October 2021 Newsletter

Marginal vs. Effective Tax Rates

Understanding marginal and effective tax rates is important for tax planning purposes; however, many taxpayers don’t fully understand the differences. Let’s take a closer look:

Marginal Tax Rate

The United States has a progressive tax system. The more money you earn, the higher your tax rate is and the more taxes you pay to the IRS. In 2021, there are seven tax brackets ranging from 10% to 37%. If you earn $35,000 a year as a single filer, you are in the 12% tax bracket. If you make $520,000 a year as a single filer, you are in the 37% tax bracket. These brackets represent the percentage of taxes you pay based on your taxable income and are referred to as marginal tax rates. When someone says they are in the 35% tax bracket, this is typically what they are referring to – and this is where the confusion begins.

For many taxpayers, their income is the same as their earnings from wages; however, taxpayers should note that income from capital gains may be taxed differently. Short-term capital gains are generally taxed as ordinary income subject to the seven tax brackets mentioned above. Long-term capital gains, however, are taxed at 0%, 15%, and 20%.

Due to the way the tax code is set up and because marginal tax rates apply to each additional level of income above your tax bracket’s income limit, it is not as straightforward as it seems. If you earn $100,000 and are in the 24% tax bracket, it doesn’t mean that you pay a 24% tax on your earned income (0.24 x $100,000 = $24,000).

To illustrate how this works, let’s look at the following example for a single taxpayer earning $100,000 of annual income in 2021 (i.e., filing a tax return in April 2022). The amount of tax owed breaks down as follows:

• 10% Bracket: ($9,950 – $0) x 10% = $995.50
• 12% Bracket: ($40,525 – $9,950) x 12% = $3,669.00
• 22% Bracket: ($86,375 – $40,525) x 22% = $10,087.00
• 24% Bracket: ($100,000 – $86,375) x 24% = $3,270.00

In the example above, the marginal tax rate (tax bracket) on $100,000 of income is 24%, but the effective tax rate is closer to 18% ($18,021.50/$100,000) – without taking any deduction that reduce taxable income.

Effective Tax Rate

The effective tax rate is the actual amount of federal income taxes paid on a taxpayer’s taxable income and more accurately represents the amount of tax most people pay. The effective tax rate does not include state taxes and local taxes, FICA taxes, or self-employment tax.

Many taxpayers take advantage of tax credits and deductions that reduce taxable income, such as the standard deduction, tax-deductible contributions to a retirement or pension plan, health savings account, tax credits for dependent children, and charitable contributions.

Calculating your effective tax rate is relatively simple: Divide your total tax liability by your gross (before tax) annual income. For example, if you made $100,000 (single filer), took the standard deduction of $12,500 in 2021, reducing your income to $87,450, and paid $15,009.50 in tax, the effective tax rate is 15 percent even though you are in the “24%” tax bracket.

Questions?

If you feel like too much of your hard-earned money goes straight to the IRS instead of your bank account, please call the office to learn more about tax planning strategies that could save you money.

Small Business: Tips for Ensuring Financial Success

Can you point your company in the direction of financial success, step on the gas, and then sit back and wait to arrive at your destination? Probably not.

While you may wish it was that easy, the truth is that you can’t let your business run on autopilot and expect good results. Every business owner knows you need to make numerous adjustments along the way. So, how do you handle the array of questions facing you? One way is through cost accounting.

Cost Accounting Helps You Make Informed Decisions

Cost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions – raw materials, labor, inventory, and overhead, among others.

Cost accounting differs from financial accounting because it’s only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.

Cost accounting allows you to understand the following:

Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?

Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.

Budgeting. You can’t create an effective budget if you don’t know the real costs of the line items.

Pay Attention to Fixed and Variable Costs

To monitor your company’s costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.

Fixed costs. Fixed costs do not fluctuate with changes in production or sales and include:

• rent
• insurance
• dues and subscriptions
• equipment leases
• payments on loans
• management salaries
• advertising

Variable costs. Variable costs do change with variations in production and sales. Variable costs include:

• raw materials
• hourly wages and commissions
• utilities
• inventory
• office supplies
• packaging, mailing, and shipping costs

Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company’s functioning.

Setting up a Cost Accounting System

If you’d like to understand the ins and outs of your business better and create sound guidance for internal decision making, consider setting up a cost accounting system. If you need assistance with this or any other matter related to ensuring the financial success of your business, don’t hesitate to call the office to schedule a consultation.

