Inside Small Business | Small Business & Home Business Marketing

Top Tax Preparation Mistakes

Kay Bell, Principal of Write Here!

Today’s tax code contains more than 66,000 pages, with literally thousands more added each year. No wonder every filing season so many tax returns are riddled with mistakes. And when it comes to a business, those errors can make a big difference in your company’s success.

Exactly which form you’ll use to comply with those pages and pages of tax law depends on your business’ structure. But regardless of the eventual form, there are some basic business tax areas to watch out for. Here are 10 that trip up many business taxpayers.

1. Overlooking deductions
This is the easiest way to reduce your business’ tax burden. But with so many options, filers regularly overlook some. Common write-offs include automobile expenses, business association fees, home office costs, entertainment expenses, convention costs, cell phone charges, depreciation of your computer and salaries. Don’t forget about health-care premiums. In most cases, they are deductible as a business expense instead of a Schedule A medical expense.

2. Forgetting to track expenses
Those deductions will be easier to remember if you’ve recorded them throughout the year. You don’t have to include the documentation when you file, but it will ensure you claim the correct amounts. If the IRS subsequently questions any of your claims, you’ll be doubly glad you have the records. And proof of a business expense is more convincing when it’s on a separate credit card, rather than mixing business and personal expenses.

3. Confusing current and capital expenses
In addition to keeping an eye on what costs are deducible, pay attention to when you can write them off. Expenditures that can be claimed in the year they are incurred are current expenses. These are everyday business operating costs. Write-offs for some purchases, however, are capital expenditures and must be spread out over what the IRS has determined is their “useful life” of a year or longer. These capital assets, such as equipment and vehicles, are viewed as investments that will generate revenue in future years.

4. Shortchanging Section 179
It is possible, however, to get immediate tax relief from capital expenditures under Section 179. This part of the tax code allows a business owner to write off the cost of many types of tangible property (e.g., machinery, furniture, building fixtures and computer hardware and software) in the year purchased. Two basic requirements to keep in mind: First, the deduction is generous but not unlimited. For 2006 returns, up to $108,000 in expense can be deduction under Section 179 expenses. Secondly, the expenses cannot produce a business loss; you can only use them to offset your company’s income.

5. Miscalculating automobile deductions
Yes, this was mentioned in the first tip. But business use of a car is valuable enough to warrant a closer look. In calculating your auto expenses, you can take a standard mileage deduction (44.5 cents in 2006, 48.5 cents in 2007) for each business mile or you can take a deduction for actual expenses, including depreciation of the car. If the car is company owned, 100 percent of the costs can be deducted.

6. Not Doing away with bad debts
If you have debts or payables that are still out, write them off and take a deduction for the amount. But you must be genuinely no longer trying to collect. Similarly, if you have an inventory that’s just sitting in a warehouse, it might be more tax valuable as junk. By disposing of it, you can claim the product’s value as a deduction.

7. Not Setting your salary
As business owner, you know how valuable you are to your company, but many owners opt to put earnings back into the company rather than pay themselves. The IRS, however, prefers that you make some money and pay income as well as self-employment taxes on it. While you have some latitude in setting what you deem is a fair salary, the tax agency expects your pay to be “reasonable.” If an examiner asks, be prepared to demonstrate how you came up with the wage and why it’s appropriate.

8. Not Differentiating between employee and contractor
Pay attention, too, to how you pay others. Many companies trip up by treating an employee as an independent contractor. The line between employee and independent contractor often is unclear, but generally, a worker qualifies as an employee if the person works exclusively for you; is paid by the hour, day or week; and you regularly instruct and train the person in their job duties, as well as provide the necessary tools for the job. An independent contractor, however, works for many people and chooses to perform services for you, supplies the necessary equipment, and runs a business of his or her own.

