Possible Tax Deductions for Small Business Owners

Posted by Bruce Mc on Apr 18, 2011 in Home office, Information, Opinions, Tax Planning | 0 comments

Today, April 18^th is the dreaded “D” Day: Taxes are due. If you are a small business owner and have waited until the last minute to take care of your taxes make sure to consider the deductions listed below. If you’ve already filed, then you can always take them into account come next year’s filing season.

You have a “Home-Business”

If you run your business is ran through your home, you can acquire a huge tax deduction.  There are two different ways that the IRS says you can qualify: 1) regular and exclusive use and 2) principal place of business.

“Regular and exclusive use” simply means that you use a spare bedroom or den in your home only to conduct business. For instance perhaps you run an online business through your bedroom or perhaps you’re a lawyer and file legal briefs etc. within one designated area on a regular basis (this is the key word, regular basis). This is not to be confused with simply having a “home office” where it serves as more of just a convenience. To learn more and how to differentiate the two, click here.

“Principal place of business,” on the other hand, means that while you may have other offices, the head office or headquarters is located within your home. Generally proof that administrative and bookkeeping tasks are completed within the home is needed to claim this deduction.  To learn more, click here.

You Wine and Dine Your Clients

The IRS also allows small business owners to claim up to 50 percent deductions if you have proof that your meal and entertainment expenses/ transactions are business-related.  This means that you have to partake in some sort of business endeavor/discussion either before the meal/event or at least after. However, you must have your receipts in order to claim this deduction (no exceptions). So if you did not save your receipts last year, start to do so now. Additional note: do not try to get deductions from un-related business meals/events. The IRS frequently audits those who claim this deduction since it is the one that is abused the most.

Business –Related Travel

If you use your personal vehicle for business-related purposes, for instance you use your car to meet up clients, customer or vendors or even to attend a local business meeting, the IRS allows you to deduct the mileage. It’s important that you keep accurate accounts and mileage records however, since this is an auditing-prone deduction as well.  To learn the standard mileage rates, click here.

If you go on a “business trip”, you can also qualify for a deduction. But like all of the other deductions the trip has to directly correlate with your line of work and you must save all of your receipts in order to receive a 100 percent deductible on your business-travel expenses.

With that said, here are some additional deductibles you can consider as well: Cost of goods sold; charitable donations; and software, advertising and education expenses.

By-line:

This guest contribution was submitted by Jamie Davis, who specializes in writing about masters degree. Questions and comments can be sent to: davis.jamie17@gmail.com.

Small Business Jobs Act – A Look at the Benefits

Posted by Bruce Mc on Nov 18, 2010 in Information | 0 comments

On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 into law – a $42 billion bill in tax cuts, increased loans, and other measures. The bill is designed to prop up small businesses so they can create more jobs.

Many of the Act’s provisions have already kicked in – which means it’s time to learn how they benefit you.

More Loan Money Available

The main focus of the Small Business Jobs Act is to help small businesses get loans. Here are the three major ways the Act makes loan money available to small business owners.

SBA Recovery Loans. The American Recovery and Reinvestment Act of 2009 (the Recovery Act) was last year’s attempt by Congress to aid struggling small businesses. The Jobs Act of 2010 extends some of the Recovery money. With the passage of the Jobs Act, the Small Business Administration began funding new Recovery loans within a few days of the president’s signature.

7(a) and 504 Loans. These are the two largest SBA loan programs, and under the Jobs Act, they got a huge boost.

The bill increased the maximum 7(a) and 504 loans from $2 million to $5 million, and the maximum 504 manufacturing-related loan from $4 million to $5.5 million.

Increased Capital to Community Banks. The Jobs Act established a $30 billion fund, run by the Treasury Department, that extends ultra-cheap capital to community banks with incentives to lend to small businesses. This means higher loans – with better guarantees – are now available at your local bank.

Tip: Now is an excellent time to explore your borrowing options – whether it’s through a national organization like the Small Business Administration or your hometown lending institution.

Don’t miss out on the chance to use some of this capital for your business. Give us a call to talk over your needs.

Tax Cuts, Credits, and Breaks

The Small Business Jobs Act includes $12 billion in tax incentives. Take a look at the top six:

1. The elimination of capital gains tax on certain small business investments if they’re held for five years.
2. Higher limits on the amount of investments small business owners can write off for 2010 and 2011.
3. The extension of a Recovery Act provision that allows for a 50% bonus depreciation. This means small businesses can deduct capital expenditures on certain investments.
4. The ability to deduct all of your health insurance payments for you and your family when figuring your self-employment tax.
5. An increase in the amount entrepreneurs can deduct for start-up expenses for this year.
6. The ability to offset tax liabilities for five years by carrying back general business credits.

