by Pete McAllister | Accounting News, Bookkeeping, Business Growth, News
Whether a small business owner is working with an accountant or on their own, it’s critical to establish a bookkeeping process in order to mitigate the possibilities of unexpected cash flow problems. Tracking finances and transactions provides stability for your business and allows you to focus on company goals and growth. Here are some tips for efficient bookkeeping.
Separate Business and Personal Expenses
This should be done as soon as you establish your business. Separating personal and business accounts is beneficial in that it helps to:
- Avoid blurred lines on expenses that could prompt an IRS audit.
- Limit your personal liability should your business ever be sued.
- Clarify business expenses for bookkeeping practices
By opening business accounts, you will begin to develop business credit, which is separate from your personal credit history. A good business credit score translates to lower rates on insurance policies and increases your borrowing potential.
Track All Business Expenses
It might seem like a no-brainer, but tracking and categorizing expenses and revenue streams are essential for tax purposes and profit monitoring. Doing so allows you to easily spot different areas of strength and growth based on chronicled data. Whether you use an accounting software program, a basic spreadsheet like Excel, or even a pen-and-paper ledger, what matters is that you find a process that works for you and stick with it.
Keep a Consistent Schedule for Bookkeeping
Unless your small business offers financial services, it’s unlikely that you started your company due to a love of numbers and bookkeeping, so it’s understandable if this might be a task that’s tempting to push to the backburner. However, consistently scheduling blocks of time for balancing the books will help simplify your life, especially during tax season. If your business has grown to the point where you loathe the time it takes to keep up on bookkeeping, you might be ready to hire on a bookkeeper.
Be Prepared for Major Expenses
Even if you have meticulously maintained balance sheets and cash flow reports, you don’t have a crystal ball to predict surprising expenses. That’s why it’s crucial to plan for such expenses, especially unplanned ones, with a separate emergency fund dedicated specifically to your business. Aim to save enough cash to cover expenses for three to six months. Having cash stashed away also helps to avoid going into debt for your business. Operating with little to no debt means less risk and a faster profit, which means you’ll have more capital to put back into your business for growth opportunities.
Prepare for Personal and Business Taxes
Do your best to dodge surprises and errors with your small-business taxes by preparing throughout the year. Here are some things to keep in mind:
- Income tax: The manner in which you’re required to pay income taxes depends on how your business is structured legally. For example, if you have a sole proprietorship, your business taxes are paid as part of your personal income tax known as “pass through” taxes. However, if you have a structure like a Limited Liability Company (LLC), you’ll owe self-employment taxes and no corporate taxes. Be sure that you understand how your business is structured legally so you know how you’re required to pay income taxes.
- Payroll tax: In order to file payroll tax returns, you need a Federal Employer Identification Number (FEIN). If you operate across more than one state, you will also need a State Identification Number for each state in which your business operates. Payroll taxes are deposited either semiweekly or monthly and reported quarterly.
- Sales tax: If you’re in the business of selling products, you need to collect sales tax from each customer. These taxes differ by state, county, and city. If you sell online or across multiple locations, it might be beneficial to consult a tax professional to be sure you’re collecting sales taxes correctly.
Consider Hiring and Accountant
While most accounting software programs have some form of technical support, the risk of user error is high. Real-world accounting professionals can offer an experienced set of eyes to ensure your records are accurate and your finances are organized. The hours you devote to keeping up on your business’s books and taxes could be better spent brainstorming new ideas, managing your team, and searching out new growth opportunities.
by Pete McAllister | Accounting News, News, Tax, Tax Planning, Uncategorized
There are some valuable tax deductions available for self-employed people. The key is knowing what they are and how they can help reduce your tax bill. Here are some key self-employment tax deductions to remember.