9. Not making the most of “Made in the U.S.A.”
Does your business manufacture products domestically instead of sending the work overseas? Then don’t ignore the domestic production activities deduction. This write-off offers companies a break of 3 percent of taxable income. The deduction’s rules are somewhat complicated, which probably explains why it is underused, but the savings could more than pay for the cost of hiring a tax accountant to help claim it.

10. Not starting at the beginning
If your business is a new one, you can write off up to $5,000 in business startup costs and another $5,000 in organizational expenses in the year that you open your doors. Start-up costs include not only any amounts incurred in connection with creating a business, but also investigating the creation of one. Organizational costs include the expenses of creating a corporation.

Finally, here’s a bonus tip: Don’t go it alone. You started your business to take advantage of your expertise. Unless your company is an accounting firm, then tax filing and planning is probably not your greatest strength. So don’t make the mistake of trying to maneuver those 60,000-plus pages of tax laws on your own. Let a tax pro help you avoid costly tax prep and planning mistakes.

About the Author
Kay Bell has been principal of Write Here!, an Austin, Texas-based editorial services firm, since May 2005. Her clients range from a major Maryland-based mutual fund company to a Florida bankruptcy law firm to the National Federation of Independent Business, and she writes a monthly finance column for austinwoman magazine. Kay’s diverse career also includes stints as a Congressional staff member, as well as part of the government relations teams of two Fortune 500 companies. Visit her blog at Don’tMessWithTaxes.typepad.com.

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Small Business Budgeting Tips

Pam Newman, author of Out of the Red

A budget is part of the financial roadmap every small business needs. How do you know where you are going if you don’t have a destination selected and the road mapped out? Just throw the dart and see where it lands? If so, you make up the majority of small business owners. But it doesn’t have to be that way.

Creating a budget will help you explore anticipated income, expenses, capital, expenditures and savings, and make you much more attractive to lenders and other business relationships. The challenge for the New Year is for you to be more proactive with your finances.

Where should you start?

1. Analyze your current and prior year(s) budget. It’s always a good idea to know where your starting point is! What areas did you do well on? What areas do you need to work on? If you don’t have a budget, and many small business owners don’t, then you will need to look at your actual financial statements including:
a. Profit/Loss
b. Balance Sheet
c. Cash Flow Statement

2. Utilize a simple format for your budget based on the Profit/Loss format:
Income
- Cost of Goods Sold
- Overhead Expenses
- Net Income/Profit

Don’t get confused though! Cash and Income are two different concepts, so you need to ensure that you set clear goals for the budget you are putting together.

3. Use the budgeting features in your bookkeeping software to assist you with the development of your budget. QuickBooks® has a great budget format ready for you based upon your Profit/Loss and you can input the budgeted figures into the appropriate line item.

4. Assess your budget realistically. It’s always a good idea to have an objective third party review your information. We tend to overestimate our income and underestimate our expenses so that we show a positive flow for our budget. That isn’t good if it’s not realistic. We need to be aware of where our money is coming from and going to so that we can be proactive in our financial lives. It will be amazing how much less stressful your world can be when you effectively manage your finances.

Make sure to document how you are coming up with your estimate. For example, if you predict $10,000 in sales, you need to document that it is based on the following equation (# of sales multiplied by $ amount per average sale). This will give your predictions substance and allow better variance analysis when your actual figures vary from your budgeted figures.

5. Compare your actual activities to your budgeted activities on a monthly basis. This comparison is what creates the REAL value for you. Comparing helps you to assess what parts of your finances are excelling and what parts need attention. Without comparison, there is no value in budgeting.

When you use QuickBooks®, you’ll have preformatted reports available that will calculate the variance between actual and budgeted income and expense items. This will be a great tool for you to assess which aspects of your business are on target and which areas you need to reassess.

6. Keep your budget as a �?living�? document. You may need to adjust your budget for aspects not previously included. This doesn’t mean to change it because you want your actual to equal your budgeted numbers. Changes in budgeted amounts should be for those times when unforeseen events have occurred or arisen.

