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Don’t Be Fooled by These Common Myths About Small Business Taxes

Owning a business can be advantageous when tax time rolls around because you have many options for tax write-offs and deductions. The problem is that the tax code can be quite confusing, making it hard to know how to maximize these write-offs while still staying within the guidelines established by the IRS. Too often, business owners find themselves in challenging tax situations due to an attempted DIY tax filing, often including improper deductions or other issues that could result in auditing and fines in the future.

The costs can add up if you cross the regulations set by the IRS. Not only are there penalties for mistakes on tax filings, but the late fees and other charges can really take a toll on your bank account. The best thing that you can do is make sure that you always pay your taxes on time, and be careful to avoid writing off deductions that aren’t qualified for your business.

On the flip side, don’t make the mistake of overlooking deductions that you are entitled to, which could result in an overpayment of your taxes. There is no reason to pay the IRS more money than what is needed each year! Hiring an accountant is the most effective solution to find the sweet spot with your tax filing and payments. Your small business accountant can offer advice to maximize deductions while staying within the guidelines set by the IRS.

When it comes to business taxes, there are a variety of myths floating around. Here are some of the most common myths

Myth #1: Over-Pay Your Taxes Will Help You Avoid Auditing

Some people think that fattening out their tax payments can make their business “audit-proof” in the eyes of the IRS. The truth is that red flags will fly for underpayment, but the IRS doesn’t care if you pay the right amount or if you overpay. The best way to avoid the scrutiny of the IRS is to pay the exact amount due, based on your business calculations for the year.

What happens if you overpay? If you are making quarterly payments and you send the IRS more than the amount needed for the year, then it means that you will likely get a tax return when tax time rolls around.

You can minimize the risk and impact of an audit with good recordkeeping, documentation to back up your deductions, and accurate calculations on your tax filing each year. An experienced tax accountant can provide the guidance and information you need to ensure accuracy on your tax calculations.

Myth #2: It’s Awesome to Get a Big Tax Refund

It can feel like Christmas in April to see a big check show up from the IRS. Many people plan their vacations or big purchases around their tax refund money. But, before you spend that cash on electronics or something frivolous… remember that the refund is coming because you overpaid on your taxes.

Receiving a tax refund could be a sign that you aren’t using the right calculations to estimate your tax payments. Overpaying on your taxes means that you are sending the IRS money that isn’t needed. Essentially, you are giving the government a free loan!

The best solution is to pay the right amount on your tax payments, so you have the money on hand to pay for the business expenses that need to be covered throughout the year. Your tax accountant can help you find the “sweet spot” for your payments, making it easy to dial in the right numbers without underpaying or overpaying.

Myth #3: Home Office Deductions Increase the Risk of an Audit

Are you scared to take a home office deduction because of the potential increased risk of being audited? Just because you are taking home office deductions, doesn’t mean that you will trigger something in the IRS system that causes you to be audited.

Home-based businesses are quite common in the digital world that we live in. Whether you are working at home as a freelancer or you have a new startup running in the basement or garage, don’t be scared to leverage the home office deduction to manage your expenses. Follow the recommendations of your accountant and make sure that you only write off the portion of the home that is being used for business purposes only. For example, your office should be a room used only for the business… you can’t use the room as both an office and guest bedroom.

Myth #4: All Start-Up Expenses Should Be Deducted Immediately

It costs money to start a business. Not only do you need to put cash into business development and inventory purchases, but other expenses add up when it comes to website design, marketing, and more. Many of these costs need to be paid before the business opens, and might include both organizational and structural costs.

If you put money into office equipment or machinery, then that asset can be written off in full in the current year of taxes. Sometimes, it is a better strategy to amortize costs for equipment and other expensive purchases. Talk to your accountant about the equipment that was purchased, the overall costs of the start-up purchases, and your tax strategy to decide if the expenses should be deducted immediately or spread out over time.

Myth #5: File an Extension if You Can’t Make the Tax Payment

As April 15th draws near each year, do you ever find yourself in a cash crunch? Even though tax time is still a few months away, you should start thinking about cash flow right now, so you have enough money in the account to cover the required costs for both state and federal taxes.

