Cover sheet Form W-3 is a federal form that Gusto files with paper copies of the Form W-2 to the Social Security Administration (SSA). This form is not required for electronically filed W-2s.

W3 Tax Form

Since Gusto files most federal W-2s electronically, if there are changes or corrections to W-2s, you won’t see changes on the W-3. Administrators can locate this form in Gusto by following these steps:

• Click the Documents tab from your Admin profile.
• Click the Company tab.
• Select “Form W-2: 20XX” package.
• Scroll to page 2, or beneath the cover page, and Form W-3 will be available.

Important: If you download this as a zip file, the W-3 will be the very last file in the downloaded folder.
You can review, download, or print the entire package from this location.

Note: Some states and local agencies may require an Annual Reconciliation along with Form W-2 filings. Gusto will file Annual Reconciliation if required.

Tax Form 1096

Cover sheet Form 1096 is filed to the Internal Revenue Service (IRS) along with paper copies of forms 1099-MISC. This form is not required for electronically filed 1099s. Administrators can locate this form in Gusto by following these steps:

• Click the Documents tab from your Admin profile.
• Click the Company tab.
• Select “Form 1099: 20XX” package.
• Scroll to page 2, or beneath the cover page, and Form 1096 will be available.

You can review, download, or print the entire package from this location.

Note: Some states require a paper copy of the 1096 to go with the state copy of Forms 1099. Gusto will file a paper Form 1096 if required.

 

 

 

Looking to cut your business income tax rate by up to 90%? Locating in Puerto Rico might be your answer — if you’re willing to play by their rules.

What Is Act 20?

It’s no secret that Puerto Rico needs to boost its economy. And because it enjoys a special status within the United States, it can offer tax incentives similar to offshore tax havens, without the possible risks of location in a foreign country.

Thus, in 2012 was born Act 20, the Export Services Act. Its goal is to attract employers to the island, who will invest their capital there and hire Puerto Rican workers. If your corporation qualifies, you will be exempt from U.S. income tax; instead, you will pay Puerto Rican tax at a rate of only 4% on your Puerto Rican-sourced income.

Who Qualifies?

Only service-based companies are eligible to receive Act 20 tax rates and credits. Some types of business that qualify are:

• Consulting

• Call centers

• Voice and data telecommunications (between persons located outside of Puerto Rico)

• Electronic data processing centers

• Shared service centers

• Software development

• Information systems and other technological services

• Research and development

• Scientific or environmental services

• Medical, hospital and laboratory services

• Engineering and architectural services

• Economic services

• Investment banking and other financial services

• Legal, tax and accounting services

• Auditing services

• Managerial and human resource services

• Advertising, public relations, and marketing

• Commercial art and graphic design

Who Can You Provide Services to?

Your business must provide services FROM Puerto Rico TO outside markets. If you do business with residents, businesses, or government entities within Puerto Rico, you will not be eligible. This includes real estate sales, legal advice on Puerto Rican laws, and lobbying the Puerto Rican government.

Also, e-commerce businesses probably won’t qualify, unless they can prove that they are working entirely from Puerto Rico. For example, an Amazon FBA seller won’t qualify because even though the company’s office is in Puerto Rico, the delivery service is being provided by warehouses in the U.S. The same is true of services sold from a personal website, drop-shipping, SaaS, app sellers, online ad arbitrage, affiliate marketing, and niche websites — all very difficult to prove the source of the service.

How Do You Establish the Company?

Your business must be incorporated in Puerto Rico. You may choose to sell your business assets to the new Puerto Rican corporation. An easier option is to reorganize the company as a Puerto Rican corporation (tax-free).

Next, you must hire Puerto Rican workers. In general, the minimum number of workers is five, although there are exceptions as low as one. These employees must receive full social security benefits and other mandated employee coverage (such as employment tax). And these must be real jobs, not just paper ones to meet the regulations. When the Puerto Rican government audits you, they will demand proof of actual work being done.

What Is Bona Fide Residence?

Originally, Act 20 allowed you to qualify your company for the 4% corporate income tax, yet qualify yourself (the company owner) as a non-resident in order to be exempt from Puerto Rico’s personal income tax.

That changed with Trump’s tax reform. Now, if you remain a U.S. resident while your corporation is getting the Puerto Rico tax break, the U.S. will tax the company an additional 6.5%.

The only way to avoid this is to become a bona fide resident of Puerto Rico. This will involve moving your “center of life” to the island and spend at least 183 days of the year there. You will have to build a case that your financial activity, family home, and possessions, social, professional, and cultural ties are all in Puerto Rico. You will also need a Puerto Rican voter’s registration and driver’s license.

How Do You Get the 4% Tax Rate?

Apply to the Puerto Rico tax authority for a tax concession and tax exemption decree. The decree is good for 20 years and may be extended another 10 years after that.

If you meet the qualifications above, you’ll enjoy a 4% fixed corporate income tax rate; and it could even be as low as 3% if your services are deemed strategic to Puerto Rico. You could also receive:

• 100% tax exemption on distributions and dividends from earnings and profits

• 100% tax exemption from personal and real property taxes for the first five years and 90% thereafter

• 60% tax exemption on municipal taxes

Bottom Line: Is It a Good Idea?

Act 20 may be a great choice for your business. However, we have two major caveats to keep in mind when making your decision.

The first is that tax laws are subject to change; we’ve already seen it with the Trump tax reform. And ultimately, Puerto Rico will not be able to stand up to U.S. demands for change. You could move your whole life there, only to see your reason for doing so evaporate.

