Tag Archive: tax_management

Best Practices for Improving Your Payroll Operations

Best Practices for Improving Your Payroll Operations

by Iris Dorbian.

 

It may be among the least sexy aspects of running a small business, but that doesn’t mean that payroll shouldn’t be a priority. An effective and efficient payroll operation facilitates timely and accurate employee pay while withholding taxes correctly in accordance with state and federal regulations. Having a system that fails to perform these basic functions will not only incur the justifiable wrath of employees, but could also result in penalties, audits and other draconian measures that could threaten to end your business.

 

No doubt, if you’re an experienced small business owner, you already know this and have some kind of payroll system in place. But as the famous writer Oscar Wilde once said, “It is always with the best intentions that the worst work is done.” Suppose your payroll system has experienced some software glitches lately or perhaps was not in compliance with federal and state tax regulations. How do you rectify these errors, ensuring they will never happen again? What best practices should you, as the small business owner, undertake to improve your payroll operations?

 

 

Minimize your pay cycles

Having different pay schedules for different types of employees, such as monthly for management or bi-weekly for hourly employees, may be a commonplace practice, but it can lead to duplicating errors in the payroll process.

 

”The less of these schedules, the better,” says Tiffany Washington, owner/founder of the five-year-old Waldorf, Maryland-based Washington Accounting Services, which specializes in small business payroll and has close to 1,000 clients.

 

“Minimizing pay cycles can help prevent the duplication of multiple processes so that the payroll department can operate more efficiently,” she continues. “To maximize efficiency, every type of employee should be paid on the same pay schedule (weekly, bi-weekly, or monthly). This will allow the payroll department to focus on one task at a given time. Having one pay schedule to maintain instead of three is a lot easier to maintain. It will also lessen the chance for errors to be made during the payroll process.”

 

 

Payroll_PQ.jpgIntegrate your systems

You may have an online payroll system you consider state-of-the-art, but it will ultimately prove to be counterproductive and costly if it doesn’t mesh with your accounting system. Washington cites a client, with 33 employees, and more than a dozen out-of-state workers, that recently encountered this problem. These distant employees, coupled with the incompatibility of the client’s online payroll and accounting systems (which the client was initially not aware of), was wreaking havoc on the payroll operations, particularly when it came to following out-of-state regulations and administration fees.

 

Although the withholding of taxes was being done correctly, explains Washington, “the unemployment [taxes weren’t] being coded to the correct state where the employee lived. Instead it was being coded to where this employer was located, which was in Maryland. So everyone was getting unemployment in Maryland instead of it being coordinated to the specific state that they were living in.”

 

Washington and her staff rectified the situation by filing “two years of amended unemployment returns,” she explains. But not even that cleared things up completely. “There were some penalties that had to be paid because things were not filed in a timely fashion, but we were able to get them up and rolling and in compliance,” she notes.

 

 

Outsource your payroll

If you’re a small business owner who doesn’t have the time or energy to invest in building a new payroll system or updating an older one, you may want to consider outsourcing it to a third-party provider. However, before you sign up with any payroll service, do your due diligence and make sure you get referrals from other reputable small businesses or people whom you trust. And remember, the cheapest is not always the best.

 

“You ‘get what you pay for’ from service providers, and often times, going with a provider based solely on price means you sacrifice important things like customer service or flexible platforms,” says Jason Maxwell, president of MassPay,, a payroll provider for small businesses. “Some companies will simply look online for a payroll service, or use a website to seek out competitive bids. A business owner might find the cheapest deal this way but could easily end up using an out-of-state provider that is not familiar with specific state regulations. Going with the cheapest option may also mean you sacrifice accuracy in processing.”

 

Washington strongly echoes Maxwell’s sentiments and adds that very small businesses may want to find a payroll or accounting firm that can also offer bookkeeping, accounting, and payroll together. “It can definitely be cost effective,” she says. With outsourcing, small business owners “are no longer accountable for payroll mistakes.” This also applies for not being responsible for legal compliance as well.

 

 

Understand state and federal tax guidelines

If you don’t calculate your payroll taxes correctly, you will incur a penalty. The only question will be when and how much.