Home Office Deductions
This deduction allows you to deduct any portion of your home that is used specifically and regularly for work. There are two methods used for deducting home office expenses:
- Regular Method: To use this method, you will itemize the actual expenses incurred by completing form 8829. The list of deductible expenses includes furniture, appliances, utilities, insurance, maintenance, and repairs. If you plan to use this method, it’s important to keep accurate and detailed receipts.
- Simplified Method: To use this method, you will simply apply the standard deduction of $5 per square foot of home used for business, up to a maximum of 300 square feet. This is an easier way to account for home office expenses than the method above, but keep in mind that the 300 square-foot limit amounts to a maximum deduction of $1,500.
Vehicle Use for Business
You may be able to deduct the use of your vehicle on your tax return if you regularly use it as part of your business. There are two methods of calculating these expenses:
- Actual Expense Method: Employing this method authorizes you to deduct specific costs essential to operating your business vehicle, such as gas, oil changes, tires, registration fees, insurance, and depreciation. If you also use your business vehicle for personal use, you will need to calculate the portion of the operating costs that you generated due to business travel, and only that amount is deductible.
- Standard Mileage Rate: To use this approach, you will multiply the number of business miles driven by a flat per-mile rate. This rate can vary from year to year. For tax year 2021, it decreased from 57.5 cents to 56 cents per mile.
Health Insurance
If you are self-employed, you can deduct the cost of health care premiums for you and your family. This includes any children under 27 who are on your health plan, regardless of whether you claim them on your return. However, you won’t qualify for this deduction if you or your spouse are eligible for an employer-sponsored health plan.
Social Security Taxes
Employees who work for a company have payroll taxes deducted from their paychecks, and Social Security and Medicare are typically split equally between employee and employer (i.e., employee pays 7.65% and employer pays 7.65%). However, the self-employed pay the total 15.3% tax, which consists of a 12.4% Social Security tax and a 2.9% Medicare tax. The 15.3% tax is owed if your net earnings for the year are greater than $400. The good news for the self-employed is that they can write off half of the self-employment tax without the need to itemize. For tax year 2021, the maximum amount of self-employment income that’s subject to the 12.4% Social Security tax is $142,800. In 2022, it increases to $147,000.
Retirement Tax Shelters and Credits
If you are self-employed, you are eligible to contribute pretax money to a simplified employee pension (SEP) or a solo 401(k). This is in addition to an IRA account. Both SEPs and solo 401(k)s allow higher annual limits than regular individual retirement accounts.
Covid-Related Sick and Family Leave Credits
These tax credits are applicable for the first nine months of 2021. As a self-employed person, if you were unable to work (including telework or working remotely) due to certain COVID-19 related circumstances you are eligible to claim sick and family leave credits that are comparable to credits authorized for other businesses. These circumstances include personal sickness or quarantine, awaiting the results of a COVID test, and caring for a dependent who was sick or unable to attend school or daycare because of sickness, closure, or quarantine.
The credit amounts you are ultimately eligible for will depend on a few different factors, including the reason for missed work, timeframe of missed work, and duration of missed work. You will need to fill out the IRS’s Form 7202 to calculate your credits.
Deduction for Qualified Business Income
The qualified business income deduction (QBI) allows eligible self-employed and small-business owners (including sole proprietors) to deduct up to 20% of their qualified business income on their taxes.
In order to qualify, in general, total taxable income in 2021 must be under $164,900 for single filers and $329,800 for joint filers. These limits raise in 2022 to $170,050 for single filers and $340,100 for joint filers. If your taxable income is above these limits, complex IRS rules will verify whether your business income qualifies for a full or partial deduction.
Expensing
Expensing (also known as Section 179 deduction) lets you deduct the full purchase price of certain qualifying business assets in the year you bought them. The tax break applies to physical items—equipment (new and used), machinery, office furniture, off-the-shelf software, etc. Intangible assets such as patents and copyrights do not qualify, but improvements to business buildings as well as any installation of fire alarms and security systems do qualify for the tax break. You also cannot use this deduction for purchased land and real estate.
