Expert Shares Key Insights into Small-Business Tax Filing

Richard Koreto for AccountingWeb.com writes: Owners of small businesses want to spend their time perfecting their products and services and working with their clients and customers; dealing with tax paperwork is probably the last thing on their minds. Fortunately, accountants are perfectly positioned to take over this burden on behalf of their small business clients. How can they do it? AccountingWEB sat down with Susan Drenning, president ofeFile4Biz.com, which provides 1099 and W-2 e-filing services. She gave us the inside scoop on filing these key documents, and shared her insights on trends in small business outsourcing.

AWEB: What are the key filing issues your customers find difficult to manage? What questions do they have?

Drenning: We've spoken with our customers and other companies as well, and discovered that the biggest pain point is the formatting and printing of the form itself. Even in this paperless world, there's still a lot of onsite printing, and we've found that some companies are still manually typing the W-2 and 1099 forms thinking that’s actually easier. This year, we found out that one of the major software programs doesn't correctly align the W-2 forms. Preparing the printed forms for recipients is simply a bigger pain point than you would imagine and has become a compelling reason for small businesses and accounting firms to outsource the full process.

AWEB: So having all software packages work together harmoniously seems essential. For example, I see your service works with Excel and QuickBooks uploads. Is that going to be necessary going forward—different apps working with each other?  (snip, the article continues @ AccountingWeb, click here to continue...)

XERO: Benchmarking Xero's S-1: How 7 Key SaaS Metrics Stack Up

Tomasz Tunguz writes: this post is part of a continuing series evaluating the S-1s of publicly traded SaaS companies in order to better understand the core business and build a library of benchmarks that might be useful to founders.

There’s a SaaS company on the other side of the world founded nine years ago that is worth $2B, generates $100M in annual revenue and growing 80% year over year. Based in New Zealand, Xero has built a widely adopted small-to-medium business (NYSEARCA:SMB) accounting solution that counts 371,000 paying customers, a figure that grew 76% in the last 12 months. Amazingly, 30% of New Zealand GDP is processed by Xero.

Xero is an unusual company for two reasons. First, Xero is a glowing example of a successful SMB SaaS company. Second, Xero became a publicly traded company on the New Zealand exchange very, very early on. Consequently, nearly all of the company’s data is public. In fact, below I’ve copied Xero’s P&L from its first year since founding all the way through 2014 - a data set I never thought I would be able to publish on any company for confidentiality reasons.

Xero Income Statement	2007	2008	2009	2010	211	2012	2013	2014
Revenue	0.01	0.306	0.6	2.3	7.1	15.8	32.9	61.9
Growth			109%	265%	206%	123%	107%	88%
Gross Profit	-0.8	-2.0	-2.3	-3.5	-1.6	0.3	21.2	40.6
SG&A.	-	0.3	1.2	2.2	3.3	6.2	25.1	58.6
R & D Exp.	-	-	-	-	-	-	9.7	16.0
Net Income	-1.0	-3.4	-3.9	-6.0	-5.7	-6.5	-12.1	-30.8
% of Revenue			-611%	-257%	-80%	-41%	-37%	-50%

You can read through Xero’s investor materials on their investor portal andsift through their annual report for 2015 here, which reveals that the company acquires SMBs by convincing outsourced accountancies migrate the SMBs these accountancies serve to Xero. And in the US, each accountancy provides about 13 SMB customers to Xero.

(click to enlarge)

In the next few charts, we’ll explore Xero’s business and compare it to a basket of publicly traded SaaS companies.

(click to enlarge)

Xero operates at the lowest end of the SMB market and it’s Average Revenue per Customer is second-smallest in this data set at $167 per year. In fact, the ARPC is so small, you can barely see it on the chart. Only WIX, a website builder, has a smaller ARPC.

(click to enlarge)

Nevertheless, Xero has built a fast growing business. The company reached $62M in revenue in year 7. It has taken Xero a bit longer to reach these revenue milestones than the typical company. This may be because the business started initially in New Zealand, expanded to Australia, then the US & the UK, unlike the majority of the others in the data set which started in the US, and didn’t face cross-border market expansion until later in their growth.

(click to enlarge)

Historically, Xero has spent far less than the median in Sales & Marketing, likely because they achieved high growth rates through dominance of the accountancies in New Zealand and Australia very quickly. Xero expanded into the US in 2011, which is year five in the chart above. Not coincidentally, the company has invested much more aggressively in sales and marketing at and after the US launch to displace Xero’s biggest competitor in the US, Intuit’s Quickbooks.