We all have many demands on our time, but managing the financial aspects of our businesses is a responsibility that we need to take seriously. If this is not one of your strengths, then find someone to assist you with this process. It’s like any other skill, it takes time to understand the various aspects but it will happen. There’s no better time to take control of your business path than today!

About the author:
Pam Newman is the author of Out of the Red, a book that covers budgeting and many more important aspects for small business owners. To order your copy, call 816.304.4398. For more information, you can visit her website at www.rppc.net. Newman is a Certified Management Accountant, Author, and Certified QuickBooks® ProAdvisor for Financial and Point-of-Sale software. QuickBooks® is a registered trademark of Intuit.

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What makes a good accountant?

Joe H Dike, CPA

The services of a good accountant can be invaluable to you or your small business. He or she should be able to help you find the way the through the maze of tax laws and provide the financial guidance you need to manage and grow your business.

While people tend to associate accountants with taxes, keeping you abreast of tax changes and doing your taxes are just a few of the services a good accountant should provide. Whether you’re wondering which business entity to form or trying to decide the best way to finance your business, a good accountant will be able to tell you how such a move would affect your taxes and/or your business’s growth.

There are many people who claim to be accountants but, what gives you some reassurance are the credentials they possess. In my opinion the most qualified are those individuals that are licensed CPA’s. While a Certified Public Accountant is always an accountant, not all accountants are CPAs.

To become a CPA, an accountant must take and pass a rigorous test administered by the American Institute of Certified Public Accountants. Accordingly, there are a number of accountants who never pass the CPA exam and though they can perform a variety of accounting tasks, they are not allowed to perform certain responsibilities that only a CPA can do, such as represent you in an IRS audit.

To name a few personal attributes, a good accountant should; be a good problem solver, give practical advice, communicate effectively, be approachable and ask the right questions. Asking the right questions will reveal to you what you need that you may not have known before.

The relationship is just as important as the skill and knowledge a good accountant possesses. You should do a little investigating as well as meet with a few accountants before you choose to whom you will want to reveal your most intimate financial information. Chances are you will form a relationship that will last a long time.

Here are a few things to consider when choosing a good accountant:

Length of time in business
A good accountant should be experienced and there is a good chance they will be if they have been in business for at least 10 years. Experience is important but staying abreast of tax changes, technology and current business practices is just as important. Check and see if they have written any articles or given any seminars. Talk to some of their other clients if possible.

Knowledgeable of current tax law and technology
Nowadays everybody has a web-site. Get online and review their web-site. If they don’t have a web-site they may not be up on technology. Advances in technology and being aware of them will definitely help them as well as you.

What credentials attained
Credentials or financial designations are evidence that the accountant is continuing his education and up on new laws and trends. Check to see if there are letters after their name and check-out what they mean. Type “financial designations�? in Google and do a little investigating.

Adequate help during tax season
Just a important as credentials and maintaining continuing professional education, if the accountant does not have adequate help during tax season, you may not get the help you need on a timely basis. Make sure your prospective accountant has adequate help during tax season; It is not uncommon for accountants to work 10-12 hour days during tax season.

In addition to the above, more and more people are concerned about retirement and retirement planning. Many CPAs are getting into investment planning and advising. The advantages to finding and advisor that can help with taxes and investments are invaluable. Having one person to go to for all your financial needs could not only provide great peace of mind but give the edge you need to be successful in this fast paced world we live in today.

Bio:
Joe H Dike, CPA is a licensed CPA in the state of Texas and a 1984 graduate of East Texas State University (now Texas A & M at Texarkana). He is Certified Information Technology Professional (CITP), Certified Senior Advisor (CSA) and a Licensed Investment Representative. His practice is mostly small businesses, individuals and closely held corporations. He lives and works in New Boston, TX and is actively involved in his community and serves as a four term city councilman and an active member of his local First Baptist Church. You can learn more about him and his practice at www.joedikecpa.com.

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