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10 Tips to Avoid a Tax Audit for Small Business

As Washington digs for every dollar to stem the federal deficit, IRS audits of small business tax returns are up – way up, and headed even higher.  And know this too:  Sole proprietors – the dominant type of small biz ownership – are 10 times more likely to be audited than other business entities such as LLCs, S-corps and partnerships. But here are ten tips that can help you lower your IRS audit odds:

1.       Be “DIF” score savvy. DIF is hush-hush Fed-speak for “Discriminate Information Function,” the secret IRS formula that decides if you’ll be audited. While DIF details are, well, secret, the steps below can help you avoid the audit hook. Each choice you make – including how to file (e-file or paper), when to file (early? last minute? extend?) and what deductions to claim (home office? entertainment?) – impacts your DIF score and your audit odds.

2.       Be accurate, thorough, neat and on-time (but not early). Sloppy returns, math errors and rounded numbers raise red flags at the Internal Revenue Service.  Having an accountant prepare your taxes, or using a tax prep service or tax prep software makes your return look professional and lowers chances of obvious errors.  But don’t be in a hurry. Filing early only gives the IRS extra time.

3.       Do not file electronically. The IRS hires temps to enter data from millions of paper returns. But they capture only about 40 percent of the info. Electronic filing gives the IRS quick and easy access to 100% of your return.  That’s why they like it so much.

4.       Explain yourself.  Avoid vague expense categories.  For example, “Miscellaneous” is a definite no-no.  If your biz is claiming unusual deductions, provide explanation or specific documentation with your return. Whatever it is, there’s probably a form for it.

5.       Make quarterly tax payments and issue 1099s, W2s and other mandatory filings on time.  Do these electronically. Late quarterly and estimated payments, non-payments and underestimated amounts draw serious IRS ire. Know the deadlines and meet them. File 1099s and W-2s using easy online tax services such as FileTaxes.com. The BizBest Guide to 2011 Tax Forms and Answers has the info and links you need.

6.       Beware of your income-to-deduction ratio. Your audit odds rise if the difference between expenses and income exceeds 52 percent. But total deductions are only part of it. One large deduction can also raise flags.

7.       Inc. yourself. Sole proprietors who file a Schedule C for each business get audited most. To avoid the higher risk of sole proprietor audits, consider making your biz a corporation or limited liability company (LLC).

8.       Hire a tax pro.  If your return is complex or you are uncertain about treatment of deductions, income or other areas, don’t hesitate to bring in a CPA or other business tax pro.

9.       Take a home office deduction carefully. It’s a prime IRS target, so if you plan to take a home office tax deduction, make sure you know the rules.

10.   Get real. Every year, the IRS gets better at using high-tech means to track your business income with cooperation from companies you do business with as well as state and local agencies. And some things are just obvious. If you claim lots of expenses, but show little revenue to pay for them, the tax folks get curious.

BizTaxes.com, a BizBest site, has more helpful tax-saving advice.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved.

Money to Start a Business or Fund a Creative Project

Need to start a business with no money?  Looking for a small loan to expand a business or idea already underway?  Going for a grant to get your dream creative project off the ground?  If so, there’s good news. Despite what you might have been told, “microloans” of $500 to $50,000 are available through a variety of private, online, nonprofit and government-sponsored sources.  And several new and exciting online funding platforms are now helping creative professionals line up money for all kinds of creative endeavors. Some of the sources might even surprise you!

The BizBest Bottom Line: The odds of finding funding to get your idea underway are probably better than ever.   Here’s where to look for the money:

Person-to-Person lending:  This is also called peer-to-peer lending and thanks to tight-fisted traditional lenders and a group of web sites that back it, it’s a booming alternative to traditional loan sources.  Several P2P lending websites have grown rapidly, connecting people who have money with people who need it, while helping structure and manage loans between them.  The average loan made through a P2P site is about $5,000.