(click to enlarge)

Xero does exhibit an amazing sales efficiency metric of 4.4, meaning $1 invested today in sales and marketing yields $4.4 next year. The median SaaS company charts 0.81 sales efficiency, meaning Xero is at least 5x more efficient. Xero’s efficiency is driven by its customer acquisition strategy, winning accountants and encouraging them to migrate all their business from a competitor to Xero. Winning one accountant generates more than 13 end customers, and generates substantial leverage in the sales model.

(click to enlarge)

Xero didn’t break out it’s engineering spending in its financials until 2013. Of late, the company has been spending about 40% of its revenue on research and development, more than 10 points above the median, to build out its product suite. Most notably, Xero launched a payroll product in the US in early 2015.

(click to enlarge)

In dollar terms, Xero’s net income mirrors the median. The company burned about $30M on revenues of $62M.

(click to enlarge)

In percentage terms, the story is similar. Xero is right at the median, burning about 10 points more than the median, 48% of revenue, compared to 37 points.

Xero is an amazing SMB SaaS business to study because of the company’s ability to develop a monopoly in two smaller markets before expanding to the US, which is rare. It’s much more common to see a US company move abroad. In addition, Xero has employed a unique go-to-market through accountancies that generates enormous efficiencies for its sales and marketing teams. Last, much of Xero’s data from the very earliest days of the company are public, meaning Xero can serve as a great benchmark for other startups.

A few quick things to note when examining Xero’s business. The filings are denominated in New Zealand dollars, so be sure to convert to USD. Also, Xero never filed an S-1 because the S-1 is a US exchange requirement and Xero trades in New Zealand, but there are equivalent documents on Xero’s investor site. Last, Xero has a negative gross margin for its early years, which is unusual. This is because they put the majority of their operating expenses in their Cost of Goods Sold. I suspect it might be a regional accounting difference. If there are accountants reading, I’d appreciate your insight.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Xero seeks US boost with new platform

Holly Ryan for the New Zealand Herald writes: Accounting software firm Xero has introduced a new combined payroll and accounting software platform to help increase growth in the US.

The company hit some speed bumps in the US last year.

After conceding expansion there had been slower than expected, Xero faced market concern that it might not be able to crack the difficult American market.

Chief executive Rod Drury yesterday said he was excited about growth this year, and a US listing was still a possibility.

"The US is really our focus for this year so we're getting our US team in place so we can add some other [countries] maybe towards the end of the year," Drury said.

The focus on the United States was partly a result of the possibility of an initial public offer (IPO), as the company had to prove it could take a firm foothold in the US market before listing.

"I think that to have that [listing] as an option we need to show traction in the US because a lot of the influential analysts want to see traction in their home markets," he said.

"So even though we're doing a great job in Australia and the UK, we really need to demonstrate traction in the US, which is why we're really focused there and if the market conditions are right, then we can do the IPO."

Recommendations by accountants to their clients had been an important way for the NZX-listed company to increase its global customer base.

But concerns about litigation in the US meant accountants there tended not to provide such general business advice, and they also had less exposure to cloud computing.

Drury said software purchases straight from the company's website were increasing.

"The external view [last year] was that we were off track but that wasn't the internal reality, it just takes a while to get off the ground, and we still had over 20,000 [US] customers so we were reasonably comfortable with where we got to last year," he said.

The latest payroll addition to the company's software offering has been introduced in California, Florida and Texas, and will come to New Zealand and Britain in April. Other countries will get it later in the year.

"Payroll is usually the biggest expense for small business owners," Drury said.

"So integrated accounting and payroll is compelling and inevitable. More than 40 per cent of our customers already use our payroll software in markets where it is available," he said.

"We're still putting out guidance of 80 per cent growth for the year, so we've got US$100 million [annualised] revenue and are growing quickly. We're still one of the fastest-growing software companies."

Drury said much of the hard work required to get the right team and build a solid base had been completed last year.

If the rate of software shipping continued, the company would be in "a very good position" this year.

On the move

• Xero has introduced a combined payroll and accounting software platform in the US.

• It will come to New Zealand and Britain in April, and to other countries later in the year.

• The company is looking at new areas for expansion and a possible US listing.

