Taxes

7 Tax Tips for the Self Employed

SBOCTeam — Wed, 04 Mar 2009 01:16:00 GMT

Being self-employed is a dream for many people. Who doesn't want to be his or her own boss? Of course, the downside of being the boss is the all responsibilities that come with the job. Unfortunately, calculating and paying taxes are part of those responsibilities.

By Christopher Freeburn
According to the Internal Revenue Service (IRS), you are considered self-employed "if you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor." The IRS requires self-employed individuals to pay a Self-Employment Tax, which assesses Social Security and Medicare taxes similar to those paid by employees and their firms. The IRS also requires self-employed people to pay estimated taxes as a substitute for the withholding taxes that are applied against employed person's salaries. These factors make complying with self-employment taxes rules somewhat more complicated than the rules that apply to the employed.

With that in mind, here are some tax tips for the self-employed:

1. Consult a CPA. Even if you are intent on doing everything yourself, it is better to seek outside help than make a mistake when preparing your taxes. An error on your tax returns can result in escalating fines and penalties from the IRS. Tax law is complicated, particularly when it comes to self-employment. To be certain you are in compliance with all relevant requirements, talk to a certified public accountant and review your situation. A CPA will be familiar with the federal, state and local tax laws that apply to you. Additionally, a CPA may be able to point out tax liabilities and deductions that you hadn't considered.

2. Keep good records. Good record keeping is more than simply a good business practice; it is a necessity when it comes to dealing with the IRS, which may demand to see every last detail of your income and expenses, particularly when you claim deductions on your tax return. If you are ever audited-and being self-employed makes that more likely-you will need to have every receipt and document to support your claims. Otherwise, fines and penalties will accrue. Get in the habit of saving everything, and develop a filing system that allows you to retrieve needed documents quickly.

3. Deduct the cost of medical insurance. Self-employed people can deduct up to 100% of medical insurance premiums paid for medical insurance for themselves, spouses, or dependents. Medical insurance costs are deducted directly from total income.

4. Deduct all business expenses. Every drop of toner you buy for your printers, reams of paper, shipping expenses, postage, software, pens and pads, and anything else you use for your business is an expense that can be deducted. Be sure to save every receipt to back up your claimed deduction. Also be sure that you can justify the claim that the items or services purchased were used directly for your business.

5. Increase expenses to lower taxable income. As the end of the year approaches, you can increase you deductions against this year's income by making business purchases now. Need another printer, or PC? Better desk or cushy new office chair? Buying it before the end of the year means whatever you spend can be deducted against this year's income taxes.

6. Contribute to your retirement. The options for self-employed people to save for retirement have never been better. If you haven't created a retirement plan for yourself, now is a good time. Payments made to a retirement plan-401(k), IRA, KEOGH, or SEP plan-are deductible against the current year's income. Note that most retirement plans have a contribution limit. Most local banks or financial institutions will be able to help create and maintain your preferred retirement vehicle.

7. Consider the home office deduction. Do you conduct business out of any part of your home? Many small business owners have at least one room devoted to some aspect of their business, whether it is keeping shipping materials in the garage, or maintaining a bedroom that has been converted into an office or filing storage space. With so many small businesses operating partially or completely out of people's homes, the IRS allows small business owners to deduct a portion of rent, mortgage payments, utilities and maintenance for qualifying home offices. The IRS has fairly stringent tests for such deductions, however, and it is advisable to consult a CPA about your particular situation to make certain it qualifies.

Economic Recovery Package: What�s In It for You?

SBOCTeam — Fri, 20 Feb 2009 22:35:00 GMT

by BigIdeas4Biz

The $787 billion American Recovery and Reinvestment Act of 2009, which was signed into law on February 17, 2009, is designed to spur the economy. It makes numerous tax changes for individuals and businesses. Since sole proprietors, independent contractors, LLC members, and other owners pay tax on their share of business income on their personal returns, business-related changes become highly personal!

Most of the changes run for only a short time-two years, one year, or less. Many of the changes have income caps, so check these limits carefully to see whether you qualify. Here is an overview of some key changes that could affect you.

Buying equipment
Upgrade your computers, office furniture, machinery or equipment and get tax breaks:

Deduct the cost up to $250,000 for equipment purchased placed in service by December 31, 2009 (called first-year expensing or the Section 179 deduction).
This applies to both new and pre-owned items. The deduction applies whether you finance the purchase in whole or in part. Caution: Opting to use this write-off only makes sense if you're profitable for the year. If you don't use first-year expensing, you simply depreciate the purchase price.
Claim 50% bonus depreciation for the cost of new property placed in service by December 31, 2009. This break can be combined with first-year expensing, as well as a regular depreciation allowance, to enable most or all of the cost of qualified purchases to be deducted this year.