The best P2P lending sites right now are Prosper.com, Lending Club and RaiseCapital.com. Individual lenders (investors) compete with each to make loans to borrowers who have posted a loan request on the site.  The better your credit rating and proposal, the lower you rate is likely to be.  Because P2P lending sites have to meet state government lending rules (as well as federal SEC requirements), they aren’t operating in all 50 states. Check their web sites for a list of areas they operate.

ACCION USA is a private non-profit that offers startup and expansion microloans of up to $50,000 to small business owners in the U.S., along with credit and business advice to small business owners who cannot access traditional credit.  This organization offers loans for startups as well as established businesses, and specializes in working with qualified individuals who don’t meet customary bank lending criteria. You’ll find an application and other helpful resources on the web site.

The U.S. Small Business Administration Microloan Program makes funds available to a variety of non-profit community-based lenders or “intermediaries.”  Those lenders, in turn, make the microloans to eligible entrepreneurs.  The average loan is about $13,000 and the range is typically between $5,000 and $50,000.  One example is Valley Economic Development Center (VEDC) which provides microloans to startups in Southern California.  In addition to loans, VEDC provides technical assistance to small companies. VEDC works with SCORE, the SBA and U.S. Bank branches to identify potential borrowers.

Crowdfunding for creative projects: Kickstarter has quickly become the largest online funding platform for creative projects. Every month, thousands of people pledge millions of dollars to creative projects in the fields of music, film, art, technology, design, food, publishing and others.  It’s a new form of commerce and patronage that’s not about investment or lending. Project creators keep 100% ownership and control over their work.  In return for money, they offer products and experiences that are unique to each project.  Funding on Kickstarter is all-or-nothing.  A project must reach its self-chosen funding goal before time runs out or no money changes hands.  That way, creators aren’t expected to develop their project without necessary funds, and it lets you test concepts risk free.

At this writing, for example, the would-be makers of a documentary film about the Venezuelan dance band  Los Amigos Invisibles had raised $12,100 toward their $30,000 goal with 8 days to go.  A project to create “A history of the future in 100 objects” was 90% funded with 36 days left.  Several other projects were well above their funding goals. Two other sites doing similar things are RocketHub.com and IndieGoGo.com.

Community Development Financial Institutions:  About 1,000 CDFIs nationwide make microloans for business startups mainly in lower-income communities, serving both rural and urban areas.  Use the handy CDFI State Locator to find one near you. Here are a few CDFI funding examples:

• The Utah Microenterprise Loan Fund, a certified CDFI, is making loans of up to $25,000. Their motto is “Building brighter futures through small business.” A $10,000 micro enterprise loan from the Utah fund helped Somer Gardiner get her Salt Lake City yarn store, Soul Spun Yarn, off the ground.

• Enterprise Corporation of the Delta, a CDFI in Jackson, MS, has helped train or fund thousands of entrepreneurs in the Mississippi Delta region it serves. It helped back Computers, Inc., a small business owned by three women. Computers, Inc. installs custom equipment for schools and businesses.

• Self-Help, a CDFI in North Carolina, provides small business loans in several southeastern states and elsewhere around the country. Loans range from a few thousand dollars and up to start, buy or expand a business or non-profit.

Count Me In, a non-profit organization, makes microloans to women entrepreneurs through its Micro to Millions Award program. Visit www.makemineamillion.org.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved.

10 Steps to Keeping Better Business Records

For many business owners, record keeping is an unwelcome chore that often gets far less attention than it deserves. There’s no shortage of other things to do that are far more fun.  But keeping good records is essential to running a successful business – and staying out of trouble.  Here are 10 ways to get your business finances and recordkeeping under control – and keep it that way:

1.       Separate your business and personal finances. Many biz owners (especially sole proprietors), and startup entrepreneurs fail to set up separate banking, bookkeeping and other systems to keep track of their business finances, causing confusion, tax headaches and a potential loss of business value later on. Using business checks or credit cards to pay for personal expenses, for example, can get you in legal hot water, and at a minimum complicates your recordkeeping.

