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2014

Last_Min_Tax_Tips_body.jpgby Erin O’Donnell.


Professional tax preparers for small businesses are already hard at work for the fast-approaching April 15 deadline. S corporations, which almost always follow a calendar tax year, are even shorter on time with a March 15 deadline.


Now that the reporting year has ended, most options to optimize a small business tax return lie in the deductions and credits you choose to claim, or in deciding to file for an extension. The estimated 85 percent of small business owners who file taxes as individuals should also review their returns for any claims that could raise suspicions with the IRS.


Home office deduction changes

Small business tax expert Barbara Weltman says the first thing to do is learn about changes in the tax code that affect entrepreneurs, especially those who work out of their homes.


“The good news is there is a new, simplified home-office deduction, since 52 percent of all small businesses are home-based,” says Weltman, author of J.K. Lasser’s Small Business Taxes.


Up until this year, most entrepreneurs working out of a home office had to make some complicated calculations about the percentage of their home’s square footage that they used for business, the portion of utilities and Internet that went to business use, and so on. Now, a home-based business can deduct $5 per square foot up to a limit of $1,500.


The original calculation method is still available, too. Which one should you take? Weltman advises business owners to compare the flat rate to the deduction they claimed in years past. “If you have a space that’s larger than 300 square feet, you might consider calculating it the old way. That’s the maximum you can have on the simplified method,” she says. The IRS also has an online comparison.


Use your time wisely

If you’ve been keeping good records throughout the year, tax time will be a lot less painful. But it’s also important to give yourself time to go over your paperwork and make sure you have everything you need to complete your return, says Chris Whitcomb, tax counsel for the National Federation of Independent Business.


Give your accountant or tax preparer enough time to complete your return and let you review it, Whitcomb says. Among NFIB’s 350-plus members, Whitcomb says nine out of 10 use an outside tax preparer, tax software, or both.


For sole proprietors, independent contractors, and home-based businesses, doing your own taxes isn’t out of the question. The Small Business Administration notes that tax preparation software is a good option, with one caveat: many free products don’t support business tax filers with necessary forms such as Schedule C. Check to make sure your software has everything you need.


Whitcomb adds that getting organized early also helps you find out if you owe money, and to plan accordingly. “You don’t have to file until April 15. You can plan for that cash flow ahead of time if you have to pay,” he says.


Maximizing deductions

Weltman says tax time is your opportunity to make smart elections. One example is the Section 179 deduction, which allows business owners to write off the entire cost of new equipment in one year rather than taking depreciation over multiple years. Eligible items include machinery, computers, certain software, and furniture. Or, a business can take bonus depreciation, which allows half the cost of qualifying equipment to be deducted this year, with remaining depreciation amortized over the item’s lifetime.


“Depending on your tax picture, you should sit down with your tax advisor to figure out the best depreciation strategy for your business,” Weltman says.


Enjoy these deductions while you can. They’re two of 55 tax breaks that Congress allowed to expire at the end of 2013. Congress could retroactively reinstate them, but for now Weltman says that makes 2014 tax planning difficult. For 2013, a business can write off up to $500,000 under Section 179. That number drops to $25,000 next year, and bonus depreciation is on track to be eliminated altogether.


If you laid the groundwork for a business in 2013, some startup expenses can be deducted, such as money spent on product and market analysis and visiting potential business sites. For more small business expenses and deductions, check out the SBA’s guide.


Finally, some states also have special incentives for businesses that aren’t available from the federal government, Weltman adds. Check the rules and deadlines in your state before you finalize your return.


Audit pitfalls

The SBA advises business owners to avoid these common audit triggers:


  • Large sum miscellaneous deductions – The IRS takes notice at long lists of itemized deductions that don’t seem to fit your income. Be specific about every deduction and keep the documents to back them up.
  • Classifying employees as independent contractors--Failing to classify correctly could mean you’ll owe back wages under the Fair Labor Standards Act, and you may pay back taxes and penalties. Visit this guide
  • Keep business and personal expenses separate – It’s best to maintain a separate bank account or credit card for the business, Weltman advises. But if you didn’t do that in 2013, recordkeeping is the next best defense, especially if you used personal property like a vehicle for your business. Failing to keep business and personal activities separate can mean losing out on business write-offs if your records aren’t clear, she says.


Where Weltman parts ways with the SBA, however, is over the home-office deduction. SBA repeats the long-held belief that having a home office increases your odds of being audited. “Is it a red flag? My opinion is no, because look at how many people work from home today,” Weltman says.


Just make sure you qualify for the deduction, she adds. If your business has a commercial address and you work from home occasionally, that doesn’t pass the test.


