Millions of Americans today live in other countries and earn their income. They may be working in different industries, but they share the common problem of reporting foreign income to the IRS in the end. Over the years, the enforcement requirements of income coming from foreign sources has strengthened and become even more complex than they were before. If you want the IRS from knocking on your door one fine day, you need to keep up with some very complex compliance regulations and procedures. In fact, you may end up submitting multiple copies of your foreign income report before it finally gets accepted.

What are foreign income reports?

For those of you who do not know what foreign income reports are, they are annual reports of a person’s foreign financial and bank accounts. This report is used to calculate the taxes you will pay in the U.S. for the foreign accounts. The regulations regarding foreign income reports are defined by the Bank Secrecy Act and Financial Crimes Enforcement Network. These rules can change from time to time, making it tougher to properly report foreign income and accordingly pay the calculated tax.

Why you need CPAs

The service of a certified CPA with experience in foreign income reports can be a huge benefit for your tax procedures. For one, you are less likely to submit delinquent income reports. Most CPA firms that offer foreign income reporting services for expats get the job done with their first report. Even if you hire just one CPA to do the work for you, you can expect better results than if you did it by yourself. A CPA with years of experience in writing and submitting foreign income reports will be able to make one for you that is completely free from errors that could cause delays in the process. With a firm, you would usually have CPAs checking the end foreign income report made by another accountant for mistakes and discrepancies.

Another good reason to hire a CPA for making your foreign income reports is that they help you save as much as possible in your taxes. For example, the Foreign Earned Income Exclusion is a huge tax advantage for expats and U.S. citizens earning money from foreign sources. The amount that you are exempted from may differ from year to year, but you can expect several thousand dollars to be saved with this exclusion. To claim this exclusion, you need to fulfill some requirements or be considered one of the exceptions. A good CPA will be able to guide you through the entire process and advice you on whether you are eligible for it, how you can be eligible, and what to do to get the exclusion.

Overall, the entire process of filing foreign income reports and paying taxes becomes much simpler with the help of a CPA by your side, even if you are not in the country. There are fewer hassles involved, and you are less likely to face tax problems later on.

For calculating administrative cost, we used the following assumptions:

Outsourced Accounting Cost Benefit infographic

Small business owners need to be able to plan ahead if they want their business to be a success not just at the start of the business but for many years to come. The financial forecast takes many things under consideration that will help not only in the beginning but each year. A business owner will have to think ahead and come up with a projected financial statement. These financial statements must include realistic projected profits as well as any expected borrowing.

As the year(s) go on the business owner can track where the business is with regards to where he thought it would be on the financial forecast. Since the economic environment of the business world can change month to month, a business needs to be prepared if it ever needs financial assistance. If the business needs a bank loan or help from venture capitalists at any time they will request this forecast.

Working with a company to help build a financial forecast will help take any and all adjustments into account and will be able to create several forecasts. Sometimes, a small business only needs to project out one year and as the business becomes more profitable, they may want to project out five years.

The forecasted financial plan will include the financial statement, a cash budget and finally, the budget sheet. The financial statement will include a sales plan that will calculate any business expenses to determine the business’ predicted profit.

The cash budget for a small business is not simply about when they will turn a profit and how much money they will have 1 or even 5 years out. It is about how much money they will have for future operating costs. Day to day operation costs and any foreseeable issues that may arise should be included.

The balance sheet will show any changes regarding profit and expenditures in the firm after a few years. This is a work in progress and as the business grows this will be reflected in the balance sheet. Some items will remain the same year after year but many items will need to be adjusted.

In any economy it is very difficult to be able to forecast finances and in a volatile market, such as we have today, it can be downright daunting. This is one area where asking for help is a great way for a small business to start off on the right financial footing.  We offer outsourced accounting services that include benchmarking to understand your competition and business landscape to come up with dashboards and KPIs that indicate financial health. Good financial forecasting ensures all the I’s are dotted and the T’s crossed.

It’s really simple and no it won’t take a long time to complete. Just write down ten goals for yourself and your company. If necessary, and if you have one, gather your management team and put this goal list together. In this way you will get input from all areas of the company, (e.g., sales, marketing, development, shipping, etc.) so nothing will get overlooked. Once you have finished this list of goals, set them in priority order from highest to lowest. At this point you need to attach financial numbers to each of the goals. This is critical, because by doing this you can develop the first steps towards your financial plans for the future. It would be wise to include your accountant as this point as

Well. He or she will have the knowledge and insight into your business’ financial health and should be able to make suggestions about things you may need to adjust financially to meet your goals.

Myth: I Don’t Need Bookkeeping to Know How My Business is Doing: We would hope that if you have been reading this blog series that by now you would read this myth and respond, “Well of course, I know THAT isn’t true”. If not, let’s look at some basics:

First, if you are busy, this does not mean that your business is doing well. You need financial reports to tell you if you are bringing in more money from your business than you are spending on it.

Second, you also need these financial reports to show problem areas in your business, such as; thefts, loss, waste, etc. Without this information you will not know which areas of your business are losing, or costing you more money than they should, and you will not know that they need to be addressed.

