Kim Noh

The topic of artificial intelligence (AI) has been in the news quite a bit recently, and one of the reasons is the launch of an AI chatbot called ChatGPT. The GPT in ChatGPT stands for generative pre-trained transformer, which is a program that can realistically write like a human and interact in a conversational way. Basically, you can type in a complicated question, and ChatGPT will give you an amazingly lifelike, most-of-the-time accurate answer. 

ChatGPT was launched in November 2022 and developed by OpenAI, an AI research lab tasked with developing a friendly AI. OpenAI has both a non-profit and for-profit component in its organizational structure. 

As of this writing, ChatGPT is offered at no cost, but you must open an account and verify both your email address and phone number to access it. Once you do, the prompt is simple; just ask it a question. You can get access here: https://chat.openai.com/chat

Here is a sample of the answer to the question, “What are debits and credits?”

ChatGPT: “Debits and credits are terms used in accounting to describe the movement of money into or out of an account. In accounting, every transaction involves at least two accounts, and each account is either debited or credited.”

“A debit is an entry that increases assets or expenses or decreases liabilities or equity in an account. For example, if you buy office supplies for your business, you would debit the office supplies expense account and credit the cash account.”

“A credit is an entry that increases liabilities or equity or decreases assets or expenses in an account. For example, if you sell goods on credit to a customer, you would debit the accounts receivable account and credit the sales revenue account.” 

“Debits and credits are used to keep track of the financial transactions of a business or organization. They are important tools for recording and analyzing financial information, and are essential for preparing financial statements and tax returns.”

Yes, ChatGPT is a touch verbose at times.  

Here is a tax example:

Question: Qualified Business Income – earnings limitations if NOT a specified service business

ChatGPT: “Under the current tax law in the United States, if you are a qualified business owner who operates a non-specified service business, you may be eligible for a tax deduction of up to 20% on your qualified business income (QBI).”

“However, there are certain limitations on the deduction, including a cap on the amount you can deduct based on your total taxable income. For tax year 2022, the threshold for the taxable income limit is $329,800 for married filing jointly and $164,925 for other taxpayers.”

“Additionally, there may be further limitations on the deduction if your business has a significant amount of W-2 wages and/or depreciable property.”

“It’s important to consult with a qualified tax professional or accountant to determine how the QBI deduction rules apply to your specific business and tax situation.”

It can also answer these questions/requests, along with literally millions of others:

• The best recipe for lemon bars
• Write an engagement letter for tax preparation
• Comment on the elevation of the El Camino de Santiago de Compostela from Sarria to the end.
• Write an ad for marketing services.

There is a disclaimer in place, as ChatGPT will occasionally generate wrong answers. It did generate a misleading answer when it was asked a very complex tax question about the Employee Retention Credit and greater than 50 percent owner wage eligibility.  

How can you use ChatGPT in business?  It might be able to save you time with writing initial drafts of letters, ads, speeches, webpages, or other correspondence. It can also save time on research and data analysis, but be sure to verify its answers. It can help with coding if you’re into computer programming. You can also use it for fun or for a second opinion. 

Try ChatGPT to start seeing how it can benefit you and your business. 

In the last few years, the shortage of accounting professionals has grown tremendously, and many business owners are struggling to find reputable, quality accounting services. Prices for accounting services may have gone up due to this supply/demand imbalance, and they will keep going up for years to come– due to the shortage in accounting graduates and the overall pipeline. It makes sense to explore how to work better with your accountant as they become more and more scarce and in demand.  

A Successful Partnership

Intuit conducted a survey in October 2022 which found tremendous benefits to the accountant-business owner relationship:

• Nine out of ten small businesses with an accountant or bookkeeper say they contribute to the business’s success. 
• More than eight out of ten business owners say accounting professionals helped them reduce the impact of inflation on their business. 
• More than 80 percent of business owners say their accountant helps them make better use of technology.
• More than 98 percent of business owners say they are more confident in their business because of their accountants.  
• Small business owners overwhelmingly say their accountants save them time and money. 

There’s no doubt that the relationship between a business owner and their accountant is of utmost importance to your business. Here are five ways to work even better with your accountant so that you can both benefit from this important business relationship. 

1. Reduce your accountant’s administrative time.

There is a lot of paperwork when it comes to accounting and tax work, and administrative work goes hand in hand with that paperwork. When you can reduce the administrative work, your accountant can focus more on planning and advisory work, which is more valuable to your business. Here are a couple of tips.