If you purchase a new (not pre-owned) personal car or light truck after February 17, 2009, and before January 1, 2011 (even though you use it partially for business), you can deduct state and local sales and excise taxes, regardless of whether you itemize your other personal deductions. This break doesn't apply to leased vehicles. The deduction is limited to taxes on a sticker price up to $49,500. The deduction phases out for singles with adjusted gross income between $125,000 and $135,000 ($250,000 to $260,000 for joint filers).

Getting credits
A tax credit reduces your tax bill dollar for dollar; a tax deduction saves you an amount based on your tax bracket. For example, a $1,000 credit saves you $1,000 in taxes, while a $1,000 deduction only saves you $250 in taxes if you're in the 25% tax break. Some new tax credits of note:

American opportunity credit. Now may be a great time to complete your education. If you (your spouse or dependent) is in the first four years of college, claim a tax credit in 2009 and 2010 equal to 100% of the first $2,000 of tuition and other qualified expenses, plus 25% of the next $2,000, for a top credit of $2,500. The credit phases out for singles with adjusted gross income between $80,000 and $90,000 ($160,000 to $180,000 for joint filers).
Work opportunity credit. If you hire certain disadvantaged workers, you get a tax credit (usually 40% of first-year wages up to $6,000, for a top credit of $2,400 per eligible new employee). The new law expands the group of targeted workers that can qualify for 2009 and 2010 to include certain unemployed veterans and unemployed youth who lack education and certain basic skills
Business energy credits. Going to alternative energy can save you in utility costs as well as provide you with important tax breaks. There are several tax credits to encourage investments in renewable energy production and for other alternative energy investments for your business. Note: There are also credits for making energy improvements to your home.

Getting a tax refund
If 2008 was a difficult year for your business and you show a loss, you may be able to turn that into an immediate tax refund. Net operating losses (NOLs) for small businesses can be carried back and used to offset income in prior years. Usually, the carryback period is limited to two years. For NOLs in 2008, you can choose a three-, four-, or five-year carryback (the option only applies to businesses with gross revenue of $15 million or less).

If you have an NOL and want to use this carryback, you can obtain your tax refund by filing amended returns on IRS Form 1040X, Amended U.S. Individual Income Tax Return, for those years or by filing for a quick refund (individuals use IRS Form 1045, Application for Tentative Refund, which the IRS usually acts upon within 90 days of the filing of the form).

Paying estimated taxes
Usually, to escape underpayment penalties, estimated taxes must be at least 90% of the tax shown on your current year's return or 100% of the tax on your prior year's return. The current year return threshold rises to 110% if your adjusted gross income (AGI) in the prior year was more than $150,000 (or $75,000 if married filing separately).

For 2009, the first payment of which is due April 15, 2009, there will be no estimated tax penalties if tax payments for 2009 total at least 90% of your 2008 taxes. To rely on this reduced estimated tax payment requirement, your AGI in 2008 must have been $500,000 or less, and half of your income must be derived from a small business (defined here as 500 or fewer employees).

When figuring estimated taxes for 2009, take into account the new Making Work Pay credit if you're self-employed. The credit, which is the crown jewel of the new law, is $400 for singles or $800 for joint filers. The credit phases out for singles with AGI between $75,000 and $95,000 and for joint filers with AGI between $150,000 and $150,000. The credit is paid to employees by means of adjusting their payroll withholding; for self-employed people, reduce your estimated tax payments accordingly.

Preparing for payroll changes
If you have employees (including yourself), expect revised withholding tables for 2009 in late spring to reflect the Making Work Pay credit. These new tables will help you adjust employee take home pay to reflect the credit, which is retroactive to January 1, 2009.

Businesses with more than 20 employees and that offer COBRA health coverage will also have to adapt to new federal subsidy for involuntarily terminated workers after September 1, 2008, through the end of 2009. The federal government will pay 65% of COBRA premiums for these former employees and the payments will be made by means of a reduction in an employer's payroll taxes (with some credit to employers if the subsidy exceeds payroll taxes).

Seven Year-End Tax Tips

SBOCTeam — Tue, 02 Dec 2008 15:24:00 GMT

By Christopher Freeburn

The autumn leaves are falling, a chill is in the air, holidays are looming, and, for small business owners, it's a good time to think about ... taxes. While no one likes to ponder the intricacies and implications of the Internal Revenue Code, taking the time to do so toward the end of the year can save your business a considerable amount of money come tax time.

So what can you do now?

1. Lower Revenue. Since your tax bill will be calculated on the basis of how much income your company has made during the year, a good way of keeping that bill down is to defer the receipt of as many payments from customers as possible into January. If your business operates on the cash basis of accounting, this can be easily done by simply delaying the mailing of bills for end-of-year purchases until very late in December, or permitting other bills that are due to be paid in January. Not only does this allow you to lower the current year tax bill, but you get to keep the tax due on those funds in the bank, accruing interest, for a whole year. Additionally, your customers will appreciate the added time to pay their bills, especially around the holiday season.

Note, however, that this strategy only benefits you if you won't be entering a higher tax bracket in the coming year. If you estimate that your business will be operating in a higher tax bracket next year, deferring payments until next year may cost you more later. Also, if your business shows a loss for this year, it makes less sense to defer the payments, since doing so only increases the size of your loss for this year and will have no tax impact.