And if you’re doing really well, expect extra scrutiny. Those who report $200,000 or more in income automatically fall into a high audit risk category, Weltman says. This year, there is also an additional 0.9 percent Medicare tax on earned income and 3.8 percent tax on net investment income for single filers making $200,000 and married couples filing jointly who make $250,000.


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Need more time?

You can file for an extension if April 15 is coming too fast. NFIB’s Whitcomb says it’s better to get your return right than to rush through it just to meet the deadline, especially if you’re missing key supporting documents.


If approved, an extension will give you five to six extra months to prep your return. But remember, you don’t get extra time to pay. Estimate what you owe and send the payment when you file Form 7004 to request the extension. If you’ve already made quarterly payments, furnish that information to the IRS as well. If you owe money but don’t pay, the IRS could reject your application, and interest and penalties will kick in.


Looking ahead

When wrapping up your 2013 return, remember that it’s also time for the first payment of quarterly estimated taxes for 2014, Weltman says. Stay on top of your cash flow projections so you have enough on hand when these payments come due.


Although the expiring tax breaks make for a lot of moving targets, she says it’s best to peg your 2014 tax liability to your 2013 tax obligation. “No matter how much you ultimately owe, at least you won’t have underpayment penalties,” she says.


Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.

second_opinion_taxes_body.jpgby Iris Dorbian.

 

With the proliferation of DIY tax software programs such as TurboTax flooding the market, it can be tempting for financially pinched small business owners to forgo the services of an accountant when filing their taxes. But according to several experts, that could be a serious mistake. Following are some reasons why a small business owner should, at least, have a tax accountant review their returns before filing.

 

Computers are not infallible

Believe it or not, there are several salient items that even the most deftly assembled software program can miss. Unlike an accountant who deals with thousands of returns over a career, software programs are not designed to detect oversights.

 

“They're all highly simplified,” says Eric Levenhagen, an Iowa-based CPA who runs his own firm ProWise Tax & Accounting, which specializes in small businesses. “They don't catch everything.”

 

To prove his point, Levenhagen, who launched his business four years ago, says he is frequently contacted by small business clients who use software programs to file their taxes. In one instance, his client, a sole proprietor, didn't understand that business and personal returns are filed together. The software missed this.

 

“He had already filed his personal returns and he came to me and said, 'I'm going to file my business return and I want a second opinion on the figures that I'm going to plug in,'” he recalls. “I said we need to go back and change that.”

 

Financial pros know what to look for

An accountant with years of experience working with small businesses will have likely encountered any tax situation you present. Sure, it might end up costing   more than the investment in a tax software program, but the short-term pain of parting with a few dollars compensates for an outcome that could be dire to your bottom line.

 

“Tax professionals will know additional things to watch out for like audit red flags,” says Levenhagen. “For example, you get people who have too many round numbers on their returns because they're just guessing or estimating their expenses. And there'll be a lot of numbers that end in zeros. That's not a good situation.” Levenhagen explains that such facile approximations could raise the suspicions of the IRS.

 

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Second opinions are valuable only if provided by competent professionals

Make sure that the tax professional you're consulting has a solid reputation as someone who is knowledgeable, reliable and well informed when it comes to current tax laws and trends. Ask trusted colleagues or associates for referrals. Don't pick the first name in a Google search result without doing your due diligence.

 

Linda de Marlor, president of Tax-Masters, an accounting firm in Rockville, Maryland whose client base is also heavily comprised of small businesses, agrees wholeheartedly. She recalls an example of small business owner client who came to her after dealing with an inept CPA.

 

“He was a successful real estate broker who was married and had twin sons with asthma,” she explains. “Their previous accountant never informed them that they qualified for a medical reimbursement plan. [If the accountant had done that], it would have saved them at least $5,000 in taxes a year for the 10 years since the twins were born.”

 

Tim Kerin, who with his wife Tracey, owns several businesses including a commercial construction firm, learned a very difficult lesson when he and his wife visited an ineffectual CPA several years ago to get a second opinion.

 

“He did not explain the returns to us nor did he go over how we used expenses,” recalls Kerin. “He just took our numbers and did the return. We should have questioned every line and understood it before signing the return.”

 

What ensued was a business owner's nightmare—an IRS audit. Kerin says that he and his wife have paid $95,000 in legal and accounting fees, and that the ordeal has been a financial drain on the couple's business operations. Although they did not lose their various businesses, Kerin notes they did have to lay off several employees, sell two company vehicles, and close a storage unit.

 

The ordeal inspired the Kerins to launch Learning Lessons in Business, a two-year old consulting firm designed to educate business owners on various challenges. Kerin's negative experience with the CPA notwithstanding, he does feel that small business owners who do their own taxes are taking unnecessary chances.