Defer Capital Gains Using Like-Kind Exchanges

If you’re a savvy investor, you probably know that you must generally report as income any mutual fund distributions, whether you reinvest them or exchange shares in one fund for shares of another. In other words, you must report and pay any capital gains tax owed.

But if real estate’s your game, did you know that it’s possible to defer capital gains by taking advantage of a tax break that allows you to swap investment property on a tax-deferred basis?

What Is Section 1031?

Named after Section 1031 of the tax code, a like-kind exchange generally applies to real estate and was designed for people who wanted to exchange properties of equal value. If you own land in Montana and trade it for a shopping center in Rhode Island, as long as the values of the two properties are equal, nobody pays capital gains tax even if both properties may have appreciated since they were originally purchased.

Section 1031 transactions don’t have to involve identical types of investment properties. You can swap an apartment building for a shopping center or a piece of undeveloped raw land for an office or building. You can even swap a second home that you rent out for a parking lot.

There’s also no limit as to how many times you can use a Section 1031 exchange. It’s entirely possible to roll over the gain from your investment swaps for many years and avoid paying capital gains tax until a property is finally sold. Keep in mind that gain is deferred but not forgiven in a like-kind exchange, and you must calculate and keep track of your basis in the new property you acquired in the exchange.

Section 1031 is not for personal use. For example, you can’t use it for stocks, bonds, and other securities, or personal property (with limited exceptions such as artwork).

Properties of Unequal Value

Let’s say you have a small piece of property, and you want to trade up for a bigger one by exchanging it with another party. You can make the transaction without having to pay capital gains tax on the difference between the smaller property’s current market value and your lower original cost.

That’s good for you, but the other property owner doesn’t make out so well. Presumably, you will have to pay cash or assume a mortgage on the bigger property to make up the difference in value. In the tax trade, this is referred to as “boot,” and your partner must pay capital gains tax on that part of the transaction.

To avoid that, you could work through an intermediary who is often known as an escrow agent. Instead of a two-way deal involving a one-for-one swap, your transaction becomes a three-way deal.

Your replacement property may come from a third party through the escrow agent. Juggling numerous properties in various combinations, the escrow agent may arrange evenly valued swaps.

Under the right circumstances, you don’t even need to do an equal exchange. You can sell a property at a profit, buy a more expensive one, and defer the tax indefinitely.

You sell a property and have the cash put into an escrow account. Then the escrow agent buys another property that you want. They get the title to the deed and transfers the property to you.

Mortgage and Other Debt

When considering a Section 1031 exchange, it’s important to consider mortgage loans and other debt on the property you are planning to swap. Let’s say you hold a $200,000 mortgage on your existing property but your “new” property only holds a mortgage of $150,000. Even if you’re not receiving cash from the trade, your mortgage liability has decreased by $50,000. In the eyes of the IRS, this is classified as “boot,” and you will still be liable for capital gains tax because it is still treated as “gain.”

Advance Planning Required

A Section 1031 transaction takes advance planning. You must identify your replacement property within 45 days of selling your estate. Then you must close on that within 180 days. There is no grace period. If your closing gets delayed by a storm or by other unforeseen circumstances, and you cannot close in time, you’re back to a taxable sale.

Find an escrow agent specializing in these types of transactions and contact your accountant to set up the IRS form ahead of time. Some people sell their property, take the cash, and put it in their bank account. They figure that all they have to do is find a new property within 45 days and close within 180 days, but that’s not the case. As soon as “sellers” have cash in their hands or the paperwork isn’t done right, they’ve lost their opportunity to use this provision of the code.

Personal Residences and Vacation Homes

Section 1031 doesn’t apply to personal residences, but the IRS lets you sell your principal residence tax-free as long as the gain is under $250,000 for individuals ($500,000 if you’re married).

Section 1031 exchanges may be used for swapping vacation homes but present a trickier situation. Here’s an example of how this might work. Let’s say you stop going to your condo at the ski resort and instead rent it out to a bona fide tenant for 12 months. In doing so, you’ve effectively converted the condo to an investment property, which you can then swap for another property under the Section 1031 exchange.

However, if you want to use your new property as a vacation home, there’s a catch. You’ll need to comply with a 2008 IRS safe harbor rule that states in each of the 12-month periods following the 1031 exchange, you must rent the dwelling to someone for 14 days (or more) consecutively. In addition, you cannot use the dwelling more than the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented out for at a fair rental price.

