As consumers find new ways to fill their time, agency businesses are in high demand, especially those centered around e-commerce. Your agency business, regardless of industry focus, needs to implement the proper agency accounting procedures to navigate through the complex business environment.
Sales tax, revenue recognition, and tax planning are the three pillars of agency accounting that your business should be utilizing to promote long-term success and scalability.
Whether you are a new or established business, these three areas of agency accounting can be complex, which is why many business owners turn to the help of a qualified accountant that can help you ensure you are remaining in compliance with regulatory agencies and receiving the insight needed to grow.
Sales Tax
The first pillar of agency accounting is sales tax. Agency businesses are put in a unique position because certain services are not taxable in terms of sales tax. For example, Florida taxes amusement, recreation, real property, and business services, while excluding professional services. Some states, like California, have exclusions in place for all types of services, regardless of which category they fall into.
If you walk into Oregon, Montana, and Illinois for a haircut and they charge $10, you will only need to pay $10 because there is no sales tax. However, if you walk into Utah, you will be assessed sales tax based on which county you are in.
Nationwide agency businesses need to pay close attention to where they do business to avoid miscalculating sales tax. States that impose sales tax generally have an exclusion if you are under a certain sales threshold, known as nexus.
As an agent, you are responsible for collecting and remitting the proper sales tax amounts to each state. Knowing when you’ve triggered nexus or how much tax to collect from your customers can be complex, which is why working with an accountant that understands the regulations imposed by each state is important.
Revenue Recognition
Revenue recognition is another important component of agency accounting. Many agents work through third-party platforms, such as freelancing websites or sites designed to manage your business. These platforms usually take their fees directly off the top of revenue, creating discrepancies between your gross revenue and what clears the bank.
The recent passing of ASC 606 requires agency businesses to report the gross amount of revenue on the financial statements to remain GAAP-compliant. This means that adjustments need to be made to your accounting system to true-up revenue and record the offsetting fees in the proper accounts.
Additionally, if your agency has contracts that expand multiple months, but the customer pays upfront, additional adjustments will be needed. Under ASC 606 businesses can only recognize revenue that is earned. This means that a contractual obligation for routine services that span a year should not report revenue all at once. Instead, regular adjustments will be entered as time passes.
Due to the stringent regulations that ASC 606 imposes, most accountants are well-versed in how to adjust your accounting software. However, if you choose to go with an accountant that is inexperienced in agency accounting, you risk having incorrect financial statements and tax returns, which can come with fines and penalties from regulatory agencies. This makes choosing an experienced accountant beneficial.
Tax Planning
Tax planning is a foundational piece of running a successful agency business. Most agency owners can agree that receiving a large tax bill at year-end is never fun. Effective tax planning throughout the year can not only decrease the risk of an unexpected tax bill but can also reduce the amount you pay to the IRS and state agencies.
Tax planning involves analyzing your situation based on specific criteria, such as the number of partners, and finding legal solutions to lower your tax liability. For example, if you frequently purchase equipment, are you taking advantage of special depreciation options? How about receiving credits for adding energy efficient improvements to your office?
The solutions your agency business finds most effective are dependent on a variety of factors. This is why working with an accountant that understands the implications of partners living in different states or hiring additional employees has on your tax situation.
Summary
Proper agency accounting supports growth and profitability, while inadequate processes can lead to business failure. Reporting accurate sales tax, identifying when revenue should be recognized, and preparing for year-end through tax planning are three ways you can leverage agency accounting. For help with any of these areas, reach out to BUSINESS