2.       Reconcile and don’t delay; do it today.  Review your bank statements and balance your accounts regularly. Don’t just toss statements into a stack. If you let days or weeks pass without updating records, you’ll soon be lost and errors may go unnoticed. If your business finances change daily, you should have bookkeeping systems that update daily as well. This should include daily sales, purchases and other transactions, and especially any cash transactions.

3.       Hire a bookkeeper. Don’t pay an accountant’s higher professional fees to handle routine bookkeeping. Many biz owners have part-time bookkeepers to help keep things in order. The American Institute of Professional Bookkeepers (AIBP) has some excellent bookkeeping tips, and a free bookkeepers hiring test.  Or consider outsourcing it online with a service such as Balance Your Books.

4.       Use calendar month timing. Most business owners find it helpful to account for money on a calendar month basis. But things don’t always line up. For example, if your bank statement isn’t based on a calendar month, ask for it to be changed. Most banks can make that accommodation.

5.       Be pro-active with your accountant. One reason to keep good business records is so you can provide accurate and timely information to an accountant to prepare your business taxes. Ask for their advice on how to set up your books and organize your information.

6.       Use a payroll service if you have employees.  When your business becomes large enough to have employees, recordkeeping requirements take a quantum leap. Outsourcing to a payroll service such as Paychex, Sure Payroll or ADP places the record keeping burden on them, and makes your end vastly easier.

7.       Use an online expense reporting service:  If your business reimburses employees for out-of-pocket expenses (yourself included), you need a process to track and record those costs and make timely, accurate payments. Several web-based services are out to ease the pain with easy-to-use, low-cost systems that make the expense reporting process as quick and easy as possible for small business owners. Choices include Expensify, Concur Breeze and ExpensePoint.

8.       Keep it simple and consistent. Bookkeeping is all about columns, and by keeping the same column headings all the time, you will avoid the frustration of mismatches. And if you avoid over-categorizing income and expenses, you’ll also save yourself time. Often it’s just not necessary to break things down into great detail.

9.       Automate your invoicing. Online billing services that can effortlessly issue your invoices and keep track of everything are one of the most helpful web-based (or “cloud”) small business services arou8nd.  Look at Bill.com and FreshBooks.com in particular. The services are cheap and can help clean up a billing mess quickly.

10.   Get the right software. Don’t even think about keeping your books manually or with spreadsheets. Low-cost, easy-to-use financial software for small business such as QuickBooks, or the free version called QuickBooks Simple Start (both at www.intuit.com) are perfect for keeping everything in order.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved.

Great Free Sites and Software for Small Biz

1. Home Office Suite: For many solo and home-based businesses, the $279 Microsoft Office software suite is overkill. As a free yet powerful alternative try OpenOffice.org from Sun Microsystems. You can download for free, and it comes with word processing, spreadsheet, a draw program, database program and presentation software.

2. Free Invoicing for FreelancersBillingBoss.com is a free online invoicing tool designed for small business owners and freelancers to create, send and track invoices. It’s easy to use and you can create your first invoice within minutes of signing up.  If you’ve been getting by with spreadsheets, or use complicated accounting software only for its invoicing tool, BillingBoss might be for you. Unlike some free services, there’s no limit on the number of invoices you can create or send with Billing Boss. You can also set it up so customers can pay you online through Billing Boss. There’s also comfort in knowing this service is run by one of the world’s leading business software companies, and that your information is encrypted and securely stored.

3. A Virtual Office Online: Microsoft (http://officelive.com) is a free password-protected online workspace where you can store and share files and access your work from anywhere, even from other computers.  Its companion site Office Live Small Business is a terrific, affordable place to build a professional-looking online presence, and get a free website and marketing help as well.

