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Large cash transactions with your business must be reported to the IRS

If your business receives large amounts of cash or cash equivalents, you may be required to report these transactions to the IRS.

What are the requirements?

Each person who, in the course of operating a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions), must file Form 8300. What is considered a “related transaction?” Any transactions conducted in a 24-hour period. Transactions can also be considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

To complete a Form 8300, you’ll need personal information about the person making the cash payment, including a Social Security or taxpayer identification number. 

Why does the government require reporting?

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.

What’s considered “cash” and “cash equivalents?”

For Form 8300 reporting purposes, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

Can the forms be filed electronically?

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

How can we set up an electronic account? 

To file Form 8300 electronically, a business must set up an account with FinCEN’s Bank Secrecy Act E-Filing System. For more information, visit: https://bit.ly/3fMMLAu  Interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST). Contact us with any questions or for assistance.

© 2021

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Internal control questionnaires: How to see the complete picture

  • Magnifier And Question Mark On Red Background

Businesses rely on internal controls to help ensure the accuracy and integrity of their financial statements, as well as prevent fraud, waste and abuse. Given their importance, internal controls are a key area of focus for internal and external auditors.

Many auditors use detailed internal control questionnaires to help evaluate the internal control environment — and ensure a comprehensive assessment. Although some audit teams still use paper-based questionnaires, many now prefer an electronic format. Here’s an overview of the types of questions that may be included and how the questionnaire may be used during an audit.

The basics

The contents of internal control questionnaires vary from one audit firm to the next. They also may be customized for a particular industry or business. Most include general questions pertaining to the company’s mission, control environment and compliance situation. There also may be sections dedicated to mission-critical or fraud-prone elements of the company’s operations, such as:

  • Accounts receivable,
  • Inventory,
  • Property, plant and equipment,
  • Intellectual property (such as patents, copyrights and customer lists),
  • Trade payables,
  • Related party transactions, and
  • Payroll.

Questionnaires usually don’t take long to complete, because most questions are closed-ended, requiring only yes-or-no answers. For example, a question might ask: Is a physical inventory count conducted annually? However, there also may be space for open-ended responses. For instance, a question might ask for a list of controls that limit physical access to the company’s inventory.

3 approaches

Internal control questionnaires are generally administered using one the following three approaches:

1. Completion by company personnel. Here, management completes the questionnaire independently. The audit team might request the company’s organization chart to ensure that the appropriate individuals are selected to participate. Auditors also might conduct preliminary interviews to confirm their selections before assigning the questionnaire.

2. Completion by the auditor based on inquiry. Under this approach, the auditor meets with company personnel to discuss a particular element of the internal control environment. Then the auditor completes the relevant section of the questionnaire and asks the people who were interviewed to review and validate the responses.

3. Completion by the auditor after testing. Here, the auditor completes the questionnaire after observing and testing the internal control environment. Once auditors complete the questionnaire, they typically ask management to review and validate the responses.

Enhanced understanding

The purpose of the internal control questionnaire is to help the audit team assess your company’s internal control system. Coupled with the audit team’s training, expertise and analysis, the questionnaire can help produce accurate, insightful audit reports. The insight gained from the questionnaire also can add value to your business by revealing holes in the control system that may need to be patched to prevent fraud, waste and abuse. Contact us for more information.

© 2021

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Is an LLC the right choice for your small business?

Perhaps you operate your small business as a sole proprietorship and want to form a limited liability company (LLC) to protect your assets. Or maybe you are launching a new business and want to know your options for setting it up. Here are the basics of operating as an LLC and why it might be appropriate for your business.

An LLC is somewhat of a hybrid entity because it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with the best of both worlds. 

Personal asset protection

Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.

Tax implications

The owners of an LLC can elect under the “check-the-box” rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns and are taxed only once.

To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Code Section 199A pass-through deduction, subject to various limitations. In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you and your spouse may have.

An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued. 

Review your situation

In summary, an LLC can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. For these reasons, you should consider operating your business as an LLC. Contact us to discuss in more detail how an LLC might benefit you and the other owners.

© 2021

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Financial statements: Take the time to read the entire story

A complete set of financial statements for your business contains three reports. Each serves a different purpose, but ultimately helps stakeholders — including managers, employees, investors and lenders — evaluate a company’s performance. Here’s an overview of each report and a critical question it answers.

1. Income statement: Is the company growing and profitable?

The income statement (also known as the profit and loss statement) shows revenue, expenses and earnings over a given period. A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.

Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

It’s important to note that growth and profitability aren’t the only metrics that matter. For example, high-growth companies that report healthy top and bottom lines may not have enough cash on hand to pay their bills. Though it may be tempting to just review revenue and profit trends, thorough due diligence looks beyond the income statement.

2. Balance sheet: What does the company own (and owe)?

This report provides a snapshot of the company’s financial health. It tallies assets, liabilities and “net worth.”

Under U.S. Generally Accepted Accounting Principles (GAAP), assets are reported at the lower of cost or market value. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Intangible assets (such as patents, customer lists and goodwill) can provide significant value to a business. But internally developed intangibles aren’t reported on the balance sheet. Intangible assets are only reported when they’ve been acquired externally.

Net worth (or owners’ equity) is the extent to which the value of assets exceeds liabilities. If the book value of liabilities exceeds the book value of the assets, net worth will be negative. However, book value may not necessarily reflect market value. Some companies may provide the details of owners’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

3. Cash flow statement: Where is cash coming from and going to?

This statement shows all the cash flowing in and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. Watch your statement of cash flows closely. To remain in business, companies must continually generate cash to pay creditors, vendors and employees.

Read the fine print

Disclosures at the end of a company’s financial statements provide additional details. Together with the three quantitative reports, these qualitative descriptions can help financial statement users make well-informed business decisions. Contact us for assistance conducting due diligence and benchmarking financial performance.

© 2021