your home such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the home office space and the rest of your house. Property tax, insurance, mortgage interest, and utilities are common examples of indirect expenses. Square footage is the basic way of figuring out the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot home with a 200 square foot home office area would mean 10% of the indirect expenses could be deducted as part of the home office deduction. You can also depreciate the house structure (not the value of the land) in the same percentage over 40 years. However, this may complicate matters when you sell the house.
And you will want to ensure that you are keeping meticulous records in case there is an audit. You will need to be able to prove that you were entitled to any claimed tax deductions. A diagram and/or a photo will support your claim of square-footage ratios. It is wise to have your home office address listed on business cards, letter heads, or other forms of communication. And when using your home office to meet renters, it is wise to keep a log to keep track of meetings. You should keep insurance premium notices, mortgage interest statements, property tax statements, utility bills, and other appropriate expense statements.
This topic can get quite complicated and the above is only intended to give you a basic understanding of the circumstances that would allow you to take advantage of the home office deduction.
Federal Way Tax CPA +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Federal Way CPA on February 20, 2013 · Leave a Comment
This segment the Rental Property Tax Guide focuses on the different types of expenses that you may deduct from your gross rental income in order to determine the net rental income. Because there are so many deductible expenses, this guide divides this series of articles into four different kinds. This first chapter will target advertising, interest and professional fee expenses.
Interest
If you’re renting a room in your home, or if it is a duplex and you’re occupying the other unit, you will need to pro rate the mortgage expense. (See the article titled Personal Use of Rental Property, included in this guide, for more on how to calculate personal use). Now if you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Also, if you own only a part interest in the rental, you must multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware, however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property.
Advertising
Promoting your rental property on the open market, through marketing efforts such as posting newspaper ads or paying for internet marketing, is a tax deductible expense.
Professional fees
You can deduct professional fees incurred in connection with the rental. For example, if you paid legal counsel to draw up a rental contract, or even to initiate legal proceedings to evict a tenant, you can deduct these fees. Additionally, you’ll be able to deduct cost you paid to a CPA for preparing the Schedule E of your return from the year earlier. Make sure to pro rate the total preparation fee between the Schedule E and the rest of your tax return dependent upon the percentage of time the sections of the return took. Any fees for the preparation of any section of the return separate from Schedule E must go on Schedule A as personal tax preparation expense. Finally, if you pay any management fees or commissions to a realtor group for overseeing your rental, then you should deduct these expenditures as well.
Federal Way Tax CPA +John Huddleston has written multiple articles on accounting and other tax related subjects of interest to small business owners. He is a graduate of Wshington State University and the University of Washington School of Law.
Posted by Federal Way CPA on January 21, 2013 · Leave a Comment
Certain expenses incurred while preparing a rental property (in advance of ultimately renting) are tax deductible. So let’s have a look at a few.
Note: Startup expenses discussed within this segment of the Rental Property Tax Guide, are dissimilar to the expenses which are deductible (under section 195 of the Internal Revenue Code.) Under the section 195, certain startup expenses (in an active trade or business) are deductible up front up to $5,000 with a balance amortizable over fifteen years. However, in this section 195 of the Internal Revenue Code, rental activity is not included because rental activity is considered a passive activity not an active trade or business. See the article titled Tax Deductible Rental Losses, included in this Guide, for a more focused study of passive activity rules.
Note: It isn’t just once you have literally rented real estate that rental activity “begins”, but when you have made the property available for rent.
The Expenses of Obtaining a Mortgage
Recording fees, mortgage fees, and abstract fees (amongst others) are capitalized and thus become part of your basis in the rental. Rather than expensing these fees all at once, you need to depreciate those expenses.
Points
“Points” are charges paid by a borrower to take out a loan or a mortgage. This points or charges may also be called origination fees, or premium charges, or maximum loan charges. Points are essentially prepaid interest. Thus, they are deductible as interest, but you cannot deduct the full amount at once. Rather, you must amortize the points over the life of the loan. Figuring out how many points to amortize per year is no simple chore. Visit a tax professional.
Improvements versus Repairs
You need to capitalize and depreciate all improvements you make to the property in advance of putting it on the market. Improvements prolong the use of the property or materially increase the property’s market value. Repair expenses, on the other hand, you may freely deduct. A repair aims to keep your property in good working condition, not to increase the market value or prolong use.