Tom Reahard, CEO of Symmetry Software, a Scottsdale, Arizona-based company that specializes in providing payroll and payroll-related software applications to both small and large businesses, suggests that at the end of each pay cycle, small business owners should “look at their payroll register to make sure the taxes being withheld are correct.” Also, run reports that will show your federal and state liability as well as when those taxes are due.

 

By following the above tips and paying attention to details, you can improve your payroll operations in no time. Not only will you be thankful for turning this integral aspect of your small business into a well-oiled and reliable machine, but so will your employees.

 

Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.

Tax Expert Q&A: What small business should look out for this year and next

Tax Expert Q&A What small business should look out for this year and nextby Susan Caminiti.

When it comes to issues that perplex and confuse small business owners, few items rank higher than taxes. To get a better understanding of what entrepreneurs need to know this tax season—and what changes lie ahead—Susan Caminiti spoke with Chris Walters, senior manager of tax and budget issues at the National Federation of Independent Business (NFIB), the leading small business association representing small and independent firms across the country. Some excerpts from the interview:

SC: What are the top tax issues that small business owners need to pay special attention to this year?

CW: This year there’s a change in the small business expensing provision. For 2011, a business could expense up to $500,000 in equipment and improvements to property. So for instance, if you had the roof or doors of your business changed, that expense was allowed as a deduction in addition to money spent on equipment. For the 2012 tax year, the business expense limit will drop from $500,000 to $125,000 and there is no longer a deduction provision for improvements to property; the deduction is strictly for business and office equipment. However, one thing to keep in mind is that for 2011 you can take 100% of your expenses for business and office equipment as a deduction for that year rather than depreciating it over several years.

SC: Does that still hold true for 2012 as well?

CW: Yes, but remember, for this year, it applies only to purchases for business and office equipment, not for improvements made to property.

PQ_QAchriswalters.jpgSC: Why the decrease in the amount of expenses allowed?

CW: The increase to $500,000 for 2011 was actually part of the Small Business Jobs Act of 2010; prior to that tax relief legislation, the limit was set at $25,000. So while the expense limit is lower this year than the amount allowed in 2011, it is still higher than what it had been.
SC: Why is this important for small business owners to keep in mind?

CW: If you’re going to make substantial purchases for your business, this is the year to do it. Next year [tax year 2013] it goes back to $25,000. There are leaders in Congress who want to keep the levels higher because they understand that these deductions are good for small businesses. They allow them to expand their capabilities in a tax-friendly way. That’s not only good for the small businesses, but also for the communities in which they do business.

SC: What else should small business owners pay attention to this year?

CW: If you own a business that accepts credit and debit cards (and have at least $20,000 in processed payments and at least 200 transactions a year) you will begin to receive 1099-K forms this year. For this year, the IRS says you don’t have to do anything with the forms. But by next year, businesses may have to compare their numbers with those reported by payment processing companies.

SC: What’s the reasoning behind this?

CW: Congress created the 1099-K requirement to keep better track of electronic payments. However, the NFIB views this as a new burden for small businesses. For instance, if you run a restaurant and a customer uses a credit card to pay for a $25 meal, he’s not just paying $25. There’s state sales tax and probably a tip on there. So the number reported by the payment processing company isn’t going to be the same as what the restaurant reports. Now, of course, there are plenty of small businesses that don’t accept credit cards so this will not affect them. But as that changes, small businesses need to consult with their tax professionals to make sure they’re not required to do something with the 1099-Ks.

SC: There’s been talk about changes to the laws involving independent contractors. What’s happening there that can affect small businesses?

CW: Small businesses enjoy—and depend on—the flexibility that independent contractors give them. As businesses get started, the ability to bring someone on for a few months, or on a project basis, is what allows them the financial freedom and speed with which to grow. However, as a business owner you have to be careful how you classify an independent contractor.

SC: Why?

CW: Employers are required to withhold taxes and pay Social Security, Medicare, and unemployment tax on wages paid to an employee. They don’t have to do that with an independent contractor. If you misclassify an individual as an independent contractor when in fact he or she is an employee, you could be liable for fines, back taxes, and interest payments. We’re not suggesting that businesses not be able to hire independent contractors. Small companies absolutely need that flexibility. We want the section of the tax code that defines independent contractors to be clearer.

