All posts by Candy L. Hill

Let’s Get Organized!

Happy New Year! I hope you had a wonderful holiday season!

I don’t know if you noticed that the newspaper ads for the first two weeks of January centered around getting organized. I noticed that totes and storage boxes were on sale in almost every store and it got me thinking about organizing your small business.

Then I looked around my office and thought I should think about organizing my small business!

DSC_5274rI need to get these documents filed soon so I can (1) find them and (2) not trip over them (and the step-stool) when looking out my front window!

Let’s get started:

Step 1: Decide on your top 5 or 6 categories and write each one on a piece of paper to use as a placeholder. For me, the categories will be something like Business, Writing, Photography, Beads, Teaching, and Miscellaneous.

Step 2: Separate the documents according to your categories.

Step 3: Organize each category pile into sub-categories. For example, under “Beads” my sub-categories might be: Earrings, Bracelets, Necklaces, Sets, Expenses, Taxes, and so on.

Step 4: Put them into file folders and apply labels then file them in your file cabinet.

Easier said than done, I know. But it needs to get done!

If you want more information on organizing your small business check out Nellie Akalp’s blog post “10 Tips For Organizing Your Small Business This Year.”

Top Tax Deductions for Small Business

Here is a list of top tax deductions for your small business. Remember to check with a tax professional if you have questions or concerns about your deductions.

  1. Home Office. To calculate how much of the home-related expenses are tax deductible, measure your work area and divide by the square footage of your home. The resulting percentage is the fraction of rent, mortgage, insurance, electricity, housekeeping, etc. that you can claim. Make sure your home office is dedicated to your business work.
  2. Telephone and Internet. Any dedicated services for your business are deductible. If you use your home or personal cell phone for business, you may only deduct the portion used for business purposes.
  3. Auto Maintenance and Mileage. There are two ways to calculate vehicle deductions: standard mileage rate or actual expenses (such as gas and maintenance). Use the method that results in a larger deduction.
  4. Advertising and Marketing. As long as they are directly related to your business, you can deduct the cost of ordinary advertising (business card purchases, yellow page ads, and so on), as well as promotion costs for good publicity (such as sponsoring a local sports team).
  5. Inventory (Cost of Goods Sold). Businesses that manufacture products or purchase them for resale can deduct the cost of goods sold.
  6. Office Supplies. Pens, paper, staples, thumb tacks, etc are deductible. Just keep your receipts!
  7. Bad Debts. Your bad debt is deductible only if the amount owed to you was previously included in gross income.
  8. Education. This includes seminars and trade shows, but don’t forget any magazines, books, CDs and DVDs that are related to your business or industry. They are all 100% tax deductible.
  9. Legal and Professional Fees. Accountants, lawyers and other professional consulting fees are fully deductible.
  10. Travel Expenses. Nearly all business travel expenses are 100% deductible. These include airfare, hotels, and other on-the-road expenses. Eating out on the road is also deductible, but only up to 50%.
  11. Entertaining. Eating out with colleagues on a day-to-day basis is not deductible, but if you bring along a client or prospective client, that meal is 50% deductible. Taking a current or prospective client out for drinks or a show is also 50% deductible, but it has to be within a business setting or take place before or after a business meeting.
  12. Furniture. You can either deduct the entire cost in the year of the purchase or depreciate it over several years.
  13. Office Equipment. That new fax machine, copier, or computer is also 100% deductible. You can take it all in one year or depreciate it.
  14. Depreciation. If you buy property to use in your business, you generally can’t deduct the entire cost in the year of purchase — but you can spread the cost over more than one tax year and deduct part of it each year.
  15. Startup Expenses (Capital Expenses). You can choose to deduct up to $5,000 of startup costs, which include any research costs incurred for creating your business.
  16. Interest. Mortgage interest, finance charges (like credit cards), interest on payment plans, and interest paid on other loans are all 100% deductible.
  17. Software. Boxed or downloaded software are included. With more software being made available as a service, software subscriptions are also tax deductible.
  18. Taxes. Taxes paid in running your business are deductible.
  19. Charitable Contributions. If you contribute $250 or more, and claim the deduction, you need to have a letter from the organization which verifies your donation.
  20. Rent. You can deduct rent as an expense if the rent is for property that you use for your business. However, you can’t deduct the rent if you have even partial equity (or will receive equity) in the property.
  21. Utilities. The water, power, trash, and telephone bills at your office are all 100% deductible as regular business expenses. If you have a phone line that has a mix of business and personal calls, highlight the business calls and deduct only the business related portion of the bill.
  22. Repairs and Maintenance. The cost of repairs to keep your business property and equipment in operating condition is deductible.
  23. Petty Cash and Tips. Just because you didn’t get a receipt doesn’t mean you can’t deduct the cost, but you should have some documentation. It’s as much for you as for a potential audit.
  24. Service Fees. Fees for processing credit cards are 100% deductible.
  25. Licenses. License fees, as well as regulatory fees, are deductible.