If your tax filing isn’t ready by April 15th, then you might consider filing for an extension to buy a little more time for the final calculations. Sometimes, an extension makes sense – but you should always make this decision based on the recommendations of your small business accountant.

Remember this important aspect of tax extensions: buying a little more time to file your taxes doesn’t mean that you get more time to come up with the cash that is needed. When the IRS grants permission for a tax extension, you are still required to pay the anticipated amount of taxes on the day they are due.

Myth #6: Incorporate for Better Tax Breaks

You can choose from various structures for your business entity, including Sole Proprietor or a Corporation. Don’t mistakenly think that incorporating your business is essential in the early stages. In fact, this cost is unnecessary in the beginning. It can cost thousands of dollars for accounting and legal fees to set up the corporation… and you won’t likely make enough money in the first few years to make it worth the expense.

Setting up a corporation prematurely might increase the amount of taxes you pay overall since you need to pay for corporate taxes. These expenses can be avoided in the beginning by sticking with a self-employment structure, especially if your business isn’t profitable yet.

Self-employment allows you to enjoy the same deductions, without going through the hassle of setting up an official corporation. Once your profits hit a certain annual threshold, then the real tax benefits of incorporating will kick in. Talk to your accountant about the entity strategy to determine the right timing for setting up your business corporation.

Myth #7: Paying an Accountant for Tax Filing is the Best Tax Planning Advice

No doubt, your business will benefit from the tax preparation and filing services offered by an experienced small business accountant. But, talking to your accountant once a year isn’t enough to put together a strong tax strategy for your business.

Tax preparation services are limited to taking the annual information that you provide and compiling it into the tax return paperwork that needs to be filed. Once that filing is complete, then you won’t likely hear from your tax preparer until the next tax season rolls around the following year.

If you want to be proactive about your tax strategy, then you need to be working with an accountant on an ongoing basis. The best solution is to maintain open communication with a tax professional throughout the year. You can use their advice and recommendations as you are making decisions about your business. Remember that tax planning should be an ongoing process. Your business financial information needs to be evaluated in real-time, so you can make changes and adjustments to your spending and profit strategy when it is most effective.

Talk to the Small Business Accounting Experts

Are you considering the benefits of hiring an outsourced accounting team? If you are ready to make the changes that are needed for your tax strategy, then our team is here to assist. We provide ongoing accounting and bookkeeping services, helping to keep your business up-to-date throughout the year. These services are always customized, based on the unique needs of every company.

For more information about these outsourced accounting services, call us at Easier Accounting: (888) 620-0770.

Tax Savings Secrets Every Business Owner Needs to Know

Most business owners agree that taxes are the most expensive and stressful part of running a company. Not only do you need to track ongoing expenses and write-offs, but you also need to pay attention to paperwork and payment deadlines throughout the year. Even though tax savings can take a bit of work, it’s worth the effort because of the reduced tax liability.

When working as an employee, you probably didn’t think much about tax calculations since your own taxes were automatically withheld from your paycheck. On the other hand, self-employment is a whole different ballgame since you need to calculate profits from your business and remit payments quarterly. Other tax responsibilities come into play, including employee taxes, sales tax, and more.

Taxes are inevitable, and everyone needs to pay. But the amount you are paying can be reduced if you are diligent about a good tax strategy. As a small business owner, you can save thousands of dollars per year on taxes, helping to optimize your profit margins.

Designing a Tax Plan

One of the biggest mistakes you can make is failing to design a tax plan for yourself and your small business. You know the tax bill is coming, so you need to be sure there is enough money in the bank to cover the costs. At the same time, your tax plan should be custom-designed based on the needs of your business. The smartest decision you can make is hiring an experienced accounting team to assist with tax savings and planning.

One important point you need to keep in mind: there is a BIG difference between tax evasion and tax planning. We are not talking about deliberately underpaying on taxes… tax evasion is an illegal practice and can result in serious consequences! Instead, the right tax savings plan is built on leveraging the guidelines established by the IRS so you can take advantage of all available tax write-offs.

