Home » Articles

Audit-Proof Your Business

Audit found a mistake

Audit-proofing your business requires dedication to the financial paperwork. To have the best outcome for an audit requires a commitment to regularly staying caught up and understanding your tax obligations.

Lagging on the paperwork and disorganization gets business owners in trouble. When business owners take shortcuts or avoid doing paperwork, the mistakes can become a big burden later on.

The best practice to audit-proof your business starts with a knowledgeable accountant and a CPA. Accountants take care of the day-to-day accounting. The CPA is a business partner that will assist your company in staying compliant with tax laws and guide your business planning and growth. Both an accountant and a CPA are very important for audit-proofing your business.

Types of Audits

Internal Audit

Internal audits are performed within the company and may be referred to as a self-audit. A self-audit can be performed at any time during the year. The end of the year is particularly important to discover transactions that may be coded incorrectly or were mistakenly entered into the wrong account. An internal audit assures every account is reconciled before preparing the tax return. It also helps to assure that all documentation is collected to complete the tax return.

External Audit

External Audits assure owners that internal processes are following Generally Accepted Accounting Procedures (GAAP) and industry standards. GAAP principles apply consistent standards to procedures to comply with established rules and regulations.

An external audit helps to identify areas to improve internal controls and regulatory compliance. External audits lend impartial credibility to the accuracy of financial records.

Normal preparation of financial statements by a CPA will not include assurance. The financial statements will not include a formal report to verify the accuracy or completeness of the statements. Financial reports without assurance are intended for the companies internal use.

Assurance

Components of Assurance in Auditing
  • Assurance is obtained by obtaining evidence
  • Highest level of assurance is an audit
  • Level of assurance needed for financing depends on loan size, collateral, and overall risk

Compilation

  • Compiled statements are not audited or certified
  • The compilation report includes a letter from the CPA to make the CPA’s role more apparent
  • If the CPA is not independent, the CPA must disclose the lack of independence
  • Assures financial reports have been prepared following the financial reporting framework
  • Used by lenders for financing small amounts

Review

  • Performed by an independent CPA
  • For higher levels of financing
  • Provides limited assurance

Audit

  • Performed by an independent CPA
  • CPA performs verification and substantiation procedures
  • Highest level of assurance
White hard bound audit report

Tax Audit

A tax return may be selected randomly for an audit or an audit may result because of a “red flag.”

Each year a certain number of returns are randomly chosen to be audited; they are selected by “luck of the draw.”

The IRS uses formulas that compare your return against other returns. The formula looks for normal ranges. If a deduction is not within a range for your business industry and size, the return will be flagged for a manual review.

Reasons your return may be flagged:

  • Missing or mismatched paperwork
  • Calculation and data entry errors
  • Rounded numbers
  • Self-employment
  • Low income with high deductions
  • Claiming losses several years in a row

Your return may also be selected because of an audit of another taxpayer’s return if there are transactions connected to your tax return.

The IRS looks for inconsistencies by linking payer records with the recipient records through 1099s. To audit-proof your business, always report all income.

Audit by Letter

IRS letters are sent out about 6 months after the tax returns are filed. The IRS mails the audit letter. They never communicate by email or through a phone call. If you question the legitimacy of an IRS letter, contact a tax preparer or a local IRS office to verify that is authentic. The IRS will send a letter that will have a notice number beginning with CP or a letter-number beginning with LTR located on the top or bottom right-hand corner. You can also contact the IRS at 1-800-829-1040.

Types of IRS Audits

The IRS Building in Washington DC

The IRS has three general types of audits:
  •  Adjustment letters that are sent for miscalculations
  •  Correspondence audit that will request additional documentation
  •  Examination audit that looks closer at records

A CP2000 notice isn’t an audit; however, the process is the same. A CP2000 notice is used to inquire about underreported income. The IRS has information showing that you haven’t reported all income on your tax return. Often, it’s for a 1099-NEC, if you are self-employed.

Responding to IRS Audit Notices

IRS notices require a quick response. Don’t ignore IRS notices, respond promptly.

If the notice is correct and you agree, then make the payment or payment arrangements quickly to avoid interest and penalties.

If you do not agree , the notice should be discussed with your CPA to determine how to respond or to determine if representation is needed. Documentation or a letter of explanation may clear up the issue if the evidence is provided to support your figures.

Always send the IRS copies, never send original documents.  

In-Person Interview
Audit-proofing the financials
In-Person Audits
  • Field audits take place at the taxpayer’s home, place of business, or accountant’s office
  • In-Office audits take place at an IRS office
Audit Etiquette

Prepare for the audit. Cooperate with the auditor and provide everything the audit correspondence asks for.

Have documents readily accessible. Neatness helps convince auditors that you are attempting to keep organized and accurate records.