Less Red Tape

Some of the Act’s benefits reside in reduced paperwork and clearer regulations, which allow you to take advantage of tax breaks much more easily.

Deduct Your Cell Phone Simply. Previous policies required lots of documentation to deduct charges from an employer-provided cell phone. With onerous and confusing paperwork, you had to prove you used the mobile device for business purposes more than 50% of the time.

The Small Business Jobs Act addresses this headache. The legislation removes cell phones from the Internal Revenue Code’s definition of “listed property.”

What does this mean for the small business owner? It’s now much less complicated to deduct the use of your mobile phone on your taxes.

Tip: Other telecommunications devices have also been removed from “listed property,” including Blackberries and PDAs.

Limited Penalties. The bill limits the penalty for failing to report a transaction that the IRS has formally identified as an abusive tax shelter. The penalty is set at 75% of the tax benefit and capped at $200,000 for corporations and $100,000 for individuals.

Questions?

Do you have questions about how to take advantage of the Jobs Act’s provisions? Make an appointment to meet with us. We’re eager to help you claim the capital you need for your business.

Small Business Jobs Act – A Look at the Benefits

Posted by Bruce Mc on Nov 2, 2010 in Information | 0 comments

On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 into law – a $42 billion bill in tax cuts, increased loans, and other measures. The bill is designed to prop up small businesses so they can create more jobs.

Many of the Act’s provisions have already kicked in – which means it’s time to learn how they benefit you.

More Loan Money Available

The main focus of the Small Business Jobs Act is to help small businesses get loans. Here are the three major ways the Act makes loan money available to small business owners.

SBA Recovery Loans. The American Recovery and Reinvestment Act of 2009 (the Recovery Act) was last year’s attempt by Congress to aid struggling small businesses. The Jobs Act of 2010 extends some of the Recovery money. With the passage of the Jobs Act, the Small Business Administration began funding new Recovery loans within a few days of the president’s signature.

7(a) and 504 Loans. These are the two largest SBA loan programs, and under the Jobs Act, they got a huge boost.

The bill increased the maximum 7(a) and 504 loans from $2 million to $5 million, and the maximum 504 manufacturing-related loan from $4 million to $5.5 million.

Increased Capital to Community Banks. The Jobs Act established a $30 billion fund, run by the Treasury Department, that extends ultra-cheap capital to community banks with incentives to lend to small businesses. This means higher loans – with better guarantees – are now available at your local bank.

Tip: Now is an excellent time to explore your borrowing options – whether it’s through a national organization like the Small Business Administration or your hometown lending institution.

Don’t miss out on the chance to use some of this capital for your business. Give us a call to talk over your needs.

Tax Cuts, Credits, and Breaks

The Small Business Jobs Act includes $12 billion in tax incentives. Take a look at the top six:

1. The elimination of capital gains tax on certain small business investments if they’re held for five years.
2. Higher limits on the amount of investments small business owners can write off for 2010 and 2011.
3. The extension of a Recovery Act provision that allows for a 50% bonus depreciation. This means small businesses can deduct capital expenditures on certain investments.
4. The ability to deduct all of your health insurance payments for you and your family when figuring your self-employment tax.
5. An increase in the amount entrepreneurs can deduct for start-up expenses for this year.
6. The ability to offset tax liabilities for five years by carrying back general business credits.

Less Red Tape

Some of the Act’s benefits reside in reduced paperwork and clearer regulations, which allow you to take advantage of tax breaks much more easily.

Deduct Your Cell Phone Simply. Previous policies required lots of documentation to deduct charges from an employer-provided cell phone. With onerous and confusing paperwork, you had to prove you used the mobile device for business purposes more than 50% of the time.

The Small Business Jobs Act addresses this headache. The legislation removes cell phones from the Internal Revenue Code’s definition of “listed property.”

What does this mean for the small business owner? It’s now much less complicated to deduct the use of your mobile phone on your taxes.

Tip: Other telecommunications devices have also been removed from “listed property,” including Blackberries and PDAs.

Limited Penalties. The bill limits the penalty for failing to report a transaction that the IRS has formally identified as an abusive tax shelter. The penalty is set at 75% of the tax benefit and capped at $200,000 for corporations and $100,000 for individuals.

Questions?

Do you have questions about how to take advantage of the Jobs Act’s provisions? Contact me. I’ll help you claim the capital you need for your business.

A SIMPLE Retirement Plan for the Self-Employed

Posted by Bruce Mc on Sep 14, 2010 in Information, Retirement thoughts | 0 comments

Of all the retirement plans available to small business owners, the SIMPLE plan is the easiest to set up and the least expensive to manage.

