Tax Planning Issues for Small Businesses

eva-rosenbergEvery week as SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wednesday on Twitter from 8-9 pm ET. This is excerpted from my recent interview with Eva Rosenberg @taxmama. Eva Rosenberg, known as the TaxMama®, is an award-winning author of business tax books. Find her at www.TaxMama.com and where you can ask your tax and business questions for free.

SmallBizLady: OWNING A SMALL BUSINESS IS A JOY. WHAT ARE THE ADVANTAGES OF A BUSINESS OVER A JOB? 

Eva Rosenberg: There are several advantages to make it worthwhile being self-employed:

  • You control your own working hours.
  • You only have to accept clients or customers you want to work with.
  • You set your policies and don’t have to do anything against your ethics.
  • You can try out new ideas without a boss overriding you.
  • You get to hire the people who for you or consult with you so you can make sure to only hire people who bring joy and order to your life.

SmallBizLady: OWNING A SMALL BUSINESS INVOLVES MORE THAN YOU MIGHT THINK. WHAT ARE SOME DISADVANTAGES OF A BUSINESS OVER A JOB?

Eva Rosenberg: Although you may feel that you are the one generating all the income for your company and that you can do better on your own; there are things your employer does that you may not quite realize.

  • The employer pays all the bills.
  • The employer takes care of recruiting, hiring, firing, processing payroll, and ensuring that your payroll taxes are sent to the government.
  • When you’re on your own, you need to remember to pay your own estimated taxes each quarter.
  • The employer makes sure there’s enough money to cover all the operating costs, including your compensation.
  • The employer pays for your staff, or your assistant (even if shared), freeing you up to do your work.
  • The employer ensures that all the tools and materials you need are there and working; maintaining equipment like faxes, computers, copiers, phones; paying insurances; finding the right vendors; and keeping the lights on.

Basically, they take care of the all background issues, leaving you free to do what you do so well. And if you work for a good company, you may have a variety of employee benefits, including insurance, retirement, child care, and more.

SmallBizLady: What kind of planning is important for a small business?

Eva Rosenberg: Except in rare cases, businesses don’t just float along successfully all by themselves. They take some solid planning to become successful. It takes time and focus to get all that done.  For instance:

  • Make sure you have all the licenses and registrations you’re supposed to have. Too many businesses overlook key licenses and get into trouble later.
  • Write a business plan. This will save you time, keep you focused, and ensure that your business becomes profitable more quickly.
  • Select the business entity you want to be. Don’t automatically set up an LLC or corporation, or anything without understanding how it works. This is one of the biggest mistakes made by business owners that they live to regret.
  • What kind of staff (or virtual staff) do you need to hire since you cannot do it all? Decide on the tasks you don’t have time to do (or hate to do), and find someone you can afford who wants to do it.

SmallBizLady: WHAT ARE SOME OF THE MOST IMPORTANT NEW TAX ISSUES AFFECTING BUSINESSES THIS YEAR?

Eva Rosenberg: With a new president, we are expecting changes in the tax laws. We won’t know anything for certain until at least August or September. In the meantime, look at the IRS’s concerns about your business.

Here are 6 issues to consider:

a) Should your freelancers or virtual assistants be employees? How can you avoid getting into trouble if they should be employees?

The IRS has a special amnesty programs for employers who step up before they are audited.
Watch a free video that explains the concept.

b) You set up an S or C Corporation and you didn’t pay yourself on payroll. This is generating audits.

c) You must have detailed mileage logs for all your business travel. The courts are actively disallowing mileage without good records.

A good app to use would be MileIQ. For each trip, you need to show where you started driving, where you drove to, and why this is a business trip.

d) Health insurance for your employees. How much of the cost can you pay on their behalf without a group policy – up to $4,950 per year for single coverage and $10,000 per year for family coverage? Anything over that gets added to their wages and taxed.

Will there still be a tax credit for providing any insurance coverage at all? And how can you claim it?

e) Writing off your business asset purchases – computers, furniture, vehicles, etc. The rules have gotten seriously complex in the last few years. So complex that even tax professionals are often mystified.

  • Can you write off anything under $500?
  • What about repairs in excess of $2,500?
  • What about improvements and repairs to your office, building, etc.?

You will find more information in Chapter 6 of Small Business Taxes Made Easy.

f) Your business really, really needs to keep a formal set of books. The accounting software available today is so easy to use and works with a variety of different apps, there’s just no excuse not to have good records.

