1099 Rules

Complying with government reporting requirements have been greatly expanded starting in January 2011. Congress figured that that it could theoretically pay for some of its spending by giving the IRS more information to chase down unreported income. All business owners, including rental property owners, need to pay attention to this.

For as long as I can remember, and I got out of College in 1973, the rule has been that businesses who pay any one individual more $600 in a calendar year for services must report the payment total on a IRS Form 1099-MISC. The IRS usually did not do much with this information, in fact it was reported several times that various service centers would use them as fuel for their furnaces since they didn’t have the people to enter the information. Those 1099’s that did get inputted where matched by the computer to tax returns and in many cases automated letters were sent out asking for an explanation of the differences. Most tax preparer’s have stories of the difficulty of dealing with the IRS on these issues even though the 1099 was obviously in error and the taxpayer could not have possibly provided any service to the 1099 reporter who operated on a different coast. The burden of proof was on us to prove that we didn’t get the money or somehow get the reporting company to amend their 1099. So get ready for a lot of problems with this down the road.

The big changes this year are:

• The Small Business Jobs Act expands the 1099 reporting requirements to include rental property owners starting January 1, 2011. Additionally it significantly increased the penalties for not reporting to $30 for each unreported 1099 to a maximum of $75,000 beginning in 2012.
• The Patent Protection and Affordable Care Act or Obama Care as most of us know it requires that beginning in 2012 the 1099 reporting is greatly expanded to include all payments by cash or check to all businesses, including corporations, for any and all manner of products or services purchased in a calendar year.

Why did they not include payments by credit cards? The credit card processing companies are already required to report the totals paid to each of their customers electronically to the IRS. Congress wanted to avoid as much as possible double accounting of reported receipts.

What does this mean to you the business owner? Two things: You are at substantial risk for penalties if you don’t comply and secondly there will be a lot more letters issued by the IRS asking for an explanation of the differences between your tax return and the reported 1099’s.

What should you do about this? As a minimum, require any company or individual to provide you with a form W-9 before you issue any payments. You must have their identification number in order to prepare the 1099’s at year-end. It would also behoove you to think about what reports you get from your accounting system. Sooner or later you are probably going to need to chase down the differences in what is in your accounting records with some list produced of 1099’s produced by the IRS.

What else can you do? Support the Fair Tax by going to the Fair Tax Organziation web site at http://fairtax.org/. The costs for us as a nation to comply with this and the rest of the current tax system are staggering. We need to get back on track of producing ever higher GDP per capita numbers and wasting our time on this Mickey Mouse stuff is hurting our productivty as a nation.

First Steps in Inproving Productivity

Economists are in agreement that the only way to improve profits in the long-term is to improve productivity. Events and luck can produce shortages of your products and services that may result in higher demand from your customers, but it won’t last. Competitive markets will eventually bring in competition to drive those prices back down. Only the ability to produce more products and services with fewer inputs will allow you to sustain higher profits.

This can be a daunting task depending upon how you look at it. The idea of spending the rest of your life constantly searching for process improvements can be a downright depressing thought. But, isn’t this the historical definition of the purpose of management -- to produce more outputs with less inputs. Maybe the real problem is that most of us in small business have no formal training in management and as a result we don’t think of managing our business in a manner other than giving orders and overseeing work. If we had, maybe we would see this as a great opportunity rather than a drudge task that takes them away from the sexier role of being a leader. The fact that most small business owners will not make regular productivity reviews a part of their routine means less competition for those that do.

Okay, so you have decided that the economists are right and productivity is the key to better profits. Now what do you do? The old saw “You can’t manage it unless you can measure it” is particularly true when it comes to productivity. The first step is to develop measures. This works best by looking at your major processes and finding some staple of the output that will most likely always be around. The purchasing system is probably always going to produce purchase orders as its core activity. Therefore, the natural measure for the purchasing system productivity is the Cost per Purchase Order. Similarly, the natural measure for the sales order process is the total cost of recording and delivery of the products divided by the number of sales orders.

Once you have established measures, the accounting system must be changed to report the total costs to be related to the measures. This is difficult initially for most small businesses since it is a concept change from classifying costs by the type of costs to grouping them in the process that they are used. This step has some investment requirements, but is not all that expensive to maintain once the system is setup and working.

Once these two steps are complete, you will have some management tools available to you that will allow you to constantly fine tune those processes. These tools will allow you to make changes to the process and give you empirical evidence that the changes worked or did not work. Over time, constant improvement to your processes will lead to higher productivity and higher profits.

Is empting the trash productive?

In the hopes of saving money, some government units and colleges are requiring their employees to empty their own trash in order to save in custodial costs. To give their employees an incentive to produce less trash they are also giving them smaller trash cans. What a plan. Cut your custodial costs while saving the environment at the same time.

While taking out the trash for most small people is something we do without a formal plan, I certainly have to question the logic of these bigger organizations. I can certainly imagine that their claim of cutting payouts to custodial employees and contractors is true. However, transferring work from the lower paid custodian to higher paid employees would even more certainly produce lower productivity results. Making the trash cans smaller would magnify this even more by making the higher paid employees empty their trash more often. Just imagine the cost of having a $100k per year person making a couple of trips a day to some central trash pickup location. Of course that cost will never show up in their accounting records making it appear that they have cut their total custodial costs when in fact they have increased it.

It’s easy to lose sight of the overall goal of any organization. To produce more output with less input. Shifting costs around to higher paid employees might do something for their humility, but it does nothing for their productivity.

IRS Audits are going to be more difficult

It has been reported that the IRS recently purchased more than 1,000 copies of QuickBooks 2010 to allow their agents to load all of the target taxpayers accounting data from full backups. It seems like it would be a relatively easy step from there to produce customized analysis of the data to do such things as produce a graph of cash vs. check and credit card sales.