Personnel Deductions:

  1. Employees’ Pay. You can deduct the pay you give your employees as long as the pay is in cash, property or services.
  2. Employee Benefits. Benefits like health plans, adoption assistance, educational assistance, and life insurance for your employees are generally tax deductible.
  3. Profit-Sharing or Pension Plans. You can deduct contributions you make to your employees’ SEP, SIMPLE, and other qualified plans.
  4. Insurance Premiums. You can deduct premiums that you pay for credit, liability, malpractice, and workers’ compensation insurance, among others.
  5. Freelancers. If you hire an independent contractor, you can deduct their pay as a business expense.

For more information on small business tax deductibles, check the IRS website.

Small Business Tax Tips – Part 2

Yesterday I posted the first six of 12 tax tips  for small businesses. Here are 7 – 12. Please note every effort has been made to include accurate information, but further research and the advice of a certified tax professional is highly recommended before following any of the tax advice contained here.

7. Help

If you are unsure about anything related to your tax obligations under the law, you should seek professional help from a certified public accountant. Meeting with your CPA quarterly to go over your specific situation will allow him or her to best advise you on what to do to keep your tax bill, and the stress over it, as low as possible.

7a. Update Your Accounting
Spend time each year reviewing your accounting practices to ensure that your books are up-to-date and accurate. Speak with your accountant about your procedures and ask if your current computer accounting system is the right system for your business.

 8. Traps

A small business owner may do some things that are more likely to get IRS attention than others. For example, claiming deductions that exceed your income for more than one year is a definite red flag. The home-office deduction, which is allowable only under specific circumstances, may be another red flag. That’s not to say you shouldn’t claim every deduction you’re entitled to claim, only that you should be especially careful when you do so.

Avoid Common Audit Traps:

  • Classifying Employees as Independent Contractors – Independent contractors and employees are not the same and it is important to understand the difference. In the eyes of the IRS, misclassification can be seen as an attempt to avoid payroll taxes; non-compliance can bring penalties and back taxes.
  • Home Office Deduction – This deduction is very specific and not all home-based businesses qualify. Know how to determine if you are eligible to claim this deduction and what specific expenses may be deducted.
  • Large Sum Miscellaneous Deductions – If you claim a large amount of itemized deductions or miscellaneous expenses, relative to your income, the IRS could get suspicious. Be specific and label every deduction.

9. Meet Deadlines 

April 15 isn’t the only important tax date for business owners. The following dates are important to keep in mind:

  • Annual returns. Most annual returns are due April 15 for unincorporated companies and S corporations. C corporations must file annual corporate returns within two-and-a-half months after the close of their fiscal year.
  • Estimated taxes. Estimated taxes are due four times a year: April 15, June 15, September 15, and January 15.
  • Sales taxes. Sales taxes are due quarterly or monthly, depending on the rules in your state.
  • Employee taxes. Depending on the size of your payroll, employee taxes are due weekly, monthly or quarterly.

10. Keep Business and Personal Expenses Separate

The IRS scrutinizes personal expenses that may have been claimed as a business expense, such as the use of a business vehicle, for personal use. Maintain separate bank and credit card accounts for your business and personal use. Be diligent about keeping good records.

11. Contributions

Many small business owners donate goods or services to charitable organizations throughout the year. Be sure to get a valuation for any non-cash items your business donates to charity so you’ll have the records you need to support the deduction for your contributions.