• When sending paper information to your accountant, scan it in and convert it to PDF instead. Then upload it to your secure portal.
• When sending digital information, convert images to PDF files when possible. Images can’t easily be converted to text as PDFs can.
• Instead of sending multiple files, combine PDFs into one image when they are the same document.
• Use a client portal instead of email if a client portal is provided. 

2. Spend time understanding your accounting and tax reports.

A little education can go a long way. Learning a bit about finances and accounting can help you become a much better business owner. Your accountant may have suggestions on the best source for this or they may have videos they have produced themselves.

3. Honesty is paramount.

It’s critical that there is trust and complete honesty on both sides of the relationship. Your accountant may have earned a CPA or Enrolled Agent or other certifications that took years to acquire. Their license is in peril if anything is not above board. You might be surprised to learn that there are potentially many penalties and jail time for the accountant as well as the client if fraud or other criminal acts are discovered.

One example of something you can do to ensure your accountant’s trust is in tax preparation: clients should complete the tax organizer in full when the tax preparer sends it, even though it is a pain to do so. If a piece of information is missing, or you decide it’s not important but the government feels it is, that omission can spell the beginning of trouble for both you and your tax preparer. 

4. Be mindful in communications. 

Good communication is an essential part of the accountant-client relationship. A great client will take the time to read any emails or correspondence and answer all the questions in the email (not just the first one!). 

Both you and your accountant may have preferred ways of communicating, among the choices of text, voice, and email. Keep in mind your accountant has a higher duty to protect your private information. Text and unencrypted email can be problematic for them, depending on the type of information to be conveyed. 

To save time and reduce interruptions, keep a notes file on your desktop, and add any non-urgent questions to your list. That way, you can cover a lot of ground when you meet periodically.  It’s a better use of both of your time. Of course, if you have urgent questions, feel free to contact your accountant at any time.  

5. Vet any advice you hear.

Be wary of unsolicited advice as well as tips you might see on social media. They can be uneducated and worst case, downright fraudulent. One of the biggest problems today is ERC mills: companies that have sprung up to help small businesses claim the Employee Retention Credit from 2020 and 2021. Most of these companies are not following IRS guidelines and do not have the proper credentials to evaluate the tax law properly.

Social media sources can be quite unreliable as well. TikTok has some outrageous financial claims regarding the choice of business entity, so please do not act on this advice until you speak with a qualified accounting or tax professional.  

Try these tips to build better rapport with your accountant, and your business will blossom as well. 

Being in business means taking a lot of risks, especially financially, and as an entrepreneur, you deserve to be rewarded for those risks. Your pay is just one of the many benefits of your self-employment. But it’s not like the pay you get as an employee; it needs to be more comprehensive than that.  

Getting Paid

The two major ways entrepreneurs can take money from their business is through draws or by receiving a paycheck.  If your business is incorporated, you’ll take a paycheck; if your business is a sole proprietorship or a partnership, you’ll take a draw.  

Here’s a list of five items to make sure you have covered in your pay:

1. Reasonable Compensation.  

If you were doing the same work for a company that hired you, what would your pay be?  Are you making at least market equivalent or better?  A lot of times, as entrepreneurs, we tend to focus only on this piece of our compensation when we set our pricing, and that’s a big mistake.    

There are also tax implications of paying yourself too little (to avoid payroll taxes if you take a paycheck) or too much. 

2. Retirement plan

When you work for yourself, no one is going to fund your retirement for you.  Although the Social Security program helps, it’s up to you to set additional money aside for a comfortable future when you can’t or don’t want to work anymore.  

3. Benefits

Employees get vacations, health insurance, and bonuses; and you should too.  This should be part of your compensation package as an entrepreneur, and there are many tax advantages as well.

4. Taxes

You need to cover taxes that will be incurred on your pay as well as your business profits. This includes:

• Normal withholding for federal income taxes, state and local income taxes, Medicare, and social security. If you receive a paycheck, these will be taken out of your paycheck, but they may not be enough because they don’t consider taxes on your profits. If you take a draw, you may not have withholding, but you will need to factor in self-employment taxes.
• Taxes on your profits. For sole proprietors, partnerships, LLCs, and S Corps, your taxes will be figured on the profits of your business when you complete your federal income taxes. They will “pass-through” from your business to your personal return. Don’t let this part surprise you!
• State business taxes. If your business does business in multiple states, you must file a tax return for each state. Many of them collect taxes based on flat corporate fees, the revenue you earned in that state, state payrolls, and/or the value of property owned in that state.

Check with your tax advisor so that there are no surprises in your tax bill for your business or your personal returns.   

5. Profit

As an entrepreneur, you take extra risks when you own your own company, and you should be compensated accordingly.  Your capital is tied up in your business and should be earning a good return in addition to your regular salary or draw.  