• Xero has more than 400,000 customers in 180 countries.

• The company is predicting 80 per cent growth for the year.

CAN ATTORNEYS FEES BE DEDUCTED FROM MY TAXES?

Coleman Legal Group writes: If you have sought legal help or are thinking of going to get legal advice, one of the questions that seems to be popular is whether expenses made for the legal advice are tax deductible. Perhaps you are considering divorcing your spouse or maybe you need help with a contract on a house you are interested in renting. There may be multiple reasons you may require the services of an attorney, but that fact stands that regardless of the reason, you are going you are going to have to pay for those services. Normally, the expenses incurred for legal advice or services are not tax deductible, but there are a few exceptions.

The General Guideline
The guideline to follow is straight enough; you can deduct your attorney’s fees you pay trying to collect or produce income that is taxable, or in connection with the collection or determination of a refund of any tax. Simply put, if the legal fees are connected in some form to taxable income or taxes, you are allowed to make a deduction. For example, you can make a deduction if you need the help of an attorney to procure money you have to pay taxes on or if an attorney helped you with a type of tax matter, like having legal representation when you are being audited by the IRS.

Deductions
There are different types of situations that could qualify for a tax deduction, like fees you may pay for tax advice you may seek during a divorce case, like how the divorcing couple will split deductions for child care, home mortgage interest, or whether alimony is tax deductible by the paying spouse or taxable income to the spouse receiving the alimony. If you are trying to get your divorced spouse to pay alimony that is past due. If you are receiving a share of a class action settlement in a lawsuit that was filed against your former or current employer. For instance, say your former or current employer settles the class action lawsuit claiming that it didn’t pay overtime wages. As a part of the settlement you receive a check for $2000, but $2500 is reported to the IRS as taxable income because your share of the attorney’s amounted to $500. Since the income is considered work related, you are allowed to make a tax deduction for the $500 in attorney fees.

Typically, you are not allowed to deduct legal fees paid for advice personal matters or for things that do not produce any form of taxable income such as fees for settling a will or any kind of probate matter between family members, any kind of help in the closing of a purchase for a home, or the filing of a personal lawsuit, this is because any monetary award obtained from the lawsuit is not a part of your gross income making it non-taxable.

The Process and the Amount
Usually attorney’s fees can be deducted as itemized miscellaneous deductions on the form schedule A of the 1040 tax return. Miscellaneous deductions are often limited by what is known as the the two percent rule, which is that you can only deduct the amount of your miscellaneous deductions that’s more than two percent of your adjusted gross income, which is an amount you will list of your 1040 tax return, so it may be possible that you cannot deduct all of the fees you may want.

Are the Attorney’s Fees Business Related?
You are allowed to make deductions for the same things mentioned earlier as a business owner. If you hire an attorney and they help your business produce income or they prepare your taxes, then you can deduct those fees. You can also deduct fees paid for the negotiation or drafting of contracts that are for the sale of your services or items to your customers, filing a lawsuit to collect any money that a customer my owe you, also, you can typically deduct any attorney fee’s incurred in the purchase of an existing business or even starting your own. These business related expenses are usually deducted the same way other ordinary and necessary business expenses are, on schedule C on your 1040 tax return. 

When should you itemize deductions? / Sometimes the answer is obvious, sometimes it isn't

Mark Huffman for Consumer Affairs writes: has been a consumer news reporter for ConsumerAffairs since 2004. He covers real estate, gas prices and the economy and has reported extensively on negative-option sales. He was previously an Associated Press reporter and editor in Washington, D.C., a correspondent for Westwoood One Radio Networks and Marketwatch.  

Staff photo

Using the “short form” is the quickest and easiest way to file your tax returns and millions of taxpayers use it. But with that form you can't itemize deductions, you must take the Standard Deduction.

At some point taxpayers may have deductible expenses and think they should drop the short form and go with the standard Form 1040, so that they can take advantage of those deductions.

But sometimes they shouldn't. According to the Internal Revenue Service (IRS), you should only itemize deductions if your total deductions are greater than the standard deduction amount.

Standard Deduction

For the 2014 tax year, the standard deduction for a single taxpayer is $6,200 and $12,400 for a married couple filing jointly. That's what a taxpayer may deduct from their income without itemizing any expenses.

That means if a couple purchased a home at the beginning of 2014 with a mortgage of $140,000, they probably paid a little more than $5500 in mortgage interest last year. They could itemize deductions and write off the $5,500.

