IRS issues warning on scammers and other security issues

The IRS issued a warning to taxpayers on July 10th regarding the activity of identity theives who use e-mail, faxes and other means to gather personal information from taxpayers while pretending to be from the IRS. I think it should be obvious but take note that the IRS will never send an unsolicited e-mail requesting information.

Which brings me to another security issue. I attended a class for CPAs yesterday and learned that many states now have laws making it illegal to send driver's license, social security and bank account numbers through the internet either in the body of an e-mail or in an attachment. Seems there are people in other countries writing progrms that monitor e-mail traffic just looking for bits of personal information. E-mails and their attachments are not secure.

The solutions (I'm not a techie but this is what was recommended) were either encryption, FTP transfers or portals. Portals are direct links, similiar to online banking, between a secure server and the two parties. For instance, instead of sending the tax return as a PDF attachment, we now place a document through a portal on to a secure server which can only be accessed by the client. They can go to the portal and pick it up whenever they want.

I also learned that the top two ways identity theives get information:

1. Voluntary disclosure
2. Theft of hardware that contains personal data

Make sure you encrypt and/or secure all data that resides on portable devices.

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Within 10 minutes of posting this blog entry I rec'd an official looking IRS e-mail claiming I was due $863.80, and that I'd receive it in 6-9 days if I just "clicked here" and gave them some personal information. I quickly forwarded that e-mail to phishing@irs.gov .

Yet another reason to go green and be proactive

Fines and penalties paid to the government for legal violations are not deductible for taxes. This applies to fines for environmental damage as well. The public policy doctrine and IRC Section 162(f) provide the basis to disallow tax benefits inconsistent with articulated public policy.

Over the years, many companies have had fines reduced by agreeing to perform a Supplemental Environmental Project (SEP) or similar project to settle a matter with the state or federal government. As a general rule, violators pay a smaller fine when they agree to a SEP or other remedial project.

In a recently released IRS Coordinated Issue Directive (http://preview.tinyurl.com/6m9z6l), the IRS says it will deny deductions for these projects because in their view, the cost is a nondeductible fine if the work is done to settle government charges of pollution. This includes wildlife habitat restoration and wetlands purchases.

Hopefully, this position won’t discourage the government and polluters from agreeing to mutually beneficial SEPs. Ideally, this provides yet another incentive to be proactive, go green and avoid the expensive and now non-deductible cost of remediation.

Greenwashing and environmental claims

I was recently drinking from a disposable cup that claimed to be “biodegradable”. While it may in fact be biodegradable, the question that arises is by when and under what conditions? I’m not a scientist but I suspect everything is biodegradable given enough time. Therefore, the biodegradable claim provides no useful information and may in fact be misleading if the cup is simply tossed in the garbage and ultimately buried in a landfill without sunlight and oxygen.

The point I’d like to discuss today is the importance of accurate environmental claims and to point readers towards a new guide published by our friendly neighbors to the north.

On June 25th, Canada’s The Competition Bureau, in collaboration with the Canadian Standards Association released guidelines for the business community to ensure that green marketing was not misleading, while providing consumers with greater assurance about the accuracy of environmental claims. The 72-page report addresses a number of commonly used green claims and provides examples of best practices on how such claims can be used by businesses to comply with the false or misleading provisions of Canadian laws.

Among other practices, the Guide states that:

• The use of vague claims implying general environmental improvement are insufficient and should be avoided.
• Environmental claims should be clear, specific, accurate and not misleading.
• Environmental claims should be verified and substantiated, prior to being made.

You can get a copy of the guide here: Environmental Claims: A Guide for Industry and Advertisers

One item I found particularly interesting was the entry on sustainability claims. Here is what the guide says:

The concepts involved in sustainability are highly complex and still under study. At this time there are no definitive methods for measuring sustainability or confirming its accomplishment. Therefore, no claim of achieving sustainability shall be made.
CAN/CSA-ISO 14021, Clause 5.5

In the spirit of honest advertising and useful information, I have to agree that a claim of achieving sustainability would be inappropriate within the systems thinking paradigm.

I haven’t had a chance to completely read the guide but based on a quick review, it looked like a responsible list of criteria we could all adopt as we go forward with our green business, working towards sustainability.

The value of a CPA

I may have saved a friend well over $50,000 in taxes this weekend.

I don’t want this to be a tax column and I haven’t researched this specific issue to speak with authority but I want to point out the value of professional advice, especially when you are going through life’s transitions (marriage, death, children, divorce, starting or closing a business, etc.) and dealing with non-routine transactions.

