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Art of Accounting: What potential investors must have

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A friend’s son asked if he could meet with me, and I was glad to meet. He is a college business student, and I thought he wanted some career advice. Instead, he told me he was representing a business startup and asked if I would like to invest in it and be able to double my money within two years.

My immediate response is that I am in a situation where I no longer want to do anything to make money other than with the conservative portfolio I already have; I am concerned about not losing any of what I have and not reducing my cash flow, so I will have to pass on this “opportunity.”

Since I like helping young people get started in business, I asked about the business and requested to see the investor package, suggesting I might be able to offer some tips on raising the needed funding. He handed me a single sheet of paper acknowledging receipt of the investment amount, saying I would receive 1% of the ownership for every $10,000 invested with a maximum permitted investment per investor of $100,000. They were raising a total of $300,000. It also said that the plans were to have an IPO within two years. There were spaces to fill in the amount invested and for my signature. Nothing about the type of business, who the managers were, or any business plan or financial projections.

It turns out he was “hired” as a salesman to approach his parent’s friends for this “ground floor” opportunity. I asked him how much he was being paid, and he said he was told he would be taken care of, and it would be discussed when he raises the first investment.

I told him that while I watched him grow up and I was always impressed with him, I felt I needed to tell him some things about what he was doing that he apparently was not aware of. I also told him that asking people to invest carries with it a responsibility for some “due diligence” on his part, which it appears he did not do.

He never heard the expression due diligence and asked me what I think he should have done. My reply follows. It turned out to be a mini lesson on how the entire private investment process works.

For starters, a business plan needs to be that which would explain the type of business, competitors, potential customers, industry, why this company will be better, what they are offering to do that doesn’t already exist, and bios of the people who will run it. Also needed are financial projections for a five-year period. The projections need to show the projected operations and profitability, how much is needed, and how it would be utilized, along with the cash flow for the next five years and balance sheets for each period. Further, each item in the projection should be explained and how it was arrived at. It is very important to show the amount being raised is adequate to accomplish their goals. If debt or later-stage investments would be necessary, that should be clearly provided for in the projection.

Also shown should be the capital structure, what percentages the founders will have, any expected dilution because of new investors, what the founders’ investment contribution will be, and their compensation. If there are any stock options or any other arrangements for added compensation or benefits, that should also be disclosed.

Due diligence is the process of verifying the claims made by the people you will be dealing with. In this situation, it would be the founders. Also, my friend’s son was offered compensation, but it wasn’t clear how much, how it would be determined or whether it would be in cash, stock, options or a combination of these. Further, anyone setting out to engage in any business venture of any type should be clear about the responsibilities of each party and the compensation, and that there is the ability to pay the compensation. A general rule to follow is that services are much more valuable to the customer before they are rendered than afterward. Additionally, the seller is in a much stronger position before doing any work than after they’ve performed the services. Also, while many people start out with great and sincere intentions, they might forget some of what they agreed to, the minutiae of implementation might not be thought through, and people’s purposes might get sidetracked by newer opportunities. 

If the company is already operating, then financial statements should be provided.

Getting back to this investment “opportunity,” nothing was provided that would allow a potential investor to make a decision to invest.

My experience has shown me that many times there are likely targets for such opportunities, but there is only one shot at them. Not being fully prepared creates a wasted chance with that resource.

Most business plans will require a confidentiality or nondisclosure letter or agreement before they are provided. However it is important to assume that nothing will be kept confidential and proprietary, or sensitive information should not be disclosed until there is a serious investor.

I wrote a 20-page memo on how to prepare a business plan and financial projection that I will send you if you email [email protected] and put “Business Plan” as the subject. No messages necessary.

Do not hesitate to contact me at [email protected] with your practice management questions or about engagements you might not be able to perform. 

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Accounting

House passes tax administration bills

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The House unanimously passed four bipartisan bills Tuesday concerning taxes and the Internal Revenue Service that were all endorsed this week by the American Institute of CPAs, and passed two others as well.

  • H.R. 1152, the Electronic Filing and Payment Fairness Act, sponsored by Rep. Darin LaHood, R-Illinois, Suzan Delbene, D-Washington, Randy Feenstra, R-Iowa, Brad Schneider, D-Illinois, Brian Fitzpatrick, R-Pennsylvania and Jimmy Panetta, D-California. The bill would apply the “mailbox rule” to electronically submitted tax returns and payments to allow the IRS to record payments and documents submitted to the IRS electronically on the day the payments or documents are submitted instead of when they are received or reviewed at a later date. The AICPA believes this would offer clarity and simplification to the payment and document submission process while protecting taxpayers from undue penalties.
  • H.R. 998, the Internal Revenue Service Math and Taxpayer Help Act, sponsored by Rep. Randy Feenstra, R-Iowa, and Brad Schneider, D-Illinois, which would require notices describing a mathematical or clerical error to be made in plain language, and require the Treasury to provide additional procedures for requesting an abatement of a math or clerical error adjustment, including by telephone or in person, among other provisions.
  • H.R. 517, the Filing Relief for Natural Disasters Act, sponsored by Rep. David Kustoff, R-Tennessee, and Judy Chu, D-California. The process of receiving tax relief from the IRS following a natural disaster typically must follow a federal disaster declaration, which can often come weeks after a state disaster declaration. The bill would provide the IRS with authority to grant tax relief once the governor of a state declares either a disaster or a state of emergency and expand the mandatory federal filing extension under Section 7508(d) of the Tax Code from 60 days to 120 days, providing taxpayers with more time to file tax returns after a disaster.
  • H.R. 1491, the Disaster related Extension of Deadlines Act, sponsored by Rep. Gregory Murphy, R-North Carolina, and Jimmy Panetta, D-California, would extend the amount of time disaster victims would have to file for a tax refund or credit (i.e., the lookback period) by the amount of time afforded pursuant to a disaster relief postponement period for taxpayers affected by major disasters. This legislative solution would place taxpayers on equal footing as taxpayers not impacted by major disasters and would afford greater clarity and certainty to taxpayers and tax practitioners regarding this lookback period.