4. Customize Your Own Free Software and Tools Package: Google Pack is new from the global search giant. It lets you customize and download you own set of free software and web tools that includes everything you need to work more effectively both online and off.  Dozens of  choices – all free – include:

  • Email, calendar and document creation applications.
  • Anti-virus and spyware protection.
  • Photo editing and sharing tools.
  • Skype for making free voice and video calls via the Internet.
  • Adobe Reader to view, print and search PDF files.
  • Google Talk to connect with friends via instant messaging (IM) or free voice calls.
  • A media player that lets you play and organize your music and videos.

5. Manage Your  CustomersFreeCRM.com is a great tool for small business contact and lead tracking, sales and contact management, sales forecasting, customer service and business management.  The free version is self-service, allows unlimited users and provides up to 10 MB of storage. If your customer base is not particularly large, it can be a quick and easy way to automate your sales, do a better job of tracking leads and even manage email and call campaigns.

6. Free Bookkeeping: QuickBooks Online Free is a simplified, free version of the QuickBooks accounting and bookkeeping system for small business. While it lacks the more powerful features of QuickBooks’ other versions, it still packs a nice punch for a solo business. You can instantly create invoices, track your money and manage up to 20 customers. The “easy accounting” features of QuickBooks Online Free are designed for people who don’t know anything about accounting. It helps you get and stay financially organized by gathering your important information in a central place. Your information is then available to you anytime, anywhere via the Internet.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved. 

Probing Customer Data for Bigger Profits

When customers buy something from you, change an order, request information, provide an email address or take other action, they create critical clues about who they are, what they want and how your business can better serve them.

Small businesses that capture and analyze such information – also called data or metrics – can use it to spot trends and patterns that can help avoid potholes and pump up profits. In the big business world, this is known as “data mining.”  But small business owners can do it with a simple spreadsheet, a data-mining add-in for Microsoft Office or with sales management tools for QuickBooks.

If you have the information, the goal of data mining is to dig into it for the nuggets of wisdom that can guide your decision making. That often means looking at things in a different way.

According to data mining experts at Microsoft, one reason businesses use the technique is to get better insight into their customers so they can improve their marketing.  The idea is to step back and look for connections that were probably always there, but previously invisible to you.

Information you already have, for example, might tell you that most of your customers live in a certain part of town, or come from certain cities or areas. But not until you delve into the data do you see that they’re mostly over 65, own a small dog, prefer the color red, and do most of their buying on weekends.

That’s helpful because if you know your ideal customer is 65 and is a dog owner, you can target exactly that in your marketing. You could establish stores or offices in areas where the population is largely over 65. You could make the print larger on your product. You could build partnerships with other companies that cater to dog owners and an older demographic. Knowing the information is essential, but so is acting on it.

Most business owners and entrepreneurs think only about “top level” data such as revenue, profit margins and accounts receivable. Data mining goes deeper. It’s a way of thinking that successful businesses use to coax out hidden relationships between the different data points.

Consider Amazon.com for example.  When you view a potential purchase on Amazon, the site automatically mines its data to instantly display related products that people like you also bought. You can do the same.  You can determine that people who bought one particular item also bought another.  Or you might note that customers who purchase directly from your website spend less time with you, but buy more often.

As you dig into your data and begin to recognize patterns and links, you may also discover new cross-selling opportunities and ways you hadn’t thought of to improve customer satisfaction and retention.  Data mining can also help with the important task of identifying your most (and least) profitable customers.

Even if your business isn’t yet collecting customer data, now’s a good time to start. Keep in mind that each “touch point” you have with customers and prospects – in person or online – represents a data-gathering opportunity.

The information you gather doesn’t have to be highly sophisticated.  Start with basics such as name, address (or at least a Zip Code), email, buying habits (when, how often and what they buy), how they found you and if possible, age and general income level. If you sell business-to-business, you can adapt these categories to companies instead of people.