You must report a section 1031 exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred. If you do not precisely follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

Help is Just a Phone Call Away

While they may seem straightforward, like-kind exchanges can be complicated, and you need to be careful of all kinds of restrictions and pitfalls. If you’re considering a Section 1031 exchange or have any questions, don’t hesitate to call.

Use These Strategies To Pass on Wealth to Heirs

Individuals with significant assets should take advantage of proven tax strategies such as gifting and direct payments to educational institutions to transfer wealth to heirs tax-free, as well as minimize estate taxes. Additional opportunities are available as well, thanks to low interest rates and a volatile stock market. Let’s take a look at some of them:

Gifting

The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income to heirs. For example, in 2021, you can make annual gifts of up to $15,000 ($30,000 for a married couple) to as many donees as you desire. The $15,000 is excluded from the federal gift tax so that you will not incur gift tax liability. Furthermore, each $15,000 you give away during your lifetime reduces your estate for federal estate tax purposes. However, any amounts above this limit will reduce an individual’s federal lifetime exemption and require filing a gift tax return.

Direct Payments

Direct payments for medical or educational purposes indirectly shift income to heirs; however, it only works if the payments are made directly to the qualifying educational institution or medical provider. This strategy allows you to give more than the annual gifting limit of $15,000 per donee. For example, if you’re a grandparent, you can pay tuition directly to your grandchild’s boarding school, college, or university. Room and board, books, supplies, or other nontuition expenses are not covered. Similarly, they can make direct payments to a hospital or medical provider, but medical expenses reimbursed by insurance are not covered, however.

Loans to Family Members

This strategy works by loaning cash to family members at low interest rates, which is then invested with the goal of reaping significant profits down the road. With mid and long-term applicable federal rates (AFR) rates for October 2021, as low as 0.91 and 1.72 percent, respectively, heirs can lock in these rates for many years – three to nine years (mid-term) and nine to more than 20 years (long-term).

Grantor Retained Annuity Trust (GRAT)

Another relatively low-risk strategy is the grantor retained annuity trust (GRAT), where the donor transfers assets to an irrevocable trust and receives an annuity payment back from the trust each year. This strategy enables heirs to profit from their investments long-term if returns are higher than the IRS interest rate. Now that IRS interest rates are so low, this is easier than ever to do. In October 2021, the interest rate used to value certain charitable interests in trusts such as the GRAT is 1.00 percent.

Roth IRA Conversions

Contributions to a traditional IRA are made pre-tax, which means distributions are considered taxable income; however, the tax is paid upfront with a Roth IRA, and distributions are completely exempt from income tax. This feature makes converting a traditional IRA to Roth IRA and rolling it over to an heir an attractive option, especially during a financial crisis. The conversion is treated as a rollover where the trustee of the traditional IRA is directed to transfer an amount from the traditional IRA to the trustee of the Roth IRA. The account owner pays income tax on the amount rolled over in the year the account is converted, which allows the account to accumulate assets tax-free and future distributions are tax-free.

To learn more about these and other tax strategies related to wealth management, please call the office and speak to a tax professional who can assist you.

If You Receive an IRS Letter or Notice

The IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices can be dealt with without calling or visiting an IRS office. Here’s what you need to know about IRS notices and letters:

Reasons You Might Receive an IRS Notice or Letter

The IRS sends notices and letters for a number of reasons such as:

• You have a balance due.
• You are due a larger or smaller refund.
• We have a question about your tax return.
• We need to verify your identity.
• We need additional information.
• We changed your return.
• We need to notify you of delays in processing your return.

Each Notice or Letter Contains Valuable Information

It is very important that you read the IRS notice or letter carefully. If the IRS changed your tax return, compare the information provided in the notice or letter with the information in your original return.

Explaining the Reason for the Contact

The notice will explain why it was sent and will also give you instructions on how to handle the issue. If your notice or letter requires a response by a specific date, there are two main reasons you’ll want to comply:

• To minimize additional interest and penalty charges.
• To preserve your appeal rights if you don’t agree.

Usually No Reply Is Necessary

If you agree with the correction to your account, then usually no reply is necessary – unless a payment is due or the notice directs otherwise.

Respond as Requested

If you disagree with the correction the IRS made, it is still important to respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider along with the bottom tear-off portion of the notice. Mail the information to the IRS address located in the upper left of the notice. Allow at least 30 days for a response.