“The AICPA has long supported these proposals and will continue to work to advance comprehensive legislation that enhances IRS operations and improves the taxpayer experience,” said Melanie Lauridsen, vice president of tax policy and advocacy for the AICPA, in a statement Tuesday. “We are pleased to work closely with each of these Representatives on common-sense reforms that will benefit taxpayers, tax practitioners and tax administration and we’re encouraged by their passage in the House. We look forward to continuing to work with Congress to improve the taxpayer experience.”

The bills were also included in a recent Senate discussion draft aimed at improving tax administration at the IRS that are strongly supported by the AICPA.

The House also passed two other tax-related bills Tuesday that weren’t endorsed in the recent AICPA letter. 

  • H.R. 1155, Recovery of Stolen Checks Act, sponsored by Rep. Nicole Malliotakis, R-New York, would require the IRS to create a process for taxpayers to request a replacement via direct deposit for a stolen paper check. If a check is determined to be stolen or lost, and not cashed, a taxpayer will receive a replacement check once the original check is cancelled, but many taxpayers are having their replacement checks stolen as well. Taxpayers who have a check stolen are then unable to request that the replacement check be sent via direct deposit. The bill would require the Treasury to establish processes and procedures under which taxpayers, who are otherwise eligible to receive an amount by paper check in replacement of a lost or stolen paper check, may elect to receive such amount by direct deposit.
  • H.R. 997, National Taxpayer Advocate Enhancement Act, sponsored by Rep. Randy Feenstra, R-Iowa, would prevent IRS interference with National Taxpayer Advocate personnel by granting the NTA responsibility for its attorneys. In advocating for taxpayer rights, the National Taxpayer Advocate often requires independent legal advice. But currently, the staff members hired by the National Taxpayer Advocate are accountable to internal IRS counsel, not the Taxpayer Advocate, creating a potential conflict of interest to the detriment of taxpayers. The bill would authorize the National Taxpayer Advocate to hire attorneys who report directly to her, helping establish independence from the IRS. 

House  Ways and Means Committee Chairman Jason Smith, R-Missouri, applauded the bipartisan House passage of the various bills, which had been unanimously passed by the committee.

“President Trump was elected on the promise of finally making the government work better for working people,” Smith said in a statement Tuesday. “This bipartisan legislation helps fulfill that mandate and makes improvements to tax administration that will make it easier for the American people to file their taxes. Those who are rebuilding after a natural disaster particularly need help filing taxes, which is why this set of bills lightens the load for taxpayers in communities struck by a hurricane, tornado or some other disaster. With Tax Day just a few days away, we must look for common-sense, bipartisan ways to make filing taxes less of a hassle.”

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Accounting

In the blogs: Many hats

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Teaching fraud; easement settlement offers; new blog on the block; and other highlights from our favorite tax bloggers.

Many hats

  • Taxbuzz (https://www.taxbuzz.com/blog): There’s sure an “I” in this “teamwork:” What to know about potential IRS and ICE collaboration.
  • Tax Vox (https://www.taxpolicycenter.org/taxvox): How IRS data would likely be unhelpful validating SNAP eligibility.
  • Yeo & Yeo (https://www.yeoandyeo.com/resources): How financial benchmarking (including involving taxes) can help business clients see trends, pinpoint areas for improvement and forecast future performance.
  • Integritas3 (https://www.integritas3.com/blog): One way to take a bite out of crime, according to this instructor blogger: Teach grad students how to detect, investigate and prevent financial fraud.
  • HBK (https://hbkcpa.com/insights/): Verifying income, fairly distributing property, digging the soon-to-be-ex’s assets out of the back of the dark, dark closet: How forensic accounting has emerged as a crucial element in divorces.

Standing out

Genuine intelligence

  • AICPA & CIMA Insights (https://www.aicpa-cima.com/blog): How artificial intelligence and other tech is “Reshaping Finance,” according to this podcast. Didem Un Ates, CEO of a U.K.-based company offering AI advisory services, tackles the topic.
  • Taxjar (https:/www.taxjar.com/resources/blog): How AI and automation can help even the knottiest sales tax obligations and problems.
  • Dean Dorton (https://deandorton.com/insights/): Favorite opening of the week: “The madness doesn’t just happen on college basketball courts — it also happens when your finance team is stuck using a legacy on-premises accounting system.”
  • Canopy (https://www.getcanopy.com/blog): Top client portals for accounting firms in 2025.
  • Mauled Again (https://mauledagain.blogspot.com/): Despite what Facebook claims, dependents have to be human.

New to us

  • Berkowitz Pollack Brant (https://www.bpbcpa.com/articles-press-releases/): This Florida firm offers a variety of services to many industries and has a good, wide-ranging blog. Recent topics include the BE-10, nexus and state and local tax obligations, IRS cuts and what to know about the possible bonus depreciation phase out. Welcome!

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Accounting

Is gen AI really a SOX gamechanger?

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By streamlining tasks such as risk assessment, control testing, and reporting, gen AI has the potential to increase efficiency across the entire SOX lifecycle.

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