Complete Compensation

Your compensation should include all of the above components.  If it doesn’t and you feel like you can’t afford to pay yourself that much, then your pricing might not be reflecting all of these items correctly, you might have a volume problem, or your business model may need some adjusting.  

It’s normal to take a smaller paycheck the first few years as the business is growing, but if you’re still doing it after several years or constantly have cash flow issues, then something may be wrong.  

If you’d like our help in this area of your business, please reach out and let us know.  

Make sure your future is bright and financially secure by considering all five items in your entrepreneur compensation.   

For taxpayers collecting payments through a third-party payment platform (such as PayPal), the American Rescue Plan Act (the “Act”) established a major change to tax reporting rules to prevent businesses and contractors from hiding income through the receipt of electronic payments. Form 1099-K is the tax form issued by credit card companies and third-party payment processors to report payments made via debit card, credit card, stored value cards (like gift cards), and payment apps (like Stripe, PayPal, or Venmo), and the reporting threshold for issuing the form was decreased significantly as part of the passing of the Act. Although this change was set to take effect starting with the 2022 tax year, the IRS has delayed implementation of the new rule – however, it is expected to be required for 2023. 

What Changed?

Existing rules (which are still currently in place for 2022 due to the IRS postponement) require credit card companies and payment processors to file Form 1099-K with IRS and issue to payees when: 

• gross earnings are more than $20,000, and
• the number of transactions exceeds 200 for the year

Many lawmakers argued that this “two-step” threshold created a situation where contractors/sellers could easily omit income from their tax returns. As a result, the single “$600 or more” threshold was created, meaning that any recipient with receipts of $600 or more for the year through a certain payment platform will be issued a 1099-K form, regardless of the number of transactions or other factors. Barring any additional action from Congress, this new reporting threshold will be enforced starting with 2023 forms, meaning that a substantially higher number of 1099-K forms will be sent out in early 2024 for the 2023 tax year.

Considerations and Concerns

Despite the fact that tax law has always required taxpayers to report ALL income earned/received, regardless of whether associated tax forms are received, this law change has raised concerns about several logistical challenges, including:

• What about personal transactions? For those taxpayers who use platforms like Venmo to receive personal payments, such as a birthday gift from a relative or a rent deposit from a roommate, will they be taxed on those payments? According to IRS, 1099-K forms will only be issued for those accounts that are listed as business or merchant accounts or on personal accounts where transactions are tagged as “goods and services.” Despite these reassurances, there are still questions about how this will play out as the change is implemented, especially for those who use the same account for business and personal transactions, or casual sellers who are selling used goods for less than what they paid/are not in the business of selling such goods for a profit. 

• What if the 1099-K and 1099-NEC forms report the same payment? Although this should not happen per IRS due to the fact that payment processors are responsible for issuing 1099-K forms and individual clients are responsible for sending 1099-NEC forms, it’s still possible, particularly if clients misunderstand the rules and don’t realize they shouldn’t be issuing 1099s for payments made through credit card or payment apps. This raises concerns about the double-reporting of income and how to account for such errors on a tax return so that the recipient isn’t taxed twice on the same income.

• How will IRS handle the influx of paperwork they’ll have to sort through as a result? IRS has already been dealing with understaffing and, as a result, processing backlogs and inadequate phone support over the last few years. Many believe this compliance change will increase the burden on IRS and lead to widespread confusion in the tax system, and will also lead to a rise in IRS correspondence.

For freelancers, contractors, or anyone receiving payments through a third-party platform, make sure to save any 1099-K forms received, which you will need to refer to when you file your tax returns. Consult with your tax professional about any actions you may need to take as a result of these rule changes, and if/how your tax situation may be impacted.

While spring brings a change in the weather for most locations, it also brings a number of opportunities to refresh your products and services. Spring is a great time to boost your marketing campaigns so that you can boost your business revenues.

Adding the theme of spring to your marketing campaigns allows customers to see your products and services in a different light. Here are six ways to add a spring theme to your products and services.

1. Add a holiday twist.

With a plethora of spring holidays to choose from, you can build a sale around any of these.

• Easter
• May Day
• Mother’s Day
• Memorial Day
• Flag Day
• Father’s Day

Memorial Day is the big one; it ushers in warmer weather and signals the end of school for kids and teachers. Plus, customers are used to seeing sales during this long weekend. Mother’s Day can be a revenue booster for many businesses as well.

Which one of these holidays can you best connect your products and services? That’s your answer for an effective spring sale. If you are an egg farmer, the answer is obviously Easter. If you offer women’s products, Mother’s Day is a sure bet. The same goes for men’s items and Father’s Day. If your product is patriotic, Flag Day or Memorial Day should be your choice.

