IR-2014-36, March. 25, 2014
WASHINGTON — The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.
In some environments, virtual currency operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction.
The notice provides that virtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.  Among other things, this means that:

• Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
• Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
• The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
• A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. 

Bookkeeping seems to be a never ending task.  There is always another invoice to generate, bill to pay and receipt to track.  On one hand this is a good thing because it means your are still in business. On the other hand it means far more office work for you.  You may dread this back office work but let us consider the Why, What, When and How of bookkeeping.  With a little patience and thought you can make your bookkeeping task much less daunting.  

Why bookkeeping?

• Allows you to monitor the progress of your business
• Helps you prepare your financial statements
• Identifies sources of income 
• Keeps track of expenses
• Tracks your business property
• Assist in preparing your business tax return
• Fulfills burden of proof (you must be able to prove certain elements of expenses to deduct them on your tax return)

What is bookkeeping?

• Gathering and organizing information from business transactions

When to do bookkeeping?

• Every day (take 15 minutes and keep it current)

How to keep up the books?

• Know the basics
  • Learn how double-entry bookkeeping works (both sides are equal)
  • Understand your chart of accounts (categories)
  • Know how to read your reports (financial statements)
• Choose a software application and USE IT!
  • WaveApps
  • Xero
  • Quickbooks Online
  • Gusto Payroll
  • Bill.com
• Ask questions
  • If you do not understand something in your books, ask.  As the owner it is your responsibility to know how your business works.
• Get help when you need it
  • When you need some extra help, get it

Bookkeeping may not be the most exciting task you do each day, but if you keep it current the information will change your life.

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Banker demands financials right away
Income statement, balance sheet a cash flow
Call spouse, books need reworked; I am dismayed
My planned conquest now sits with this sorrow

Makes no sense: debit, credit, cash, accrual,
Inventory, cost account and payroll
Assumed with QuickBooks this would be simple
Flustered and downbeat this may end bankroll

But wait it can’t end now, I won’t allow
With time and effort and analysis
Engaged an expert with accounting know how
Who told me this, the secret to success

Assets must match the liability
​And in addition owners equity ​

Black Jack Smatt, a pirate in the late 16th century, known for his unique ability to escape form authorities is believed to be the Jack be nimble.  The medieval game of jumping over the candlestick originated from the tradition of jumping over fires.  Successfully, jumping over a burning candle without blowing out the flame was thought to bring good luck in the future.

Leaping forward to the 21st century, I came up with my own rendition of Jack. 

Jack be awkward is not clever or nimble, but is stuck in the 20th century using desktop accounting tools.  Jack loves the software from the past.  It is familiar, it has always been there, in the back room on the old PC, which only the part-time bookkeeper knows how to use.  It has everything his business needs to print paper checks, reports and when he gets around to tracking inventory it will do that too.  The best part is at tax time each year Jack backs everything up on a thumb drive, jumps in the truck, drives it over to his tax accountant and is finished for the year.  Why would Jack change?  Jack be awkward is not changing, but for the rest of us there is a better way.

Bookkeeping and accounting should not be banished to the back room with information never seeing the light of day.  Cloud-based accounting software connects everyone, the business owner, bookkeeper, controller and tax accountant to the same information in real-time.  Online software can integrate with other applications used by the business and share the same data back and forth.  This allows the decision makers in the business to view and analyze real-time information and stay ahead of the competition.

There are many cloud-based accounting apps to choose from.  Do some research and discover which one is right for your business.  You can become Jack be nimble and bring some good luck to your future.

Each January every business which paid an employee must go through the process of preparing and filing W-2 forms.  Most software now is able to file the federal W-3 and W-2 forms electronically with a push of a button, if yours can not it is time upgrade now.  For those who live in populated states you should be able to file the W-2 forms electronically through your payroll software as well.  What about those who live in less populated states?  I hate to say this but if you are a small business with just a few employees the easiest way to file your W-2 forms, with your state, may be to just mail them in with the appropriate state form.  You may also login to your state's website and file them directly.  For example in the State of Idaho you can register to file at tax.idaho.gov.  This will allow you to access Taxpayer Access Point (TAP) to file and pay the Idaho taxes; multiple states use this same TAP system.  If you are tired of doing this yourself maybe you should consider upgrading your systems and automating the whole process.  Use the right tools for the job. 

