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SBC Team

Do it yourself taxes

Posted by SBC Team Jan 30, 2008
For many entrepreneurs, the same go it alone spirit that prompted them to start their own company also informs their attitude toward filing their small business' taxes. Who better than me to do it? If you're one of those types willing to take on 1040s, 1065s or 1120s all by yourself, here's some things to consider to make things go a little bit smoother along the way.

Get the timing down
First, you're going to want to invest an ample amount of time into researching and planning out your tax filing, just as you would before any other situation that could significantly affect your small business' cash flow. In fact, the IRS estimates 85 percent of the total time required to prepare the average business tax return is typically devoted to record keeping and planning. (In 2007, this amounts to just over two full days of document gathering and organizing, since the IRS estimates the overall time needed to file now takes 56.9 hours.) In other words, you should have been thinking about and working on your taxes months before this year's filing deadline, if not all year long. And as for that deadline, it's important to remember that the final date to file without penalty depends upon the legal structure of your small business. C and S corporations that require a Form 1120 have an earlier deadline March 17, 2008 whereas unincorporated sole proprietorships as well as most general partnerships and limited liability companies have until April 15 to file 1040s and 1065s. For a handy way to track these deadlines and other milestones, such as quarterly payment dates and extension deadlines, check out the IRS's online month by month tax calendar at http://www.irs.gov/businesses/small/article/0id=176080,00.html.

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The No. 2 Pencil Method
Although computer assisted tax filing has grown by leaps and bounds recently between 1993 and 2003, the share of self prepared returns using tax prep software tripled, from 8 to 25 percent of the population not everyone is fond of staring at numbers on a monitor for hours on end. For those who prefer the old fashioned paper and pencil method, there are still plenty of resources out there to help you if you're going it alone.

Foremost is the IRS's Small Business Resource Center www.irs.gov/businesses/small/index.html. Yes, it's online and therefore demands some face time with a computer screen, but it's still a great place to go to get general questions answered and find out which forms you will need to fill out during your handwritten tax preparation. If you'd prefer a human voice or you have a specific question, however, try the IRS's free business tax help line at 1-800-829-4933, which is open 7 a.m. to 10 p.m. Monday through Friday and from 10 a.m. to 3 p.m. on Saturdays (all times local) through early April. Of course, as tax-deadline day approaches, you might experience long waits when calling the IRS so, as an alternative, you might try a local tax help line (often run by the local Chamber of Commerce or your state's Department of Taxation) or reaching out to a tax expert at SCORE to get some free advice. (To find one, search "tax" on the "Ask SCORE" web page: http://counseling.score.org/AvectraScore/Secure/SearchCounselor.aspx.)

Software Jump
As affordable tax prep software has achieved critical mass in the marketplace, more and more small business owners have become converts of its simple, "plug and chug" nature. And with affordable, online versions of these software products now compatible with many of the accounting platforms popular in the small business sector, many entrepreneurs are finding that they can easily tackle what might otherwise be a confounding tax situation without ever having to leave their workstation or fork over much more than $100. In fact, a September 2005 National Tax Journal article concluded, "use of software...is one way that taxpayers have taken advantage of technological change to adjust to an increasingly complex tax law." The two major players in the tax prep software game, however, have come to the market from different directions. For a general review of the various tax prep software products, go here: http://tax-software-review.toptenreviews.com/.

H&R Block, which has long been a market leader in the storefront tax preparation industry, leverages its selling position by integrating its Tax Cut software (http://www.taxcut.com/) with its more retail, people oriented roots. For example, as an added benefit of Tax Cut's "Premium" and "Home and Business" packages, even software only customers can get access to a live H&R Block tax expert in the event that they are audited. The company's new "Online Office" product blurs the line even further, letting customers send their tax documents to H&R Block and fill out a brief online questionnaire and then let one of the company's tax pros prepare your return for you all without ever having to leave your house. (It's worth noting here that while many tax prep software programs, like TaxACT, will not allow you to import financial data from the major accounting software platforms like Microsoft's Money or Intuit's Quicken, H&R Block's Tax Cut will allow it.)

