Small Business Owners: Manage Your Tax Burden by Leveraging These Deductible Expenses

There are many advantages of self-employment. Not only do you have the flexibility to make your own schedule, but you can also manage your finances in a way that will minimize your tax burden. If you are spending money on anything that is related to your company, then it is important that you are working with your accountant to write off the applicable expenses.

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How do you know which expenses are deductible? Your accountant can provide specific insights to help you include all of the transactions for your business. This professional financial advice will ensure that you are following the IRS rules. Here are some of the main deduction categories that shouldn’t be overlooked:

1. Home Office Space

If you want to deduct a home office, you need to make sure that the space is dedicated to your work activities. The work area needs to be dedicated to your business and nothing else, creating a clear line between business and personal activities.

You don’t necessarily need to use a full room for this deduction. But, if the room is shared with any personal activities, then you will need to calculate the work area compared to the overall space. The best way to figure this calculation is to determine the amount of space used for work, and figure out the percentage compared to the overall square-footage of your home.

Once you have determined this percentage, then you can calculate the portion of your mortgage, rent, utilities, insurance, internet costs, and other household expenses that should be included on your tax claim.

2. Furniture and Equipment

Whether you are buying a new computer or you need a desk to use in your home office, these expenses can be deductions on your taxes. Since the purchase is for business purposes, there is no doubt that they are necessary to keep your company running.

But, like the home office space, there is a fine line to show that the furniture purchase is for business purposes. For example, if you have the family computer in your office and there are kids in the house, then the IRS could potentially ask whether you are using your business computer for other family activities. Instead, it is best to set up the family computer in a different location and use your company computer only for business-related activities. Regardless of IRS tax rules, this is a good idea anyway.

There are two methods that can be used to deduct furniture and office equipment:

  • Take a 100% deduction the year that the purchase is made
  • Depreciate the purchase by deducting a portion of the expense for several years

Your accountant can help you choose the deduction method that will work best for your situation. The simplest solution is to take the full deduction when the purchase is made. But, there are times when it might make sense to use the depreciation method instead.

If you use depreciation for furniture, then the deductions will be split out over a period of seven years. In the case where depreciation is used for electronic equipment, such as computers, scanners, and copiers, then the depreciation is used over a period of five years.

3. Office Supplies

In addition to the big expenses for computer equipment and furniture, there are often other office supplies that are needed for a small business. Whether you are buying stamps to mail out invoices or you need more printer paper, these expenses can be used as deductions.

Any time you purchase office supplies, keep track of the details so that you can ensure that it was a business expense instead of a personal purchase. Hold onto the receipt and make sure that the transaction is recorded in your accounting software.

If you have a receipt that includes both business and personal spending, then you will need to calculate the portion of the cost specifically related to office supplies. The best solution is to have two separate transactions so that you have different receipts for business and personal.

4. Subscriptions and Software

Most businesses utilize some type of software for accounting or other business-related tasks. These software expenses can be deducted from your taxes. These transactions might be in the form of a one-time upfront payment to purchase a software. Or, many software companies are going to subscription-based payment systems that require a monthly or quarterly payment.

What other subscriptions do you have for your business? These subscriptions might include everything from magazines for your clients to read while they are waiting, or a delivery service that provides copy paper and ink on a consistent basis. Anytime you are paying a recurring fee, make sure to track the expense so that you don’t miss out on the tax deduction.

5. Insurance Costs

If you are self-employed, then you are likely paying for your own health insurance, long-term care insurance, and life insurance premiums. These monthly costs are 100% deductible on your taxes.

There are some limitations that your accountant will need to help you avoid though. For example, if you have a small home-based business, your profits will need to exceed the amount that you are writing off for your insurance premiums.

Also, if you were eligible for other health insurance, such as a plan through your spouse’s job, then you aren’t allowed to write off the full amount of independent insurance costs. That being said, if your spouse also worked for your home-based business in addition to their full-time job, then you can deduct the spouse’s premiums that were deducted from their paycheck.