Pay as Much as You Can

If you can’t pay the full amount you owe, you should pay as much as you can to try to avoid or reduce penalties incurred. You can pay online or apply for an Online Payment Agreement or Offer in Compromise. If you need help with either of these, please call the office.

Usually No Need to Visit an IRS Office

Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right of the notice. Have a copy of your tax return and the correspondence available when you call to help the IRS respond to your inquiry.

Keep a Copy of Notices and Letters

It’s important to keep a copy of all notices or letters with your tax records. You may need to reference these documents at a later date.

IRS Notices and Letters Are Sent by Mail

The IRS does not correspond by email about taxpayer accounts or tax returns. If you search the IRS website for your notice or letter and it doesn’t return a result – or you believe the notice or letter looks suspicious – contact the IRS at 800-829-1040 or report it on the Report Phishing page on IRS.gov. You can find the notice (CP) or letter (LTR) number on either the top or the bottom right-hand corner of your correspondence.

Contact Phone Number Is Provided

A contact phone number is provided on the top right-hand corner of the notice or letter. Typically, you only need to contact the IRS if you don’t agree with the information, have a balance due, or need to send additional information.

Questions or Concerns About IRS Notices?

As always, don’t hesitate to call if you have questions or concerns about IRS notices.

Federal Per Diem Rates Updated for FY 2022

Per diem rates have been updated for FY 2022 and are effective October 1, 2021. These allowances substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home and include lodging, meal, and incidental expenses, as well as meal and incidental expenses only.

Taxpayers are not required to use a method described in this revenue procedure. Instead, they may substantiate actual allowable expenses provided they maintain adequate records.

As a reminder, the TCJA suspended the miscellaneous itemized deduction that employees could take for non-reimbursed business expenses. Certain individuals such as the self-employed, Armed Forces reservists, and qualified performing artists that deduct unreimbursed expenses for travel away from home may still use per diem rates for meals and incidental expenses, or incidental expenses only.

Special meal and incidental expenses rates for taxpayers in the transportation industry are $69 for any location in the continental United States and $74 for any locality outside the continental U.S. The rate for the incidental-expenses-only deduction is $5 per day and applies to any travel locale inside or outside the continental United States.

Per diem rates and the list of high-cost localities for purposes of the high-low substantiation method are also updated. For travel to any high-cost locality, per diem rates are $296. The per diem rate is $202 for travel to any other locality within the continental U.S. The amount that is treated as paid for meals is $74 for travel to any high-cost locale and $64 for travel to any other locality within the continental U.S. Travel to areas on the list of high-cost localities have a federal per diem rate of $249 or more.

Please call the office if you have any questions about per diem rates.

IRAs: Terms to Know

IRAs, or Individual Retirement Arrangements, provide tax incentives for people to make investments that can provide financial security for their retirement. To help people better understand this type of retirement savings account, here’s a basic overview of terms to know:

Contribution. The money that someone puts into their IRA. There are annual limits to contributions depending on their age and the type of IRA. Generally, a taxpayer or their spouse must have earned income to contribute to an IRA.

Distribution. The amount that someone withdraws from their IRA.

Withdrawals. Taxpayers may face a 10% penalty and a tax bill if they withdraw money before age 59 ½ unless they qualify for an exception.

Required distribution. There are requirements for withdrawing from an IRA:

• Someone generally must start taking withdrawals from their IRA when they reach age 70 1/2.
• Per the 2019 SECURE Act, if a person’s 70th birthday is on or after July 1, 2019, they do not have to take withdrawals until age 72.
• Special distribution rules apply for IRA beneficiaries.

Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.

Roth IRA. This type of IRA that is subject to the same rules as a traditional IRA but with certain exceptions:

• A taxpayer cannot deduct contributions to a Roth IRA.
• Qualified distributions are tax-free.
• Roth IRAs do not require withdrawals until after the death of the owner.

Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.

Simplified Employee Pension. This is known as a SEP-IRA. An employer can make contributions toward their own retirement and their employees’ retirement. The employee owns and controls a SEP.

Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.

It’s essential to understand the tax implications of your retirement planning choices. If you haven’t started saving for retirement, call the office and speak to a tax professional who will help you figure out a plan that works for you.