During a casual conversation, my friend mentioned that her elderly father wanted to leave his California home to her when he died. The house has over $500,000 of potential gain in it (Market price less tax basis). Dad had or was going to simply add her name to the title with right of survivorship.

While this would get the house to her upon death, my concern here is that dad has made an Inter vivos transfer as opposed to a testamentary transfer. This difference can have significant tax implications since the beneficiary of a testamentary transfer gets a step up in basis while the recipient of an Inter vivos transfer doesn’t.

My advice to her was to talk with an attorney and her CPA to make sure they were doing this transaction correctly from both a legal and tax perspective. While it will cost some money for the professional services, I think it is better to be safe then sorry when engaged in transactions with significant financial implications.

As a CPA, I really, really like it when my clients call me for advice BEFORE these situations arise since it provides us the best opportunity to accomplish their goals and to avoid nasty surprises.

Accounting's role in sustainability

My accounting professor at Bainbridge Graduate Institute (http://www.bgiedu.org/), Dr. Kate Lancaster, PhD, CPA has written a paper with two of her colleagues urging the development of sustainable curriculum for university finance and accounting students, and outlined some specific courses or curriculum modules that need to be created.

Kate asked me if I would write a few sentences about why it is important to include sustainability in finance and accounting curriculum. Here is what I wrote:

"The shift towards sustainability will be a significant business driver over the foreseeable future. An emerging and evolving set of metrics beyond traditional financial measurements will provide guidance, scoring, comparability and accountability for sustainable business practices.

Who better to measure, report, analyze and interpret the data than accountants? It is vital that students learn the thinking and tools they'll need for jobs in the 21st century."

Sustainability offers significant opportunities and challenges for both internal and external reporting. In a sustainable economy, everyone will be on board. It is a hopeful sign when even traditionally conservative professions like accounting begin to see the light.

Transparency and reporting

I have been super busy wrapping up the end of school but really wanted to follow up on my last blog entry. While doing a GHG inventory is the first step towards climate and emissions sustainability, the obvious question is what's next for the business owner?

As a reminder, at one level, the process looks like this:

1. Measure your GHG emissions (conduct a footprint analysis)
2. Take steps to reduce your GHG emissions
3. Purchase carbon credits to offset the remainder

While that is a high level overview, their is another equally important aspect of this process: Reporting and transparency.

As we move towards sustainability, transparency is vital to the success of the journey and reporting is part of this effort. By reporting your results, you build trust and credibility with your stakeholders and you allow yourself to be benchmarked for comparison.

Just as a public company reports financial results, the information gleaned from a triple-bottom line reporting needs to be communicated to help stakeholders make decisions.

A GHG footprint is your baseline measurement

I was speaking with the owner of a successful progressive business. His company is environmentally conscious and plays an active role in the sustainable community here in Portland. Founded in 2001, they have been steadily building their business. Our discussion turned to triple-bottom line accounting and he acknowledged their business didn’t have many, if any, non-financial measurements. Like most individuals and organizations, they didn’t know their greenhouse gas (GHG) emissions footprint.

A GHG footprint analysis is a measurement of an organization’s direct and indirect GHG emissions. Greenhouse gases contribute to global warming through the greenhouse effect. They include carbon dioxide, methane, nitrous oxide, ozone, CFCs and water vapor. A GHG report will measure an entity’s direct and indirect emissions of the various gases, and then convert the data to CO2 equivalents. The final result is the tons of CO2 equivalents released over the year. This is a number to be managed.

As the old saying goes, “What gets measured get’s managed”. The GHG reduction process is a 1, 2, 3 process beginning with measuring emissions, then reducing and finally, offsetting the GHG emissions that can’t be eliminated. The first step in this process is the measurement. Every business should begin this measurement process now. Businesses can download free tools to get started at http://www.ghgprotocol.org/. Individuals might want to start here: www.nature.org/initiatives/climatechange/calculator.

Performing a GHG inventory will allow you to understand the source of your emissions. I was on a team who performed the first GHG inventory for the Bainbridge Graduate Institute (http://www.bgiedu.org/) and it was eye opening to see that well over half the annual emissions was from air travel by a small percentage of students, faculty and staff. We wouldn’t have known this without performing the footprint analysis.

For a great list of the Top 10 things businesses can do to reduce their emissions you can start here: http://www.carbonconcierge.com/act/top-10-things-businesses-can-do.

Individuals can start here for a similar list: http://www.carbonconcierge.com/act/top-10-things-businesses-can-do.