SmallBizLady: WHAT BENEFITS ARE THE MOST OVERLOOKED BY SMALL BUSINESSES?

Eva Rosenberg: Tax credits are a big help and are often available in addition to deductions. Here are some you can use, perhaps on things that you’re already spending money on – or not yet.

a) Work Opportunity Credit. Hire people to help, folks who might otherwise
not get jobs – veterans, seniors, underprivileged youth, food stamp recipients, and the long-term unemployed.

b) Enterprise Zones. Many people actually live in Enterprise Zones, or have your business in one without realizing it. When you are located in one, there are all kinds of special benefits – tax credits, higher depreciation deductions, special capital gains benefits, and maybe even state and local benefits. Find out where Enterprise Zones are located.

Read more about this:

c) Employer-Provided Child Care Facilities and Services. This provides a tax credit for 25% of child care costs (paid to a licensed facility) + 10% of childcare resource and referral costs. The credit is worth up to $150,000. Handled properly, this can be used to cover costs of the business owner’s children or grandchildren, as well as the costs for other employees. Learn more in
Form 8882.

SmallBizLady: WHAT TO DO IF YOU HATE ADMINISTRATION OR BOOKKEEPING?

Eva Rosenberg: Some people love doing bookkeeping or accounting because it’s so tidy, kind of like getting closure each month. For others, it’s something they dread or hate. So, how to make it easier?

If you really, really hate it, turn it over to someonelse. It’s cheaper to pay to get it done, than to not do it.

Here are ways to turn it over to someone else.

a) Hire a Enrolled Agents and CPAs to handle the whole thing.

b) Hire a bookkeeper but make SURE they actually know accounting (GAAP – Generally Accepted Accounting Principles). I have seen many bookkeepers charging $50 an hour or more who don’t have a clue.

You can find a free test to give them, and possibly a trained bookkeeper at  https://www.aipb.org/testrequest.php.

c) Have you tried Shoeboxed.com? You can send or scan all your documents to them and they’ll organize them for you. They will even work with your tax professional, if you have one.

SmallBizLady: WHAT ARE SOME WAYS TO MAKE YOUR RECORD-KEEPING EASIER WHEN YOU DO IT YOURSELF?

Eva Rosenberg: The truth is, you are the best source of information for your own books. By doing things yourself, you can get a better understanding of what’s going on in your own business. Of course, it often requires some oversight from your Enrolled Agent or CPA. What record-keeping tools are best for you to use?

The easiest way to collaborate with your tax professional is to use an online system. You can make entries from anywhere, even if you’re on the road. Most offer free trials and most of these systems allow you to scan and upload documents directly to your accounting system, including receipts and bank statements.

Here are some options:

a) QuickBooks Online

b) Xero

c) Freshbooks

d) GoDaddy Bookkeeping

SmallBizLady: I’VE HEARD THAT WE NEED TO KEEP RECORDS ON OUR DRIVING. WHAT DATA DO WE NEED TO KEEP AND WHY?

Eva Rosenberg: More and more often, the courts are rejecting vehicle-related deductions when the business owner didn’t keep good records. Following are the records you need to maintain whether you’re using mileage rates or actual expenses:

a) The total mileage driven on your vehicle(s) for the year.
b) The business miles driven for the vehicle(s). Having the total miles and the business miles makes it possible to get a percentage of business use for each car.
c) WHERE you drove to and from.
d) Why it was a business trip and the business purpose.
e) If you are using actual expenses, you need receipts for all your costs, including insurance, gasoline, repairs and maintenance. Don’t forget car washes, detailing and other specific things you do to make the car more desirable for your clients and customers to get into with you.
f) Get proof of all parking costs like tolls, valets, tips, etc., even if you paid cash.

SMALLBIZLADY: WHAT ARE THE BEST WAYS TO KEEP LOGS ON YOUR DRIVING?

Eva Rosenberg: You can keep your logs on paper or use an app. Let’s look at some options.

The best two paper options are:

a) Use your appointment book and enter each appointment. I use an inexpensive Week-At-A-Glance You can add the location later, as long as you can remember where you went and where you started each trip from.

b) Use a Tax MiniMiser. This is a series of envelopes that let you write down your mileage and details, and to drop receipts into the envelopes.