2. Temporarily switch to spring packaging.

If you sell products with packaging, put some color into your offerings to make them stand out. Common spring colors include green, yellow, pink, orange, baby blue, and pastels. Consider adding flowers to your artwork or to your actual offering.

3. Hold an open house.

If you offer services and no products, an open house works especially well. Invite your prospect list and current clients – ask them to bring a friend – and offer refreshments with a spring theme.  Plan an agenda with a speaker on a topic adjacent to your offerings and allow time for guests to mingle and network.

4. Free spring gift with purchase.

Providing a free gift is common in the cosmetics industry, but you may be able to apply the idea to your products and services. Make it spring-focused if possible.

An easy idea that works in any industry is a spring basket of goodies, which can be food, personal items, or just about anything that will fit in a basket. A spring basket in conjunction with any of the above holidays works great. For example, a basket with items women would love would work for Mother’s Day. With Memorial Day, you could create a picnic theme and add tiny flags to further tie it to the holiday. These baskets could be sold separately or included for free with a large purchase.

5. Spring cleaning.

Spring cleaning is a common theme you may be able to use in your offerings. Whether it’s actually cleaning, removing clutter, becoming more organized, or even crossing an item off the to-do list, this theme will help to connect the feeling of accomplishment to your products and services.

If you offer any kind of organizational services and products, such as closet design, junk removal, or house cleaning, this is a perfect theme. It also works with companies in the business of beautifying your home or office space, such as wardrobe designers, interior decorators, home furnishings businesses, florists, art galleries, landscape businesses, and plant nurseries.

6. Graduation

Spring is a time for graduation ceremonies. Tie your products and services to graduation, starting a new life, or progressing your career.

Mix and match these six ideas to produce an even more powerful spring theme in your business.

Whether you go with a small change like adding a flower to your offerings or a big change like an entirely new marketing campaign with a bonus gift, adding a spring theme to your products and services will be like a breath of fresh air to your sales.

If you have accumulated more money in your business checking account than you really need for daily operating expenses, that is a nice problem to have! It’s time to consider putting that money to work. A business savings account might be your answer.

Every bank is different when it comes to the features and benefits of their business offerings. Here is a list of some of the items to consider asking your banker.

1. Is your checking account interest-bearing, and if so, how does the interest rate compare to a business savings account interest rate?
2. Is there an initial minimum deposit to open the savings account?
3. What are the monthly fees for each type of account?
4. What minimum balances are required in both checking and savings accounts so that fees are waived? And, is it worth it to keep minimum balances?
5. Are there withdrawal limits?
6. What are the other benefits of having a business savings account?
7. Is my money FDIC-insured, and if so, what is the cap?

Often, a bank will tie the checking and savings accounts together, and there will be a combined minimum balance that is lower than if either account was separate. For that reason, having your checking and savings accounts in the same bank might be more effective. Other common benefits include waiving overdraft fees, wire transfer fees, and NSF charges.

There are other types of interest-bearing accounts besides savings accounts, including money market accounts and certificates of deposits (CDs). Money market accounts may have check-writing privileges, but the withdrawals may be limited. While CDs typically pay a higher interest rate than a savings account, they tie up your money for a specified period of time, and there are steep early-withdrawal penalties.

There are many institutions besides your main bank that are focused on savings accounts and will pay much higher interest rates. Typically, online banks and credit unions will pay a higher interest rate than a bank, but the money may not be FDIC-insured, so be sure to read the fine print.

An additional benefit of keeping money in a separate savings account is that you can save for many things:

• A cushion for emergencies.
• Lump sum tax payments.
• Future capital expenditures.

Once you’ve set up your new savings account, consider setting up monthly automatic transfers from your checking account to your savings account so that you build up your savings balance.

Make sure your business cash works as hard as you do in your new savings account.

As business owners, we’d like to think that we make rational, logical decisions when it comes to our business finances. However, scientists have discovered that we have built-in biases in our brains and our thinking processes, and one of these biases is the sunk cost bias.

A sunk cost is simply money, time, or resources that you have already spent and can’t get back. Another word for them is retrospective costs. The bias comes into the picture when we consider those costs in future decisions.

One example is when you have already invested a lot of time and money in a losing project. You continue to do so even if the benefits are not worth it. Let’s say you have spent a lot on car repairs. You continue to repair the car, digging a deeper and deeper hole. Buying a new car would be the better decision because the benefits would outweigh the costs, but you are still emotionally (and irrationally) attached to all the money you spent on the clunker.