SC: Are there any other steps that small businesses need to take now that will benefit them in the current tax year?

CW: Stay in touch with your tax accountant. The rules can be complicated. That’s why our studies show that 90 percent of small businesses use an outside tax preparer and 61 percent consulted a tax professional before making a major business decision. Tax rates are going up next year and business incentives are different every year so you need to have someone on your side that knows these issues thoroughly. As a small business owner, you’re too busy running your company to stay on top of every change.

Of course, since the details of each business situation are unique, you should always seek the services of a qualified financial planner and tax advisor.

File Fail: Avoid These Four Common Small Business Tax Mistakes

File Fail: Avoid These Four Common Small Business Tax MistakesFile Fail: Avoid These Four Common Small Business Tax Mistakes by Sherron Lumley.

If you’re like many small business owners, tackling your company’s federal taxes falls somewhere along the panic-procrastination continuum. You want to do the job right, but dread the possibility of an audit after filing. Three U.S. tax professionals discuss some common mistakes small businesses make at tax time, and how best to avoid them.

File Fail Avoid These Four Common Small Business Tax Mistakes #1 – Miscalculating Mileage, Auto Use and Depreciation

Tax expert Paul Bardaro, founding partner of Rucci, Bardao, & Barrett PC, one of the largest public accounting firms in the Boston area, reveals that claiming excessive auto expenses can trigger audits. Deducting an excessive percentage of business use for a passenger car, say somewhere in the 85 to 90 percent range, “would be considered low-hanging fruit for the IRS,” says Bardaro. He explains that the IRS uses aggregate stats from the North American Industry Classification System (NAICS) to identify drastic outliers.

However, “if you are entitled to the deduction legitimately, you shouldn’t be afraid to take it,” says Bardaro. File Fail: Avoid These Four Common Small Business Tax Mistakes

Overstated adjustments, deductions, exemptions, and credits account for more than $30 billion in unpaid taxes annually, according to the IRS. As a result, taxpayers should be very familiar with tax law before deducting car and truck-related business expenses. To help clarify what’s what, consult the IRS’s comprehensive publication “Travel, Entertainment, Gift and Car Expenses.” It’s a 56-page document, so here are a few highlights pertaining to mileage, depreciation, and auto use:

  • Standard Mileage for business: For the first six months of 2011, the rate was $.51 per mile, for the last six months, the rate to use is $.55 per mile. If you take the standard mileage deduction per business mile, then you can’t claim actual expenses. Actual car expenses include depreciation, licenses, gas, oil, tolls, lease payments, insurance, garage rent, parking fees, registration fees, repairs, and tires.
  • Auto depreciation: This deduction can either be straight-line or a modified accelerated cost recovery system (MACRS). But if you use the standard mileage deduction, then you must use straight-line depreciation (see pp. 15-16 of the IRS Publication 463 for a detailed explanation). Also note: there is a maximum depreciation limit per year, depending on what year the vehicle was first placed into service.
  • Personal use of a vehicle: For employees, this is taxable income, and must be included on the employees W-2, notes Bardaro.

File Fail Avoid These Four Common Small Business Tax Mistakes # 2 – Home office deduction, pros and cons

Like the auto deductions, be careful when deducting home office expenses. Small businesses that operate out of the home can deduct a percentage of the home used for business purposes, but “if you claim 6/7ths of your house for business use, that’s going to be suspect,” warns Bardaro.

IRS Form 8829 covers expenses for business use of your home. The IRS publication “Business Use of Your Home” goes into greater detail about which expenses are deductible in full, which are deductible based on the percentage of the home used for the business, and which expenses are not deductible.

This deduction applies to real estate taxes, utilities, insurance, depreciation, and some other homeowner expenses. However, taking the home office deduction can have tax ramifications down the road when the home is sold, Bardaro notes.