Organize records in a logical order. Keep receipts flat and by date. Paper clip small receipts together to keep from losing. Organize checks by check number and invoices by invoice numbers.

Provide additional backup records with logs and calendars. Auditors will disallow deductions if documentation isn’t provided.

Treat the experience as an opportunity to improve your business.

After the Audit
  • Keep track of correspondence with tax agencies.
  • Send correspondence by certified mail.
  • Stay compliant by filing on time.
Burdon of Proof

All expenses must be ordinary and necessary business expenses. More importantly, can you provide a business purpose for the expense? To audit-proof your business, each transaction must have a business reason.

  • Ordinary expense – common and accepted for your industry
  • Necessary expense – helpful and appropriate
Obtain, maintain, and retain records
  • Records are now commonly available through online accounts
  • POS terminals make it easy to retrieve lost and missing receipts from the vendor
Match documentation with every transaction on the bank and credit card statements
  • An invoice for every income deposit
  • A receipt for every expense
Reconcile:
  • Bank accounts
  • Processor accounts
  • Savings, brokerage, reserve, trust accounts
  • Credit card accounts
  • 1099’s with income
  • Income records with bank statements
  • Sales tax
  • Payroll taxes

A few more tips to audit-proof your business:

  • Never mix personal and business transactions
  • Avoid cash transactions
  • Use accounting software
  • Use a mileage app
  • File all required 1099’s and W-2s
  • Know the rules for deductions
  • Keep backup records

Audit-proofing your business requires paying attention to the financials and a partnership with an expert account and CPA. Using this approach to your accounting will provide assurance of accuracy.

Home » Articles

Cargo Trailer Theft

Enclosed cargo trailer with hitch lock on tongue

Contractors know that thieves like to steal cargo trailers, and protecting them is a constant concern. Whatever may be behind the four walls in a cargo trailer is a target and a challenge to protect.

Protecting Cargo Trailers

Slowing down cargo trailer theft requires diligence and multiple layers of protection. Thieves watch for vulnerabilities and have ways to cover their tracks. Thieves may pick locks, steal cameras, disconnect lights, or attempt to remove identifiers from trailers.

Create a theft prevention policy and procedures

  • Assign tools, if you have a crew
  • Limit (avoid) loaning and borrowing
  • Use lists to keep track of tools
  • Establish a pack up process
  • Establish a lock-up policy

Set up layers of protection

  • Place a lock on the hitch as well as the doors
  • Put cameras on the trailer and at fixed locations pointing to the trailer
  • Enhance lighting
  • Use anti-theft equipment (wheel locks, coupler locks, GPS tracking devices)
  • Make access to the hitch difficult, such as parking a vehicle in front of the trailer
  • Remove a wheel if the trailer will be parked for an extended period
  • Hide trailers from traffic and walkways
  • Use buildings and tall fences to your advantage
  • Secure the trailer to a fixed object or use an anchor, if possible
  • Use security fencing, if possible

Identification

  • License and register trailer
  • Advertise business with decals and lettering to make identification easy
  • Weld business name and number on the trailer near the hitch
  • Use fluorescent paint for marking; it is difficult to cover with other paints

Insurance on Cargo Trailers

Auto insurance covers trailers during towing; otherwise, there is no coverage for the trailer unless the trailer is listed on an automobile policy.

Insurance on Tools in Cargo Trailers

Commercial property insurance is coverage for equipment inside a building. It does not cover equipment that moves around from one location to another.

Inland marine insurance or equipment floater insurance, also known as contractor tool and equipment insurance, is optional insurance that can be added for the loss of tools and equipment that move from one site to another location. It does not cover stationary tools. Inland marine insurance has a deductible and a coverage limit. This is separate insurance from the business policy. Inquire with an insurance agent to add coverage for tool and equipment transported in a cargo trailer.

I recently received a quote, which conveniently works well for calculating. The premium was $500 a year with a $500 deductible for coverage up to $5,000. Here is an example of how a loss payout works. We could all assume an insurance company would not renew the policy if claims were turned in four years in a row, and we certainly hope no one would have that type of luck.

 PremiumDeductibleCoverageLossPayout
Year 1$500$500$5,000$5,000$4,500
Year 2$500$500$5,000$7,000$4,500
Year 3$1,000$500$10,000$2,000$1,500
Year 4$1,000$500$10,000$12,000$9,500
Total$3,000  $26,000$20,000

Tools are listed as either unscheduled coverage or scheduled coverage, based on the tool’s value.