If you choose to deduct the cost of premiums for your spouse’s insurance coverage, then you need to ensure that equal coverage is available for all other employees.

Talk to your accountant about your individual situation to ensure that you are following the guidelines set by the IRS for insurance premium deductions.

6. Travel and Entertainment

There is good news if you are traveling for business because the travel-related expenses can be used as deductions. But, you need to make sure that your trip is business and not personal entertainment. When you are heading somewhere on a business trip, the full expense of your hotel or accommodations is tax-deductible. You can also write off all of the cost of travel, including the plane ticket, rental car, taxi fees, and more.

Other costs of life on the road can also be fully deducted, such as tipping, dry cleaning, or any other costs that might be essential for daily living.

When it comes to meals and entertainment, you can only take a 50% deduction on these expenses. Keep the receipts, and make sure to record down how the meal related to your business efforts.

7. Car Mileage

Make sure that you are tracking your mileage every time you get in the car for business purposes. If you drive for business, then those miles can be written off. The car trips could be for anything related to your company, including a visit with a client, a trip to the bank, or driving to a conference or event.

You need to keep documentation of your mileage. Put a notebook in your car where you record the date, mileage, and the purpose of the trip. At the end of the year, you have two options to write off the mileage on your car:

  • Total the mileage, and your accountant can do the math based on the annual mileage rate. In 2016, the rate was 54 cents per mile. In 2017, the rate is 53.5 cents per mile.
  • Calculate the percentage of time when the vehicle is used for business purposes vs. personal driving. Then, use that percentage to deduct a portion of your payment, repairs, gas, and insurance.

When you have a home-based business, the mileage can start from the moment you pull out of the driveway. If your business is based in an office, your mileage starts when you leave the office to your off-site destination. With an office-based business, you cannot deduct the drive from your home to the office and back.

8. Contributions to a Retirement Account

Certain types of retirement accounts can be tax-deductible, giving you the benefit of shielding some of your income in a given calendar year. Talk to your accountant for suggestions about the type of account that you should be using. Then, set up an account and make contributions to that account throughout the year.

These contributions can be deducted on your personal income tax return if the contributions are made to a qualifying retirement account.

Get Expert Advice from Easier Accounting

Are you interested in learning more about how you can maximize your tax deductions this year? It is important to have an experienced accounting team help you with your tax filing and ongoing bookkeeping systems.

For more information about our first-rate accounting services, talk to our team here at Easier Accounting. We are focused on accounting services for small business owners, giving you the benefit of working with an accounting team that truly cares about you and your company.

For more information about the services that are available, we invite you to contact us right away: (888) 620-0770

How Much Should You Pay in Estimated Taxes Each Quarter?

Do taxes make your head spin? Many people are overwhelmed at the idea of filing their taxes each year. It can be a surprise to new small business owners to find out that they need to make estimated tax payments throughout the year. If you don’t know a lot about accounting or tax law, it is essential that you have a trusted accounting team to offer advice and help you manage your tax obligations and deadlines every year.

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Here at Easier Accounting, our goal is to alleviate your stress about accounting and taxes. We know that you are carrying a lot of responsibility in the management of your company. We will gladly handle the financial arithmetic to free up your time. As a result, you can focus on business development, client relationships, and employee management—instead of worrying about expense accounts and accounting ledgers.

Estimated taxes are an important part of your financial strategy, to help you avoid unnecessary fees. Here is some information to help you understand more about what you need to do for estimated tax payments:

Withholdings vs. Estimated Tax Payments

As an employee, taxes are withheld from each paycheck, and the employer sends that money to the IRS. This process makes it possible for each individual to pay their taxes as they go, and often they get a tax refund when they file at the end of the year. Many employees know that taxes are taken out of their checks, but they don’t realize what happens behind the scenes to send that money to the IRS.

If you are self-employed, then taxes aren’t automatically withheld from your paycheck. You can expect that you will likely need to pay taxes at the end of the year. Many self-employed people need to make estimated payments throughout the year. Then, the final tax preparation calculation will determine the remaining balance, and you will either need to pay the difference, or you will receive a tax refund.

