I like this book Small Business Taxes Made Easy: How to Increase Your Deductions, Reduce What You Owe, and Boost Your Profits by Eva Rosenberg (@TaxMama).
It is great no-nonsense tax-advice! Eva is passionate about helping small business owners pay the least business taxes legally possible, but she also provides information (however tough it may be to read) on how to make your business more profitable. This book is full of effective business tax strategies that are good at tax time and throughout the entire year as you are running your small business. I conducted an interview with her to ask her more information about her book. Check out her other tax resources at www.taxmama.com
SmallBizlady: What are the tax characteristics of successful business owners?
TaxMama®: They take the time to do three primary things for their business.
- Foundation: They take the steps outlined in Chapter 1 of Small Business Taxes Made Easy to get the proper licenses, file with the proper government agencies, get the minimum requisite insurance coverage, and find the best advisors, vendors and resources for their business.
- Prosperity: Successful business owners have business plans. They look at the big picture relative to their business goals, tying them in to their personal and family goals. Not only is this essential for building a good life, it ensures the business becomes ever-pro profitable, and protects them in the event of tax audits.
- Tax Planning: They meet with their tax advisors, and perhaps their advisory team, at least twice a year to lay out a tax plan and to rebalance it as the year’s profits or losses emerge.
o This avoids the complaint one talk show host got from a local CPA. His client complained that his CPA wasn’t letting him take the medical and health care insurance deductions that TaxMama® said his business should have.
o Why couldn’t he use those deductions? Simple. He had never taken the time to call his CPA to do the planning to establish the written plan his business needed in order to claim those deductions.
SmallBizlady: Your book seems to cover a lot more than taxes. Why?
TaxMama®: One of the things I realized during my decades working with small business owners is that they need guidance in so many more areas than just pure tax planning. After all, what’s the point of trying to reduce your taxes when your business never makes any money — or makes very little profit?
That why, I start in Chapter 1 with the foundation a business needs in order stand solidly, avoid getting into trouble with government agencies, and to build a network of people and resources that can help the business generate income and reduce day-to-day expenses.
People with long-established businesses read the book and consistently say, “I wish I had read this when I started out. It would have saved me so much time and trouble — and my business would have been profitable so much sooner”.
There’s nothing miraculous in here. Just a lot of common-sense, based on my own successes, my own failures — and those of everyone I’ve ever known or read about.
SmallBizlady: You talk about failing in the face of success. How can that happen?
TaxMama®: Let me tell you a story my brother just told us, while we were reminiscing about my father. He started a toy factory, based on the clever designs of an engineer, who partnered with him. The toys they designed were terrific. My father made a sales pitch to Eaton’s, then one of the largest department store chains in Canada at the time. Eaton’s loved the toys and placed a large order for their Christmas sales season — to be delivered in September.
1) This sale took place in February.
2) They weren’t going to get paid until November.
3) The bulk of sales in the toy industry are for the Christmas season.
4) They had to pay for the production costs in advance.
5) What were they going to live on and use to cover costs until November?
Their timing was terrible. They did not research the industry to learn when the toy buying took place. They didn’t have any plans for any activities to generate income in the short-run. They didn’t have arrangements to cover operating costs or salaries until income started coming in. Long before September rolled around, they were bankrupt. Even though they had a very profitable first order — they were never in a position to deliver on it.
SmallBizlady: What is one of the biggest problems you find with small businesses?
TaxMama®: Large corporations have large, complex accounting departments. In fact, on a recent edition of Christiane Amanpour’s ABC News This Week, George Will commented that GE has 900 people in its tax department whose sole job it is to reduce their taxes.
However, most small business owners run their business out of their back pockets. They don’t keep books, records are in shambles, and they rarely even open a separate bank account for their business.
In fact, too often someone starts something up just to pick up money to tide them over during a hard time, or on the side when they have a job. They don’t really take being in business seriously. In fact, they don’t even know they have a profit, until tax time comes around.