Third, financial reports will also show you the areas in which your business is doing well. This can be anything from increased sales to revenues, to increased profits – and no, sales, revenues and profits are not interchangeable terms for the same thing. There are very clear differences between the three terms. But as we just mentioned above, if you don’t the areas in which your company is doing well, how are you going to know what things you want to keep doing, and perhaps increase doing as they help your bottom line?

It’s no myth. You need bookkeeping and you need the help from an accountant to get your business on a strong financial footing and keep it there so you can continue to grow it and prosper.

In this, our third and final post of our series, we will wrap up our look at bookkeeping mistakes that small businesses can make.

Using the Wrong Accounting Method: In accounting, there are two basic methods of financial reporting – cash and accrual. Wikipedia defines these two methods as:

“Cash method of accounting: The cash method of accounting records revenue when cash is received, and records expenses when cash is paid. For a business invoicing for an item sold, or work done, the corresponding amount will not appear in the books until payment is received – and similarly, debts owed by the business will not appear until they have been paid.

“Accrual method of accounting: is the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These types of accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.”

The type of business you are running should determine which method is the correct one for you to use. Sometimes is not obvious. If you rely on cash accounting, your business might look profitable during months with few expenses and then unprofitable during months with large expenses, with no way of really knowing the difference. If this sounds confusing you really should consider getting some outside bookkeeping service to assist you.

Not Backing Up Financial Data: If you are like most small businesses you use a computer for many things, and it is quite likely that your financial data is on that computer as well. While this makes things easier than carrying around ledgers full of financial information, it also brings some risks. What happens if your computer gets lost or stolen? What happens if your computer gets damaged? What happens if the hard disk in your computer crashes? Then answer is, you are in trouble. Make sure that you regularly backup copies of your data, and keep those backups in an “off-site” location in case of flood, fire, etc. at your place of business.

Paying for Reimbursements from the Wrong Account: If you are in the habit of paying for business expenses out of your own personal funds – stop it now. All too often these expenses get “forgotten” and they are never correctly accounted for in your financial data. Not tracking these expenses (which are reimbursable to you personally) will result in lost money and lost tax deductions for you.

Incorrect Accounting for Sales Tax: Many businesses do not accounting correctly for sales tax. While it is a common error it can cause you major problems down the road. Mistakes in both the collection of and the reporting of sales taxes can result in significant fines and penalties from both state and federal tax collection agencies. One of the big benefits of hiring a outsourced bookkeeping service is that they have the expertise to understand complex tax law and can help you to avoid these problems before they ever happen.

In Part II, we will take a look at some other potential bookkeeping pitfalls you may run into as you run your business

No Chart of Accounts: A “Chart of Accounts” (COA) is defined by Wikipedia as, “…a created list of the accounts used by a business entity to define each class of items for which money or the equivalent is spent or received. It is used to organize the finances of the entity and to segregate expenditures, revenue, assets and liabilities in order to give interested parties a better understanding of the financial health of the entity.” In layman’s terms, the COA is intended to be a road map of all of your business financial transactions – both incoming and outgoing. It is designed to have separate registers for each bank account, credit card, etc., as well as properly classifying categories and sub-categories.

If you do not have the skillset developing a Chart of Accounts this can become a problem very quickly. You need to know how to track income and expenses in the correct categories to ensure proper measure your company’s financial health. If you do not adhere to general bookkeeping guidelines for standard categorization and follow generally accepted accounting practices, you are in going to run into issues as you grow your business.

Neglecting to Reconcile Accounts: This is sort of a no-brainer, except that it quite often gets overlooked and slips to the bottom of your “to do” list when you get busy and other things take priority. You need to consistently reconcile your books with your credit card statements, bank statements, and any other financial statements that you receive as part of your business finances. This is one of the key fundamentals of good bookkeeping. Oftentimes businesses either incorrectly reconcile, or fail to reconcile at all on any kind of regular (e.g., weekly or monthly) basis. The primary benefit of reconciling accounts is to make sure that the statements you receive equal the amount of cash on your books. It also minimizes errors and identifies potential financial issues. Using a professional bookkeeping service can alleviate these problems for you.

Not Keeping Separate Bank Accounts: All too often small business owners tend to co-mingle their personal accounts and business accounts – not for any nefarious reasons but in many cases simply because they started out using their personal accounts and never opened a specific account for their business – and as their business grew, this never changed. It’s critical that your personal and business finances be kept separate at all times, regardless of size, because if you are ever audited, you will need to provide complete records from both your business activities and your personal expenses.

Poor Management of Petty Cash: As a small business owner it is quite likely that you keep a small amount of petty cash on hand, but have no way to accurately track how it gets spent and by whom. Make sure that you get (and use) a petty cash lock box and that you get receipts for all disbursements out of that box. Petty cash may be a small amount, but you will be surprised at how quickly you can burn through it when you are not tracking where it goes and who is spending it.

