Accounting for "Forgiven Debt"

With the current economic conditions and the growing uncertainty over the financial markets more and more companys may end up in the situation of having to account for 'forgiven' debt.

When your company’s debt is forgiven, you include the forgiven amount in gross income for tax purposes. The exception is cancellation of a debt to the extent that the payment would have been a deduction.

For example: You use a consulting firm from which you obtain service on credit. You are having trouble paying your account, but are neither bankrupt nor insolvent, so the consulting firm forgives part of your invoice. How do you book the cancellation?

The solution depends on your method of accounting:

· If you use the accrual basis, you include cancellation of the debt as income because, under the accrual method, expenses are recognized when incurred, not when paid.

· If you use a cash basis, you do not include the debt cancellation in income because payment for the services would have been a deductible business expense.

These hard times make for some complicated accounting issues. Get the help you need - hire an independent bookkeeper. They can make sense of these issues for you.

These Tough Times

Every day it seems there is a new batch of doom and gloom in the financial sector. Stock market is falling, banks are failing, investment firms are teetering...... The sky is falling.....

Now is the time to make sure that your own finances are in good order. Do you know where your business stands as far as income to debt ratio? How about your personal finances?

You need to lay things out so that you can budget accordingly to get through this stormy weather.

Get your financial data into a software program. Whether it's just your personal finances or your business too. Only good planning will get you through this.

If you need help, consider a freelance bookkeeper to help you get a handle on things.

Freelance Bookkeepers vs. Employees

Freelance bookkeeper services run on average about $50-$70+ an hour. Let's compare this with the cost of hiring an employee. An employee's actual cost is 2 to 2 1/2 times their salary. Let's factor in some of the inevitable expenses that come with hiring an employee.

• Health/Dental/Vision Benefits
• Equipment and Space
• Supplies
• Retirement Plans
• Insurance
• Unemployment
• TAXES (Freelancers are self-employed and pay their own taxes.)
• Overtime Payment

Someone to administer and oversee all of the above. If you calculate the cost of all of the above, plus the actual salary, you can see how expensive it is to hire an employee.

Plus you will only be paying for time actually worked - not a flat 8 hours per day regardless of how much time is spent on actual work.

Vacation Pay - The Ins and Outs

1. Apply all withholding taxes to vacation pay.

2. You can accrue paid vacation differently by the job, because it is a matter of company policy, not federal law. For example, give managers two days' paid vacation for each month worked, a clerk one or no days. Or, base paid vacation on salary, years worked or a mix of standards. But the policy should be in writing, made known to employees and applied consistently.

3. You need not include paid vacation days in overtime calculations. For example, if an employee works 40 hours, Monday-Thursday and takes a paid vacation day on Friday, you need not include the paid Friday hours when determining whether the employee is entitled to overtime pay.

4. If vacation pay is included in a normal paycheck, withhold for the entire check over a longer period. For example, if you pay weekly and include one week’s paid vacation, withhold for a two-week period.

5. You must pay earned or accrued vacation if the employee quits. Have a written policy that clearly states who is or is not entitled to accrued vacation pay at termination. Reminder: Employees may be entitled to unused vacation pay under ERISA (covers early retirement) if there is a written policy or a pattern or practice of paying unused accrued vacation to such employees.

Important: These are the rules under federal law. Where appropriate, also check your state laws.

Keeping Track in Tough Times

We all know the economy is not at it's best right now. Everyone is looking for ways to trim expenses and boost profits. One area you definately don't want to neglect is your accounting. It is your books that will show you whether you are doing well or not, which makes keeping them accurate more important than ever.

That doesn't mean that you need a full time bookkeeper or even a part time one. Depending on the size of your business you may just need someone to come in once or twice a month and crunch the numbers into your software program.

Keeping it up-to-date will enable you to generate meaningful reports that can help you see where you are spending, where you can cut back and what your bottom line is.

A Monthly Financial Review

In order to determine the profitability of your business each month you should look at your income statement, also known as a profit and loss statement. If you are keeping your books with a software program such as QuickBooks, once your data is entered you can just go to the report function and the software will automatically create the report for you.

You should review the report to see where your expenses were and if any of them were out of the ordinary. You will also see how profitable a month you had.

By taking a look at the statements each month you can keep expenses in check and not be surprised at the end of the year.

If you do not have time to enter the data yourself, you should consider hiring a freelance bookkeeper/accountant so that you are able to track where you are at financially all year long.

Paying Part-Time Employees

Part-Time Employees are no different from your regular employees. You need to withhold FICA from any amount they pay. It doesn't matter whether they are retired, have a full-time job elsewhere or only work one day a week. If eligible they will receive any overpayment of FICA back on their 1040 at the end of the year.

Here's a big one that is getting some employers in trouble. If a former employee returns as an 'independent contractor' to do the same job they were doing as an employee - they are employees. The IRS is targeting individuals who receive a W-2 and a 1099 from the same company in a given tax year.

The length of employment does not determine worker status. All employment taxes apply even if the individual only works one or two days, or even part of a day.


With part-time employees providing benefits is optional. You do need to cover yourself by having a written plan indicating which benefits apply to which workers. Generally, you do not need to pay for holidays or provide other benefits to part-time employees.

Some states may have special laws regarding payment of part-time employees so it is always advisable to check.