But just because they can, doesn't mean they should. If they itemize they can't take the Standard Deduction. If the mortgage interest is the only deductible expense they have, they're taking a $5,500 deduction and giving up a $12,400 one.

Consider all deductions

That said, there may be several other expenses you incurred through the year that could also be write-offs, if you itemize deductions. Besides mortgage interest on your home, you can also deduct the taxes paid.

If you have significant uninsured casualty or theft losses, that could add to the deduction total. If you have large uninsured medical or dental expenses or large un-reimbursed employee business expenses, itemizing may be in your best interest.

The key number is the standard deduction. You probably shouldn't itemize if your total expenses don't exceed it.

Tax bracket

A secondary consideration is your tax bracket. If you are in a high tax bracket, a deduction is worth more than if you are in a low bracket.

Here's an example. John and Loretta have a taxable income of $80,000. That puts them in the 25% bracket, meaning they pay 25% of their income in taxes.

George and Linda earned $195,000. That puts them in the 33% tax bracket.

Each dollar of itemized deductions will save John and Loretta 25 cents while George and Linda will realize 33 cents.

When it's not obvious

Sometimes the decision to itemize or not is not that obvious. That's when you should seek help from tax experts. They may lean toward itemizing because, frankly, filling out the long form and itemizing usually results in higher fees than just filing with the short form.

But TurboTax says 1 out of 4 taxpayers will end up paying less in taxes when they itemize. The company points out that other considerations, like age, can affect your bottom line tax.

H&R Blocknotes there might be cases when your itemized deductions are less than your standard deduction, but it still makes sense to itemize. It says you might want to do this if itemizing on your state return provides a savings that more than makes up the difference on your federal return.

Meanwhile, the IRS says it will begin accepting returns electronically on Jan. 20. Paper tax returns will begin processing at the same time.

Australia: MYOB Has Invested More Than $40 Million To Grow Its Cloud Users To 116,000

Alex Heber for Business Insider Australia writes: The number of small businesses using accounting software company MYOB’s cloud-based program has increased to more than 110,000.

The company today released updated customer numbers which show more than 1.2 million businesses actively use MYOB. Of the total more than 500,000 are regular paying customers and 116,000 are on the cloud.

Since September MYOB had added about 16,000 to its cloud user tally.

At the end of September cloud-only accounting software company Xero had 158,000 full paying cloud customers in Australia and 371,000 globally.

MYOB has been attempting to transition its existing user base from desktop to cloud-based solutions, spending $40 million on cloud developments in 2014 as it jostles for position against newcomers like Xero and Intuit in the Australian and New Zealand markets.

“[With] significant investment in R&D, we are positioned well for continued growth moving forward,” MYOB SME solutions general manager James Scollay said.

MYOB said it is confident of its leading market share status, which it estimates to be about 60%, in both markets.

“The uptake of our cloud solutions is driving growth of our total paying and online users,” Scollay said.

In the three months to December over two thirds of MYOB’s new subscribers were on the cloud. At the same time Xero estimates about 40% of new users were previously using competitor products like MYOB. Xero Australia MD Chris Ridd maintains the company is taking market share directly off MYOB.

An MYOB spokesman said comparing Xero’s cloud user numbers to MYOB directly doesn’t match up as Xero includes customers who use practice ledgers. He said about 60% of Xero’s published user base can be compared to MYOB’s cloud numbers.

In response Ridd said: “Less than 20% [of its published cloud subscribers] are classed as ledgers, the rest are businesses.”

He said Xero doesn’t combine its Australian and New Zealand numbers as one, but MYOB does.

“Our Australian customer number doubled in the 12 months to 30 September 2014, and continues to grow quickly by the day,” Ridd has said previously.

“There’s no other way of saying it – Xero is the no.1 cloud accounting software provider in Australia. We have yet to see MYOB to break out its cloud customer numbers for New Zealand, so the true state of its online accounting market share is unclear.”

MYOB said while the 116,000 is a combined total for Australia and NZ the majority are in Australia. The company has not broken down its subscriber base into Australia and New Zealand users but did say of its 1.2 million total active users about 240,000 are in New Zealand.

MYOB is gearing up for an IPO before the end of the second quarter and has a bunch of investor meetings scheduled for next week.

The cloud accounting wars continue.