If you plan to dig for data mining gold, remember it’s not just an exercise. The goal is to “connect the dots” – to recognize and act on new opportunities that were hidden in plain sight.

Microsoft offers extensive help and information about data mining on its website, including white papers and webcasts, as well as details on its data mining add-ins for Office. Go to office.microsoft.com and enter “data mining” in the search box.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved. 

Yo – Are You Yammering Yet?

Sometimes called “Twitter for business,” but actually much more than that, Yammer is shaking up internal communications at many mid-to-larger companies by connecting employees inside a private and secure company-only social network hosted on the Yammer site. Yammer is business social networking at an enterprise level, providing an easy way for employees inside a company to communicate, collaborate and share information. The basic version is free, and companies can pay to upgrade their network with additional features.  Yammer launched in Sept. 2008 and now is being used by over 100,000 companies and organizations.

Although Yammer is as easy to use as consumer products like Facebook or Twitter, its platform is built from the ground up specifically for business.  Yammer lets users communicate, collaborate and share more easily and efficiently than with other systems. It reduces the need for meetings, increases communications and connects remote workers. Each network is private, and a valid company email address is required to join.

Key Features:

  • Enterprise Micro-blogging – Start a conversation, read posts, and actively collaborate with your coworkers in real-time.
  • Direct Messaging – Create a private dialog with one or multiple co-workers.
  • Files, Links, and Images – Upload and share documents with co-workers, groups, or your entire company.
  • Groups – Create and join private or public groups and collaborate in small teams within your network.
  • Communities – Create communities for working with partners who are outside of your network.
  • Profiles – Upload a picture and fill in your expertise, past work experience and contact information to become discoverable across your organization.
  • Company Directory – Use Yammer to connect with employees in other departments.
  • Knowledge Base – Each conversation is archived and fully searchable so you can find what you need from your company’s knowledge base.
  • Administrative Tools – Keep your Yammer network running smoothly with a suite of admin features built to increase control.
  • Security – Message privately and securely in the cloud. Your security is Yammer’s top priority.
  • Topics – Tag content and messages in your network to make content easy to organize and discover.
  • Applications – Install third-party applications into Yammer to increase the functionality of your network.  Polls — Tap the wisdom of crowds by quickly and easily creating a poll and asking co-workers to identify the best option. See real-time updates as the votes come in. Events — Invite co-workers to company or group events and track responses. Download events into Microsoft Outlook or Google calendar. Links — Share URLs with co-workers in a form that displays web content such as videos and images inline.
  • Mobile – Connect to your network anywhere, any time. Download free iPhone, BlackBerry, Android and Windows Mobile applications.

Several third-party developers are integrating their applications with Yammer, including:

  • Crocodoc for Document Mark Up and Review — Collaboratively highlight and comment on PDFs, Word documents, images and other files that are attached to Yammer messages.
  • Zendesk for Customer Support — Attach a Zendesk ticket or knowledge base article to a Yammer message so that all key stakeholders can collaborate and resolve trouble tickets quickly.

Yammer also has these applications in development:

  • Box.net for Enterprise Content Management — Share files from Box.net’s leading cloud content management solution in Yammer messages.
  • Expensify for Online Expense Report Management — Notify the appropriate people when an expense report requires action.
  • Lithium for Social Customer Relationship Management (SCRM) — Enable employees to share and discuss feedback from brand influencer and customer conversations that take place in Lithium’s leading customer community solutions.

Yammer is headquartered in San Francisco and is well-funded by top tier investors including Charles River Ventures, Founders Fund, Emergence Capital, SV Angel’s Ron Conway and Goldcrest Investments.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved. 

Join the Local Group Buying Game with Caution

Offering great group buying deals online is the hottest thing going for local business.  By posting their deals on sites such as Groupon and LivingSocial, legions of local businesses (and some national brands, too) are attracting new customers, boosting sales, and augmenting their email lists.  The front runners in this exploding marketplace – Groupon and LivingSocial – have been making big headlines.  Groupon, for example, recently thumbed its nose at Google’s offer to buy it for nearly $6 billion.  Meanwhile, LivingSocial made a national splash offering $20 Amazon.com gifts cards for $10, and moving 1.3 million of them within 24 hours. And Google may soon launch its own version called Google Offers.