File Fail Avoid These Four Common Small Business Tax Mistakes # 3 – Not Knowing Tax Responsibilities

“Businesses have to know their tax responsibilities and make sure they are paying everything they might be responsible for,” says Gail Rosen, an award-winning CPA specializing in startups and small businesses in New Jersey. Here’s what Rosen says not to miss:

  • Sales Tax: Will a business have to charge sales tax on their new product or service? If it should have and didn’t, then the individual business owner can be personally liable for the sales tax he or she should have charged but didn’t.
  • Use Tax: If you purchased something for your business without paying your home state’s sales tax. (For example: items bought in another state and brought into the home state, including mail order and Internet purchases, are generally subject to use tax, usually at the same rate as the home state’s sales tax.)
  • Estimated Tax: If you are a sole proprietor, partnership, or LLC, you have to pay estimated federal and state taxes on profits from the business.
  • Payroll: If you have employees, you must set up payroll. If you are a corporation, you have to include and pay yourself on payroll (versus paying quarterly tax estimates required of sole proprietorships, partnerships, and LLCs).

Besides identifying which taxes to pay, knowing which forms to file is another pitfall for small businesses to avoid. For example, if your business uses the services of contractors and other non-employee service providers throughout the year, Form 1099 –MISC enters the picture.

“Form 1099-MISC is something that comes up every January for the small businessperson, and the rules seem to change every year,” says Gina McCombs, a CPA for Loggins & Associates in Jonesboro, Georgia. “This year, something new is that businesses need to exclude any payment made to a 1099 vendor that was made by a third party (like a credit card),” she says.

The IRS has tightened its 1099 requirements, and here’s what business owners need to know: You are required to issue the 1099-MISC for any services over $600 from LLCs, sole proprietors, partnerships, and trust estates. However, if the service provider is either a C Corporation or an S Corporation, you do not have to issue a 1099. You only have to give 1099s to service providers you pay by check or cash. If you pay an attorney more than $600 during the year then you must issue a 1099, even if the law firm is incorporated.

“To make tax time easier, we recommend that all businesses record the payment type (such as check, cash, credit card, debit card, etc.) as a part of each transaction. It is something that is usually overlooked, but you’ll be glad you did it next January,” McCombs says.

File Fail Avoid These Four Common Small Business Tax Mistakes#4: Small Employer Health Insurance Premiums Credit

“Sure, it’s easy to figure out what I spent on healthcare, but now I have to know the small business benchmark premium,” explains Bardaro of a new challenge facing entrepreneurs come tax time.

The Small Business Healthcare Credit is considered by some CPAs to be too complicated for non-tax professionals to navigate. However, failing to even consider it is perhaps the biggest mistake of all, says Bardaro. (To look at a few different health care tax credit scenarios, check out this IRS worksheet.)

The small employer health insurance premiums credit is a tax credit of up to 35 percent of employer-paid healthcare insurance premiums for small businesses that qualify: those with fewer than 25 employees, where employees earn on average less than $50,000, and the employer pays at least half of the insurance premiums. Form 8941 is used to calculate the credit.

And, Barbaro names other tax credits not to miss, such as the Work Opportunity Credit and the Pension Plan Start-up Cost Credit. The Domestic Production Activity Deduction (IRS Form 8903), is also worth investigating by those companies involved in manufacturing, production, and construction activities. Its benefit is nine percent of qualified income.

“A good set of books often makes these calculations a lot more tolerable,” says Bardaro.

More to Know…File Fail: Avoid These Four Common Small Business Tax Mistakes

The U.S. Small Business Administration provides further insight into tax breaks for small businesses, including the $500,000 small business expensing limit:

For the 2011 tax year, small businesses can write-off a larger portion of the cost of new equipment purchased during last year rather than depreciating the cost over time. This provides an immediate tax benefit.

The 2009 fiscal stimulus increased the maximum amount that small businesses could expense—ordinarily $125,000—to $250,000 for 2009. For 2010 and 2011, the Small Business Jobs Act doubled that to $500,000 and increased the phase-out threshold to $2 million.

Looking forward, working with a CPA throughout the year can significantly impact your small business’s tax consequences.

“After the year, tax preparers can only report on what happened during the year, and have very little opportunity to affect the outcome of your tax liability,” Damita Davis Wren, of DavisWren CPA & Associates in Dover, Florida. “Get tax planning for 2012 now, not in December 2012,” she advises.