On the other hand, Intuit's Turbo Tax software (http://turbotax.intuit.com/small-business-taxes/) builds upon the company's already strong position in the accounting software market as a result of Intuit's popular Quick Books products. Because of this more robust presence in the small business world, Intuit also offers more software options for the small business owner. For the sole proprietor or single owner LLC, there's a Turbo Tax "Home and Business" tier focused on entrepreneurs whose individual and business tax profiles are still inherently intermingled. For owners of C or S corporations as well as general partnerships and multiple partner LLCs, Turbo Tax provides a "Business" version aimed at those who file their personal and business returns separately.
The third major tax prep software platform, TaxACT (http://www.taxact.com/products/index_business.asp), has rolled out even more narrowly focused products, with six separate, low cost business versions now available.

While using tax prep software is becoming easier every year, comparing pricing among the different brands is anything but. All the major players now bundle their products, combining federal and state returns along with the ability to e-file into the various individual and business tiers. For a rough idea of what an apples to apples price breakdown of the last year's tax-prep software landscape looks like, go here: http://www.gettingfinancesdone.com/blog/archives/2007/02/taxpreparationsoftwarepricingcomparison/.

Still, there are a few general pricing principles to remember if you want to save money: First, printing out and mailing your return is more cost effective because most tax-prep software products charge anywhere from $5 to $20 extra to e-file your tax returns. (Even if they claim e-filing is "included for free," there's generally a hidden mark up. One way to keep your costs down is to use the online rather than the "disc in a box" version of the software as the downloadable editions can cost up to $25 less than software purchased in a store.) Second, state tax returns tend to be priced the highest, but not all states require your business to file. Finally, keep in mind that the paper filing method will mean that any refund you are due to receive could take up to twice as long to receive.

What if you have a change of heart?
Even the staunchest of independent spirits can occasionally run up against a problem that they can't solve alone. If you start down the road of filing your own taxes but then just a few days before the filing deadline, you realize that you just don't feel comfortable with the results, don't panic, there's a way out.

First, you should understand that it's not necessarily a bad thing to have a tax pro prepare your return. In fact, many consumer and business experts note that people with home businesses or complicated financial lives are probably better off going to an accountant or enrolled agent. "If you have a sophisticated tax situation, like you own rental property or you get a Schedule K-1 from a partnership or you have a second home, or if you go through any kind of major lifestyle change, such as starting a business, moving, having a child, or getting a divorce, any of these circumstances mean it will probably pay to have a tax professional handle it," advises Tom Ochsenschlager of the American Institute of Certified Professional Accountants (AICPA). "They're going to know what kind of questions to ask as well as what advice to give for the upcoming tax year that you're just not going to find with software."

Once you've made your decision to hand off your taxes, the next step should be to request a six month extension. Once somewhat difficult to obtain, extensions are automatically granted by IRS nowadays and the process is fairly easy. You can mail in the paper extension request form (4868 for individuals or sole proprietors, 7004 for corporations), call it in (1-888-796-1074), or e-file an extension. Even if you have a month to go before the deadline, getting an extension allows your paid tax preparer sufficient time to dig through your documents from the very beginning. Keep in mind, however, that an extension to file is NOT an extension on payment, so if you owe the IRS, you must at least work up an estimated amount due and pay that to avoid late fees and penalties.

To find a tax pro, the AICPA's Ochsenschlager recommends asking friends and relatives first. In addition you might try looking at a couple of online tax pro locator websites like http://www.naea.org/ or www.aicpa.org/states/info/index.htm. Once you've narrowed down your list of candidates to two or three, sit down with each of them for a brief explanation of your tax situation. "Most CPAs won't charge for this initial visit," Ochsenschlager says, "and from the discussion, you should get a good feel for whether or not you're comfortable with them."

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.
SBC Team

Commonly Missed Deductions

Posted by SBC Team Jan 30, 2008
Don't Leave Money on the Table! Tax time is here, so make sure your small business is getting every dollar you deserve

By Reed Richardson

Every year, millions of small businesses give away billions of dollars to the U.S. government by failing to claim everything they should on their tax return. To ensure you don't make the same mistake, here are some of the most commonly overlooked tax deductions and credits.