Having done a GHG inventory, I can assure you they aren’t that hard. There are experts who can help if you don’t have the time or skills. I actually offer reduced rates for this type of work because I want to help.

The process will engage your employees and could help you develop a competitive advantage. Customers, especially in the green community, will increasingly be asking about your footprint. I predict it won’t be long before a business that doesn’t know its footprint will be in the same boat as a company that doesn’t recycle – unattractive to customers, employees, regulators and the community.

What accounting system should I choose?

One of my MBA classmates asked me if I might be able to create a matrix relating accounting packages to size and industry. In her two paragraph inquiry she mentioned seven different software packages. The reality is that there are likely a thousand or more accounting programs on the market, each with their own set of advantages and disadvantages. What might work great for one company could be a disaster for another.

Choosing the right software is a critical business decision. Get it right and you’ll be extremely pleased. Get it wrong and you’ll spend countless hours doing workarounds and other labor intensive work to get the information and control a good system should provide.

Because there are so many choices in the market, it would be impossible for me to know all of them. As a Certified QuickBooks™ ProAdvisor, I am somewhat biased towards them and often recommend that solution. However, QuickBooks is a terrible program for many businesses.

I tend to recommend QuickBooks because it is inexpensive to purchase, easy to use, offers great customer support, is expandable within limits, and offers a variety of industry specific packages. The industry specific packages cost more to purchase but offer many great features for certain companies.

Being the most widely used makes it easy to find bookkeepers and staff who are trained and familiar with the software which can significantly reduce current and future training costs. There are also a number of third-party vendor options to enhance the package that can be purchased separately.

On the other hand, QuickBooks can only handle average cost inventory pricing. If you need LIFO, FIFO, specific identification or some other inventory pricing system, QuickBooks will not work for you. QuickBooks has other limitations as well but those are for another discussion.

Since there is no one size fits all accounting system, I recommend business owners start by evaluating any industry specific programs on the market. Industry specific software helps address business processes typical to an industry without adding extra customization costs.

I was involved in start-up bakery which selected QuickBooks prior to my arrival on the team. While I was trying to determine how to make QuickBooks cost a loaf of bread and then differentiate that from a sliced loaf of bread, I did some research and found specialized bakery software. The bakery software was admittedly more expensive (approximately $5,000 to buy and another $5,000 to set up) but infinitely more useful. The bakery software provided so many additional benefits that the added cost was more than worth it. The specialized software helped the start-up bakery operate at an entirely different level than what would have been possible with QuickBooks alone.

Sometimes it makes sense to use QuickBoooks for A/R, A/P, G/L and financial reporting while using a different package for inventory, costing, billing, or other specialized tasks. It just depends.

The total cost of the system will include the purchase price, setup, training, operating costs, advisory and support costs as well as future upgrades. All of these costs need to be considered when making a choice and compared to the anticipated benefits of the systems under consideration.

Here is where I recommend the value of a CPA knowledgeable in systems design. Armed with knowledge about your business, goals, plans, operations, processes, transaction flows and critical information requirements, a CPA can help you find and select the software that will be a strategic fit for your company.

How important are good records?

I was reading a story from the New York Times this morning regarding the declining value of small businesses during this economic downturn. Not surprisingly, there are a lot more sellers than buyers which is driving down prices.


While it did not surprise me that small business valuations were falling, what I found most interesting and valuable was this little bit of information from the end of the story:


"... an unpleasant truth is that many, if not most, businesses do not sell. For decades, the conventional wisdom was that brokers sold about one out of five businesses they listed. But a new study by Louis O. Vescio, owner of Sunbelt Business Brokers in Melbourne, Fla., found that the percentage was only 10.5 percent.


The main reason, Mr. Vescio and others said, was that 'most small business owners keep bad records,' so buyers cannot get an accurate financial picture."


As I wrote in my blog last week, a good accounting system is extremely valuable to a small business. I see too many business owners who fail to adequately invest in their accounting and information systems because they don't see the value and they don't have the knowledge or expertise. This approach is ultimately costly when the entrepreneur creates a potentially valuable asset that can't be sold.

Accordingly, I recommend that business owners make adequate investments in their accounting and record keeping systems. This aspect of a successful business is no less important than HR, marketing, sales, operations, banking, etc.

A good accounting system is efficient, fairly easy to maintain and provides a number of key functions like reporting, analysis, security and operational control.