  • Unscheduled coverage – blanket coverage for tools with a value of under $1,000 – $1,500
    • Has a set coverage limit and deductible
    • Most insurance companies only offer cash value for unscheduled coverage
  • Scheduled coverage – the policy will list each item and its value
    • Cash value – pays on the depreciated value
    • Replacement value – pays to repair or replace at the actual cash value

Policy Exclusions

  • War, government seizure, nuclear hazard
  • Pollution damage
  • Changes in temperature or humidity
  • Loss of documents
  • Strikes
  • Earthquakes and floods
  • Wear and tear

Policy Endorsements

  • Flood and earth movement
  • Electrical and power supply disturbance coverage
  • Upgrade value
  • Loss of income

Recordkeeping

  • Keep an itemized tool inventory recording purchase date, name, serial number, and purchase price
  • Mark equipment with the business name and phone number
  • Take pictures of the inside, both empty and filled with tools
  • Take photos of each side of the outside of the trailer
  • Weld or engrave the business name and phone number on the frame

Act Quickly if Your Cargo Trailer is Stolen

The quicker news spreads about the theft, the more potential for covering the stolen trailer. The chances of recovering a stolen trailer and contents are best within the first 48 hours after the loss.

If serial numbers on tools are provided to police, police are able to search pawn shop databases.

  • Immediately report the loss to the police
  • Contact your insurance company
  • Appeal to social media
  • Search locally lost and found Facebook groups
  • Monitor Facebook marketplace and Craigslist

Tracing Cargo Trailers

Some states don’t register trailers, and some states use a sticker on the tongue rather than a license plate. Even though licensed, thieves can remove the license plate quickly and sell the trailer. Reselling stolen trailers is very easy because there isn’t a national stolen trailer registration like vehicles.

Recovering from a Stolen Cargo Trailer

Time is money. Stolen equipment is a setback financially for replacing tools and losing work time. Even with insurance, the loss will not be fully covered, and it can take some time to receive payment from the insurance company.

The loss of everything a person has worked for is devastating and feels violating. It is understandable to have a difficult time with this setback. Well-meaning people may question how it happened and why this or that wasn’t done. They may even suggest that you give it up. While this is a setback, it is difficult but not impossible to bounce back.

The ability to recover from a loss is dependent on your ability to secure financing. You are in a much better position to recover with a high credit score, assets, and savings.

Loans

Loans, this one is tricky. Banks will look at the financial health of a business. The banks look for profitability and at credit scores. SBA does not offer loans for the replacement of stolen equipment. 

Credit Cards

Be careful with credit cards. Credit cards are an easy go-to for quick money. However, credit cards with high-interest rates should be reserved for emergencies and considered after other options have been exhausted unless they can be paid back quickly.

Crowdfunding

Crowdfunding allows the community to support and help you get up and going again. Gofundme is a personal fundraising site. Grab attention with a well-written appeal. Let clients, friends, and family know about your crowdfunding effort and ask them to pass along your request through their social media.

Yard sales

When you started your business or even before that, you may watched yard sales.  As you know, this can be an easy way to pick up hand tools and the occasional corded tool. Great finds can also be found at estate sales and online marketplaces. 

Friends, Family, Clients

You may be amazed at the generosity of others. Those around you may not realize the prediction you are in and may be willing to help get you to get up and going again. Let others know, share your story. You may be able to borrow tools temporarily, or someone may let go of their old tools. Friends or family may have resources available to provide you with a short-term loan. Clients may even be willing to put a deposit towards future work.

Home » Articles

Start of the Year for Your Construction Company

Are you ready to start the new year for your construction company? At the top of the list for the start of the year is getting the tax preparation done. If you have employees, you have additional tax deadlines.

Happy New Year written in block form on graph paper
Construction New Year

Important Tax Deadlines

January 15

  • 4th Estimated Tax Payment Due

January 31

  • W-2’s, W-3’s Due
  • Form 940 Due
  • Form 945 Due
  • 1099-NEC, Form 1096 Due

February 28

(March 31 for electronic filing)

  • 1099-Misc, Form 1096 Due

March 15

  • Partnership Returns Due
  • S-Corporation Returns Due

April 15

  • C-Corporation Returns Due
  • 1st Estimated Tax Payment Due

Accountant’s Responsibility

At the start of the year, an accountant’s responsibility is to compile all of the company’s transactions for the year into reports for tax preparation. All of the income and expenses are reconciled to bank statements. Accountants have a tight timeline between when the statements are available and when taxes are filed.  

The accountant is responsible for:

  • Entering Transactions
  • Reconciling Statements
  • Making Adjusting Entries
  • Closing out the Year
  • Compiling Reports
  • Payroll and Payroll Reports

Tax Preparation

After the accountant has made entries and reconciled statements, a review of the accuracy should occur before tax preparation.

There are many options for tax preparation. Tax preparation can be self-prepared, a tax service can be used, or a CPA can prepare taxes. Tax preparation software provides a reasonably priced option for a sole proprietor. However, construction involves complex tax issues, and construction companies will benefit from the expertise of a professional.