Your tax plan should include systems that help with tracking transactions, including both expenses and income. These details need to be calculated to determine how much you owe after business expenses are factored in. Then, you need to have a strategy in place that keeps you current with the owed taxes, as well as the paperwork and reporting that needs to be submitted throughout the year.

What is the Difference Between Tax Planning and Preparation?

Some people talk to their accountant once a year for tax services. When the accountant assists with your paperwork and filing in April, this service is known as tax preparation. While tax preparation is an important service, you are missing out if you aren’t working with an outsourced accounting team that also assists with tax planning.

Here is the difference in services:

  • Tax Preparation: This accounting service is focused on the preparation and filing of annual tax returns. You provide the financial records, and then the accountant works through the numbers to calculate the amount that is owed. These services are provided to ensure that you are maintaining compliance with the IRS. Most people only use tax preparation services.
  • Tax Planning: On the other hand, tax planning involves ongoing services and analysis based on the business financial details throughout the year. Instead of only talking to your accountant once a year, you have the opportunity to work hand-in-hand with an outsourced accounting team that can guide your financial strategies and processes all year long. The goal is to minimize tax liability and ensure that you are ready when it is time to prepare your annual taxes.

To put it simply: tax planning helps you reduce the amount of money you spend each year on taxes. Tax Preparation is the service to prepare your paperwork and numbers for submission to the IRS each year.

If you haven’t had a direct conversation with your accountant about tax planning and reducing your tax burden, then it is likely that you are only receiving tax preparation services, not planning services.

Tax Saving Strategies to Reduce the Amount You Owe

Now that you understand the difference between tax preparation and tax planning, what is an actionable way that you can change your financial practices to reduce the amount that you owe each year? It all comes down to your ongoing strategies regarding expenses, tracking, and more. Your outsourced accountant can offer guidance and insights regarding a proven system that can streamline your finances.

Here are a few important strategies that every business owner needs to follow:

  • Track Receipts: It seems obvious that you need to hold onto receipts for business expenses. But it’s easy to let small receipts fall through the cracks. If you don’t have an awareness of how much you are spending on business costs, then it is likely that you are missing out on transactions that could be calculated as deductions. You need to know how you spent your money. Proper organization and tracking of your receipts ensure that your deductions are logged, giving you accurate information for your tax filing. Not only does this process help you maximize the deductions, but you also have documentation in case the business is audited. The IRS will request paperwork to prove the validity of these deductions.
  • Don’t Pay Late Fees: Missing a tax payment is not only a hassle, but it can be an expensive mistake when you add up the costs of late fees, interest costs, and more. If you aren’t paying attention to the quarterly tax payment schedule, then you could be doing yourself a disservice by adding unnecessary fees on your tax bill. The simplest solution to ensure that you don’t miss tax payments is to enlist the support of an experienced accounting team that can help with tax planning and implementation.
  • Business Restructuring: The way your business is structured will impact the amount you are paying in taxes. You need to consider the structure of your business entity and the way taxation deductions and policies affect annual calculations. The rules and forms change, depending on the way you choose to structure the company. Even if you’ve had the same business entity for years, it doesn’t mean that the structure is still the right answer for your tax planning. Talk to your accountant about the various options. It might make sense to restructure based on your bottom line and long-term goals.
  • Use the Right Accounting Software: Calculating tax deductions by hand is not only time consuming, but it also increases the risk of mistakes. You can save yourself hours of time by using a tax preparation and filing software that handles the automatic calculations for you. Choose a cloud-based software so your outsourced accounting team can access the reports remotely to assist with your tax planning strategy.
  • Retirement Accounts: Since you own a business, you have the benefit of certain retirement strategies that can be used as tax deductions. For example, you can reduce your reported income by contributing to an individual retirement plan, such as a 401k or an IRA. Some of these accounts need to be opened by the end of the year to qualify for the deduction. Other types of retirement savings accounts can be used with delayed payments for the previous tax year. For example, you can contribute to the account in the early months of 2020 and have the contributions count for your 2019 tax calculations.
  • Healthcare Costs: Also consider ways you can save taxes on money used for healthcare needs. Medical costs are always increasing, and you need to be ready with the cash for future bills. A Health Savings Account (HSA) can be opened to be paired if you have a high-deductible health plan. This strategy allows you to deposit money pre-tax into the account. Keep in mind that money deposited into an HSA account can only be used on qualified medical expenses.
  • Travel Expenses: Do you often travel for both business and pleasure? If you have a justifiable business purpose for the trip, then you can write off the travel expenses. Business owners often look for ways to pair their personal time with business travel, giving them the benefit of writing off a portion of the flights, food, hotels, entertainment, and more.