 

“As much as you may not like to have a professional prepare your taxes, [you should do this] at least once every three years,” he advises. “That way you can probably get some tips from your tax preparer on things that you should have been doing, such as categorizing expenses correctly based on your business activity code (which classifies a business type) and the round number syndrome. And if there are mistakes that the preparer finds by going through your records, then you can see if that same mistake exists in the past.”

 

Small business owners looking to save money by preparing their own tax returns may be doing themselves—and their companies—a serious disservice. With tax laws continually changing, there may be deductions or other items that you, as a busy entrepreneur, simply can’t keep up with. Even if you feel confident about the reliability of your software program and your gift for numbers, always seek out the opinion of a tax professional who is trained to file returns just to make sure you’re not missing anything. It may be the best money you ever spend.

Taxes_body.jpgby Robert Lerose.


Congress waited until the early hours of January 1, 2013 to pass the American Taxpayer Relief Act of 2012, which the president signed the next day. Although this was not the first piece of legislation approved at the last minute, it underscores how daunting it can be for small businesses to do any kind of tax planning while they wait to find out what laws and provisions will be enacted. Still, by looking carefully at their returns, entrepreneurs can use their tax situation to help manage their finances and make sound business decisions in the year ahead. We checked with three experts to get their perspective on how small business owners can gain tax advantages.

 

Pick the right structure

One of the first things a small business can do to manage their tax bill is to examine their business structure to see if it gives them the best tax advantages. "The first tip I would give to almost anybody who has income besides W-2 wages is to form a corporation or a limited liability company (or an LLC)," says Aaron Young, CEO of Laughlin Associates, a Nevada-based company that specializes in helping entrepreneurs find the right business structure. "Right away, you're going to see your taxes go down for the investment of a few hundred dollars."

 

For example, a sole proprietorship is subject to self-employment tax, but a corporation or an LLC is exempt. An S corporation allows you to take part of your salary in dividends, which further reduces the tax bite. "Small business owners, including very small operators, don't realize that they can benefit from this just like a big company," Young says.

 

Corporations exist to reduce the risk to business owners and to get every advantage that the government allows, Young says. For example, while a home-based sole proprietor would not be able to write off a home gym, a corporation could turn their spare bedroom into an exercise facility and deduct 100 percent of the cost as part of a wellness plan.  

 

Still, Young warns that sole proprietors should think carefully before incorporating because each business structure has its own legal and tax consequences. For example, depending on who will own the company and whether it will seek outside financing will help determine the best way to incorporate. "It's not good for a husband and wife to own a limited liability company because the government looks at them as one person," Young says. "If you're going to bring in outside equity, then you're going to want to be a C corporation. They have lower tax rates than individual tax rates."

 

Another factor to consider when incorporating is different attributes of each business structure. For example, shareholders of an S corporation are taxed at their individual income tax rate. In contrast, profits from a C corporation are taxed twice—at the corporate level and then again at the individual level when the profits are distributed as dividends.

 

Document and deduct

Studies from different sources, including the General Accounting Office, show that many small businesses overpay their taxes. It is clear that many entrepreneurs are not aware of all the deductions that they are legally entitled to.

 

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"I have found that there are two reasons people miss deductions. One is that they don't know what they don't know," says Sandy Botkin, CEO of the Tax Reduction Institute and author of Lower Your Taxes Big Time. "For example, if you talk business with a client in person and then go out to the theater with them, you can deduct 50 percent of the cost of the tickets. You can write off any meals that you have with that client."

 

The second reason that small business owners miss out on deductions is because they do not properly document their expenses. For example, to document a local business appointment by car, you should record the mileage, the date and explanation of the trip, and the beginning and ending addresses. "If you don't have something triggering you to write down the types of things you need for a deduction, you're not going to do it," Botkin says. He recommends getting software that does the work for you. There are different expense tracker apps on the market—including Botkin's own application Taxbot—that supply everything you need for documentation.

 

Overnight business trips have their own requirements, but small business owners can still reap a handsome amount of deductions. "For every day you're doing business, you can deduct your road expenses, including 50 percent of your food and 100 percent of your lodging. You can even deduct 100 percent of the dry cleaning bill for the clothes you wore while away,” Botkin says.

 

In looking for an accountant, Botkin recommends choosing a CPA, tax attorney, former IRS attorney or Enrolled Agent who is "honest but aggressive. Someone who tells you to take every deduction you may be legitimately entitled to with the right documentation and who specializes in your industry."

 

Review with a pro

Small business owners should set aside time with their accountant to do some serious tax planning, but not at the height of tax season.