12. Always Keep Your Tax Documentation for Seven Years 

Although no one is looking for an audit, it is better to have your documentation ready if it happens. Some things like copies of business tax returns, licenses, incorporation papers, and capital equipment expenses should be preserved indefinitely. Keep any tax-related documents (e.g., expense receipts, client 1099 forms, and vehicle mileage logs) for a minimum of seven years.

*********

For additional information on these tax tips and current year tax deductions visit the SBA Small Business Tax Guide or contact the IRS. Next time we will discuss deductions for your small business in more detail.

Small Business Tax Tips

According to the professionals at the website AllBusiness.com: “Taxes are one of the most important issues facing small and growing businesses. And like a company’s profits, its annual tax bill will in part reflect the owner’s skills and knowledge. Business owners need to be sure that they are meeting all of their responsibilities to the tax man — and also seizing every opportunity to reduce their taxes.”

Here are the first six of 12 tips I gathered from the internet in an attempt to ease the burden of tax preparation and help in preparation for the next deadline. Please note every effort has been made to include accurate information, but further research and the advice of a certified tax professional is highly recommended before following any of the tax advice contained here.

1. Keep Good Records
Proper record-keeping year-round is the first step to ensure taxes are filed accurately. Save essential paperwork that could be needed to back-up deduction claims, should there be an audit. Keep it in mind that tax credits and deductions change each year.

2. Understand Available Deductions
One of the reasons small business owners pay more taxes than necessary is that they don’t take advantage of all of the deductions they’re legally allowed. Often that happens because they can’t prove they are qualified. The most common deductions for small business owners include entertainment, travel, meals, capital assets, home office and health insurance. Travel miles, meals and entertainment deductions require that you maintain a diary with daily entries that tie into receipts and other records.

3. Employee Taxes
If a business has employees, a variety of taxes will have to be withheld from their salaries. Among them are:

  • Withholding. Social Security (FICA), Medicare and federal and state income taxes must be withheld from employees’ pay.
  • Employer matching. Businesses must match the FICA and Medicare taxes and pay them along with employees.
  • Unemployment tax. Businesses must pay federal and state unemployment taxes.

4. Check out Tax Credits 
There are a variety of valuable tax credits available that can reduce your tax liability. These tax credits include Employer Social Security Credit, Disabled Access Credit, Work Opportunity Credit, Research Credit, Investment Credit, and more. Ask your accountant what credits are available for your business.

5. Quarterly Estimated Tax
This area trips up many an entrepreneur and is especially vexing for home-based businesses. Failure to keep up with estimated tax bills can create cash flow problems as well as the potential for punishing IRS penalties. Among the issues are:

  • Who should pay? A business probably must pay quarterly estimated taxes if the total tax bill in a given year will exceed $500.
  • How much should you pay? By the end of the year, either 90% of the tax that is owed or 100 percent of last year’s tax must be paid (the figure is 110% if a business’s income exceeds $150,000). Businesses can subtract their expenses from their income each quarter and apply their income tax rate (and any self-employment tax rate) to the resulting figure (their quarterly profit).

6. Sales Taxes
Most services remain exempt from sales tax, but most products are taxable (typical exceptions are food and drugs). If a business owner sells a product or service that is subject to sales tax, he or she must register with the state’s tax department. Then taxable and nontaxable sales must be tracked and included on the company’s sales tax return.

  • Having what is considered a “presence” in a state is the criteria used by the IRS to determine whether or not you are liable for paying state sales tax.
  • If you do not have a physical presence in another state, but sell items via the Internet or by catalog in that state, you can be subject to a state’s “use tax,” but typically not to their state sales tax. A “presence” in another state does not necessarily mean that you have a retail outlet in that state. If you have an office, warehouse, or employees working for you in that state, the IRS may consider you to have a presence in that state. Make sure you are aware of your sales tax responsibilities in all states in which you are doing business.

We’ll continue with 7-12 in a couple of days.

Business Taxes

As a small business owner, you need to know your federal tax responsibilities. Understanding and complying with tax requirements is a necessary aspect of doing business.  The IRS.gov website for small businesses provides extensive tax information and online tools and resources.

For additional information refer to IRS Publication 583, Starting a Business and Keeping Records. This publication provides basic federal tax information for people who are starting a business. It also provides information on keeping records and illustrates a record-keeping system.