File Fail: Avoid These Four Common Small Business Tax Mistakes For more tax help, here are some links to IRS publications of interest to small business owners:

Publication 463, Travel, Entertainment, Gift and Car Expenses

Publication 587, Business Use of Your Home

Publication 583, Starting a Business and Keeping Records

Small Business and Self-Employed One-Stop Resource Center

Publication 509, IRS Tax Calendars

Small Business Healthcare Tax Credit Questions and Answers

Of course, since the details of your situation are unique, you should always seek the services of a qualified financial planner and tax advisor. File Fail: Avoid These Four Common Small Business Tax Mistakes

After the Tax Deadline, What’s Next?

After the Tax Deadline, What's NextAfter the Tax Deadline, What’s Next? by Sherron Lumley.

Now that last year’s taxes are filed, it’s tempting to forget about the whole ordeal until the 2013 deadline rolls around. However, small business owners who take some time now to plan ahead for next year’s tax season can create substantial benefits for their companies.

Stay informed

Bruce Devereaux, a certified public accountant (CPA) in Seattle for 35 years, has witnessed the extensive changes in tax law over the years. He cites the ongoing Affordable Care Act healthcare tax credit, which many eligible small business owners failed to claim last year, as a good example of how complicated the tax terrain can be to navigate. So, it’s not surprising when his first bit of advice to small business owners is to “get a good tax advisor.”

Bisera Urdarevik, owner of the start-up company Lush Gourmet Foods in Kalamazoo, Michigan, agrees. “I would have to say that it is quite intimidating. It’s not the same as filing just as an individual,” she notes. That’s why Urdarevik says she opted to work with a tax specialist in her first year as a small business owner rather than risk making a costly mistake. Or, as she puts it, “Just to make sure all the ‘t’s’ are crossed and the ‘i’s’ are dotted.”

However, many small business owners prefer to do their taxes on their own and, thus, need a way to stay current on the changing tax climate’s potential impact on their business in the upcoming year. “I would encourage small business owners to form relationships with other small businesses,” says Devereaux, “whether through the Chamber of Commerce or trade associations, so they can be aware of tax law changes that will impact them and see how other businesses are dealing with the changing environment.”

PQ_AfterDeadline-1.jpgLook forward

“In the end, not planning costs you dearly because you will never know the missed opportunities,” says Sandy Abalos, managing partner of Abalos & Associates, a full-service accounting firm in Phoenix, Arizona. Abalos, a former member of the U.S. Small Business Administration’s National Advisory Council, notes that some of her clients are clearly eligible for the research and development tax credit, yet they tell her they don’t want to bother with claiming it.

But whether it’s out of apathy or fear of making a mistake, such a standoffish attitude toward aligning one’s business strategy and with tax rules can cost thousands, if not millions, of dollars. It may seem like a safe strategy after a down year or two, but if left unchecked, omitting taxes from the equation can quickly become an unhealthy fiscal habit. “After a period of time, people can lose sight of the value of planning,” Abalos explains.

Revisit your business structure

Once your taxes are filed, it’s a good time to ponder changing the legal structure of your business. Such a move is a major decision, but because it can have a significant impact on tax ramifications, it’s one that can and should be revisited periodically.

“So many businesses just start out quickly and they don’t know what type of entity they are or why,” says Gail Rosen, a CPA for 30 years in Martinsville, New Jersey. “Most start-up businesses do start off as an LLC because it is a simpler, less expensive way to begin and you can always incorporate later.” Also, the LLC structure provides business owners with some liability protection that a sole proprietor or partnership does not have. But take care, because some of these decisions can’t be undone. For instance, Rosen points out that once a business incorporates, it can’t go back to being an LLC.

Find your recordkeeping comfort zone

From the old-fashioned paper ledger to desktop accounting software to the new cloud-based financial tracking platfroms, there is a form of record keeping for everyone’s technological comfort zone.

Lauren Kay is head of SmartSitting, a nanny agency and temporary sitting service based in New York City. Kay founded the company three years ago, just after her sophomore year at Brown University, and since then the business has grown quickly and now includes 215 SmartSitters and over 100 families. Initially, her uncle acted as the accountant when the business was a part-time affair, with Kay doing most of the work herself to prepare the taxes. But after she recently graduated, rapid growth turned the business into a full-time job and that’s when she knew some changes had to be made.

“We’re learning to prepare better now,” says Kay. “We didn’t have a good system of recording before, other than going over the statements, which is painstaking after the fact.” SmartSitting sought some free small business advice from SCORE, a national non-profit that works in conjunction with the U.S. Small Business Administration to connect new businesses with thousands of seasoned mentors and consultants. “Our [SCORE] counselor had it out with us for not having an accounting system.”

Kathy Burlison, a CPA for 29 years and co-owner of SmartSpot in Prairie Village, Kansas, a suburb of Kansas City, says getting some organization is one of the key things to think about for the future after filing this year. For instance, she has a client with $3 million in annual revenues who still records everything for the company in a ledger. A simple Excel spreadsheet might be the next step for a business like that, while business accounting software such as QuickBooks is more advanced and for those who want to keep track of more data. She also recommends Expensify, a program that takes scanned receipts and files them automatically.

However, if a business has a number of people working remotely (or if the owner would just like to look at the company’s finances from the comfort of his or her home) a desktop software program on a standalone computer may no longer serve its needs, says Abalos. Instead, she says an entrepreneur may be ready to move up to a cloud-based version of a program like QuickBooks. “This is a full version that’s housed in a cloud platform that the business owner can access anywhere at any time and share with their accountant or bookkeeper,” explains Abalos. “It’s especially great for clients doing international work.”

(For more information about business record keeping, including how long to archive tax returns, payroll data, and capital investment information, check out IRS publication 583.)

Keep track of next year’s claims

Ian Aronovich, co-founder of the web-based GovernmentAuctions.org, says he has simpliflied his tax filing process thanks to a special desktop scanner and organizer. It lets him scan in things like receipts from expenses, sales invoices, and even business cards, and then sorts them by pertinent information. “At the end of each business day, just make scanning part of your work and you will have a leg up on next year’s tax season,” says Aronovich.

Note that not all of these expense deductions are created equal, however. For example, entertainment deductions are capped at 50 percent and must be backed up with documentation, which must include the who, what, when, where, and why of each expense. Business gifts, on the other hand, are limited to $25 a person per year. Knowing what can be deducted as an expense can help a small business better plan its spending for the year ahead.

“Although I am a pretty organized person, I had to go back several times to make sure I had all my receipts from expenses over the [past] year,” says Lush Gourmet Foods’ Urdarevik. She adds that with the ability to purchase goods and services through the Internet, it’s tough to remember to print and save the receipts. “I’ve found myself going back through and combing my emails for electronic receipts,” she says. “In the future, I think I will continue to file with a professional just because it would keep a bit more stress off of me.”

Back in Seattle, Deveraux would agree. When a small business is able to make its decisions based on good advice, he says, it is best positioned to “pay all the tax that’s due and no more.”

Five ways to profit by planning ahead for next year’s taxes.

Maximize your investments by taking advantage of 2012 tax credits.
Evaluate your current business structure through the prism of its tax burden.
Stay informed about changing tax rules and how they affect your business.
Keep good records, know what deductible expense receipts to keep and for how long.
Obtain free tax advice from small business mentors at SCORE.

Think Big, Tax Small

What Small Business Can Learn from Big Business Tax Strategies.

by Jen Hickey.

If you’re a small business, chances are you don’t have access to a team of accountants and lawyers to find savings in the tax code. But as it turns out, you don’t need to. Almost every expense is tax deductible if you’re a small business. And recent legislation has dramatically increased the thresholds for certain deductions dramatically for tax years 2010 through 2012.
Pull-Quote.pngTravel and entertainment expenses

Small companies, like their bigger brethren, can write off travel and entertainment expenses. But further savings can be had if a small business adopts an efficient reimbursement method for such costs. Most if not all big businesses have an “accountable plan” for T&E reimbursement. As Barbara Weltman, tax and business attorney and author of J.K. Lasser’s Tax Deductions for Small Business, points out, “these reimbursements are not only deductible, but businesses do not have to include them in their payroll taxes” if they have an IRS compliant accountable plan in place.
Health benefits

Benefit plans are another area often overlooked by small businesses for tax savings. For example, during tax years 2010 through 2013, the Patient Protection and Affordable Care Act provides up to a 35 percent tax credit for businesses that have 25 or fewer full-time-equivalent employees and that cover at least half the cost of their employee’s health insurance. Yet a 2011 Kaiser Family Foundation survey found that only 29 percent of small firms had made an attempt to find out if they were eligible for this credit. And don’t forget that any remaining premium costs (or all of them if your small business doesn’t qualify for the ACA tax credit) can be deducted as a business expense.