E-Signatures Extended for Many Tax Forms

To help reduce the burden to taxpayers brought about by the coronavirus pandemic, the use of electronic or digital signatures on certain paper forms they normally cannot file electronically have been extended through December 31, 2021. Let’s take a look at what this means for taxpayers:

Types of acceptable electronic signatures

An electronic signature is a way to get approval on electronic documents. There are a number of ways to do this. Acceptable electronic signature methods include:

1. A typed name typed on a signature block
2. A scanned or digitized image of a handwritten signature that’s attached to an electronic record
3. A handwritten signature input onto an electronic signature pad
4. A handwritten signature, mark or command input on a display screen with a stylus device
5. A signature created by a third-party software

The type of technology a taxpayer must use to capture an electronic signature is not specified; the IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as tiff, jpg, jpeg, pdf, Microsoft Office suite or Zip.

E-signatures on certain paper-filed forms

Electronic or digital signatures are typically allowed on paper forms that cannot be filed using IRS e-file. Some of these forms are listed below. For a complete list, please call the office.

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;
• Form 1120-H, U.S. Income Tax Return for Homeowners Associations;
• Form 1120-L, U.S. Life Insurance Company Income Tax Return;
• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;
• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;
• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);
• Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;
• Form 1128, Application to Adopt, Change or Retain a Tax Year;
• Form 2678, Employer/Payer Appointment of Agent;
• Form 3115, Application for Change in Accounting Method;
• Form 4421, Declaration – Executor’s Commissions and Attorney’s Fees;
• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;
• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;
• Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;
• Form 8283, Noncash Charitable Contributions;
• Form 8802, Application for U.S. Residency Certification;
• Form 8832, Entity Classification Election;
• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent.

Closing Your Business: A Tax Checklist

Many small businesses have closed due to COVID-19. If yours is one of them, you should be aware that there is more to closing a business than laying off employees, selling office furniture, and closing the doors – you must also take certain actions as required by the IRS to fulfill your tax obligations. For example, if you have employees, you must file final employment tax returns as well as make final federal tax deposits of these taxes. You will need to attach a statement to your return listing the name and address of the person that keeps the payroll records (this could be you or another person) as well. If you are disposing of business property, exchanging like-kind property, and/or changing the form of your business, you must file a return to report these actions too. You must also file an annual tax return for the year you go out of business.

Depending on your type of business structure, you may need to take the some or all of the following steps:

• File final federal tax deposits
• File final quarterly or annual employment tax form (Forms 94x)
• Issue final wage and withholding information to employees (Form W-2, Wage and Tax Statement
• Report information from W-2s issued (Form W-3, Transmittal of Income and Tax Statements)
• File final tip income and allocated tips information return (Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips)
• Report capital gains or losses
• Report partner’s/shareholder’s shares (Schedules K-1)
• File final employee pension/benefit plan
• Issue payment information to sub-contractors (Form 1099-MISC, Miscellaneous Income)
• Report information from 1099s issued Form 1096, Annual Summary and Transmittal of U.S. Information Returns)
• Report corporate dissolution or liquidation
• Consider allowing S corporation election to terminate
• Report business asset sales
• Report the sale or exchange of property used in your trade or business.

If you find yourself in the position of having to close your business, help is just a phone call away.

Reporting Gambling Income and Losses

If you aren’t in the trade or business of gambling, you should be aware that gambling winnings are fully taxable and must be reported as income on your tax return. Gambling income includes but isn’t limited to winnings from lotteries, raffles, horse races, and casinos, and also includes cash winnings and the fair market value of prizes, such as cars and trips. Here is what you need to know:

Gambling Winnings

If you receive certain gambling winnings or have any gambling winnings subject to federal income tax withholding, you will be issued a Form W-2G, Certain Gambling Winnings. Gambling winnings are reported as “Other Income” on Schedule 1 of Form 1040 or Form 1040-SR. Winnings that aren’t reported on a Form W-2G should also be included. Depending on the amount of gambling winnings, you may be required to pay an estimated tax on that additional income. For additional information on withholding gambling winnings, please contact the office.

Gambling Losses

You may deduct gambling losses only if you itemize your deductions on Schedule A (Form 1040) and have kept a record of your winnings and losses. The amount of losses you deduct can’t be more than the amount of gambling income you reported on your return. You can claim your gambling losses up to the amount of winnings as “Other Itemized Deductions.”