You can also fall into the sunk cost trap with relationships. Let’s say you have an employee that is a borderline performer. You keep investing in them, thinking you can “fix” them, and they don’t improve. You should have fired them a long time ago!

Scientists Daniel Kahneman and Amos Tversky studied cognitive bias, including the sunk cost bias, in case you want to read more about the topic. Kahneman won the Nobel prize for his work.

How can you avoid falling into the sunk cost bias trap? Here are some ideas:

1. Be aware that it exists and it affects more of our daily activities than we realize.
2. Track key performance indicators regularly so that you can see whether you’re on or off track.
3. Detach emotionally, if possible, from your business project.
4. Set goals and milestones on your projects and have a “walk away” plan if things spiral out of control.
5. Stay future-focused.

Now that you’re aware of sunk cost bias, you can be more mindful when making financial decisions.

Are you looking for new ideas to market your business? If so, knowledge panels might be something to consider. Most people haven’t heard of them, but they are widely used in search results every day.

Knowledge panels are an invention from Google. They are the information panels that appear on the bottom right corner of your search results when you search for certain people or brands. They are different from the business profiles provided by Google Business Profile.

Knowledge panels display information that Google has collected in its Knowledge Graph, which is one of Google’s information databases. Search for your favorite author or your Congressperson, and you will be able to see an example of a knowledge panel. Famous historical figures and extremely popular entertainers may have more of an entire page displaying all of the information about them, but there will typically also be a right column of text (you may have to scroll a bit to see it), which is the knowledge panel.

How can you use knowledge panels in your business? When your leadership or brand is represented by a knowledge panel, it brings instant credibility to your organization. It boosts reputation and helps to build trust with all stakeholders. It increases your firm’s visibility.

Who typically has a knowledge panel? If you are an author of a book that has a formal ISBN (International Standard Book Number), you will automatically get one. If you are a leader of certain organizations, you will also get one. If your brand is well-known, it will have a knowledge panel.

You can’t create a knowledge panel, but you can claim it once it appears. Google determines who receives a knowledge panel. But you can “lobby” for one, and there are marketers you can hire to help you execute the steps it takes to get one. The main thing is to be active and visible online.

If you already have a knowledge panel, there are procedures documented on Google Help that you can follow to claim it. You can also make edit suggestions and submit them to Google. You can’t directly edit your knowledge panel; Google has final control over what is displayed.

Hopefully, you are now more aware of knowledge panels and how they can help your business become more visible.

The equity section of the balance sheet looks different depending on the legal structure of your business. The most common entity types are corporations, partnerships, and sole proprietors. In this article, we’ll take a look at what the equity section of the balance sheet looks like for sole proprietors.

The Equity Section

As a reminder, the balance sheet has three major sections: assets, liabilities, and equity. The equation Assets = Liabilities + Equity is true for all entities. For a sole proprietor, equity is called Owner’s Equity. There are typically two accounts listed: the Owner’s Capital Account and Owner’s Draw Account.

Owner’s Capital Account. This balance represents how much money the owner has put into the business. Also included are cumulative business income or loss amounts from prior years.

Owner’s Draw Account. This balance represents how much money the owner has taken out of the business. Since a sole proprietor does not get a paycheck, taking money out of the business via a draw is how they get their money.

A third account will show up if you run a balance sheet report in your accounting system on any date during the year: Current Year Earnings.

Current Year Earnings. This balance is the same as the net income on the year-to-date income statement. It represents the profit in the business.

On a formal balance sheet for external purposes, only one account will show and that’s the Owner’s Capital Account. The draw and the current year earnings will roll into that account.

Salary vs. Draw

It’s important to distinguish between the idea of a salary and a draw. In corporations, owners receive salaries in the form of paychecks, where payroll taxes are taken out and W-2s are issued at year-end. The salary and taxes are deducted as expenses in the corporation’s income statement. For a sole proprietor, this is not at all how it works.

A sole proprietor has no salary. There is no payroll expense or payroll taxes on the income statement for the owner. The owner could have employees, and those payroll expenses would be shown on the income statement, but there is nothing for the owner.

The owner takes draws, which is not an expense. Draws are a reduction in equity. They do not affect profits. They do not change taxes owed. An owner can take a lot of money out of the business, and there is no impact on profits. There is definitely an impact on cash flow though!

A sole proprietor does pay payroll taxes in the form of self-employment taxes. They simply do it on their IRS Form 1040 as opposed to payroll tax forms that a corporation would use.

The equity section can be the most difficult section to understand on the balance sheet. Hopefully, the explanation above will provide a bit more clarity so you can better understand how to read your business’s financial statements.