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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.

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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.

What Business Structure is Right for You?

It’s a reasonable question – but not easy to answer. Entire books have been written on the subject. I am going to give you a basic introduction with links to resources that will give you more information. You should meet with your attorney or accountant to make the final decision.

legal-structures

Selecting the legal structure of your business is a big deal but you can change the business structure whenever you think it is appropriate to do so. In other words, you can start out as a sole proprietor and change to LLC later. Things to consider when deciding the legal structure of your business include the start-up cost, cost of operations, taxes and liability.

Here’s an overview of the basic legal structures you can use for your business:

Sole Proprietorship

A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

Partnership

A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.

Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.

Limited Liability Company

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

The “owners” of a LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.

Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

Corporation

A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.

Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.

My jewelry business is a sole proprietorship and I am leaning that way for the consulting business. I plan to find and meet with a business attorney soon.

Next time we’ll discuss writing a business plan.

[Photo Credit: howtostart-acleaningbusiness.com]

It’s Independence Day!

I hope you are having a happy and safe Fourth of July holiday. I’m happy because I’m working towards my own independence day. Why are you happy today?

I thought I would give you a little background information so you have a better idea where I am coming from. I have one business already. I started it in 2003. I make and sell beaded jewelry, mostly at Christmas craft shows. The name of my business is “Sweet Creations – Jewelry by Candy” and it violates many of the principles of naming a business. For example, it’s too long – sweetcreations-jewelrybycandy.com is a mouthful! Also, it’s too specific. What if I decided to create something other than jewelry?

You may be wondering why I didn’t go with just “Sweet Creations” or “Jewelry by Candy” First, I found out that “Sweet Creations” was registered to a bakery somewhere in Florida when I tried to register it on the Fictitious name website. Second, I never thought of going with “Jewelry by Candy” until a minute ago!! So, wait here while I go look to see if that’s registered to anyone else in Florida … No it isn’t but there were 21 businesses registered that started with “Jewelry by …”

I decided to use my initials in naming any new endeavors. And I came up with a logo. It stems from the way I have initialed things since I was a teenager. Here’s my logo for the consulting business I’m working on:

CandyHill_logo-centered

Next time we’ll investigate what’s the right legal structure for your new business. There are four types of business structures — sole proprietorship, partnership, limited liability company or corporation — each has its own advantages and disadvantages.

What’s in a Name?

There are so many things to consider when naming your business that it can make your head spin. If you use Google and search “how to pick a name for your business” you will see hundreds of websites as well as lists suggesting related searches.

I have searched a number of small business websites and finally found one that explains the process simply so it makes sense. Darrell Zahorsky writes for About.com – Small Business Information and he wrote an article entitled, “The 10 Commandments of a Great Business Name.” Be sure to read the entire article but for now here is the list:

1. Take Naming Seriously.
2. Avoid Word Play Dangers.
3. Don’t be an IBM.
4. Be Focused. 
5. Stay Out of Court.
6. Think Beyond Local.
7. Avoid ME Inc.
8. Ask Others to Spell it.
9. Be Web Friendly.
10. Check Availability.

Once you have decided on the name of your business you will have to register it with local, state, or federal government — especially if it’s considered fictitious. NOLO – Law for all has a good article on “How to Register Your Business Name.”

If your business doesn’t use your legal name as part of its business name you must comply with fictitious or assumed business name requirements in most states.

States like to keep track of fictitious business names in order to prevent confusion between businesses that use the same name and to give customers a quick way to determine the owner of a company. This allows customers to easily contact the owners with a complaint, etc.

If you are interested in following along with me on my journey, please subscribe to my posts. Next, we’ll talk more about the steps necessary to register your business.

Today I Started a New Journey

For as long as I can remember I have wanted to work for myself. Instead I have spent close to 30 years working as a  Research Administrator in Psychiatric Research. The story of how I got there is for another time. Today I want to talk about the future and getting on the right path.

Starting today I am actively working towards getting my consulting business up and running. I will be blogging about the trials and tribulations of starting an online business. I have learned quite a bit over the past 6-8 months that you may need to know. I have made mistakes that I want you to avoid. But I have also not found out about many topics that are crucial – such as getting a license, registering your business, taxes, etc.

If you are interested in following along with me on my journey, please subscribe to my posts. Tomorrow we’ll talk about registering Fictitious names, which is required in the state of Florida. So start thinking about a name for your business.