For tax year 2021, up to $1.05 million worth of equipment is acceptable for the immediate write-off of expenses, but this amount decreases if you put more than $2.62 million of new assets into service over the course of any single year. The equipment must have been purchased (or financed) and placed into service by December 31, 2021.
by Pete McAllister | Accounting News, Audit and Accounting, Bookkeeping, IRS, News, Tax, Tax Planning
The IRS uses a computer program called the Discriminant Function System (DIF) to analyze tax returns and red flag them if they deviate from statistical averages. When a return draws a high DIF score, an agent evaluates it and decides if an audit is necessary. Your business should always be prepared for an audit, and that includes avoid these audit triggers when filing your small business taxes.
Higher Than Average Income
If you report a high amount of income, this may draw red flags for the IRS. Approximately 50% of the returns audited belong to taxpayers earning more than one million dollars per year. For taxpayers who earn more than $5 million, their odds of being audited more than doubles those of taxpayers who earn less.
Underreporting Cash Transactions
Don’t make the mistake of thinking that the IRS has no way to trace cash transactions. Credit card processors submit 1099-K forms to the IRS, which include a report of the total credit card transactions your business processed for the year. The IRS then applies these figures to an undisclosed formula in order to calculate the amount a business should have generated in cash sales. Therefore, if your reported cash sales reflect a lower figure than their formula detects, your business could be at risk for an audit. It’s a smart idea to keep detailed records of both cash and credit card transactions so you can support your claims should your business be audited.
Taking Too Many Deductions
Deductions are important to a small business owner, but claiming too many can raise red flags. Higher than average meal expenses and claiming your car as 100% business can set off alarm bells for the IRS and trigger and audit.
The IRS states that a legitimate business expense must be both ordinary and necessary to qualify as a deduction.
- Ordinary expenses = common and accepted in your trade or business
- Necessary expenses = helpful and appropriate for your trade or business. Note that an expense does not need to be indispensable to qualify as necessary.
Claiming Consistent Business Losses
Given the primary purpose of a business is to generate money, reporting losses year after year can lead the IRS to question the legitimacy of your business. If your business gets audited and you claimed losses, be prepared with documentation to demonstrate your business’ earnings and expenses throughout the year.
Be Prepared for an Audit
Your business may never need to go through an audit process, but you should manage your business always knowing that it’s possible. Keep precise records, make sure the numbers on your tax return are accurate and honest, report all income, and take suitable deductions. Lastly, consult with an accountant to be sure the totality of your revenue, expenses, and documents are free of missteps or miscalculations.
by Pete McAllister | Accounting News, CARES Act, News, Tax
The Consolidated Appropriations Act, 2021 (the Act) signed into law by President Trump on Dec. 27, 2020 includes significant modifications to the Employee Retention Tax Credit (ERC) enacted under the CARES Act. The credit originally provided a 50% refundable tax credit for businesses that maintain employee payroll, even amidst temporary business closures due to government-mandated lockdowns, or considerable downturns in gross receipts due to loss of business. This article will highlight changes to the ERC for 2021.
Period of Credit Availability
The CARES Act originally provided credit for qualified wages paid after March 12, 2020 and before Jan. 1, 2021. The new law extends availability of the credit for qualified wages to the first two quarters of 2021 (before July 1, 2021).
Amount of Credit
Under the original law, the credit amount was set at 50% of the qualified wages paid to the employee, plus the cost to continue providing employee health benefits. The Act increases the credit amount to 70% of qualified wages, which is intended to include the cost of employee health benefits.
Maximum Credit Amount
The CARES Act capped the credit at $5,000 per employee for all qualified wages paid during 2020, but the Act increases the maximum credit to $7,000 per employee for each of the two quarters in 2021, so the maximum credit for 2021 will be $14,000.