Here are a couple of electronic options:

a) MileIQ for Android or Apple devices

b) Magical Miles via iTunes

SmallBizLady: WHAT ABOUT MEALS, ENTERTAINMENT AND TRAVEL – THE MYTHS ABOUT ESTIMATING THOSE COSTS?

Eva Rosenberg: Folks are under the impression that even if you don’t keep any records, you can get away with just estimating the amounts you spent. Well, that’s true – and not true.

  1. You’ve heard that you can use the Cohan Rule to use “reasonable” business deductions if you don’t have records. Well, not entirely. Lately, the courts have said that if you make no effort to keep records, or to reconstruct lost or destroyed records, you’re not getting the deductions. Or, if you do get deductions, they will give you the lowest possible deductions. I’ve put together a course to help you with this, called Cohan or Bust.
  2. Sure, you can just look at your tax pro’s ceiling and find the number. I had a client who did just that – to the tune of about $5,000. But when I challenged him to keep records for a whole year, his actual expenses were over 12,000, more than double what he used to find on my ceiling. You’re shortchanging yourself when you do that.
  3. Even without keeping details records on your spending, if you have your travel records, you can use something call “per diem” rates. The rates are different in each location, and change depending on the time of year. And there are some overall, standard rates you can use throughout the year, but using the rate for the specific locations gives you a much higher deduction.
  4. Chapter 6 of Small Business Taxes Made Easy explains how to use these and provides links to the three main sources of the rates: domestic travel, travel to Alaska, Hawaii and the US Territories, and international travel.

SmallBizLady: MEALS, ENTERTAINMENT AND TRAVEL – THE FACTS ABOUT ESTIMATING THOSE COSTS?

Eva Rosenberg: There is a specific code section (IRC 274) that absolutely requires taxpayers to keep detailed records on business travel, entertainment, and meals. That’s why the Cohan Rule doesn’t work the way you might wish it to. This rule applies to travel, transportation, meals, entertainment and gifts.

You MUST have the following records in order to get the full benefit of your business deductions:

1) Amount: what was the cost, or how many miles are involved, for each separate transaction, on each trip?
2) Time:  the date and time (if relevant) for each deductible instance. When traveling, you must stay overnight in order to deduct travel meals and lodging.
3) Place or location: the name and address and city of the place you visited.
4) Business purpose and business relationship: why was this trip for business? You also need to document who you were meeting there and and how is that person (or persons) related to your business or business purpose. Read IRS Publication 463, Table 5.1 for more details.

When handled properly, with good records, you can often get away with using per diem rates that are higher than your actual expenses. Business owners may only deduct per diem meals, not lodging.

I managed to get over $15,000 worth of per diem deductions for a client who taught for two semesters out of state. His actual costs were closer to $7,000.

SmallBizLady: WHAT DO YOU THINK IS IMPORTANT FOR BUSINESS OWNERS TO CONSIDER THAT WE HAVEN’T TALKED ABOUT YET?

Eva Rosenberg: There are two things I think are overlooked: hiring your children, and succession planning. I call this Dynasty.

a) There are shysters out there saying that you can put your children on payroll and take a business deduction, even if your children never do anything in the business. That’s utter nonsense and can get you into big trouble.

However, when you hire your children for real, and they work in the business, it’s a total win-win for everyone. Your children learn more about who you are and what you do. They earn some money and learn to appreciate the value. You don’t need to pay them an allowance anymore; you can take a legitimate deduction for their payroll.

They can either use the money or save it in an IRA (or not) and avoid taxes. Best of all, they may bring talents, fresh ideas, and skills to your business that you didn’t expect.

b) Dynasty, or getting your children involved in your business and letting them find their own passion. Perhaps it’s selling. Perhaps customer service. Maybe they are great a designing websites or advertising campaigns, or even to help you develop a new product. When they have a joyful experience (instead of a forced one), their job can become their career – and their college education can focus on how to enhance their role in the family business. And pass this along to future generations.

On the other hand, when there is no chance of your children getting involved (or you have none), do some succession planning. Start now to determine how to build your business so you can sell it, or components of it, when you are ready to retire. Amit Chandel, CPA, CTP wrote an excellent article on this topic.

If you found this interview helpful, join us on Wednesdays 8-9 pm ET; follow @SmallBizChat on Twitter.

Here’s how to participate in #SmallBizChat: http://bit.ly/1hZeIlz

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