Guest post by Howard Hales
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I am excited to write a guest blog for my brother Doug who is in the middle of an online accounting firm start-up.  Doug has always been a trendsetter.  He was always trying new things while we were growing up, he had the first motorcycle in our family; he was the first to get into a wreck, and the first to go to Utah State University.

Doug also saw the online accounting trend ten years before it was “trendy”.  When he first started talking about online accounting, “QuickBooks Online” was not even available.  Doug has always been ahead of the curve, and just courageous enough to make things happen.   

He taught me a great lesson, when he left a good accounting job to start an online accounting practice.  His actions reminded me of a sign I read recently which stated, “Life is a journey, not a destination”.  To build on this idea, we are all in different locations on our journey, some are nearing completion, and others are just starting out and others are smack-dab in the middle.  Along this journey regardless of our location, one thing is for sure, we will all encounter problems, some small ones, some big ones, and some really big ones. In order to overcome these problems we need to do at least two things.  The first is to have access to good information, and the second is to have a good plan of action.  This does not mean to gather the needed information half-heartily, or to put together a poorly thought out plan.  I will address both of these ideas below:

1.  Gather information-This information has to be as accurate as possible, whether it is market statistics, product cost, current break-even costs or the most precise and accurate month end numbers.  This information must be able to tell you if you or your business is starting to go down the wrong path.  The sooner you know, the sooner you can make the needed adjustments.

The company I work for was recently acquired, and one of the changes from the new company was an accelerated accounting close schedule.  The new company not only expected the monthly close numbers sooner, they expected increased accuracy.   At first, I resisted this new close schedule, but I quickly learned the importance of the new schedule, and soon realized the Executives were adjusting their plans each month based upon the accounting close information.   There is no doubt the accelerated accounting schedule was more difficult, but the information gathered and changes made to the plan are making the company more successful than ever before.

Another example, on the importance of gathering information, was this spring I was helping a friend sell some alfalfa hay.  We knew the alfalfa market was softening, but we had no idea how soft the market would actually become.   We had an opportunity to sell hay for $30 more per ton than it sold for five months later.  If we had based the decision not to sell earlier in the spring on better information, it would have made a huge difference to the company’s cash flow and its bottom line.  I wonder if I would have made three more phone calls to hay marketing experts, if we would have learned really how low the market would go.
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The lesson we learned was to take the time to acquire the best information in order to make the best decisions.  This takes time and is not easy.  Nevertheless, it is possible.  The other lesson learned was to “focus on the problem, not the person”.  When this happens, take the time to learn what happened, find the root cause, and do not make the same mistake twice.

2.  Create a plan-This seems very basic, but every company should have a long-term and short-term plan.  Each plan should consist of at least three items: goals, metrics to measure the goals and contingency plans for what may go wrong.  Remember just because we cannot foresee every problem that is coming down the road, we should not stop trying.  One proven method is to write down the problems we encounter, the cause of the problem, what we did to correct the problem and the results of our actions.  In time, this process will begin to teach us what indicators we must watch to identify problems before they happen.  We must be brutally honest when identifying possible problems.   We should never bury our heads in the sand by saying, “That will never happen”, chances are it can and it will.  The Boy Scout motto of “Be Prepared” is very fitting for the planning phase. 

In conclusion, be patient, work hard, be creative, be realistic and never give up on your plan.  Gather the needed information and compare it often to the metrics identified in your plan.  Do not let the wheels fall off, before you start adjusting your plan.  If you ever need assistance with either of these two items, give Doug a call.

For what it is worth, I have one last thought “The only limiting factor to how far we can go is our own imagination”.  Everyone has far more abilities than they think they have.  I wish we could all remember this old adage “Treat a man (business/company/ or whatever) as he is and that is what he will be, treat a man (business/company or whatever) as he should be, and that is what he will become.

On the next blog, I will dig deeper into the basics of “The Plan”.