But hype and headlines aside, are Groupon and Groupon-like promotions worth it? According to a new study from the Jones Graduate School of Business at Rice University, the answer is only “maybe.” According to the study, Groupon promotions were profitable for 66% of the local businesses surveyed — and unprofitable for 32 percent. And despite the sites’ own testimonials, more than 40% of respondents to the Rice study said they would not do it again.  (The study covered 150 businesses in 19 U.S. cities and 13 product or service categories.)

Daily deals offered online have been wildly popular with customers, and the roster of U.S. and Canadian cities, regions or metros covered by the two leaders – about 125 for LivingSocial and some 190 for Groupon – is growing rapidly.  But the Rice B-school study showed that the discount offered and the number of deals sold did NOT predict profitability; nor did the percentage of users who purchased something in addition to the deal offered, or purchased again at full price.

The key was this:  “Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal,” says Utpal Dholakia, author of the study and a professor of marketing at Rice. “Employees must be prepared for this type of customer and the sheer volume that might come through.

“The social promotion industry reminds me of the Internet boom’s heyday. We are in the midst of a dynamic and exuberant period, and once the dust has settled the industry will look vastly different than it does today, with consolidation and savvier small-business customers.”.

Here are four things you should know:

  1. Groupon promotions offer the most benefit for businesses in which the promotion does not cannibalize sales to existing customers.
  2. Among the service businesses (restaurants, educational services, tourism and salons), restaurants fared the worst and salons and spas were the most successful.
  3. Businesses with unprofitable promotions reported low rates of spending by Groupon users beyond the Groupon’s face value and low rates of return to the business again at full price.
  4. Respondents indicated they had largely negative perceptions of Groupon’s competitors.

So far, it looks like the Groupons of the world  need to put more emphasis on creating positive outcomes for local businesses, and stop tilting the equation so much toward consumers.

Still, two in three local businesses report a positive outcome, so it’s worth trying it out. A great way to get a feel for how it works, who’s participating (both buyers and sellers), and whether your small business should give it a go is to check out some of the sample offers (Groupon here; LivingSocial here), detailed case studies and other details on the LivingSocial and Groupon websites.  The Groupon video here on BizBest is also helpful.

Both sites offer a full range of local merchant services. At Groupon, most things are done by phone or online, while LivingSocial maintains small customer service teams in the cities it works in.  They’ll help you devise and structure a deal specifically for your business that delivers on your performance goals.

Since a minimum number of people must buy the deal for the offer to be valid, you are guaranteed paying customers.  There are no up-front costs (other than your time) to create and run a deal.  Groupon, LivingSocial and other copy-cat type sites make money by taking a small piece of each deal sold.

Biz owners who’ve had success don’t try to target customers looking for “the perfect deal.”  Rather the way the system works – offering consumers a handy way to make new local discoveries – you get customers looking for an excuse to try something new.  The deal you devise gets them in the door, and it’s up to you to keep them coming back.

From a demographic viewpoint, the Groupon audience tends to skew younger, toward people looking for great stuff or experiences they’ve never tried, or maybe never heard about, right in their own backyard.  But with thousands more people subscribing daily in the cities covered (and more cities being added all the time), the customer range is widening .

Ask for help with “redemption cycle planning,” so your business isn’t overwhelmed by a large response it can’t handle – especially in the first 30 days following the offer. Groupon offers checklists and hosts webinars to help with the planning.  As part of the deal creation and planning process, the services will also work with you to calculate the optimal number of customer’s you’ll want to generate by an online deal, relative to your existing customer base, and the capacity or staffing issues of your particular type of business.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved.