Tag Archive: deductions

Small Business Tax Tips Your Should Know

Small Business Tax Tips Your Should Know Small Business Tax Tips Your Should Know

Professional tax preparers for small businesses are already hard at work for the fast-approaching April 15 deadline. S corporations, which almost always follow a calendar tax year, are even shorter on time with a March 15 deadline.

Now that the reporting year has ended, most options to optimize a small business tax return lie in the deductions and credits you choose to claim, or in deciding to file for an extension. The estimated 85 percent of small business owners who file taxes as individuals should also review their returns for any claims that could raise suspicions with the IRS.

Home office deduction changes

Small business tax expert Barbara Weltman says the first thing to do is learn about changes in the tax code that affect entrepreneurs, especially those who work out of their homes.

“The good news is there is a new, simplified home-office deduction, since 52 percent of all small businesses are home-based,” says Weltman, author of J.K. Lasser’s Small Business Taxes.

Up until this year, most entrepreneurs working out of a home office had to make some complicated calculations about the percentage of their home’s square footage that they used for business, the portion of utilities and Internet that went to business use, and so on. Now, a home-based business can deduct $5 per square foot up to a limit of $1,500.

The original calculation method is still available, too. Which one should you take? Weltman advises business owners to compare the flat rate to the deduction they claimed in years past. “If you have a space that’s larger than 300 square feet, you might consider calculating it the old way. That’s the maximum you can have on the simplified method,” she says. The IRS also has an online comparison.

Use your time wisely

If you’ve been keeping good records throughout the year, tax time will be a lot less painful. But it’s also important to give yourself time to go over your paperwork and make sure you have everything you need to complete your return, says Chris Whitcomb, tax counsel for the National Federation of Independent Business.

Give your accountant or tax preparer enough time to complete your return and let you review it, Whitcomb says. Among NFIB’s 350-plus members, Whitcomb says nine out of 10 use an outside tax preparer, tax software, or both.

For sole proprietors, independent contractors, and home-based businesses, doing your own taxes isn’t out of the question. The Small Business Administration notes that tax preparation software is a good option, with one caveat: many free products don’t support business tax filers with necessary forms such as Schedule C. Check to make sure your software has everything you need.

Whitcomb adds that getting organized early also helps you find out if you owe money, and to plan accordingly. “You don’t have to file until April 15. You can plan for that cash flow ahead of time if you have to pay,” he says.

Maximizing deductions

Weltman says tax time is your opportunity to make smart elections. One example is the Section 179 deduction, which allows business owners to write off the entire cost of new equipment in one year rather than taking depreciation over multiple years. Eligible items include machinery, computers, certain software, and furniture. Or, a business can take bonus depreciation, which allows half the cost of qualifying equipment to be deducted this year, with remaining depreciation amortized over the item’s lifetime.

“Depending on your tax picture, you should sit down with your tax advisor to figure out the best depreciation strategy for your business,” Weltman says.

Enjoy these deductions while you can. They’re two of 55 tax breaks that Congress allowed to expire at the end of 2013. Congress could retroactively reinstate them, but for now Weltman says that makes 2014 tax planning difficult. For 2013, a business can write off up to $500,000 under Section 179. That number drops to $25,000 next year, and bonus depreciation is on track to be eliminated altogether.

If you laid the groundwork for a business in 2013, some startup expenses can be deducted, such as money spent on product and market analysis and visiting potential business sites. For more small business expenses and deductions, check out the SBA’s guide.

Finally, some states also have special incentives for businesses that aren’t available from the federal government, Weltman adds. Check the rules and deadlines in your state before you finalize your return.

Audit pitfalls

The SBA advises business owners to avoid these common audit triggers:

Large sum miscellaneous deductions – The IRS takes notice at long lists of itemized deductions that don’t seem to fit your income. Be specific about every deduction and keep the documents to back them up.
Classifying employees as independent contractors–Failing to classify correctly could mean you’ll owe back wages under the Fair Labor Standards Act, and you may pay back taxes and penalties. Visit this guide
Keep business and personal expenses separate – It’s best to maintain a separate bank account or credit card for the business, Weltman advises. But if you didn’t do that in 2013, recordkeeping is the next best defense, especially if you used personal property like a vehicle for your business. Failing to keep business and personal activities separate can mean losing out on business write-offs if your records aren’t clear, she says.

Where Weltman parts ways with the SBA, however, is over the home-office deduction. SBA repeats the long-held belief that having a home office increases your odds of being audited. “Is it a red flag? My opinion is no, because look at how many people work from home today,” Weltman says.

Just make sure you qualify for the deduction, she adds. If your business has a commercial address and you work from home occasionally, that doesn’t pass the test.

And if you’re doing really well, expect extra scrutiny. Those who report $200,000 or more in income automatically fall into a high audit risk category, Weltman says. This year, there is also an additional 0.9 percent Medicare tax on earned income and 3.8 percent tax on net investment income for single filers making $200,000 and married couples filing jointly who make $250,000.

Need more time?

You can file for an extension if April 15 is coming too fast. NFIB’s Whitcomb says it’s better to get your return right than to rush through it just to meet the deadline, especially if you’re missing key supporting documents.

If approved, an extension will give you five to six extra months to prep your return. But remember, you don’t get extra time to pay. Estimate what you owe and send the payment when you file Form 7004 to request the extension. If you’ve already made quarterly payments, furnish that information to the IRS as well. If you owe money but don’t pay, the IRS could reject your application, and interest and penalties will kick in.

Looking ahead

When wrapping up your 2013 return, remember that it’s also time for the first payment of quarterly estimated taxes for 2014, Weltman says. Stay on top of your cash flow projections so you have enough on hand when these payments come due.

Although the expiring tax breaks make for a lot of moving targets, she says it’s best to peg your 2014 tax liability to your 2013 tax obligation. “No matter how much you ultimately owe, at least you won’t have underpayment penalties,” she says.

Why A LLC Limited Liability Company The Right Formation for Your Business

Why A LLC Limited Liability Company The Right Formation for Your BusinessWhy A LLC Limited Liability Company The Right Formation for Your Business
Should you operate your business as a corporation? Or is there another, simpler alternative. You’ve probably noticed that in the past decade there are more and more businesses with their names followed by the letters “LLC” instead of “Inc.”. “LLC” stands for Limited Liability Company, is the newest type of legal entity that exists in the United States, and for many entrepreneurs it is the ideal marriage between the tax advantages of the limited partnership and the limited liability feature of the corporation. Now available in all 50 states—even to non-U.S. citizens–most likely the LLC should have a key place in your business structure. Why A LLC Limited Liability Company The Right Formation for Your Business

When it comes to legal entities for conducting business, limited liability companies are the newest kid on the block in the United States. The state of Wyoming was the first to pass legislation, in 1977, to establish this new entity. By 1999 all fifty states in the United States had enacted legislation to allow the formation of this exciting new legal entity.

But why is the LLC so attractive, so irresistible to legislators? And why have so many entrepreneurs opted for the LLC instead of a “C” corporation, or even an “S” corporation? And most important, how do you decide if it’s right for you?

Perhaps the most important reason is for the popularity of the LLC that the it satisfies the demands of both accountants and attorneys. Accountants tend to prefer the Limited Partnership (“LP”) because they are concerned about the dangers of “double taxation” if their clients use a corporation: If your corporation pays dividends, the corporation pays taxes on its profits, and its shareholders pay taxes again on those same profits when they are taxed on the dividends they receive. By contrast, attorneys usually prefer the greater asset protection offered by the limited liability that the corporation has to offer to all its owners.

Let’s begin with an understanding of what the limited liability company is. Basically it is a partnership among its owners, who are called “members”. The LLC is like a limited partnership (and an S-corporation), because it is a “pass-through entity”–each partner’s or member’s share of the net gain or loss for the year “flows through” to the individual tax-payer’s 1040 individual tax return. There is no separate tax to which the LLC itself is subject. On the other hand, the LLC is also like a corporation, because unlike the limited partnership–which requires a general partner, who is responsible for all results of all decisions and actions of the partners–all its owners benefit from limited liability. 

People choose to form LLCs basically for the same reasons that they would elect to set up an S-corporation or a limited partnership. The LLC, like the S-corporation, is attractive if you have earned income that puts you in a high tax bracket, and you would like to be able to offset that income with the losses that you can normally expect to incur in your first years in a business. When I formed my first business entity twenty years ago, my husband and I selected the S-corporation. We both had salary income that placed us in a high tax bracket, and we knew that our new consulting business would incur significant capital expenses in the first few years. After all, we would have to purchase new equipment such as a fax machine, a laser printer, personal computers, and the replaceable supplies to operate them. We were also aware that it would take some time to build a clientele, so our income from the business would take a few years to take off. The S-corporation allowed us to carry the losses we incurred onto our individual 1040 tax returns. The losses were deducted from our gross personal salary income, and we paid dramatically lower taxes.