Retirement Plans If your small business has a SEP IRA, SIMPLE IRA, or 401(k) retirement plan, you can deduct your employee contributions as well as your own personal contributions from your company's federal taxable income. Also, the IRS allows tax credits to cover the cost of starting up these retirement plans. (For example, a small business could be eligible to claim up to $500 a year in tax credits for the first three years after starting a SEP IRA.) For more on small business retirement plans, check out IRS Publication 560 (irs.gov/publications/p560/index.html).

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Sales Taxes If you're a sole proprietor and you only file an individual tax return, you should check the IRS's handy sales tax deduction calculator (http://apps.irs.gov/app/stdc/) before filing. If your small business is incorporated and files a separate tax return, however, you can deduct all sales tax you paid on business property and equipment on Schedules C or F (or E if it involves rental property). In fact, you should treat sales tax in the same manner as you would the rest of that same purchase. So, if a business expense is deductible, so too is the sales tax, and if a purchase involves property or equipment that is depreciable, the cost of the sales tax is also subject to depreciation. Also, any foreign point of sale taxes paid by your small business, such as the European Union's VAT (Value Added Tax), can be tax deductible as well.

Insurance Generally, the premiums you pay on most kinds of insurance for your company are deductible as business expenses. This includes fire, accident, and theft insurance as well as liability, worker's compensation, and malpractice insurance premiums.

Home Office Deduction As a small business owner, it's probably quite common for you to chase the kids off of your home computer so you can run the occasional sales report or P/L statement. And if this sounds familiar, you have, unfortunately, just disqualified yourself from the home office deduction. That's because it is only available to self employed people who meet a "regular and exclusive" test. In other words, you can't mix your business and personal life in your home office even if your home office's use is 99% business and 1% personal and still claim the deduction.
In fact, a September 2006 IRS circular noted that because of the frequent misinterpretation of the home office deduction "compliance is a concern," and that it will be "focusing enforcement efforts, including examinations, on these issues." So, consider yourself warned: If you take the home office deduction, you stand a higher chance of getting audited. (For a quick guide to figuring out if you really do qualify, see page 4 of IRS Publication 587 here: www.irs.gov/pub/irspdf/p587.pdf).
To calculate your home office deduction you must first find the business percentage of your house. (Dividing the square footage of your office by the total area of your home is one way to do this, dividing the number of rooms used for your business by the total number of rooms in your home is another.) Once you've figured out the business percentage you can apply it to general expenses associated with your entire home, such as property taxes and mortgage interest or rent, as well as expenses specific to just your home office, like additional insurance, security systems, repairs, and utilities (like a second, work-only phone line). To see a sample of what a home office deduction for a self employed individual or sole proprietor looks like when filled out, take a look at page 23 of IRS publication 587.

Bad debts and business write offs Unpaid customer accounts that will be written off as worthless debts as well as any documented losses due to theft or fraud (not already covered by insurance) are deductible, but only if the revenue was at one time included in your business's gross income. However, cash based businesses that never recorded the sale or service as income in the first place are not eligible to take this deduction.

Bank fees and finance charges Many of these business costs are deductible from both sides of the transaction equation buyer and seller. So, not only can you typically deduct fees and interest charges on your own business credit cards, you can also deduct service fees charged by the bank for accepting your customer's credit cards.

Advertising A big one that should never be overlooked, as almost all advertising and promotional expenses, even the cost of printing up your business cards or sponsoring a local Little League team, can be deductible.

Mileage deduction For the 2007 tax year, the standard mileage deduction for business related driving rose four cents to 48.5 cents per mile. Keep in mind, this deduction is only available to companies with four or fewer vehicles. One other note, while the standard mileage deduction covers most car-related costs, parking fees and tolls as well as finance charges and insurance premiums on business-owned vehicle loans can be listed as separate deductions.