As we discussed previously, when starting a business you must decide what form of business entity to establish. Your form of business (e.g., sole proprietorship, partnership, LLC) determines what taxes you must pay and how you pay them.

The following are the four general types of business taxes.

  • Income Tax
  • Estimated Taxes
  • Self-Employment Tax
  • Employment Taxes

Income Tax

All businesses except partnerships must file an annual income tax return.  Partnerships file an information return.  The form you use depends on how your business is organized. Refer to Business Structures to find out which returns you must file based on the business entity established.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year.  An employee usually has income tax withheld from his or her pay.  If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.  If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Estimated tax

Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. For additional information, refer to Estimated Taxes.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves.  Your payments of SE tax contribute to your coverage under the social security system.  Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Generally, you must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

  • If your net earnings from self-employment were $400 or more.
  • If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.

Note: There are Special Rules and Exceptions for aliens, fishing crew members, notary public, State or local government employees, foreign government or international organization employees, etc. For additional information, refer to Self-Employment Tax.

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file.  Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

For additional information, refer to Employment Taxes for Small Businesses.

This information provides a brief overview from the Internal Revenue Service of issues and decisions involved in owning a small business and avoiding common pitfalls.

Five Tips for Buying Business Insurance

To assess what types of insurance are best for your business, and how to secure coverage to provide adequate protection and minimize risks, use these five steps from the SBA.

1. Assess Your Risks. Insurance companies determine the level of risk they’ll accept when issuing policies. This is known as underwriting. The insurance company reviews your application and determines whether it will provide all or a portion of the coverage being requested. Each policy carries a premium and a deductible. Premiums vary widely and depend on a number of risk factors, including your business location, building type, local fire protection services, and the amount of insurance you purchase. Generally, the higher deductible you agree to pay, the lower your premium will be. When you agree to take on a high deductible you are taking on some financial risk. So, it’s important to assess your own risks before you go shopping.

2. Shop Around. Prices vary from company to company, so it pays to get several quotes. The  Insurance Information Institute recommends that you get the names of insurance companies or brokers who specialize in your type of business. Call several so that you can compare prices and get a feel for the types of services they would provide. It’s also important to pick a company that is financially stable. Check the financial health of insurers with rating companies such as Standard & Poor’s and consult consumer magazines.

3. Consider a Business Owner’s Policy. Insurance can be purchased separately or in a package called a business owners’ policy (BOP). A BOP combines typical coverage options into a standard package, and is offered at a premium that is less than if each type of coverage was purchased separately. Typically, BOPs consist of covering property, general liability, vehicles, business interruption and other types of coverage common to most types of businesses. BOPs simplify the insurance buying process and can save you money. However, make sure you understand the extent of coverage in any BOP you are considering. Not every type of insurance is included in a BOP. If your business has unique risks, you may require additional coverage.

4. Find a Reputable, Licensed Agent. Finding a good insurance agent is as important as finding a good lawyer or accountant. You should always look for one that has a license. State governments regulate the insurance industry and license insurance brokers. Many states provide a directory of licensed agents.

5. Assess Your Insurance Coverage on an Annual Basis. As your business grows, so do your liabilities. You don’t want to be caught underinsured should disaster strike. If you have purchased or replaced equipment or expanded operations, you should contact your insurance broker to discuss changes in your business and how they affect your coverage.

Does Your Small Business Really Need Insurance?

Today we will try to answer the question “Does Your Small Business Need Insurance?”

The short answer is YES.

If you don’t have business insurance you run the risk of losing more than your business. Without the right type of coverage, a fire, theft, accident, or lawsuit could destroy your business and may put your personal finances at risk.

Whether you are starting a business, taking on employees for the first time, or evolving your business structure, there are many variables that determine the right insurance for your small business. Insurance companies differ in the types of business operations they will cover under the various options they offer. So it’s wise to shop around for coverage options as well as price. 

Since there are such a wide variety of insurance policies available, always discuss your individual business insurance needs with an insurance agent or broker.

