Now that last year’s taxes are filed, it’s tempting to forget about the whole ordeal until the 2013 deadline rolls around. However, small business owners who take some time now to plan ahead for next year’s tax season can create substantial benefits for their companies.
Bruce Devereaux, a certified public accountant (CPA) in Seattle for 35 years, has witnessed the extensive changes in tax law over the years. He cites the ongoing Affordable Care Act (often referred to as ObamaCare) healthcare tax credit, which many eligible small business owners failed to claim last year, as a good example of how complicated the tax terrain can be to navigate. So, it’s not surprising when his first bit of advice to small business owners is to “get a good tax advisor.”
Bisera Urdarevik, owner of the start-up company Lush Gourmet Foods in Kalamazoo, Michigan, agrees. “I would have to say that it is quite intimidating. It’s not the same as filing just as an individual,” she notes. That’s why Urdarevik says she opted to work with a tax specialist in her first year as a small business owner rather than risk making a costly mistake. Or, as she puts it, “Just to make sure all the ‘t’s’ are crossed and the ‘i’s’ are dotted.”
However, many small business owners prefer to do their taxes on their own and, thus, need a way to stay current on the changing tax climate’s potential impact on their business in the upcoming year. “I would encourage small business owners to form relationships with other small businesses,” says Devereaux, “whether through the Chamber of Commerce or trade associations, so they can be aware of tax law changes that will impact them and see how other businesses are dealing with the changing environment.”
“In the end, not planning costs you dearly because you will never know the missed opportunities,” says Sandy Abalos, managing partner of Abalos & Associates, a full-service accounting firm in Phoenix, Arizona. Abalos, a former member of the U.S. Small Business Administration’s National Advisory Council, notes that some of her clients are clearly eligible for the research and development tax credit, yet they tell her they don’t want to bother with claiming it.
But whether it’s out of apathy or fear of making a mistake, such a standoffish attitude toward aligning one’s business strategy and with tax rules can cost thousands, if not millions, of dollars. It may seem like a safe strategy after a down year or two, but if left unchecked, omitting taxes from the equation can quickly become an unhealthy fiscal habit. “After a period of time, people can lose sight of the value of planning,” Abalos explains.
Revisit your business structure
Once your taxes are filed, it’s a good time to ponder changing the legal structure of your business. Such a move is a major decision, but because it can have a significant impact on tax ramifications, it’s one that can and should be revisited periodically.
“So many businesses just start out quickly and they don’t know what type of entity they are or why,” says Gail Rosen, a CPA for 30 years in Martinsville, New Jersey. “Most start-up businesses do start off as an LLC because it is a simpler, less expensive way to begin and you can always incorporate later.” Also, the LLC structure provides business owners with some liability protection that a sole proprietor or partnership does not have. But take care, because some of these decisions can’t be undone. For instance, Rosen points out that once a business incorporates, it can’t go back to being an LLC.
Find your recordkeeping comfort zone
From the old-fashioned paper ledger to desktop accounting software to the new cloud-based financial tracking platfroms, there is a form of record keeping for everyone’s technological comfort zone.
Lauren Kay is head of SmartSitting, a nanny agency and temporary sitting service based in New York City. Kay founded the company three years ago, just after her sophomore year at Brown University, and since then the business has grown quickly and now includes 215 SmartSitters and over 100 families. Initially, her uncle acted as the accountant when the business was a part-time affair, with Kay doing most of the work herself to prepare the taxes. But after she recently graduated, rapid growth turned the business into a full-time job and that’s when she knew some changes had to be made.
“We’re learning to prepare better now,” says Kay. “We didn’t have a good system of recording before, other than going over the statements, which is painstaking after the fact.” SmartSitting sought some free small business advice from SCORE, a national non-profit that works in conjunction with the U.S. Small Business Administration to connect new businesses with thousands of seasoned mentors and consultants. “Our [SCORE] counselor had it out with us for not having an accounting system.”
Kathy Burlison, a CPA for 29 years and co-owner of SmartSpot in Prairie Village, Kansas, a suburb of Kansas City, says getting some organization is one of the key things to think about for the future after filing this year. For instance, she has a client with $3 million in annual revenues who still records everything for the company in a ledger. A simple Excel spreadsheet might be the next step for a business like that, while business accounting software such as QuickBooks is more advanced and for those who want to keep track of more data. She also recommends Expensify, a program that takes scanned receipts and files them automatically.
However, if a business has a number of people working remotely (or if the owner would just like to look at the company’s finances from the comfort of his or her home) a desktop software program on a standalone computer may no longer serve its needs, says Abalos. Instead, she says an entrepreneur may be ready to move up to a cloud-based version of a program like QuickBooks. “This is a full version that’s housed in a cloud platform that the business owner can access anywhere at any time and share with their accountant or bookkeeper,” explains Abalos. “It’s especially great for clients doing international work.”
(For more information about business record keeping, including how long to archive tax returns, payroll data, and capital investment information, check out IRS publication 583.)
Keep track of next year’s claims
Ian Aronovich, co-founder of the web-based GovernmentAuctions.org, says he has simpliflied his tax filing process thanks to a special desktop scanner and organizer. It lets him scan in things like receipts from expenses, sales invoices, and even business cards, and then sorts them by pertinent information. “At the end of each business day, just make scanning part of your work and you will have a leg up on next year’s tax season,” says Aronovich.
Note that not all of these expense deductions are created equal, however. For example, entertainment deductions are capped at 50 percent and must be backed up with documentation, which must include the who, what, when, where, and why of each expense. Business gifts, on the other hand, are limited to $25 a person per year. Knowing what can be deducted as an expense can help a small business better plan its spending for the year ahead.
“Although I am a pretty organized person, I had to go back several times to make sure I had all my receipts from expenses over the [past] year,” says Lush Gourmet Foods’ Urdarevik. She adds that with the ability to purchase goods and services through the Internet, it’s tough to remember to print and save the receipts. “I’ve found myself going back through and combing my emails for electronic receipts,” she says. “In the future, I think I will continue to file with a professional just because it would keep a bit more stress off of me.”
Back in Seattle, Deveraux would agree. When a small business is able to make its decisions based on good advice, he says, it is best positioned to “pay all the tax that’s due and no more.”
Five ways to profit by planning ahead for next year’s taxes.
- Maximize your investments by taking advantage of 2012 tax credits.
- Evaluate your current business structure through the prism of its tax burden.
- Stay informed about changing tax rules and how they affect your business.
- Keep good records, know what deductible expense receipts to keep and for how long.
- Obtain free tax advice from small business mentors at SCORE.
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