Physicians: 5 Smart Ways to Cut Your Income Taxes in 2015

Dave Denniston, CFA for HCP Live writes: Today’s world is an incredibly tax-unfriendly environment for physicians.

By increasing your taxes due to the provisions of the Affordable Care Act, Uncle Sam is out to get even more!

The good news is that there are several steps that you can take to be proactive and keep more money in your pocket. Here’s how you can minimize your tax burden and improve your specific situation.

Pay Yourself First

Start contributing to your 401(k) plan (or 403(b) plan if you work for a nonprofit) as well as a 457(b) and a Health Savings Account (HSA) if they are available. Contributing boosts your retirement savings and lowers your income taxes as well. This money comes right out of your paycheck, withheld by your employer.

By contributing to your 401(k), every dollar you put in gives you a discount on your federal income taxes. For example, if you are in the 35% bracket, and you contribute $10,000, you have just lowered your taxes by $3,500. That’s like a 35% rate of return on your money today that can grow tax-free until you withdraw it someday, when it will be taxed likely at a lower rate.

Be sure to contribute at least up to the maximum match your employer provides. If your employer matches dollar-for-dollar, this is like an automatic 100% return. Even if your employer matches 50 cents or 25 cents on the dollar, that is still a 50% or 25% return just for contributing.

Get as close as you can to maxing out your contribution. If you are under 50 years old, the maximum you can put in the 401(k) is $18,000 in 2015. If you are over 50 years old, you make do an additional catch-up contribution of $5,500 for a total of $23,500.

Set Up a Business or Moonlight as a Consultant

The American tax code is set up to benefit one person: the business owner. There are many potential write-offs, including using a home office, which allows for many deductions. For instance, you could remodel your basement as a tax-deductible home office, and deduct 100% of all costs, such as utilities, insurance, and depreciation, related to the office. Keep in mind—you don’t have to be the business owner; it can be your spouse.

Avoid Tax-Inefficient Funds

You can control capital gains and dividends when you own individual stocks and ETFs, because you can sell them anytime. Unfortunately, it is much more difficult to control them with mutual funds. Mutual funds will distribute capital gains even when you haven’t sold anything, a phenomenon called "phantom capital gains." As assets come into a fund, the portfolio manager will buy stocks or other securities. Then, when investors redeem their money, the manager will have to sell stocks or other securities, creating taxable distributions.

This can be bad news for tax efficiency. If you are in a "hot fund" that had capital gains from unsold positions that the manager bought years earlier (before you invested in the fund), and investors start pulling out dough, you could be left with a big tax bill. You could actually lose money in a mutual fund and still get caught with a big capital-gain distribution.

Be very careful which mutual funds you invest in. Some managers are incredibly tax-efficient, but many are not.

Harvest Capital Losses

The idea of tax harvesting is to purposely create capital gains or capital losses to maximize your tax advantages. Of course, the government has no ceiling on the amount it can tax you for capital gains.

However, it does it have a floor on capital losses: $3,000 per year. Net losses above $3,000 must be carried over into the following year.

Perhaps you have no carry-forward losses and you have realized some capital gains. Instead, you may have some capital losses that you can harvest to offset the gains and perhaps even create a loss for the year. It’s simply a matter of selling one or more losers while holding onto your winners.

Be Charitable

By donating to charity, you can get a tax deduction by unleashing your giving spirit. If you can get your itemized deductions above the amount of the standard deduction, you can have a higher tax write-off than many Americans. Remember your state income taxes are counted towards your itemized deductions, as well as mortgage interest. By adding some charitable giving to the mix, most of us can easily exceed the standard deduction limits and be able to itemize instead.

There’s no minimum to the amount of charitable gifts you can report. However, if your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution—a bank or credit card record or a written communication from the qualified charity containing the name of the organization, date of the contribution, and the amount.

Final Thoughts

As a physician, you’ve made a commitment to helping others and your community.

Now you need to make a similar commitment to your finances.

You can fight back at Uncle Sam through focusing on reducing your taxes by contributing to your retirement, settng up your own business, harvesting losses, avoiding tax-inefficient funds, and being charitable.

By being proactive with your tax situation, you can then do the things you’ve long dreamed of doing and be well down the road to financial independence.

Dave Denniston, CFA is a professional wealth manager and financial advisor locate

d in Bloomington, MN, visit his website at www.DoctorFreedomBook.com