There are two fundamental types of insurance – commercial business insurance, which is not necessarily required by law, and employer insurance, which is. Caron Beesley, a small business owner, writer, and marketing communications consultant, complied this summary:

1. Types of Commercial Business Insurance

  • General Liability Insurance – This insurance broadly covers and provides protection against the legal hassles associated with accidents, injuries and claims of negligence.
  • Product Liability Insurance – If you manufacture, wholesale, distribute and retail a product, this insurance protects against financial loss as a result of a product defect that can cause injury.
  • Professional Liability Insurance – If you provide a service to a customer, this insurance can protect against malpractice, errors, and negligence in the provision of those services to your customers. Some state governments require certain professions (e.g. physicians) to carry such a policy.
  • Commercial Property Insurance – This covers everything related to the loss and damage of company property due to a wide variety of events such as fire, smoke, severe weather, vandalism, etc. The definition of ‘property’ is broad, and includes lost income, business interruption, buildings, computers, company papers and money. This is definitely one you should talk to an insurance expert about to understand your specific needs.

2. Insurance Requirements for Employers

If your small business hires employees, you are required by state law to pay for certain types of insurance. Here are the three key employee insurance requirements:

  • Workers Compensation Insurance – Businesses with employees are required to carry Workers’ Compensation Insurance coverage through a commercial carrier, on a self-insured basis, or through the state Workers’ Compensation Insurance program. Visit your state’s Workers’ Compensation Office for more information on your state’s program.
  • Unemployment Insurance Tax – If you have employees you are required to pay unemployment insurance taxes as determined by your state. First you’ll need to register your business with your state’s workforce agency. The State Taxes page on IRS.gov includes links to connect you with your state’s agency.
  • Disability Insurance – In the U.S., it is mandatory to purchase disability insurance only if your business is in one of six locations – California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island.

Next time we will look at “Five Tips for Buying Business Insurance” from the U.S. Small Business Administration (SBA).

Shiny Object Syndrome

I have come to the conclusion that I suffer from Shiny Object Syndrome – I often sit at my computer for hours getting nothing done. 

Internet Marketing Wiki defines Shiny Object Syndrome (SOS) as

the tendency for someone to get distracted by new thoughts and ideas, their own and others, and never focus or complete anything. In effect, the internet marketer is in such a state of constant distraction that they continually lose themselves in imagination and dreaming, instead of seeing the bigger picture and getting things done.

They go on to say that SOS “will commonly result in procrastination, even chronic procrastination and a constant sense of unease and dissatisfaction at not being able to move forward.”

Now that I have identified the problem, I am on the road to recovery. It will be an uphill battle but there is comfort in knowing that I am not alone.

“Nothing is so fatiguing as the eternal hanging on of an uncompleted task.” – William James

“Procrastination is the bad habit of putting off until the day after tomorrow what should have been done the day before yesterday.”  Napoleon Hill

Recently Mashable published a comic by Angela Liao of 20px  that identifies 12 Types of Procrastinators. I can relate to at least six but the Sidetracker and the Internet Researcher probably describe me the best. Which one (or two) are you? 

Luckily Mashable also supplied a link to a post by Sarah Ang on 7 Productivity-Boosting Tools to Fight Procrastination. I may have to start using “Strict Workflow” this week. It is a Chrome extension that helps you stay focused by blocking sites for 25 minutes then letting you browse for a 5-minute break.

I’ll be back soon with a post on business insurance, as soon as I finish researching it …

Why should you keep good business records?

Keeping good records is vital to your business. Bad record-keeping can be a serious pitfall for small business owners. You can avoid headaches when you are filing your tax return by keeping track of your receipts and other records throughout the year. 

Good records will help you:

1. Monitor the progress of your business

Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.

2. Project your tax liability (estimated tax payments)

During that first year of business you will need to project your tax liability so that you can make estimated tax payments. Estimated tax is the method used to pay tax on income that is not subject to withholding. Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. 

3. Prepare your financial statements

You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.

4. Identify source of receipts

You may receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business from your personal receipts and taxable from nontaxable income.

5. Keep track of deductible expenses

It is very important to have a system to keep track of your deductible expenses. If you don’t keep your receipts you may forget expenses when you prepare your tax return, unless you record them when they occur.

6. Prepare your tax returns

You need business good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.

7. Support items reported on tax returns

You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination. Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.

This information provides a brief overview from the Internal Revenue Service of issues and decisions involved in owning a small business and avoiding common pitfalls.