Tax CPA +John Huddleston has written numerous articles on accounting and other tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington.
Posted by Federal Way CPA on December 26, 2012 · Leave a Comment
This article will look at the various types of entities for rental property ownership. Below, you’ll see that different entities have their disadvantages and advantages. In any case, the general aim in each case is to limit liability and safety-guard your real estate from unsecured creditors.
TIP: To form any of the entities presented below, the applicable registration form and fee must be filed with the Washington Secretary of State’s office. These forms are available at: Washington Entity Registration.
TIP: Consult with a Federal Way certified public accountant or tax attorney prior to establishing an entity and transferring ownership of your rental property. This Guide isn’t meant to be an all-in-one solution you should seek the attention of a qualified professional.
Individual Ownership
This form of ownership is the more common and simplest form of ownership and occurs when you purchase the rental property in your own name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The main advantage here is that this is straightforward and simple, for one it doesn’t require the filing of any complicated paperwork or pay any heavy filing fees. The main disadvantage to this type of ownership is that your creditors could force a sale of the rental property if they can attain a court judgment against you, or force you into an involuntary bankruptcy.
Legal Entity Ownership
General partnerships, limited liability companies, and corporations are all legal entities. The differences between the entities are important and outlined below. The main advantage to entity ownership is that your personal creditors are not able to force a sale of the rental property, considering that you do not own it. The general partnership is the only type of entity that does not require registration with the Secretary of State. As far as taxes are concerned, the entity type chosen doesn’t matter a whole lot because in most cases, income from the rental property “passes through” from the entity and is taxed on a personal tax return (but see the cautionary note under corporations). See the article entitled Necessary Tax Forms for Reporting Rental Activity, which is included in this Guide, for more details on just how rental income is taxed.
General partnership. A partnership is an association of two or more people to carry on as co-owners of a business for profit. In a general partnership, each partner has equal management rights, but is personally liable for the debts of this partnership. And as regards that liability, a general partnership is in most cases not recommended.
Limited partnership. This entity is more complex than a general partnership as it requires both a limited partner and one general partner. The general partner has sole management rights, coupled with personal liability for any resulting debts. Whereas, the limited partner is not personally liable for debts of the partnership and additionally is without management rights. This entity selection is generally not recommended.
Limited liability partnerships (LLPs) or limited liability company (LLCs). A limited liability partnership and a limited liability company are similar forms of entity selection. Both of them provide limited liability to the members and partners. This would mean that you are not personally liable for the entity’s debts, that is, unless the debts result from your own wrongdoing. This form of ownership is preferred as it reduces liability and reveals fewer formalities than those of the corporation.
Corporations. This form of ownership offers you limited liability and also allows for perpetual existence. Although this mode of ownership requires the upholding of particular formalities for you to maintain this limited liability status. Thus for this reason that LLPs or LLCs are commonly more suitable to your aims. Also worthy of mentioning is that corporations are categorized as either s-corporation or c-corporation. When a corporate entity is taxed as a c-corp, it will pay tax on rental income, and then you will pay tax (again) when the corporation pays dividends. And it’s more desirable to avoid the double-taxation trap whenever it is possible.
Federal Way Accountant +John Huddleston is a prolific writer of tax and finance articles. He holds two post graduate degrees from the University of Washington School of Law.
Posted by Federal Way CPA on October 19, 2012 · Leave a Comment
Deciding where to buy, how to handle it, and what kind of dental practice to purchase is a very important step in the career of a dentist. There are many essential decisions to make and key factors to examine as you search for the perfect dental practice that meets all of your needs.
Do Your research
Pace yourself. You are building the foundation of your future. Where do you want to live, how responsive will the community be to your new practice, how much of a rapport do you already have with the community?
Location Location Location
Think on where you’d like to live. You’ll want to be a big part of this community, so you’ll need to make sure it’s a good fit. Dentists who involve themselves in community events and organizations are usually successful as they are meeting people and networking all the while. And shortening your community wouldn’t hurt either. Avoid a long commute and you’ll have the opportunity to spend that time with friends and family. That’s not a bad trade off.