Most tax preparers provide a checklist of items needed to prepare the tax return. Here’s a general list:

  • Previous Tax Return
  • EIN, Social Security Numbers
  • Year-End Income Statement and Balance Sheet
  • Year-End Banking and Credit Card Account Statements
  • Vehicle Information
    • Business Use, Mileage Totals
    • Loan Documents
  • Equipment Information
    • Loan Documents
    • Prior Depreciation
  • Sales of Assets
  • Payroll Summary, Payroll Tax Forms
  • 1099s
  • Estimated Tax Payments Made
  • Home Office Information

Year-End Tasks

By now, the end-of-the-year tasks should be completed. Here’s a quick reminder of the tasks on the list.

  • Review Accounts
  • Set up Tax Appointment
  • Make a Budget Projection
  • Clean up Receivables
  • Purge and File Paperwork
  • Inventory Tools and Equipment
  • Review Mileage Records
  • Review Subcontractor Status and Insurance Certificates
  • Clean up Punch Lists and Open Permits
  • Touch Base with Clients

With those tasks out of the way, you can concentrate on the upcoming year.

Kick-off the New Year

The end of the year was about getting prepared for taxes. The beginning of the year is an excellent time to organize and prepare for the busy construction season.

  • Review Contract Terms
  • Update Employee Manual
  • Perform Employee Reviews
  • Hire Employees
  • Improve Safety Program
  • Line up Subcontractors
  • Marketing

Review Contract Terms

Over time the size and type of projects may change, thus resulting in the need for revising contracts. It’s always important to watch for situations that may affect the terms of your agreements. Contracts are vital to construction companies. In case something was missed during the year, the start of the year for your construction company is a great time to review contracts to determine if the wording meets all the legal protections your company needs.

Update Employee Manual

The employee manual has policies and procedures that change because of how the company operates or law changes. Laws are constantly changing, and the start of the year is an excellent time to review the employee manual to reflect the changes. 

If the company changes employee benefits or plans to make changes, revise the employee manual to reflect benefit changes.

Perform Employee Reviews

Employee reviews are typically done at specific milestones and anniversaries. Be sure to add the dates to your calendar for reviews. Provide the payroll manager with pay increases when they occur.

Hire Employees

You celebrated the accomplishments, looked at the budget, and planned for the upcoming year at the end of the year. If your construction company is in a growth and expansion stage, start planning for the next hire. Along with the employee manual, update the employee welcome packet and onboarding materials.

Next comes recruiting and training. A successful recruiting effort is an ongoing process. Employee retention in the construction industry tends to look like a revolving door. Implement thoughtful recruiting programs and provide quality training. Offer a career path rather than “just a job.” Providing regular reviews and opportunities for career growth are valuable tools for retaining employees.

Improve Safety Program

Improve your safety program by making it a priority. While planning for the year ahead, lay out a calendar of toolbox talks, appoint a safety coordinator and implement the Safe + Sound program. Safe + Sound is a year-round program with week-long events in August.

Line Up Subcontractors

Many subcontractors and general contractors have worked well together for years, but change is inevitable. Sooner or later, the general contractor will need to widen the net and look for subcontractors. 

Word spreads pretty quickly when a contractor is hiring subcontractors. Subcontractors often are the ones to make the call to the general contractor. Subcontractors can be found through online searches, trade organizations, or hosting an open house.

Develop a process for qualifying subcontractors. Consider compatibility for current projects and future projects.

Subcontractor Screening

Scalability
  • Does the subcontractor have the capacity to provide labor and equipment?
  • Can the subcontractor schedule labor when your schedule needs it?
Experience
  • Does the subcontractor have adequate experience?
  • What is the quality of the subcontractor’s work?
Portfolio
  • Has the subcontractor worked on similar projects?
  • Does the subcontractor have recommendations?
Licensing
  • Has the subcontractor obtained proper licensing?
  • Have there been any violations?
Insurance and Bonding
  • Does the subcontractor have adequate liability insurance?
  • Is the subcontractor bonded?
Safety Record
  • Does the subcontractor have a safety program?
  • Does the subcontractor carry worker’s compensation insurance?
  • What is the accident history of the subcontractor?
Marketing

Construction companies’ branding and marketing can be done on a reasonably low budget. Facebook and Instagram are perfect, as long as the pictures are good quality and captioned. Watch for comments and respond professionally. People love short videos.

A website is essential for high-end projects, and pictures must look professional. A website can be relatively simple as long as it has a gallery of projects and a well-written “about us.” It requires a description of the type of projects you work on and provides contact information.

Novelty items like pens, t-shirts, and stickers are fun to advertise. Yard signs and advertising on vehicles and trailers are also affordable ways to promote.

Looking Forward

Before you know it, the start of the year will ramp up to a busy spring. Start now to plan for a successful building season. It won’t seem like a long time, and you’ll be looking back on this year, preparing for the next one.

Item added to cart.
0 items - $0.00