These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don’t want to spend time and high administration fees associated with more complex retirement plans.

SIMPLE plans really shine for self-employed business owners. Here’s why…

Self-employed business owners contribute both as employee and employer, with both contributions made from self-employment earnings.

SIMPLEs calculate contributions in two steps:

1. Employee out-of-salary contribution. The limit on this “elective deferral” is $11,500 in 2010, after which it can rise further with the cost of living. Catch-up. Owner-employees age 50 or over can make a further $2,500 deductible “catch-up” contribution as employee in 2010.
2. Employer “matching” contribution The employer match equals 3% of employee’s earnings.

Example: A 52-year-old owner-employee with self-employment earnings of $40,000 could contribute and deduct $11,500 as employee plus a further $2,500 employee catch-up contribution, plus $1,200 (3% of $40,000) employer match, or a total of $15,200.

The SIMPLE plan is good for the home-based business and can be ideal for the moonlighter – the full-time employee, or the homemaker, with modest income from a sideline self-employment business.

With living expenses covered by your day job (or your spouse’s job), you could be free to put all your sideline earnings, up to the ceiling, into SIMPLE retirement investments.

A Truly Simple Plan

The SIMPLE plan really is simpler to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules – in investment options, spousal rights, creditors’ rights – don’t have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible. Your plan’s custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit simpler than with other plans.

What’s Not So Good About SIMPLEs

Other plans can do better than SIMPLE once self-employment earnings become significant.

Example: If you are under 50 with $50,000 of self-employment earnings in 2010, you could contribute $11,500 as employee to your SIMPLE plus a further 3% of $50,000 as an employer contribution, for a total of $13,000. In contrast, a Keogh 401(k) plan would allow a $25,500 contribution.

With $100,000 of earnings, it would be a total of $14,500 with a SIMPLE and $35,500 with a 401(k).

Because investments are through an IRA, you’re not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will in practice have fewer investment options than if you were your own trustee, as you would be in a Keogh.

It won’t work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.

There’s this problem if the SIMPLE is for a sideline business and you’re in a 401(k) in another business or as an employee: the total amount you can put into the SIMPLE and the 401(k) combined can’t be more than $16,500 (2010 amount) – $21,500 if catch-up contributions are made to the 401(k) by someone age 50 or over.

So someone under age 50 who puts $8,000 in her 401(k) can’t put more than $8,500 in her SIMPLE in 2010. The same limit applies if you have a SIMPLE while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

How to Get Started in a SIMPLE

You can set up a SIMPLE on your own by using IRS Form 5304-SIMPLE or 5305-SIMPLE – but most people turn to financial institutions.

SIMPLES are offered by the same financial institutions that offer IRAs and Keogh master plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an “effective date” – the beginning date for payments out of salary or business earnings. That date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.

Keoghs, SEPs, and SIMPLES Compared

The Pulse of Your Business

Posted by Bruce Mc on Aug 17, 2010 in Bookeeping, Information | 0 comments

Unfortunately, many small business owners do not fully understand their cash flow statement. This is shocking, given that all businesses essentially run on cash, and cash flow is the lifeblood of your business.

Some business experts even say that a healthy cash flow is more important than your business’s ability to deliver its goods and services! That’s hard to swallow, but consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or employees, you’re out of business!

What Is Cash Flow?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers. The inflow only occurs when you make a cash sale or collect on receivables, however. Remember, it is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

Note: An accountant is the best person to help you learn how your cash flow statement works.

Cash Flow Versus Profit

Profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.

Theoretically, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

Analyzing Your Cash Flow

The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.

The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.

Some of the more important components to examine are:

• Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.
• Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
• Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy – neither too strict nor too generous – is crucial for a healthy cash flow.
• Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
• Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable some time in the near future – “near” meaning 30 to 90 days. Without payables and trade credit, you’d have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.

The Income Statement (Profit & Loss) Part 2

Posted by Bruce Mc on Jul 15, 2010 in Accounting, Bookeeping, Income Statement, Information, Preparer, QuickBooks | 0 comments

It has come to my attention that many of you could use some help in understanding how to use your Profit & Loss effectively in managing your business. Even more so, Some of you may not even know that this is a tool to use in managing your business. So here is just exactly what the Profit & Loss Statement is good for.

The Profit & Loss Statement is your major management tool. This report shows you many things that you will want to be aware of as you are managing from month to month.

The Profit & Loss lists all your income and all your expenses. It will first list your income and then list your Cost of Goods Sold (COGS), subtracting the total COGS from your total Income. COGS are the expenses that are directly related to your service or product you sell.