Every business needs an accountant watching their back. You cannot effectively run a business based on whether or not there is cash in your bank account at any given moment. If for nothing else, you need to know for tax purposes if you will be reporting a loss or income to the Internal Revenue Service? And if you are reporting a loss, you need to report as much of a loss as you legally can to reduce your tax burden – otherwise you are just hurting yourself and your business. Because of this, once you hire your accountant he or she will be follow your financials the entire year so at tax time there are no nasty surprises.

Myth: An Accountant is Very Expensive: This really depends upon who you hire and what you need them to do for you. Much in the same way as if you hired a big expensive law firm, if you use an large, expensive accounting firm then you are going to pay large, big money dollars to them. But it does not have to be that way. You need to find the right firm or individual for you.

The first step is to ask other business owners in your area who they use, and if they would recommend them to you. Once you have developed a short list of candidates, then call each one and set up a brief meeting – just so you can get a feel for the person and if you believe you could work together. Make sure at this time to ask for references, qualifications, services, etc. Don’t be afraid at the end to bring up the subject of their fee structure. Once you have completed your round of meetings, compare the information, and make sure the fee structures match the industry standards in your area. Once you have done this legwork you should be able to narrow down your list to the one person you feel with give you the attention and services you are going to need, for a price you believe is fair.

Myth: Paying Business Expenses from Your Pocket is Fine: WRONG. Never fall into this trap. It is all too easy to quickly pick up something you need for your business, pay for it out of your personal funds, and then either forget about it or lose the receipt. If possible make sure to always pay for those little expenses out of your petty cash fund, and treat them as if they were larger, more important expenditures. Remember to always get the receipt and record it, or file it so that you can tally it up against your petty cash balance.

Thanks to Jon Long for the correction regarding security assurance. Please see comments below.

Myth: A Tax Preparer is the Same Thing as an Accountant: This couldn’t be further from the truth. According to Wikipedia the definition of an accountant is, “…a practitioner of accountancy or accounting, which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources.” However you should be aware that when you enter a major tax franchise or chain your taxes are mostly being done by a trained “tax preparer” NOT an accountant. A tax preparer does not have to hold the educational degree that an accountant does. In fact a tax preparer does not have to hold any degree at all! Also be careful when someone says they are an “accountant”. Quite often bookkeepers will self-identify as an account when it truth they are not.

Myth: Bookkeepers are Usually Men: In fact the opposite is true. Today the number of female bookkeepers is either equal to, or exceeds male bookkeepers. In some countries, Canada for example, women clearly outnumber men as bookkeepers. According to Statistics Canada, “women hold approximately 80.3 percent of the country’s 17,350 bookkeeping positions. Men hold just 19.7 percent of those jobs.” As a matter of fact, many outsourced bookkeeping firms these days are dominated by women.

Myth: Accountants are Boring: Well, not that we are taking this myth personally, but… This is totally untrue. An accountant (and even a tax accountant) has to be somewhat of a people person. We are not just sitting at computers crunching numbers. We have to work with clients, clients’ customers, employees, vendors, client’s customers, etc. each and every single day. Many times we have to deal with people at difficult times in their lives. They come to us when they have financial issues that they need help in understanding and in developing a strategy to overcome those issues. Now that you think about, that really makes accountants something akin to a “financial therapist”! Okay, that may be taking it a little too far, but as you can tell, we do have a pretty good sense of humor.

With that in mind, below is a list of some of the biggest bookkeeping mistakes small businesses, and small business owners) make.

No Bookkeeping at All: Let’s start with the most obvious one – you have no bookkeeping in place to track any of your accounts receivable, accounts payable, payroll, etc. You take all of your receipts, keep them in a file or a box, and have a simple Excel spreadsheet to make lists of income and expenses. This is not a bookkeeping system. This is chaos. It is so easy to lose or misplace receipts, forget about little expenses (like the box of pens you had to purchase at lunch time because you had nothing to write with any longer), etc.

You have to maintaining accurate records on a monthly basis, along with a proper filing system, for not only the health of your company but also for your taxes. Don’t be the person that goes to their accountant (assuming you have one) with a shoebox full of receipts and paperwork a week before taxes must be filed and expect him or her to work it all out. Be proactive and get a true bookkeeping system in place – or even better, hire bookkeeping outsource company to do your bookkeeping for you.

Lack of Knowledge: We can’t all be experts at everything. If your passion is artisan cheese making, or developing mobile apps, or construction work, it is highly unlikely that you are going to be an expert at accounting at bookkeeping as well. And that is OK, but it does mean you have to find someone who has the expertise and knowledge to do your bookkeeping.

Some business owners enlist their partner, family member, or friend to do their books. If that person has the experience in bookkeeping that is fantastic. But if they do not, then this approach is not always as cost-effective as one you may think. If they have the same lack of knowledge as you, then there is no advantage to this approach.

Other business owners purchase some off-the-shelf accounting software because it claims accounting proficiency in just a few steps. But unless you are familiar with general accounting principles, this approach can be frustrating and time-consuming as well. Your best bet is to find a bookkeeper with the knowledge and skills necessary to complete your books quickly and accurately. Leave the time-consuming task of bookkeeping to a bookkeeper. This saves you time, freeing you up to focus on growing your business.