The second is that many people seem to be trying to use Act 20 to their advantage without fully abiding by its requirements. Whether they’re just cutting a few corners or outright cheating, it’s getting the attention of the authorities. This again could lead to unwelcome changes, excessive audits, and other annoyances.

 

xendoo tax experts can help you sort out your options and determine which are the most financially rewarding. Give us a call today!

 

 

Every month you receive a P&L statement from xendoo. In a nutshell, it tells you whether your business made a profit or a loss — for the month as well as the year to date.

It can do more than that, though, if you know what the numbers mean. Here’s a quick guide.

Revenue on a profit and loss statement

The money you received from customers who bought your products or services. This section probably itemizes sources of those revenues, so you can see which areas are bringing in the biggest returns.

It shows the total sales amount including any sales tax collected. When you remit the tax to the state, that amount will be listed as a debit entry to be subtracted from total revenue. (All debit entries are shown in parentheses.)

This section will also account for any merchandise that was returned to you by customers, as a negative entry. Since the original sale is listed in this section, the return has to be there also, so that it balances out to zero.

Cost of Sales

These are the expenses directly related to the products or services you sell, including your purchase costs, labor, storage, and delivery.

The line called “Cost of Goods Sold” can either be what you paid for merchandise that you resell or raw materials that you make into products for sale, as well as manufacturing labor costs.

Gross Profit

Revenue – Cost of Sales = Gross Profit. This line is immediately under the Cost of Sales section. If the number is in parentheses, you made a loss instead of a profit.

Be sure to look at the year to date column as well as this month’s column. There’s no need to panic over one atypical month if the year to date figures are in line with your expectations.

Other Income and Expense

Here is where you’ll find everything not directly involved in making and/or selling your product.

• Office and equipment-related expenses such as utilities, leasing, and maintenance
• Employee-related expenses such as salaries, insurance, and business travel
• Fees such as licenses, bank charges, and merchant fees
• Taxes: real estate and payroll
• Costs of advertising, legal or other professional services

Net Income

Gross Profit – Other Income and Expense = Net Income. This line is immediately under the Other Income and Expense section. Net Income is your “bottom line”, which reveals whether your business is operating in the black or the red. Note, it does not include your business income tax, which will be calculated at the time you fill out your return.

Because we know how important these numbers are to your business decision-making, xendoo guarantees delivery of our clients’ Profit and Loss statement by the fifth business day of every month. This allows you to quickly identify  — and react to — both trouble spots and growth opportunities. It’s just one of the ways we help keep your business growing strong.

 

If your business sells, resells, or makes new products from purchased stock, then your inventory is probably your biggest asset. The right accounting tools can help you make sure that inventory maintains its value, as well as guide business decisions for maximum success.

Types of Inventory

First, determine what type of inventory you work with.

Items for Reselling

The stock of a retail store, or the retail component of a service business such as a hair salon. (Drop shipped products don’t count if you never bought them from the supplier.)

Items for Installing

Products sold by a service business as an essential part of the job, for example, a computer repair company that sells spare parts.

Items for Manufacturing

Materials you make into products for sale, for example, fabric, beads, thread, etc. for making wedding gowns. For accounting purposes, they will be assigned to one of three categories:

• Raw materials
• Work in progress
• Finished goods

Basics of Inventory Accounting

To keep tight control of your inventory, set the right prices, properly insure the stock and do your taxes, you’ll need to track the number of variables. Your accounting software should be able to show you:

• Cost of goods
• Associated costs including storage, shipping, and losses due to damage or age
• Stock on hand
• Selling price
• Revenue
• Profit (or loss)
• Items sold
• Sales patterns by item and season

You must also choose an inventory valuation method for your year-end statement, which will affect both your profits and tax liability. The most common ones are:

LIFO (Last In, First Out): Assumes you sell your most recently acquired — therefore most expensive — items first, while leaving older/lower priced stock on the shelf.

• Advantage: Increases the cost of goods sold and lowers net income, reducing taxes.
• Disadvantage: May does not correspond to the actual flow of goods or replacement costs.

FIFO (First In, First Out): Assumes you have perishable or quickly outdated items, so you need to sell the oldest goods first. Also, if selling prices rise, this method will give you a lower cost of goods sold.

• Advantage: Makes bottom line look better to lenders and investors.
• Disadvantage: Higher profit results in higher taxes.

AVCO (Weighted Average Cost): Bases report on the average product cost and average selling price for the entire year.

• Advantage: Simpler to do, more accurately represents replacement costs.
• Disadvantage: Inaccurate when prices fluctuate severely up or down.

Benefits of Inventory Management

Now we get to the good stuff: how your accounting system can save money and help you make money, too.

1. Avoid cash flow problems. With stock levels properly tracked, you’ll never tie up too much cash in unneeded inventory. Use that cash to pay other expenses or improve your business.

2. Maximize sales. Know in advance when you’re running short of an item, so you’ll never have to turn customers away.

3. Reduce storage costs. Know which items are slow-selling, so you reorder less often or not at all.

4. Maximize write-offs. Know exactly how much you’re losing to damage, theft, and product expiration.

5. Get bulk discounts. Know what’s selling fast, so you can place larger orders at a lower cost per unit.

6. Get better marketing results. Use seasonal sales trends to build promotions.

7. Optimize profit margins. Fully tracked costs let you see how much you’re making and where adjustments could be made.

In short, the better your inventory management system, the more you’ll be empowered to take your business to the next level. If you have any questions about inventory accounting or valuation, please give us a call.