by Pete McAllister | Accounting News, IRS, News, Tax, Tax Planning
Filing taxes puts stress on small business owners, because most know that mistakes on business tax returns can affect your business’s success. Here are some common tax mistakes to avoid.
Mixing Business and Personal Expenses
Be sure not to report personal expenses on your small business’s tax return. It’s always a good idea to have separate credit cards, bank accounts, and filing folders for each. Sometimes an expense isn’t as cut-and-dry and you may have difficulty determining if it is indeed business or personal. In this case, turn to the IRS’s Publication 535 at www.irs.gov, which provides an overview of expenses that are and are not deductible.
Being Disorganized with Recordkeeping
This may seem like second nature to some business owners, but staying on top of tax documents, receipts, and copies of bank and credit card statements will go a long way toward avoiding overwhelm at tax time. While you don’t need to submit receipts or other proof of tax deductions to the IRS, you will need them on hand if the IRS decides to probe into your taxes further. If you get audited and you don’t have required documentation on hand to prove any claimed deductions, your tax bill could increase significantly.
Filing the Wrong Tax Forms
There are different types of tax forms required for different types of businesses (C corporations, S corporations, etc.), and if you have employees, you’ll need to fill out additional forms that document their payment through the year. Simply put, it can be a lot to track. A tax advisor can help you determine which forms you should be filling out.
Taking Too Many Deductions
Simply stated, taking deductions means that you get money back for certain purchases that assisted your business. Just keep in mind that too many deductions could raise a red flag for the IRS. If you’re unsure, a tax advisor can ensure that you’re adhering to deduction limitations and only claiming expenses that qualify.
Forgetting or Underestimating Your Tax Payments
Many small business owners are required to make quarterly estimated tax payments. Typically, the deadlines for these payments are the 15h of April, June, September, and January of the following year. How much you owe is based on your income. If you miss a payment, or if your payment falls short of your actual tax liability for the year, the government could saddle you with penalties, thereby increasing your tax liability. Furthermore, if the IRS suspects an intention to defraud it, the fine can be as high as 75%, and you could face criminal tax fraud charges.
by Stephen Reed | Accounting News, News, Tax, Tax Planning
As the owner of a small business, you are well aware that taxes are one of the most important topics on which to keep up to date. Making mistakes could mean a higher tax bill, and failing to properly manage your taxes could land your business in trouble. On the other hand, planning in advance, taking advantage of available deductions, and preparing your tax returns correctly can save on the amount of taxes your business is required to pay. Keep reading for tax-saving strategies to help reduce your tax bill.
Use the Qualified Business Income Deduction
The Qualified Business Income (QBI) deduction was created when the Tax Cuts and Jobs Act (TCJA) was established in 2018. With the QBI you might be eligible to deduct up to 20% from your qualifying business income if your business is a pass-through entity—a sole proprietorship, an S corporation, a partnership, or a limited liability company (LLC), where business income is passed to its shareholders, partners, or owners to report on their personal tax returns.
Limits apply to the QBI deduction based on income level and business type, so be sure to talk to your tax advisor. It’s also worth noting that the QBI deduction is set to expire in 2025.
Fund a Retirement Plan
Providing a qualified retirement plan for yourself and/or your employees can help save money on taxes. Owners of corporations can contribute up to 25% of their salary to a tax-deferred plan like a 401(k) or 403(b). Sole proprietors can contribute up to 20% of income into a tax-deferred SEP-IRA account.
Take Advantage of Tax Credits
Tax credits can be subtracted from owed business income taxes at state or federal levels. They encourage investment or provide assistance in targeted areas such as employee hiring, training, and retention; clean energy initiatives; disaster relief; and new construction, historic preservation, and disability access. The list of potential tax credits for businesses is extensive, so be sure to check with your accountant about your available options.
Take Tax Write-Offs for Qualifying Purchases
If you purchase equipment, machinery, and vehicles (and sometimes real estate) for your business, you can take tax-write-offs. The most frequently utilized types of deprecation are Section 179 deductions and bonus appreciation.
Section 179 deductions permit business owners to deduct the costs of certain assets as soon as they’re put to use, so you can deduct the entire cost of equipment in the year it is placed in service. This could allow you to pay lower taxes in the current year and still buy or lease more equipment to write off in following years.
Bonus depreciation is an added advantage for purchasing assets. The TCJA increased this tax break from 50% to 100% of the cost for assets placed in service through January 1, 2023.
Defer Income and Accelerate Expenses
Defer income by shifting some of it from this year into the next. You can do this by holding on to year-end invoices until just before the start of the new year. You likely won’t collect the payment until the first quarter of the new year, so taxes on that income won’t be paid until next year. Accelerate expenses in the fourth quarter by prepaying some expenses that aren’t due until the following year. Of course, you’ll need to determine the year in which you expect to pay the most in taxes. For instance, if you anticipate notably higher personal income next year, it may save on taxes to collect income now rather than delay it until next year.