Establish yourself amongst people you can relate to and people you can enjoy. Your practice and your interpersonal life will reap the benefit. Do you like the suburbs, or do you want to live in more of a rural community? Let the location of your competition inform your decision. Will your spouse be able to find work? Will your kids end up in a school district that will nurture them and grant you piece of mind?
Deciding on the Ideal Practice for You
Are you pursuing a specialized dental practice or a generalized dental practice? Who is your competition? Will you be able to gain referrals from local practices (and likewise return the favor)? Who is your competition and is there room for your particular niche? What is your working schedule? You’ll want to establish a business plan that is meticulous.
Seek a Valuation
Seek an appraisal through a certified public accountant. A professional with experience in this industry is preferable. This way you’ll gain a better perspective. This will give you necessary information in making a purchase and could save you plenty.
Enlist Support
Trying to save money by being completely self-sufficient is a poor decision when you plan on purchasing a dental practice. There are many areas where you’ll need and benefit greatly from the expertise of others. In the long-run, investing in advisors will save you a lot of trouble. Here are some people you might want to have on your side:
- A tax accountant with a history of guiding dental care practices and other small businesses on maximizing deductions and remaining tax compliant. You will want an accountant who can help you develop tax-saving strategies. You will need a certified public accountant to advise you on the best entity structure for your small business (S-Corp, C-Corp, LLC, PLLC, Sole Proprietorship).
- A Bookkeeper who has familiarity in a bookkeeping software system like Quickbooks. A certified Quickbooks Advisor is a title bestowed upon a bookkeeper which says the person is certified by Quickbooks as knowledgeable with the accounting program.
- Legal counsel to review documents and legally protect your interests.
- A consultant for your new dental practice will most probably prove invaluable in the long run, helping you navigate toward success.
- Right at the beginning, you should establish a relationship with a bank. Getting prequalified, and ready to finance, informs how much you can afford when putting in an offer.
- An insurance agent will evaluate risk and assess the value of the business to see just how much coverage you’ll have to have.
- It is smart to seek the aid of a mentor that has experienced similar circumstance to those you’ll face.
- A marketing pro that knows online marketing.
Build the team that will help you get things right.
Tax CPA John Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Tacoma & Everett area on various tax and accounting issues. His firm, Huddleston Tax CPAs, also provides tax preparation service, QuickBooks consulting, business valuation, general accounting and bookkeeping service. Profile information on CPA John Huddleston and the CPAs employed by Huddleston Tax CPAs is available at CPA tax accountant profile. Seattle CPA John Huddleston is a frequent publisher of tax saving ideas.
Filing an Offer for Compromise: Preparing Form 656 and Supporting Documentation
An Offer of Compromise (OIC) is a debt settlement offer from the Internal revenue service to taxpayers, either an individual or a business unable to pay their tax dues in full. There are certain strict criteria that spell out who will be eligible to file for the OIC. If you meet these requirements, you are required to fill out Form 656 and submit a number of documents to be considered for an OIC.
Preparing the Form 656
There are two circumstances in which you’ll meet the requirements to file Form 656. In the first, you’re making a case that paying the full amount of owed taxes will create economic hardship. In the second, you are make the case that there is doubt as to collectiblity.
If you meet the above criteria, here are some considerations for when you begin to complete the Form 656:
• All persons submitting the offer should enter their social security numbers.
• You’ll need to give the names of both the persons in the case of a joint offer for joint liabilities. If you owe a joint liability and both you and the other party are submitting for an offer, then you will want to do so on Form 656, just one form. You may owe a liability, such as employment taxes for yourself and hold other liabilities, such as income taxes, with another person. If, only you are submitting this form, then you will need to list all liabilities on one of Form 656. In case both of you want to submit this application, then you have to include all tax liabilities on your Form 656 and the other person must show only the joint tax liability on their Form 656.
• You will need to include the appropriate information In each field on the Form 656.
• You will need to show the EIN of all businesses, except corporate concerns, that you own, either in whole or in part.
• If your claim to an OIC is based on a Doubt as to Collectability, you need to also furnish a completed Form 433A if you are an individual taxpayer and Form 433B if you are a business taxpayer.
• If your claim to an OIC is based on Effective Tax Administration, then apart from submitting a Form 433A or 433B, you will also need to fill out the information in the “Explanation of Circumstances” field. You may include additional bits of relevant information on separate sheets along with your employer identification and social security numbers.