This is clearly going to produce a very uncomfortable situation for taxpayers and their representatives. In the past, IRS policy has been to mostly avoid fishing expeditions. Loading all of the taxpayer’s data on to a government owned notebook and performing computerized analysis is fishing with the biggest fish finder around. Worse is the question of what happens to that data after the audit is completed? I know that in the back of my mind I am going to wonder for years whether the agent deleted the files or they are now sitting on some server somewhere.

If you believe that the IRS does not have the power to demand your backup files, think again. Revenue Procedure 98-25 provides IRS Agents with the authority to request financial records in electronic form when those records are maintained electronically. Additionally, Internal Revenue Code Section 7601 gives them broad powers to investigate for unpaid taxes including what we might call a “fishing expedition.” Unlike the TV crime shows, they are not required to have any reasonable grounds to justify a look-see at your records.

What can you do about this? Probably not much other than to recognize that what you are doing today in your bookkeeping procedures might be looked at some years in the future by either a human IRS agent or an IRS statistics gathering program.

Actually, there is one big thing you can do about this and that is to support the passage of the Fair Tax Act. The Fair Tax pushes much of the burden of proof onto the Government where it should be. For more information about the Fair Tax, go to http://fairtax.org. It’s past time to bring some sanity to our methods of collecting taxes.

Software Design's Impact on Productivity

The design phase of a software project will have ramifications to the users far beyond just getting it to work. The users’ productivity itself will be impacted by decisions made in the design phase. Here is a list of productivity issues to think about in the design phase of a software project:

1. People need to see what is only relevant to them in what they do. Too much information slows people down. This is probably the biggest productivity issue of all.

2. Minimize options. The more buttons on a screen, the more the user has to think about the process and how to proceed. This also has a negative impact on new employee training. They have to try all the buttons to really understand how the software works.

3. Involve the Users early in the design process. Release beta versions of the software as soon as possible and make it easy for the users to respond with their likes and dislikes. Finding out what works and does not work for users early in the project allows for relatively cheap changes with a big impact on productivity down the road.

4. Minimize innovation. Innovate only to solve technical challenges or to gain a specific business advantage. Innovation for innovations sake is hard to resist for most technical people, but it is more expensive and the outcome is less than certain. Changes to the look and feel of input screens, while neat, makes it tougher on the users.

5. Keep the coding simple. Simple coding is easier to read and understand a year or more later when all the design details are no longer fresh. Easier reading makes it easier to throw some little change into the mix and avoiding any cascading impact on other programs.

Better Passwords

Here is a super idea on using passwords. Most of us probably have a couple of basic passwords that we use to sign up with on various websites. The problem is that if any one of those sites becomes compromised, the key to all the other sites could become available to a hacker. To better control this problem, David H. Freedman wrote an article in the NY Times suggesting that you design a different password for each site using the following.

Come up with a simple formula for generating passwords in your head that’s based on the name of the site or organization you’re signing up with. For example, you might take the name of the site (tractortires.com), drop everything but the first six characters to the left of the “dot” (tracto), reverse the first three letters (artcto), add the number “5″ after the third character and a capital “Z” at the end (art5ctoZ). By this formula, “plan9movie.net” gets the password “alp5n9mZ,” and “cellphone.org” yields “lec5lphZ.”

You’ll also need a trick for dealing with site or organization names that have fewer than six letters, because you’ll want an eight-character password. You might, for example, just add in extra “5″s, so that the password for beer.net becomes eebr555Z. Make up your own formula, and don’t share it with anyone. It may sound a bit complicated, but after doing it a few times you’ll be able to do it in your sleep, and you’ll have a unique, impossible-to-guess password for every one of your accounts and sites without having to write anything down. The formula could be easily cracked, of course, but a hacker would need to get his hands on at least a few of your different passwords to figure it out.

This rather simple approach beats all of the others I have heard of including the idea of changing passwords every 30 days which nobody will do more than 3 months in a row.

How to Improve your Construction Firms Profitability

Every economist will tell you that the key to making more money than you make today is to increase your productivity. So, just how the heck do you do that? The answer is simple, improve how you do business. For small construction firms, the major deficiency that I see in their processes is how they do bids.

Most small firms don’t know what it costs them to bid a job. Absolutely no clue! Some of them can ball park what the last one cost, but they could not even hazard a guess on what their annual cost is. So, if everybody is bad does it make a difference? The answer is yes, if you want to make more money than the rest of the industry.

Just picture what an advantage you would have, not only knowing what it costs to bid, but having the cheapest bid system around. You could bid more often than your competitors for the same amount of money. You could also know when it’s profitable to bid and when it’s not. Just think about what this advantage could do for your bottom line over the life time of your business.

Once you begin to realize how important your bid process is to your firm, the next question is how do you make it more productive. The answer to this will never be a cookie cutter approach of downloading some software package from the web and begin pounding away. The problem is that many factors come into developing a better process that must be customized to your business and its strengths and weaknesses. Here are a few of the things to think about when it comes to getting started on improving your process.

1. This project will never be complete. Nature never remains static and your business is part of nature and always changing. Therefore, you should adopt a mindset that your bid process will always need more improvements and you need tools built into that process to monitor how it is doing.

2. It is the entire process and how it works together that determines its productivity. Bidding does involve a lot of accounting and software will be a major part of the process. But a lot of other factors are also included such as how experienced are the field people at inspecting the site and how efficiently are they scheduled for those visits.

3. Every business process has an error rate and fixing errors are far more costly than getting it right the first time. Your bid process should be able to monitor this error rate and its costs.

4. Your business and its bid process are unique to every other business. Given the cost of bidding and the potential benefit of getting it right, this is probably great time to consider outside help to get a customized approach to making bids more affordable.