Should You Be Paying Estimated Taxes?

Estimated taxes are based on your individual situation, so the best thing that you can do is talk to an experienced tax accountant to see if you need to make these payments. Successful self-employment usually requires estimated taxes to be made. These tax payments might also be necessary if you receive other income that didn’t have withholding, including alimony, gains from the sale of assets or stocks, dividends, or interest income.

For individuals, partners, sole proprietors, and S corporation shareholders, the rule is that estimated tax payments need to be made if you are expecting to owe $1,000 or more in taxes for the year. Corporations are required to make estimated tax payments if they expect to owe $500 or more in taxes for the year.

The rule is that you need to pay taxes as you go. So, if you receive any income that doesn’t have withholdings, then it is likely that you will need to make payments on that money.

There are several requirements that need to be met to determine if estimated tax payments are needed. Your accountant will evaluate your situation and then make recommendations about the amount of money that you should be sending to the IRS each quarter.

What Happens if You Miss Estimated Tax Payments?

If you fail to make the estimated tax payments that are required, you can expect to pay up later on. Not only will you have a big tax bill to pay when your tax returns are filed, but there is also a possibility that you might need to pay the penalty.

It is essential that you work with your accountant to calculate the correct amounts for your estimated tax payments. Whether your taxes are withheld, or you are making estimated payments, there is a penalty that could be charged if you have underpaid. This underpayment penalty can be avoided by using accounting software that will track your financial details and estimate the amount that you will need to pay in taxes.

How much should you be sending for your estimated tax payments? If you want to avoid an underpayment penalty, the safest option is to pay “100% of your previous year’s taxes.” This rule falls under the safe harbor requirement that is written into the tax law. If you satisfy this test, then you won’t have a penalty for underpayment, regardless of how much you owe on your tax return.

Do I Need to Make Estimated Payments on a Smaller Income?

What if your income went down this year? If you are expecting your overall income to be less this year compared to last year, you might consider paying 90% of the estimated tax bill. But, it is important that you work with your accountant to calculate this number so that you don’t drop below the 90% mark. In situations where you pay less than 90% of what you owe, you could end up with an underpayment penalty.

When your income goes down, your accountant can look at the numbers to determine the amount that you should be paying each quarter. If you prefer, you can choose to pay the full estimated amount, but you are essentially loaning your money to the IRS until you get a tax return after filing at the end of the year.

Who is Exempt from Estimated Taxes?

Do you meet all of the following three requirements? If so, then you may not need to pay estimated taxes:

  • You had no tax liability in the prior year
  • Your prior tax year covered a 12-month period
  • You were a resident or citizen of the United States for the entire year

If you did not have to file an income tax return last year and you met all three of the requirements above, then you likely will not need to pay estimated taxes.

If you own a small business and you are receiving separate wages or salaries at the same time, then you might be able to cover the estimated taxes through your paycheck withholdings. Talk to your accountant to figure out the right amount that should be withheld. Then, ask your employer to increase the withholdings on each check. You will need to fill out a new W-4 and enter the additional amount that you would like withheld.

Calculating Estimated Taxes

The easiest solution to calculate estimated tax payments is to have an accountant handle the details for you. It can be a complicated calculation if you aren’t familiar with the rules associated with figuring income, expenses, and tax law. This calculation is based on your expected gross income, taxable income, deductions, credits, and taxes for the year.

Many times, it makes sense to use the previous year as a starting point for the calculations. Your federal tax return can be a guide. From there, you can use the worksheet on Form 1040-ES to figure out the new estimated payments that should be made. These calculations should be adjusted if you estimate that your income this year will be higher or lower when compared to last year.

When Do Tax Payments Need to Be Sent?

Estimated tax payments have specific deadlines that need to be met. Your accountant will provide these dates to you, and you will need to make sure that the check is mailed and postmarked by the deadline. Keep in mind that you might need to pay the penalty if you don’t have adequate funds to pay the taxes by the due date, even if you will be receiving a refund at the end of the year.