• In filling out the total amount of your offer, you cannot include a sum that the Internal revenue service owes back to you or any amount that you have already paid in taxes.
• All persons submitting the offer should apply their signature on the 656 Form and supply a date. They need provide as well the titles and names of authorized corporate officers, trustees, Powers of Attorney, and executors when requested.
• Be sure that you mention the name and when possible, the address of the Offer in Compromise preparer.
• You may want the IRS to contact a family member, a friend, or some other acquaintance to discuss your case in order to understand your state of affairs better. In that case, you will need to tick the “Yes” box in the “Third Party Designee” field. Also, if you would like a CPA, your attorney, or an enrolled agent to represent your case, you’ll have to finish the Form 2848 and submit it together with your offer. to improve the chances of your offer being accepted by the IRS. After you have compiled all the documents for submission, ensure that you make electronic copies or hard copies for your records. In addition to these documents, you might also submit documents that support your claim for the offer.
Focus on Detail
The application process for an Offer for compromise is a complicated process. Ensure that you spend enough time completing Form 656 and provide all supporting documents to strengthen your chances of your offer being accepted.
To see addition resources on seeking an offer in compromise, visit the tax library at:
Accountants and Tax Preparers in Bothell
Accountants and Tax Preparers in Burien
Accountants and Tax Preparers in Des Moines
Posted by Federal Way CPA on April 20, 2012 · Leave a Comment
Best Accounting Practices for Startup Business
When developing a startup business it is necessary to consider the accounting groundwork you will put in place from the onset of things.
Which Bookkeeping Software Package to Prefer
Sooner or later if your startup business grows, you will need small business accounting software. If you maintain your books with Excel Spreadsheets, you’ll find eventually this accounting method can no longer sustain the growth of your business.
Certain bookkeeping packages work exceptionally well for real property/real estate, and there is software that works well for project accounting. While generalized accounting software is frequently less expensive, whereas the niche-specific accounting software is in most cases more costly, but keep in mind that industry-specific accounting software may end up saving you time and money in the end.
How to Select the Accounting Method that Works Best for You
As a small business owner, you’ve got a bit of freedom in how you document your financial comings and goings. As you’re no huge corporation, it is not necessary for you to provide financial books in line with Generally Accepted Accounting Principles, or GAAP. For instance, you may prefer to record your income at the time you deposit payment for a job into your bank account and record an expense whenever you write out a check. This is referred to as the cash method of accounting. While this doesn’t fall in line with GAAP, it is more than adequate for a smaller start-up.
Some more advanced methods of accounting, such as the accrual method of accounting, may better serve you as your business grows. The accrual method of accounting records expenses and income upon invoice, rather than waiting for cash to change hands. This bookkeeping method provides you a more expansive insight into you finances.
As for income taxes, the IRS is very flexible in allowing you to choose an accounting method. According to its rules, you may use any method as long as it clearly reflects income and expenses and you treat all items of income and expenses in the same manner from one year to the next. Although, if you produce, purchase, or sell goods, special rules apply on when to use the accrual method. If you handle inventory at all, you should consult our accountants to find out when to use the accrual method.
Create a Budget
Many of the small business bookkeeping software packages allow you to construct a budget, either based on the previous year’s records or from scratch. Establishing a budget is critical considering that it will determine your standards of performance. Then after a period of time, you can then compare your performance against the budgeted amount. This analysis will convey to you if you might satisfy your goals. It can also keep your business profitable.
Judging Your Performance
Most accounting software packages also make it possible for you to draw comparisons between your business’s current-year financial statements to those from preceding years. This anaylsis will permit you to see trends in your business. It also provides insight on how you can add to its success.
For example, if your small business’ revenue increased by 30-percent for 2011 over that from 2010, whereas your expenses only increased by 10 percent, this indicates that your business model could be hyper-efficient. Were all expenses recorded? Is there a chance some revenue was duplicated? And did you definitely manage to increase your return on investment? It is very important to get to the bottom of these trends so as to have a detailed picture of your small business’ performance and to make essential financial decisions. On the flip side, if your revenue increased by 10-percent in 2011 over that from 2010, but, to do so, your expenses increased by 30-percent, this might indicate a lack of efficiency in your business model. You might ask yourself, are you investing in assets with the greatest returns on investment? Or, did you forget to provide invoices during the year?
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