Business deductions

I was meeting with a prospective client yesterday and they were talking about deductions. This person owned an upscale retail clothing store and a friend of theirs had told them they could write off almost everything as a small business owner.


Drive to work - write it off.
Laptop computer - write it off.
Cell phone - write it off.
Daily lunch with his business partner - write it off.
Fancy clothes - write it off.
Haircut - write if off.


The list was actually longer but I think you get the picture.


While all of these have some connection to the business activity, that doesn't necessarily make them deductible. While there are many specific rules regarding business deductions, the items noted above generally have a high degree of personal benefit, i.e. non-business, to them. Everyone has to eat, wear clothes, get their haircut and drive to work. These are generally personal expenses and therefore not deductible as business expenses.


Haircuts and clothing are almost never deductible. As a general rule, clothing is deductible only if it is a requirement of the job AND, cannot be worn as street clothes. My friend and his employees who dress nicely in their upscale clothing store cannot deduct their clothing as a business expense. It may be a requirement of the job but the clothes can also be worn outside of work and therefore can't be deducted. If it is any consolation, I can't deduct my suits, shoes and ties either.


Cell phones and laptops are considered listed property and an allocation between business and personal use is required. The business use portion is deductible while the personal portion isn't.


There are a number of ways to handle cell phone accounting and I recommend you do it right with professional help to review the tax implications of your plan. I see too many companies who don't handle this correctly and expose themselves to potential liabilities. The biggest mistake I see is where a company simply provides cell phones to employees and pays the monthly bill without any accounting by the cell phone user. This type of arrangement is allowed but the payment is considered W-2 compensation and should be handled accordingly.


Business meals have a their own set of specific rules but generally, the meal must be ordinary and necessary for your business and directly related to or associated with it as well. Having lunch with a co-worker will not pass the necessary test and is therefore not deductible. Most meals are considered personal unless, you are meeting with a client or perspective client AND discussing business.


The IRS has strict rules for substantiating meal and entertainment expenses. For each expense, you must show the date, place, amount, business purpose of the expense, and the business relationship of the person you entertained. Receipts are required for expenses of $75 or more.

The value of accounting

A classmate getting ready to launch a business (www.soupcycle.com), recently asked me about accounting systems. Specifically, what should they do and of course, what will it cost?

I recommended QuickBooks given their size, budget and sophistication. However, while QuickBooks will cost anywhere from $200-$450 for the software depending upon the version, this is really just a fraction of the total investment.

After opening the box and installing the software, the chart of accounts, terms, items, vendors, employees, customers and more must be created in QuickBooks. Transactional systems outside QuickBooks must be designed, tested and implemented so individual transactions ultimately get recorded and summarized properly in the financial statements and other accounting reports.

While all of this costs money, I prefer to think of this as an investment in the efficient operations of the business. A well created accounting system is a valuable intangible asset. It provides a significant level of the internal control environment for a small business. Your accounting system should provide timely and accurate financial reports to help you assess progress, problems and success. A quality financial reporting system should make you more attractive to lenders and investors, all other things being equal and it will save you money when it comes time to prepare your taxes since the data will be easier to work with.

Small business leaders have so many things to think about. Failing to recognize the value and importance of a quality financial reporting system is a costly mistake. You wouldn't start a business without a marketing plan. You shouldn't start a business without an equally robust accounting and financial reporting plan.

How much should you spend on accounting? I don't have a specific number or percentage but the number is larger than many start-ups suspect and is a valuable investment and component of a successful enterprise.

What are you doing with your rebate?

I have been receiving lots of requests from non-profits to donate all or a portion of my rebate check. While I routinely donate 100% of my Oregon kicker refund, I am not planning to do the same with this federal rebate. I may donate some but have yet to be convinced of the connection between my rebate and my charitable giving.

With the Oregon kicker I know that the money I get back comes directly from the state agencies that benefit Oregonians. I always donate my kicker to public schools.

The federal rebate is different. Half the money comes from the military budget and the other half from federal programs. However, given the federal spending and deficits, does this rebate really impact any agency? I don't think so.

I contribute approximately 10 percent of my income to charity and non-profit groups working to make the world a better place. I don't plan to donate more because of this rebate. Instead, I plan to use my rebate to pay down a loan.

What are you doing with your rebate?

The beginning

I met a business associate after work last night and she mentioned how she blogs at work. I love writing and had thought about blogging but never got around to getting started. Today I changed that.

I plan to write about accounting, business and sustainability. As a business advisor, I want to encourage my clients and now my readers (LOL) to be smart, successful and sustainable in all they do.