Deduct Travel Expenses
Business travel is entirely deductible. While personal travel doesn’t hold the same advantage, you might be able to combine an acceptable business purpose with personal travel in order to maximize business travel. Keep in mind, too, that frequent flier miles earned from business travel can be applied to personal travel at a later time.
by Stephen Reed | Accounting News, Business Growth, News
After weathering the storm of the Covid-19 pandemic for the past two years, small businesses are facing yet another significant challenge: rising inflation. While small business owners can take solace in the fact that they’re not facing this challenge alone, it can be difficult to come up with a game plan to hedge against inflation. Below we’ll go over some top tips to help you do just that.
What’s Driving Inflation?
Inflation is a sustained increase in the price of goods and services, and it weakens the purchasing power of currency. In the US, demand surged once the economy re-opened post-pandemic lockdowns, and Americans were eager to spend money they had saved, including government stimulus checks. At the same time, we started to experience supply chain issues as a result of Covid-era policies. This put pressure on the supply-and-demand flow, with supply falling exceedingly short of demand. Rising oil prices, which lead to rising gas prices, are also to blame.
Media coverage on inflation tends to center the consumers, but the challenges posed to small businesses can be even greater, including:
- A loss of money due to rising supply costs
- A slowdown of incoming invoice payments as clients struggle with their own financial hardships
- More hurdles to access funds as financial institutions often tighten borrowing requirements for the duration of higher inflation
These challenges force the small business owner to either absorb higher costs or raise prices for the consumer. However, there are inflation protection measures that can help to alleviate this dilemma.
Use Automation to Increase Productivity
If it’s possible to automate certain daily tasks, do it. Tasks that make the most sense to automate include those that are repeatable and don’t take a lot of brainpower to complete, including:
- Email
- Contracts
- Purchase orders
- Invoices
- Inventory
- Shipping
- Sales and marketing
Automation cuts down on errors, simplifies processes, and enhances customer service. There is a plethora of apps available to help you, from implementing basic bookkeeping to boosting client care, ramping up marketing, and more. You may be using some of these apps already, but be sure you’re taking full advantage of the features they offer.
Cut Expenses
Reduce costs wherever you can. Cancel any services, subscriptions, and products your company isn’t using. Also consider looking into alternate materials, products, or ingredients that may be less expensive and will help ultimately save money. Something else to think about: Is transitioning to a hybrid remote/in-office model that would give you the opportunity to downsize your office a possibility for your business?
Tackle Debt
If you have any residual funds from the Covid-era stimulus packages, now is the time to use those to pay down high-interest debt, especially as interest rates are expected to keep rising. You may not be able to wipe out your debt completely, but try to cut down at least the principal amount. Decreasing how much you pay through lowering interest rates can aid in protecting against inflation.
Additionally, don’t discount trying to renegotiate loans or lines of credit with your lender in order to lower interest rates. Doing so will allow you to save money, which you can put into savings reserves.
Lower Your Supply Chain Risk
Your business is going to be susceptible to supply chain disruptions. To further protect against inflation, lower your supply chain risk by:
- Organizing backup supply chain options
- Exploring domestic substitutes for overseas suppliers
- Storing stockpiles of essential supplies for the least possible storage costs
Raise Prices Strategically
Even if you’re automating processes and cutting expenses, sometimes price increases can’t be avoided during periods of high inflation. Always keep a pulse on what the competition is doing, and be careful not to raise prices too quickly. Pricing yourself above the market without a strategic approach could lose customers.
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 Jean Miller | Accounting News, Business Growth, News
Running a small business can be stressful and time consuming, so it’s understandable when the financial health of your business gets neglected. Getting into the habit of reviewing your company’s overall financial health is a smart move to position your business for success now—and for years to come. Read on for an effective health checklist for your small business by focusing on three critical components: financial planning, budgeting, and investing.
Financial Planning
As a business owner you know that taxes are potentially one of the most substantial expenses affecting your bottom line. Therefore, you need to have defined business goals and personal financial goals in order to adhere to the most appropriate tax-planning strategies.
To do this you should:
- Keep an ongoing list of business and personal financial goals in order of priority, and consult this list when making any new financial decisions.
- Be sure you have a small-business structure that provides the most pertinent legal protections and benefits.
- Reduce taxes, or file an extension, and maximize applicable deductions and credits. Strategize by timing income and expenses to your advantage, utilizing charitable gifting, and saving for retirement with a Simple IRA, solo 401(k), or SEP IRA.
Budgeting
Issues with cash flow can derail a business to the point of no return. Get ahead of any challenges by managing your budget in accordance with your business plan.
- Know how much revenue it will take to cover any expenses before you can break even and generate a profit.
- Consistently keep an eye on your income, inventory, credit, and cash. Modify as needed in order to cover fixed expenses and hold onto a healthy cash reserve.
- When you do need financing, analyze your budget and cash flow trends to help determine the best financing options for your business.
Investing
As a small-business owner, don’t make the mistake of investing all of your money into your business. Make saving a habit so that you have enough cash reserves accessible in a pinch for both personal and business needs, but invest any extra cash inflow, and diversify non-business investments.
Additional Factor of Financial Health
In addition to financial planning, budgeting, and investing, you should be protecting your business with insurance. This could include liability insurance, property insurance, workers’ compensation insurance, health insurance, life and disability insurance, and business interruption insurance.
A financial health checklist is an important tool for aiding small-business owners in overseeing the financial condition of their company. Routinely taking stock of your business allows you to make smarter decisions for growth and success.