The simplest way to make a federal tax payment is by using the Electronic Federal Tax Payment System (EFTPS). All federal tax expenses can be paid online using this system. You are required to send the payments on a quarterly basis, but you can choose to send payments more frequently if it is easier for you.

For example, some small business owners choose to send these payments on a weekly, bi-weekly, or monthly basis. If you choose these frequent payments, make sure that the totals add up at the end of the quarter. When you use the EFTPS system, you will have a record of all of the payments that were sent to ensure that you met the total quarterly requirements. You can choose to pay directly from your bank account online, or you might also use a credit card or debit card. When a card is used, transaction fees will be added to the total amount that is paid.

Other payment options include a same-day wire, money order, check, or electronic funds withdrawal that are completed during e-filing. If needed, you can also make a cash payment at designated retail partners listed on the IRS website.

Easier Accounting: Your Trusted Business Accounting Team

Here at Easier Accounting, we work hard to make sure that you are staying current with all of the tax deadlines throughout the year. If you are interested in learning more about the services that we offer, we invite you to contact us anytime. We would be glad to provide our accounting expertise to help you your company grow. Call us for more information: (888) 620-0770

5 Things You Need to Do Before Talking to Your Accountant about Taxes This Year

Tax season is here, making many small business owners groan at the idea of scheduling an appointment with their accountant for tax preparation. Whether you own a small business or you are an employee, taxes are unavoidable. But, there are more things that will need to be done if you are filing your personal taxes as well as your business taxes.

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If you have an appointment scheduled or you are getting ready to talk to your accountant, there are several things that you need to consider before the meeting.

Do-It-Yourself vs. Professional Tax Preparation

The first question to ask is whether you should file your taxes on your own or hire someone to help. Even if you have completed your personal taxes in the past, it is important to know that business taxes are a bit more complicated. Even if you feel comfortable filing your tax return, it is suggested that you work with a tax professional for all business-related tax questions and filings.

Remember, tax laws change every year. So, you need to be sure that you have an accounting professional who is keeping up with the trends to ensure that your business is compliant with the new laws.

There’s no reason for you to spend the time trying to decipher tax laws! Your time is better spent on growing and running your business. Outsource your tax preparation to save yourself a headache that often comes during this time of year.

Even if you are outsourcing your tax preparation, there are a few things that you can do to be ready for the meeting with your accountant. Here are five steps that should be followed before the meeting:

Step #1: Gather Tax Paperwork

If you are filing personal taxes as an employee, then you only need to worry about a W2 and a few other financial documents for the tax return. But, there are many other documents that will need to be gathered and provided to your accountant for a business tax return. You might receive 1099’s and other statements of income. It is also a good idea to bring forms showing details about your bank accounts, investment accounts, debt interest payments, and more.

This tax paperwork shows your accountant the financial map, helping them to see the annual picture of your business income and expenses over the course of the fiscal year. Providing the paperwork decreases the likelihood that a miscommunication will occur. With this information, the accountant can crunch the numbers and figure out the best strategy for filing your taxes.

You might provide them with a stack of paperwork and call it good. Or, you might have a summary page that maps out the accounts to provide an easy-to-reference sheet for the accountant to review. Talk to your small business accounting team to see if they have any specific requests about what information you should provide during your tax appointment.

Step #2: Provide Payroll Details and Estimated Tax Payments

How much did you pay in payroll and payroll taxes? These numbers are necessary for your business tax filing. If you were consistent with tracking financial information throughout the year, this should be as simple as running a report in your accounting software to provide to your accountant.

However, it is a good idea to do an audit to ensure the reporting information is correct. These internal audits should be performed on a regular basis to identify potential mistakes or errors that were made in payroll processing or during data entry. Identifying these problems before tax filing time can help you avoid problems later.

It is also important that you provide detailed information about any estimated tax payments that were made. These tax payments should include quarterly taxes as well as other tax expenses such as employment taxes. Your accountant can help you stay ahead of these payments all year long to ensure that you don’t miss any of the necessary deadlines.