Why? When you’re always broke, and you don’t have any money at the end of the year, it feels that business earned nothing. Yet, you still managed to pay your rent or mortgage and living expenses, right? That means there was a profit, even if it didn’t feel like it.
In those cases, it is even more crucial to keep records and to do tax planning — to avoid those surprise taxes, like self-employment taxes people don’t understand are coming.
SmallBizlady: OK, enough gloom! Please tell me how I can save more money on my taxes?
TaxMama®: Ohhh, my favorite stuff — tax savings.
Chapter 10 is all about the benefits you take advantage of if you get organized, and get your family involved. Aside from all the personal benefits and relationship benefits (I love those!), let’s look at the tax benefits.
Think about this — if you can hire your spouse and put him or her on payroll. Being on payroll, your spouse can get family medical coverage. Then all the health insurance premiums for the whole family can be deducted from the business profits, along with all the out of pocket medical expenses. Naturally, your spouse must really, legitimately be working for your business for these benefits to work.
For instance — a family of three will pay about $750 per month (on the low end) for medical coverage ($9,000). Add in the braces for Suzy ($2,000), the optometrist and contact lenses for Mom ($600), the routine dental and cleaning for the family ($750). You’re looking at $12,350 of expenses the family was paying personally — that just reduced your business profits. That’s worth nearly $1,900 in Self-Employment taxes. Aside from the insurance (which would have been an adjustment to income, anyway), the extra $3,350 in medical expenses is worth about $1,000 in federal and state taxes (assuming 25% = IRS, 5% = state). That’s a total of $2,900 saved just by setting up a business medical plan properly.
Instead of paying your child an allowance, put the child on payroll. You can avoid all payroll taxes on a child under age 18. Imagine paying your teen $300 per month for helping in the business. That $3,600 will not be taxable to your child — the amount is too low. That can replace an allowance, and the cost of clothing, entertainment, gasoline, and other impulse buys. Your child will have to make decisions about whether to buy the $300 designer shoes — or the Keds. It will save you over $1,600 (15.3% = SE (Self-Employment) taxes, 25% = IRS, 5% = State) in taxes.
Just these two ways of rearranging money you’re already spending has saved you $4,500. And I haven’t even gotten into retirement plans.
SmallBizlady: You really get into this, don’t you?
TaxMama®: I love it! I love being able to look at a person, or a business and see ways to turn it around and make it all work. I don’t understand “you can’t do that”. And I don’t understand people who live with, “But you can’t…”
This is what I love. Looking at the financial statements for one of my clients, I realized he was being held back because his accounts receivable were too high. I gave him one single suggestion. He was stunned. He got excited. He did what I told him to.
When he implemented it, it took his income from about $2 million a year to over $5 million the next year and to over $10 million two years. Now, his business is growing even more — and he owns several million dollars worth of warehouses, too.
This book is useful long after tax-time is over. Check out the second edition of Small Business Taxes Made Easy.
For more tips on how start or grow your small business subscribe to Melinda Emerson’s blog: www.succeedasyourownboss.com.
Melinda F. Emerson, known to many as SmallBizLady is one of America’s leading small business experts. As a seasoned entrepreneur, professional speaker, and small business coach, she develops audio, video and written content to fulfill her mission to end small business failure. As CEO of MFE Consulting LLC, Melinda educates entrepreneurs and Fortune 500 companies on subjects including small business start-up, business development and social media marketing. Forbes Magazine recently named her one of the Top 20 Women for Entrepreneurs to Follow on Twitter. She hosts #SmallBizChat Wednesdays on Twitter 8-9pm ET for emerging entrepreneurs, and publishes a resource blog at: www.succeedasyourownboss.com. Melinda is also the author of the national bestseller Become Your Own Boss in 12 months: A Month-by-Month Guide to a Business That Works. (Adams Media 2010)