Upfront Depreciation Commonly known as Section 179 deductions, this provision in the tax code allows small businesses to claim a maximum deduction of up to $125,000 on depreciable property purchased for the business in 2007. Qualified property for this deduction typically includes machinery and equipment, furniture and fixtures, as well as most storage facilities.

Tax Preparation Fees Ironically, the cost of hiring an accountant or tax preparer as well as the cost of purchasing tax preparation software is an often overlooked deductible expense. Don't make that mistake.

Mailing Costs Postage, postal meter rental fees, and shipping costs that your small business pays are tax deductible.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.
SBC Team

What To Do With Your Refund?

Posted by SBC Team Jan 30, 2008
Spend it wisely, and take a closer look at your quarterly payments

By Robert Tie, CFP

Congratulations - you've just received a sizeable check from the IRS! Sure, you knew it was coming and how much it would be. But still your pulse quickens, and you're mildly euphoric. Somehow this feels almost as good as getting cash from a client.
But is a large refund reason to celebrate? "Certainly not," says Eric Rigby, CPA, of RFG, Inc., a New Orleans tax and accounting firm that serves entrepreneurs. "Never give the IRS an interest-free loan." All too often, he says, small business owners do exactly that when they pay too much in estimated taxes. "So resolve to plan better next time," advises Bea L. Nahon, CPA, of Nahon CPA, a Bellevue, Washington firm providing tax and other services to small businesses. "Check in with your CPA at mid-year," she says. "You'll get better at managing your tax payments, and you'll develop a deeper understanding of all your business finances."

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First Things First
What's the best way to begin the rest of your life as a taxpayer? The answer is to put your refund to work in the smartest ways possible. In working with their respective clients and also as volunteer advisers with the American Institute of Certified Public Accountants, Nahon and Rigby both recommend three sure-fire ways to get a big bang for your refund buck.

1. Set up an emergency fund
Cash flow is the lifeblood of any enterprise. And yet Rigby encounters enough undercapitalized businesses to make him worry with good reason. "When Hurricane Katrina slammed into New Orleans, a lot of small business owners saw their income plummet and their expenses soar," he says. "So priority number one is an emergency fund. Plan ahead, and you'll weather the storm."
How big a fund do you need? That depends on how long you might reasonably expect to be short of cash. A money market fund or other sufficiently liquid reserve will earn you only a minimal return. So use your refund to help set aside just enough to meet recurring expenses for, say, six months. Then spread your largest risks among highly rated disability, property, business continuity, and other insurers, as appropriate.

2. Pay down your debt.
"Do it now," says Nahon. You can't beat the cost benefit numbers behind this sage advice. Trouble is, spending money is more fun than repaying it. "Don't hesitate," she insists. "This is a perfect opportunity to improve your finances and your peace of mind."

3. Set up a retirement plan.
"It's never too early to start saving for retirement, and there are few better places to invest your refund," Rigby says. So, he advises, find out which type of plan is appropriate for your situation, and set it up.

The two types of retirement plan are:

IRA based plans

Payroll Deduction IRA

Simplified Employee Pension (SEP)

SIMPLE IRA

Safe Harbor 401(k)

 


Defined Contribution and Defined Benefit plans

Automatic Enrollment Safe Harbor 401(k)

 


401(k)

 


Profit Sharing

 


Defined Benefit

 


Their characteristics are too complex to usefully summarize here. But IRS Publication 3998, Choosing a Retirement Solution for Your Small Business, concisely explains each plan. Read it through, noting contribution methods, limits, and other plan features that correspond to your needs and preferences, as well as those of your employees. You'll then be well prepared to consult your financial services provider and discuss your options.

Off to a Good Start
"Of course, if you've already addressed those three priorities," says Nahon, "consider using your refund to boost your marketing budget." A large refund, Nahon notes, is usually due to a significant drop in revenue, since small business owners typically try to avoid penalties by basing their current estimated payments on the total tax from their prior year's return. "That means it's time to put some extra money into marketing," she advises. "But first ensure that you've adequately funded your more urgent needs." Once you've fulfilled those goals, you'll really have something to cheer about.

 


Robert Tie is a Certified Financial Planner and business writer.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

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