Offering a health savings account (HSA) is another way small businesses can achieve tax savings and offset the medical costs of a high-deductible health plan. An HSA is a tax-exempt trust or custodial account set up by an employer to pay or reimburse qualified employee medical expenses; contributions are allowed annually up to set limits for self-only or family coverage. Flexible spending arrangements (FSAs) work similarly by reimbursing employees for eligible medical expenses up to the plan’s limit (capped at $2,500 annually starting in 2013). They are funded through voluntary employee salary reductions. Most notably, contributions to HSAs and FSAs are not subject to payroll taxes, and withdrawals for qualified medical expenses are tax free.
Retirement plan costs

According to the U.S. Department of Labor, 64 percent of all employees in medium- and large-sized firms are covered by an employment-based retirement plan, yet only 34 percent of small firms offer this benefit. Start-up and maintenance costs are often cited as a deterrent.

But small businesses can claim a 50-percent tax credit to help offset the “ordinary and necessary” costs of starting a SEP, SIMPLE, or qualified plan (including a 401k), up to a maximum of $500 per year for each of the first three years of the plan. Even better, this credit dates back to any plans implemented since 2002. As a result, any unclaimed retirement plan startup costs can be retroactively redeemed by amending previous returns going back to that tax year.

“By setting up a small pension fund, you can deduct contributions for employees and, if a sole proprietor, deduct contributions made for yourself,” explains Stephen L. Nelson, a CPA who publishes the website S Corporations Explained and is author of QuickBooks 2011 for Dummies. “Earnings on contributions are tax free until employees receive distributions from the plan. It’s an inexpensive way to encourage savings while lowering your tax rate.”
Debt writeoffs

While the economy may be on a gentle upswing, many small businesses are still recovering from the loss of customers and suppliers swallowed up by the recession. Just like big banks and insurance companies, though, a small business can write off bad debts if it uses the accrual method of accounting. This means the amount must have been previously included in income. And if a bad debt is recovered, accounts can be adjusted for the next tax year.
Company structure

Ultimately, the structure of one’s business will determine how it’s taxed. This begs the question: which structure is the most tax friendly? Well, that depends on the nature of your business and average earnings. “As a sole proprietor or partnership, you’re legally liable for all debts,” Nelson explains. “In addition to income taxes on business income, the owner also pays another tax on business profits through the self-employment tax.”

For some companies, transitioning to an LLC offers the most tax flexibility while limiting personal liability for owners. S corporations do not pay income taxes, as profits/losses are passed through to shareholders who report them on their individual income taxes.

Whether you’re just starting out or considering a change, Weltman recommends meeting with a lawyer to help determine the best structure for your business. And, as Nelson points out, such tax-planning decisions should be made at the start of the year for the next tax season.
Capital investments and capital gains

“If it has a business purpose, it can be deducted,” says Nelson. And more recently, legislation relating to Section 179 deductions, bonus depreciation, and capital gains taxes on certain small business stock sales has become more accommodating. As a result, more and more large corporations are taking advantage of this favorable tax climate to make large capital investments in their production equipment and rolling stock inventory.

“Keep in mind ‘ordinary’ and ‘necessary’ when gathering those receipts,” Nelson reiterates. Internet service, cell phones/smart devices, office furniture and computers, production equipment, software: all these types of investments are deductible and many can now be completely depreciated within their first year of service.

For small companies that generally struggle with limited cash flow, taking full advantage of all these tax strategies can return real dividends in the long run. And it proves that an entrepreneur need not have access to offshore tax shelters or a team of accounting wizards to achieve big tax savings.