 

"I always suggest to people that they get together with their tax professional in, say, midsummer once tax season is over and the accountant is rested to go forward with some tax planning," says Bonnie Lee, an Enrolled Agent and founder of California-based Taxpertise. "They can pull up a comparative profit and loss statement from the prior year to see if your net profit or sales have increased or decreased and then you can go from there."


Tax issues are rarely a favorite topic among small business owners and the details can seem overwhelming at times. But the evidence is clear that taking the time to review your taxes with a qualified professional could put your business on firmer financial footing.

 

Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business. 

 

 

Time_Management_body.jpgBy Iris Dorbian.

Few would argue that being a small business owner can be enormously demanding. Whether it's dealing with vendors, managing staff, or serving customers, finding the right balance for these tasks can be a formidable challenge. While some try to handle the time management dilemma by working overtime every day, this kind of solution can often lead to burnout. How then can business owners successfully manage their time without sacrificing their health and personal lives?

Following are time management tips from several small business owners who have faced this challenge:

1. Don't be afraid of shutting down technology to complete a project.

Because technology allows us to instantaneously access information via an unending assortment of mobile or wireless devices, it can be tempting to constantly check for e-mails or alerts—and then just as quickly respond to them. Try to avoid this trap. Unless you are waiting for a time-sensitive response from a client, your time is probably better spent attending to other aspects of your business.

Diana Ennen, president of Virtual Word Publishing, an online PR/marketing firm that handles book authors, wholeheartedly agrees.

“You absolutely need to focus and turn off all notifications when working on projects,” she urges. “That means turn off your cell phone, social media, Skype, or e-mail notifications. Log out of Outlook so that way you won't see new e-mails coming in. If it helps, set a timer and work for several hours.”

To prove her point, Ennen, who works with four subcontractors regularly, says she often does this when writing press releases and articles for clients. As a result, she can complete the job easily. “It's so much better because I've committed to it and am fully focused,” she says.

2. Carve out a block of time to complete jobs.

If you want to use your time productively, schedule in your calendar a block of time to work on a key job or project. This way you will be able to concentrate on what needs to be done without scattering your energies or letting your attention wander to a host of other things.

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Dana Manciagli, a Bellevue, Washington-based career consultant with her own business, says this is an imperative.

“Schedule your important work as an appointment to yourself,” advises Manciagli, who previously worked at Microsoft as a worldwide sales manager. “If you need to write proposals that you are not getting to, open your calendar and make an appointment with yourself for it. If you need to remind yourself which ones to work on, put more details in the body of the invitation.”

3. Master the art of saying no.

Cultivating potential customers and associates at meetings or networking events is good for business. But if your attendance prevents you from planning your monthly budget or training new personnel, you might have to decline the invitation to focus on the task on hand. Be strategic when weighing the pros and cons of invitations as well as favors that others may ask of you.

“Learn how to say no,” insists Manciagli. “I made a lot of mistakes in my first year [as a small business professional] and this is one of them. Ask yourself: Which line item of my P&L will benefit immediately if I attend this event? Cost-Savings? And within revenue, be more specific with yourself. Will new clients be there? Will I get leads? If not, say ‘no, thank you.’”

4. Get up early.

It might be a platitude but the old saying, “Early to bed and early to rise makes a man, healthy, wealthy and wise,” might have some validity for business owners seeking to better manage their time. Drew Stevens, owner of Stevens Consulting Group, which helps small struggling healthcare professionals improve their revenue, endorses this takeaway as a great way to get things done.

With the extra time, Stevens says small business owners can review a perplexing client issue or look over notes or PowerPoint slides for an upcoming board meeting. “I remember getting up at 5 a.m. to get my master’s work done before I commuted to work,” he says. And if you do commute, do some work on the train rather than read a book or sleep.”

5. Create a to-do list.

Sometimes scheduling time to complete a project is not enough. You might need to actually write out a to-do list on a regular basis. Then once you're finished with each task, just cross it off until you get to the next job. It might sound like an obvious time management solution for small business owners, but not too many do it, says Essen. However, if you don't adhere to this simple best practice, you might be subjecting yourself to a lot of all-nighters.

“To feel more in control, make this a habit—even on your busiest days,” she advises. “It takes away the feeling of being overwhelmed and the fear of forgetting something. For me, it has been instrumental as well in completing larger projects, such as redoing my website. It's amazing how freeing it is to take large projects a chunk at a time. And if they don t get done, put it on the list for tomorrow.”

6. Learn to delegate.

As a small business owner, it is not incumbent upon you to do everything yourself. Lighten your load by learning to assign some duties to your staff or others who can help you.

Says Stevens: “There is no reason to be involved in everything. For example, I operate a very busy coaching business and recognize I cannot do it all. To that end, I hire freelancers for my graphics, my invoicing, my collections and even printing. This allows me to focus on my most vital aspect—clients.”

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