Step #3: Details about Expenses and Tax Deductions

One of the most powerful benefits of owning a business is leveraging tax write-offs where appropriate. If expenses are business-related, you can write off those costs on your taxes and reduce the amount of taxable income that will be factored into the return.

What types of expenses can you write off? It varies, depending on the type of business. If you have a home-based business, there are a few things that your tax accountant might ask about, such as utility bills, mortgage payments, and cell phone usage so that an appropriate write-off can be calculated. Other write-offs include the cost of business development, equipment, a company vehicle and more.

Here is a list of potential expenses that you might be able to use as tax deductions:

  • Marketing or advertising costs
  • Local transportation, including a mileage log for your car
  • Travel costs, including airfare, meals, hotel, taxis, and any other costs that were incurred
  • Phone lines, including cell phones, VOIP, and land lines
  • Internet, computer, and software costs
  • Payments made to subcontractors
  • Insurance and certification premiums
  • Depreciation of old assets
  • Office supplies
  • Rental costs
  • Utilities
  • Professional expenses for consultants, accountants, and lawyers
  • Bank and credit card interest expenses
  • In-home office deductions
  • Payroll costs
  • Health insurance premiums
  • Estimated tax payments
  • Maintenance and repairs

This list is not comprehensive. But, it will give you a good idea about the types of expenses that your accountant will be asking about.

The best thing that you can do is talk to your accountant in advance about potential write-offs that should be tracked for the year. Keeping detailed records of all of your expenses will ensure that you can use the deductions where they are appropriate. In some situations, you might choose to strategically purchase equipment or furniture before the end of the year in order to minimize tax burden. Other times, it might make sense to wait until January rolls around so that those deductions are available for the next year.

Make sure that you have receipts and documentation to back up the purchases that happened throughout the year. These deductions can be problematic if you don’t have documentation in case an audit happens in the future.

Step #4: Summarize Cost of Goods Sold

If your business sold any goods, you would need to have details about your inventory, including the total beginning dollar amount, purchases, and the ending dollar amount. Materials and supplies expenses also need to be figured into the business financial documents, so that you can determine overall profits and tax burdens for the year.

These numbers might seem overwhelming if you don’t know a lot about accounting. That’s why it is essential to have an experienced tax team who can offer advice and support all year long. Don’t wait until tax season to prepare the information for your accountant! Instead, have a solid system in place that will be used on a daily, weekly, and monthly basis to ensure that you have all of the financial information that will be needed.

Step #5: Bring Your Questions

Taxes can be complicated, leaving many small business owners confused about how the numbers worked out. If you have questions during the tax preparation process, it is important that you talk with your accountant to help you understand the details of the filing. Even though your tax accountant is managing the numbers and the paperwork, as a business owner, it can be very helpful for you to at least have a basic knowledge about how the calculations are summarized for the filing.

There are times when your accountant might come to you asking for specific information. Keeping open lines of communication will ensure that you have a good team to minimize the tax burden and maximize the final results.

What types of questions should you ask? Anything goes! Full-service accounting provides you with a great resource that you can tap into all year long. So, don’t feel like you need to wait until it is time for tax preparation before you talk to your accountant about the questions that arise. Strategic accounting can minimize the stress during tax time and make it easier for you to gather the necessary information when it is time to file your taxes.

Talk to an Experienced Accounting Team

The annual tax deadline is drawing near, so be sure that you are ready to have your paperwork submitted by the deadline. April 15th is the standard deadline each year. But, since this date falls on a weekend, you will have until April 18th to file your Federal tax return this year. The due dates for state tax filing varies depending on your location. It’s always best to talk to your accountant to ensure that you don’t miss the local deadlines.

Do you need help with your tax preparation? Talk to a small business accounting team to get the best service that can be catered to meet your needs. These services will ensure the financial success of your company, helping you to optimize profits and prepare for the future. For more information, talk to our team here are Easier Accounting to learn about the services that are available: (888) 620-0770