Eligibility Requirements for the Credit
In order to qualify for the ERC under the original law, businesses must have been experiencing full or partial suspension of operations due to a Covid-19 lockdown order. They could also qualify if, for any quarter in 2020, gross receipts were less than 50% of gross receipts for the same quarter in 2019. With the passage of the Act, businesses whose operations are either fully or partially suspended by a government-mandated lockdown order due to Covid-19 or whose gross receipts are less than 80% of gross receipts for the same quarter in 2019 can qualify for the ERC.
Credit Eligibility Whether or Not Employees Are Working
For a company with more than 100 employees, the original law under the CARES Act did not provide credit for wages paid to employees who were performing services for the employer in some capacity. However, a company with 100 employees or less did qualify for the credit, even if the employee was working. The Act raises this threshold to 500 employees, so that for the first two quarters of 2021, a company with 500 or fewer will be eligible for the credit, even if employees are working.
PPP Loan Eligibility
A company that received a Paycheck Protection Program (PPP) loan was not eligible for the ERC under the original CARES Act. With the passage of the Act, companies that received a PPP loan in 2020 may also qualify for the ERC. To prevent double dipping, a credit may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven. However, amounts paid that were either not forgiven or are over and above the PPP loan amounts can be included for ERC purposes.
by Pete McAllister | Accounting News, CARES Act, COVID-19, News, Relief Bill, Stimulus, Stimulus Package, Tax
President Trump recently signed a second stimulus package—called the Consolidated Appropriations Act, 2021 (Act)—into law. The legislation includes over $300 billion in aid for small businesses. Below is a breakdown of some of the business tax changes and extenders in the new COVID-19 relief bill.
Payroll Tax Credit for Paid Sick and Family Leave
The refundable payroll tax credit for paid and sick family leave, established in the Families First Coronavirus Response Act, is extended until March 31, 2021. The tax credits are modified so that they now apply to practically any payments made to workers for these purposes.
Payroll Tax Repayment
The time frame for employees to repay deferred employment taxes under the President’s executive order, which was issued in August 2020, has been extended from April 2021 to December 31, 2021.
Employee Retention Credit
The Employee Retention Credit (ERC) under the CARES Act has extended to July 1, 2021. Further, the refundable tax credit has increased from 50% to 70%, the per-employee wages limitation has increased from $10,000 per year to $10,000 per quarter, and the determination of a large employer for purposes of the ERC has increased from 100 to 500 employees.
30-Year Depreciation of Certain Residential Rental Property
The new law determines that the recovery period relevant to residential rental property placed in service before Jan. 1, 2018, and held by an electing real property trade or business, is 30 years.
Business Meal Deduction
Rather than the current 50% business expense deduction for meals, the bill temporarily allows a 100% expense deduction for meals provided by restaurants in 2021 and 2022.
Deduction for Energy Efficient Commercial Buildings
The deduction for energy-efficient improvements to commercial buildings, such as lighting, heating, cooling, ventilation, and hot water systems was made permanent. The amount will be inflation-adjusted after 2020.
Changes to the Work Opportunity Tax Credit
If employers hire workers who are members of one of more of ten targeted groups under the Work Opportunity Tax Credit (WOTC) program, they are permitted to use an elective general business tax credit. Previously applicable to hires before 1/1/2021, the TCDTR extends the credit through 2025.
Employer Payments of Student Loans
Section 127, which permits employers to provide certain educational assistance to employees on a tax-free basis, was modified under the CARES Act to authorize the payment by an employer of principal or interest on specific employee qualified education loans through December 31, 2020. The Consolidated Appropriations Act expands this through December 30, 2025. As the pandemic subsides, employers may want to consider this valuable tax-free benefit.
Health and Dependent Care Flexible Spending Arrangements
The bill allows taxpayers to roll over unused funds in their health and dependent care flexible spending accounts from 2020 to 2021 and from 2021 to 2022. This arrangement also permits employers to grant employees a 2021 midyear prospective adjustment in contribution amounts.