If you can get this advantage from an S-corporation, why would you bother with an LLC? The LLC has a number of advantages over the S-corporation:

1. First, LLC does not have the limitations that the S-corporation has on who can be a member of the LLC. Only individuals, estates, some trusts, and other S-corporations can be members of an S-corporation. Individuals (shareholders) must be either U.S. citizens or residents. By contrast, the LLC is not subject to these limitations. Thus, it is an ideal entity that you can combine with other entities in your business structure. For example, you can have a corporation or other legal entity be a member of an LLC. Why A LLC Limited Liability Company The Right Formation for Your Business

2. The LLC has much greater flexibility for allocation of rights, profits, and assets than the S-corporation. The S-corporation can have only one class of stock: In other words each share of stock has the same rights as every other share. This means that the allocation of profits and assets is extremely rigid. If Parties A and B are equal shareholders in a corporation, and the corporation decides to distribute its profits of $10,000, then A and B must each receive $5,000. This might not necessarily be equitable if one partner was much more active and produced a much greater share of the profits than the other. The LLC allows for A to receive, say, $8,000 if its business activities generated 80% of the profit, leaving B with the remaining 20%, or $2,000. This can be very attractive in a partnership in which there is a significant difference in the amount of capital and ongoing business activity that the partners are contributing to the business.

3. The LLC is not subject to the same corporate formalities that are required of the S or C corporation. While the LLC must still maintain appropriate LLC records and bookkeeping, it is not required to be managed by a board of directors and maintain minutes of regular board of directors meetings.

4. Unlike the S-corporation, liquidation of an LLC is generally not a taxable event. As your personal and business financial situation change over time, you may determine that it is no longer in your interest to maintain a “pass through” entity for your business. Once your business begins to turn a regular profit after the relatively high costs of the first year or two, you may decide that a C-corporation that is taxed at a maximum of 25% (unless it is a personal service corporation) would be more advantageous to you. If you have been operating as an S-corporation and you liquidate it by selling the liquidated assets to the shareholder(s) at their fair market value, the liquidation will be a taxable event. This does not apply to the LLC. This is one of the factors that makes the LLC particularly attractive for holding real estate. Why A LLC Limited Liability Company The Right Formation for Your Business
5. The concept of the charging order makes the LLC especially effective for asset protection. This makes it a particularly attractive entity for holding real estate. The corporation should not be used to hold real estate, because if the corporation is sued, the court might award shares in the corporation in the judgment. Control of the corporation translates into control of the property, and you effectively lose control over your real estate holdings. By contrast, the charging order, used with Limited Liability Companies as with Limited Partnerships, gives the plaintiff only the right to receive income distributions from the interest of the party or parties against whom the suit was brought. The charging order grants no voting rights or management powers. Thus, the existing managers or members could vote simply not to distribute income, thus leaving the plaintiff with no recourse; yet the plaintiff will have to pay taxes on the income allocated to her, even though the funds were not distributed(!). This offers a strong incentive for the plaintiff to negotiate for a settlement.

Clearly, the LLC is a powerful tool for protecting your assets against financial predators. If you use it for real estate holdings, you can maximize this protection by holding each piece of real estate in a separate LLC. Thus, if one LLC comes under attack from financial predators, the operations affecting only a single property will be affected.
Disadvantages of the Limited Liability Company

Needless to say, there are some disadvantages with the LLC–otherwise there would not be remain so many other attractive options for structuring your business. Why might the LLC not be the best option for you?

1. Increased taxes for LLC members in high tax brackets. Once your LLC is making a profit, its income passes through the individual members, who are taxed directly on that income, whether it is actually taken out of the LLC or not. Thus, members who are in a high tax bracket might pay higher taxes than they would if they used a C-corporation, which is subject to lower marginal tax rates. Proper planning of disbursements for expenses and other aspects of the business could overcome this disadvantage.

2. Higher initial filing fees for LLCs in some states. Some states may levy heavier tax obligations on LLCs in their initial years. Our home state of California requires that an LLC pay a minimum $800 tax in its first year, while corporations are exempt in their first year–whether the business has any earnings or not! It can still be worthwhile for you to start an LLC: If you have high start up costs, tax savings in the thousands of dollars will outweigh these higher filing fees.

3. Unlike corporations, LLCs do not have continuity of life, that is they are limited usually to a specific period of time (say, 50 years) depending on the state.
If an LLC member dies, the remaining members may vote to continue the LLC business. LLC interests can be gifted to other family members; and the LLC can have a trust or family limited partnership as a member, thus providing for effective estate planning.

4. The LLC is a relatively untested entity. There is the large body of case law on corporations but on LLCs. We may also expect to see changes in the laws governing LLCs as the implications of this new entity become more apparent to legislators.

Space does not permit coverage of all the advantages and disadvantages of LLCs, but clearly the LLC can be a powerful tool for operating your business, protecting your assets, and planning your estate. It is easy and inexpensive to set up on your own, if you use one or more of the items. Why A LLC Limited Liability Company The Right Formation for Your Business


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.