For example:

 if you are a contractor, then your COGS could be your labor, the building materials, the permit, things like that.

 Each industry has its own COGS. So the number that you get from subtracting your COGS from your total income is your gross profit margin. This number is very important and helps you to determine if you are making a profit on your services or product. This is not the infamous “bottom line” though, because all companies have “overhead” or expenses that are not directly related to the service or product.

For example:

your accounting, the receptionist, taxes, office supplies, and many other expenses not directly related to what you do or sell.

So after you have subtracted the COGS and the overhead expenses from your income, that is what your net profit is for the month or the infamous “bottom line.”

There are many things to be aware of and to look for on your Profit & Loss in helping you to manage your company. The following is a Top Ten list:

1. Did I make a profit? If so how much?
2. Use your Profit & Loss to determine your financial viability, not your online bank balance. Small business owners think that if they have money in the bank, they are good. The problem is that your bank account is only one facet of your business at a specific point in time, and your Profit & Loss will provide you with the overall picture.
3. If I did not make a profit, why?
4. Did we spend too much on a given expense, like tools? Computer repairs? Cell phone fees? Meals out? Advertising?
   1. You can see this at a glance as a total for each expense category on your Profit & Loss.
5. How much income do I need to break even?
6. How many months have I lost money?
7. Based on your numbers, you will be able to tell if you need to get a loan.
8. Do you need to lay people off?
   1. You can determine this from this Statement.
9. Do you need to make your company more efficient in order to break even or make a profit?
10. Based on your income numbers, you might find one income source essentially non-existent and another is booming. This will give you direction on what to promote, what to put your money into and what not to.

So as you can see, your Profit & Loss will provide you with crucial info in the management and direction of your company.

You can use your Profit & Loss to help with many facets of the business. But as you may have figured already, it is very essential that your accounting/bookkeeping be accurate, because if the accounting is off, then these reports are incorrect and therefore, worthless. If you have QuickBooks and do not know accounting, it would be good to outsource the review of your books and maybe the entry of your transactions to a reliable accounting/bookkeeping service, so that you can have effective tools in your tool bag and have control of your business.

Understanding what to look for and how to use it can save your company in tough times and make your company extremely profitable in the good times.

Related articles

• What is the importance of profit and loss account (wiki.answers.com)
• Profit and Loss, By Leontia Flynn (independent.co.uk)
• One trading statement for Companies House and HMRC for small firms in future (telegraph.co.uk)

Some Commonly Overlooked Small Business Deductions

Posted by Bruce Mc on Apr 6, 2009 in Deductions, Form 1040 Information, Opinions, Schedule C, Tax Preparation, Things forgotten | 1 comment

Written by: Courtney Phillips

In the current economic climate, it is no surprise that people are looking for ways to save on their taxes.  Over the last several years, many people have begun to telecommute, freelance, or work from home.  These people often do not realize that there are many things that can be deducted from taxes as an independent contractor.  Other small business owners may not realize what is deductible and what is not. 

Whether you do your taxes on your own or use a tax professional to help you through the filing process, look into whether or not some of the following commonly overlooked small business deductions apply to your situation.

Office Space – If you have a dedicated office space in your home, you may be able to deduct the value of the square footage.  There are some requirements that your office must meet, like being strictly used for business purposes.

Gift Deductions – Perhaps you have donated goods or services at some point throughout the last tax year.  These gifts are often tax-deductible, so keep track of donations and gifts.

Office Supplies – Office supplies that are necessary to the functionality of your office and business can be tax-deductible.  Make sure that you keep meticulous records of what you purchase for your office so that money can be accounted for later on down the road.

Communications – Office lines, dedicated cell phones, fax lines, and internet connections may all be tax-deductible, depending on your situation.  These types of services are often necessary for operating a successful business and can give you a much-needed break come tax time.

Equipment – Purchasing new office equipment and other items needed to perform the tasks related to your business are generally tax-deductible as well.  If you need to buy external hard drives, printers, or other hardware, keep track of your spending.

Professional Organizations, Memberships, and Fees – These things are all commonly overlooked tax deductions.  If you belong to a particular group, subscribe to a trade journal, or keep memberships in order to meet with and entertain clients, you may be able to deduct these expenses as well. 

Talk with a tax professional, like Bruce or visit www.irs.gov for more information regarding tax guidelines for business deductions.

This post was contributed by Courtney Phillips, who writes about how to obtain bachelors degree online (Bachelors Degree Online). She invites and welcomes your feedback at CourtneyPhillips80 at gmail.com

Be sure to check out the Carnival of Pecuniary Delights No. 1: The Madoline Hatter Pecuniary Art Edition. it is a must read for us all.