Also note that simply not depositing a check received before the end of the year does not mean that you can defer that revenue to next year. The IRS requires you to include any checks received before December 31 as part of this year's revenue. Failing to do so could result in penalties if you are audited.

2. Make that major purchase. If you are considering a major purchase of business equipment, it's a good idea to do it now, so that the cost can be deducted from this year's taxes. As part of the Economic Stimulus Act of 2008, signed into law earlier this year, the limit on Section 179 deductions for business equipment purchases was raised from $125,000 to $250,000, and the total amount of equipment purchases that are deductible was raised from $500,000 to $800,000. Both used and new equipment qualify for the deduction and you are able to finance the purchase. But any new equipment acquired must be put into use by your business by December 31 to qualify for the deduction.

3. Increase Expenses. You can reduce your tax bill by increasing the amount and number of deductions you take for business expenses like office supplies and office furniture. You can increase the benefit by charging such expenses on your business credit card, which means that-if you make the purchase in December-you get to claim the deduction for this year's taxes, but won't have to pay the credit card bill until next year.

4. Pay Recurring Bills Now. The same applies to bills for business services, like rent, phone service, and equipment leases, which should be paid before the end of the year, even if not due until after December 31. Consider pre-paying for bills that you know you will need to pay anyway like rent. Such payments can be deducted against this year's taxes. Make sure that pre-payments made now won't complicate your cash flow in January.

5. Contribute to a Retirement Plan: If you don't have one, you really should, and this is the perfect time to set it up. Payments made to a retirement plan-401(k), IRA, KEOGH, or SEP plan-are deductible against this year's income. Most retirement plans have a contribution limit.

6. Consult a Tax Advisor. Tax law is complicated. Very few small business owners, outside of CPAs themselves, have the time or inclination to acquaint themselves with the IRS code and the yearly changes made by Congress. Instead of trying to work it all out yourself, you are better off consulting someone who has made business taxes his or her profession. A tax advisor can make certain that your business is not only in compliance with all the relevant tax codes, but is taking advantage of every allowable deduction.

7. Consider the home office deduction. Do you conduct business out of any part of your home? Many small business owners have at least one room devoted to some aspect of their business, whether it is keeping shipping materials in the garage, or a bedroom that has been converted into an office or filing storage space. With so many small businesses operating partially or completely out of people's homes, the IRS allows small business owners to deduct a portion of rent, mortgage payments, utilities, and maintenance for qualifying home offices. The IRS has fairly stringent tests for such deductions, however, and it is advisable to consult a CPA about your particular situation to make certain it qualifies.

Make 13% more on the sale of your business, guaranteed!

SBOCTeam — Tue, 16 Sep 2008 13:33:00 GMT

By Bridge

Yes, it's a pitch line to grab your attention. Yes, there are some caveats. But, if you have ever considered selling you business, you can potentially net 13% more now versus next year.

It's not what you make, it's what you keep

In my experience, when most owners decide to pursue the sale of their company, they tend to focus on price. The first question a client typically asks is "What's my business worth?" A better question would be "If I sell, how much of the price do I get to keep?"

Net 13% more on the sale

They say two things in life are unavoidable, death and taxes. Right now most small business owners can actually avoid a 10% tax increase. The current capital gains tax rate is at 15%, a historic low. The democratic platform calls for increasing the capital gains tax rate to 25%. Selling your business today for one million dollars nets you $850,000 after taxes (1). With the proposed tax increase, that same sale price next year would only net you $750,000 after taxes. That's $100,000 more in your pocket today, or 13% more than you would get to keep with the proposed rate increase.

All good things must come to an end

Many business owners do not remember that in the late 1970's, the highest effective capital gains tax rate reached 49.875%. As recent as the early 1990's the highest capital gains tax rate was still at 29.2% (2). In recent years we have been experiencing one of the greatest tax windfalls for small business owners - all created by a change of ownership. The current capital gains tax rate was originally part of a stimulus package and was set to expire at the end of 2008 (it was recently extended until 2010).

With elections coming and a budget deficit growing, how long this window of opportunity remains open for small business owners is anyone's guess. Should you consider a sale now? That's your decision, but remember that sometimes you pick the timing and sometimes the timing picks you.

About the author: Greg Dupuis is President of Bridge Ventures, LLC, a middle market merger and acquisition advisory firm. He has completed over 200 transactions in his career. More information about Mr. Dupuis and his firm can be found at http://www.bridgeventuresllc.com.

If you would like to view a short video on other ways timing can effect the value of a business in a sale, visit: http://www.bridgeventures.net/pinnacle_videos/pinnacle_5_Timing.html

Notes: (1) Your actual tax situation will vary depending on your specific circumstances and you should consult a tax professional for guidance. (2) Tax rate data from The Encyclopedia of Taxation and Tax Policy.