Of course, this is not a comprehensive list of tax savings strategies. There are other ways that you can maximize your tax deductions to reduce tax liability. Every situation is unique, which is why it is important to work with an experienced outsourced accounting team for assistance.

Need Help with Your Tax Savings Strategy?

You don’t have to go through the headache and hassle of trying to decipher tax law. Instead, our experienced team at Easier Accounting is here to help. We specialize in small business tax preparation and planning, and we’re just a phone call away if you have questions about your taxes. You are invited to contact us at your convenience to learn about the various strategies that can be used to streamline your tax strategy and minimize the amount that is paid in taxes each year. Call us for more information: (888) 620-0770.

2018 Tax Law Changes: How the New Law Will Impact Small Business Owners

It was a headline-making story to have tax reform go through in Washington D.C. While there are many news stories about these laws, it can be a challenge to find non-biased information that breaks down the facts. What do these new tax laws mean for your company?

As a business owner, you need to stay ahead of the changes that happen in the accounting and tax industry. But, you don’t need to do the footwork to read the fine print of the new laws. Instead, let your accountant do the hard work to ensure that your business is staying current with the changes that are happening this year.

The unofficial title for the new tax law is The Tax Cuts and Jobs Act, and these new rules went into effect on January 1, 2018. Accountants are facing the task of decoding the rules that have been established by the IRS. The document has about 1100 pages, although these changes may or may not simplify your tax filing. Here’s an overview of a few differences that could impact your business:

What Type of Business Do You Own?

The structure of your company will impact the way the tax changes will impact your business. For example, sole proprietors will experience a different change compared to those who have partnerships or corporations.

The good news is that there are potential decreases in the taxes that will need to be paid for your business. These changes are most favorable for large corporations.

Talk to your accountant about 2018 tax strategy to understand how these changes will impact the type of business that you own. Depending on your current business trends, it might make sense to restructure the company to strategically maximize the tax benefits that are available in the future.

2018 Tax Reform and Depreciations

There are some changes to tax rates, which will be discussed in more detail in the next section of this article. Here is a highlight of some of the other changes that have been put in place with this new tax reform:

  • According to Section 179, businesses could previously write off the cost of used or new equipment and property up to $500,000 in the year the acquisition occurred. This number has been changed, now capping the amount at $1 million.
  • Businesses can choose to speed up the depreciation amount when purchasing new equipment or property. Or, Section 179 expensing can be used if desired. 100% of the cost of the property can be used as bonus depreciation (compared to the previous rules of 50% depreciation).
  • Increases were made to the passenger vehicle depreciation limits.

Losers and Winners of Tax Reform

With the bill being so long, it can be hard to tell who the true winners and losers are. Many people have been asking the question about whether these changes will reduce their tax burden. But, there aren’t clear-cut lines about who will win or lose. As mentioned above, the business changes are impacted by the way the company is structured. There are also individual factors that need to be considered regarding the way your personal tax returns will be impacted.

Consulting an experienced accounting team is the most effective way to ensure that you have the right plan in place for your taxes this year.