We have all heard, "You have to spend money to make money."  In business the money spent is often referred to as an expense.  What is an expense?  The IRS describes it as:  "Business expenses are the cost of carrying on a trade or business.  These expenses are usually deductible if the business operates to make a profit."  If you spend money to operate your company it is most likely an expense.  Some examples include:  advertising expense, rent expense, wage expense, office supplies and interest expense.  You want to increase income and reduce expenses.

When I was in elementary school I loved the Great Brain series by John D. Fitzgerald.  The books mainly focus on Tom D. Fitzgerald,  John's older brother and their childhood in Utah.  The other day I noticed "The Great Brain At The Academy" on our book shelf and could not resist the urge to pick it up and read it.  I was amazed at the business lesson's taught in the book.  Here are ten lessons I learned from the Great Brain.

1. Identify opportunities
2. Ask questions
3. Watch others
4. Risks are good
5. Associate with the right people
6. Take responsibility
7. Provide solutions
8. Be honest
9. Willing to change
10. Use your strengths

I recommend getting a copy of the book and reading it.  Check the children's section of your local library.  Tom was a fantastic entrepreneur with a knack for making money.   The book is still great and I came away with a new appreciation for TD and his great brain.

Now for the fun stuff!  Everyone loves income, the more the better.  What is income?  Income is often referred to as revenues on the financial statements.  The official definition from the International Accounting Standards Board (IASB) is:  

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants. 

Did you get all that?  Income for a basic small business is revenue or money received from selling your service or product.  If you priced your service or product correctly this will increase your cash in your bank account which should increase your equity in the business.  You have to love accounting!

One afternoon during a busy tax season the receptionist buzzed me and told me my next appointment was here.  I walked into the lobby to greet them and had to hold my breath to keep from laughing.  You always hear about the shoe box full of receipts someone brings into the accountant to prepare their taxes.  On this day it was not a shoe box but an actual wooden dresser drawer full of receipts.

Want to have less stress and a happier life?  Good bookkeeping can go a long way toward reducing your anxiety over financial matters.  You may not always be pleased with the results, but you will be able to make decisions based on the information, and dresser drawers are difficult to carry in your pocket.

Here are five bookkeeping tips to help you get started.

• Do it!  
  

This is the most important tip in bookkeeping and in life for that matter.  If we never start the process we will never realize the benefits.  Jennifer Kunst, Ph.D, wrote an interesting article on this subject:

Being successful is difficult and takes courage to change.  Many people desire to be financially free but are unwilling to do the work which is required.   You must be consistent in the effort put forward and be aware what needs to be done.  Start now, do not procrastinate.

• Use a budget
  

Budgets are amazing.  If used correctly your budget will help you make money.  They will help you evaluate your current spending, help you set goals for your future and help you track where your money will be spent.  At the beginning of the year complete a simple budget for each month.  Each month compare your actual results with your budget numbers.  If problems appear they say, “fix me.”  You are able to take action and correct immediately.    Each month as you adjust your spending to optimize your results with the budget you will spend less and will increase your bottom line.

• Know your cash balance
  

This may seem obvious but do you know what your cash balance is?   Check your cash balance everyday and know what transactions have not cleared the bank.  Do your bank reconciliation every month.  On the first day of a job I was asked to get the bank reconciliations caught up, they had not been done for over a year.  I spent weeks working on them and in the end had to make some sizeable “adjustments” in order to balance.  This company struggled with cash flow and one of the reasons was they did not know their actual cash balance.  You must know your cash position and manage it accordingly.

• Get help
  

Guess what?  Your spouse does not want to keep the books.  I know it is hard to believe. Too many spouses do it and in most cases it does not work.  Do not wait until your tax return is due and ask your tax preparer to clean up the mess.  Get someone involved on a daily, weekly or at least monthly basis.  Ask your tax preparer if they would recommend someone or ask other business owners for suggestions.  A qualified bookkeeper will make your life easier which will make everyone happy. Once you have someone helping with the books ask questions and expect answers you understand.  It is your responsibility to make sure the bookkeeping is in order.  Do not assume. If you do not know, ask.