Nonresident Aliens

As a nonresident alien of the United States for income tax purposes and you must file a tax return for U.S. source gambling winnings, using Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Generally, nonresident aliens of the United States who aren’t residents of Canada can’t deduct gambling losses.

Recordkeeping

To deduct your losses, you must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses. If you need assistance with this, don’t hesitate to call.

How To Use Quickbooks’ New Customer Groups

QuickBooks has a new set of tools that can help you deal with what is probably one of your most pressing problems: getting customers to pay. Here’s how to use this new feature:

Creating Your Groups

QuickBooks has added an entry in the Customers menu to take you to these new tools. Go to Customers | Payment Reminders | Manage Customer Groups. In the window that opens, click Create Customer Group. QuickBooks then walks you through a three-step wizard. First, you enter a Name for your group in the first field of the Group details window. We’ll call ours “California High Balance.” If you’d like you can add a Description. Click Next.

In the Select fields window, you’ll set the filters for the group. If you’d rather open your complete list of customers and choose the ones you want manually, you can skip this step. For our example, we’ll define a group by choosing:

• One or more Fields. We want to narrow the group down to California customers. Click the down arrow in the Field box and select State.
• An Operator. Here, you’d select Equals.
• A Value. QuickBooks will display a list of states. Click the box in front of CA. If you’d like to include more states, you can do so. When you’re done, click Add. You’ll see your Selected fields in the box below.

Figure 1: You can set the parameters for your group by selecting multiple fields, operators, and values.

We want to narrow the list down to customers in California who have open balances of more than $500. So you’d select Open Balance for the Field, Greater Than for the Operator, and 500 for the Value. Then click Add again to move your filter into the Selected fields box.

You can keep adding filters to narrow down your list even more if you’d like. When you’re done, click Next. The View/select customers window opens displaying the results of your search in a table whose columns include Name, Overdue balance, and Avg days to pay. There’s a checkmark in the box in front of Automatically add new or remove existing customers based on fields and values selected in this group.

If you leave the box checked, QuickBooks will move customers into the group as their open balances top $500 and out when they catch up on their payments. Uncheck the box, and you’ll have to add and remove customers manually, which would take vigilance and a lot of extra work. If you’re satisfied with the list, click Finish, then OK. The Manage groups window now contains an entry for your new group.

Entries here are earmarked with icons indicating whether they are manually or automatically updated. You can also click links in the Actions column to edit or delete a group or send an email to it. If you select the last option, a window will open containing your list of customers (you can unselect any of them) and a composition box for your email.

Sending Payment Reminders

To start working with Payment Reminders, open the Customers menu and click Payment Reminders | Schedule Payment Reminders. Click Let’s get started. From the next window, you can send either invoices or statements. Click New schedule next to Invoice and enter a name in the box that opens. Lat’s call ours 15 days past due since we want to create reminders for customers who are more than 15 days past due.

This should go to all customers who fit the criteria, so click in the drop down list that follows Send reminder to. Call the new group All customers in the window that opens. Click Next, then Next again to display your entire list of customers. Click Finish, then OK. Back on the Schedule payment reminders screen, click + Add Reminder. This overlapping window will open:

Figure 2: You can see and edit what your reminder will say and what fields will be replaced with real data.

Enter 15 after Send this reminder and select after from the drop-down list. QuickBooks supplies a sample email that you can edit if you’d like. Real data will, of course, replace the text in brackets. You can delete any of these and add more by clicking Insert Field in the lower right corner. Be very careful if you modify the bracketed fields. Brackets should surround the exact text that comes from the QuickBooks options supplied.

When you’re satisfied with your email, you can Check spelling. Then click OK. You’ll be back at the Payment reminders screen where you can save your reminder or add another.

QuickBooks will now prompt you to send reminders when they’re due. You can track them in your customers’ invoice histories and your sent mail folder. When the time comes, open the Customers menu and select Payment Reminders | Review & Send Payment Reminders. QuickBooks will display a list of reminders that need to be dispatched. Make sure all of the reminders you want to send have a checkmark in the box next to them and click Send Now.

While there’s nothing difficult about using these new QuickBooks tools, you should be very careful with them. You don’t want to annoy customers by sending payment reminders unless they are really warranted, and you also don’t want to let late payments languish. Should you choose to use them, contact the office to speak with a QuickBooks professional who will be happy to walk you through the process to prevent errors. As always, please call if you have any questions about QuickBooks or want to learn how to make optimal use of it in your business.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.