  • Corporate Tax Rates: There is good news for you if you have a C Corporation. Instead of using tax brackets, C Corporations now follow a tax rule of a flat 21% rate on all taxable income. The new rates will likely decrease your tax burden, as long as the corporation has a taxable income of $90,385 or more each year. If your taxable income is less than that amount, then your taxes will likely go up since there is no longer a bracket system in place.
  • Pass-Through Entities: Sometimes, businesses are set up as pass-through entities, such as S Corporations, LLCs, Partnerships, and Sole-Proprietors. These types of companies will not be impacted by the changes to business taxes. But, there are individual tax changes that might affect your outcome each year. The deduction is based on 20% of income from the entity, which can be used as a deduction on the personal tax return. As an example, if you have an income of $100,000 in 2018, then your deduction would be $20,000. This deduction is calculated in before the calculations are made for your individual tax rate. There are many nuances to the tax law that need to be considered, but this simplified example will give you a general idea of how the system works.

Small businesses that are structured as pass-through entities will also benefit from the AMT relief as well as other provisions that might apply to the circumstances.

At the same time, certain deductions were reduced, which could impact your business taxes. For example, there is a limitation of $10,000 in deductions on state and local taxes.

Tax Changes for Individual Filing

In addition to filing your business taxes, it is also necessary to file an individual tax return as well. A few small changes might impact your personal filing, depending on your current financial situation.

The new tax laws maintained seven brackets for individual taxes, with changes to those tax rates. At the same time, many of the individual changes were focused on allowed deductions. Tax rates in all seven brackets have decreased, while the dollar amount for each bracket has increased.

Even though the tax rates have been reduced, you need to talk to an experienced accounting team to understand the full impact of these changes. For example, your rates have gone down, but you might be limited in the deductions that are used when calculating your income. As a result, there is a possibility that you might have a higher income on paper, which changes the rates that you will need to pay.

Standard Deductions for Individual Tax Returns

The standard deductions have been increased, which changes some of the itemizations that could be used on a schedule A. The standard deduction is the base amount that a taxpayer can deduct for tax liability if they don’t use a Schedule A for deductions.

Your accountant will help you compare the itemized deductions with the standard deduction; then you can choose the higher amount for the deductions that are used on the filing of your individual tax return. Using the standard deduction can simplify the process for many families because they don’t have to worry about additional tax paperwork and calculations. The goal of this reform to the tax law was to reduce the work that goes into the preparation of individual tax returns.

Whether you are single, married filing jointly, or head of household, the standard deductions have almost doubled. So, many people will find it beneficial to simply take the standard deduction so that they can manage their taxable income in the best way possible.

There were a few changes to itemized deductions. One notable change was the capped mortgage interest. The debt cap for mortgage interest write-offs is now $750,000. Also, joint filers can no longer use active passthrough losses of $500,000.

How Long are the New Tax Laws in Affect?

Most of the changes for business taxes are indefinite, which means that these changes will stay in place until the laws are changed at a future date. On the other hand, many of the individual tax laws have a deadline.

For example, many of the provisions for pass-throughs and individuals expire after December 31, 2025. It is possible that more adjustments could be made in the future which will make these changes permanent.

Putting Together the Best Tax Strategy for Your Business and Family

Taxes can be complicated and confusing, and many people get heartburn when they think about everything that needs to go into a tax filing. There is no reason for you to carry this stress! Instead, hire an expert who can handle the calculations, paperwork, and filing.

As a business owner, it is better for you to focus on the daily tasks that will help your business grow. It takes too much time and effort for you to read through and understand the laws. Instead, lean on the support of an experienced accounting team who will guide your strategy and ensure that you maximize tax write-offs as much as possible.

Outsourcing these accounting tasks will free up your time, giving you the ability to focus on employee management and product development. At the same time, you will be able to enjoy more time with your family because you don’t need to spend the long hours in the office. Let the pros handle your tax preparation so that you can stay focused on the most important aspects of your life.

For more information about tax preparation and accounting services, talk to our team here at Easier Accounting. We specialize in small business accounting, and we will gladly help you put together the best tax strategy for 2018. Call to schedule a consultation to learn more: (888) 620-0770