The Bottom Line: Taking a Bite Out of Taxes

Bottom Line: Taking a Bite Out of Taxes

Your 2009 tax returns are now in the mail, unless you’ve filed an extension. Think you can rest on your laurels? Hardly. Taxes don’t file themselves, and procrastination almost always costs money. People in a rush tend to forget things, so get a grip and get a plan. Gather up and process all of your records in a timely manner and meet your filing deadlines. “It seems like just getting a handle on this year’s taxes is enough work, but if you start thinking ahead for next year now, you’ll have a whole heck of an easier time when next April rolls around,” says Mike Peterson, co-founder of the American Credit Foundation, a nonprofit consumer-credit counseling organization. In an article for DebtGuru.com, American Credit Foundation’s Web site, he points out that thinking about your taxes doesn’t end when you sign on the dotted line. Decisions made throughout the year have an effect on your business’s taxes.

Bottom Line: Taking a Bite Out of Taxes What to start doing now to help shave down your next tax bill By Jason Dehart Originally published in the Apr/May 2010 issue of 850 Business Magazine

Your 2009 tax returns are now in the mail, unless you’ve filed an extension. Think you can rest on your laurels? Hardly.

Taxes don’t file themselves, and procrastination almost always costs money. People in a rush tend to forget things, so get a grip and get a plan. Gather up and process all of your records in a timely manner and meet your filing deadlines.

“It seems like just getting a handle on this year’s taxes is enough work, but if you start thinking ahead for next year now, you’ll have a whole heck of an easier time when next April rolls around,” says Mike Peterson, co-founder of the American Credit Foundation, a nonprofit consumer-credit counseling organization. In an article for DebtGuru.com, American Credit Foundation’s Web site, he points out that thinking about your taxes doesn’t end when you sign on the dotted line. Decisions made throughout the year have an effect on your business’s taxes.

“When making decisions for your business — such as purchasing office space, incorporating or hiring extra help — consider the implications those changes may have on your taxes,” he says.

One of the first things you need to do is consult with your tax adviser or accountant — especially if you file end-of-year taxes in December.

“Contact your CPA prior to the year-end to make sure that there are not any planning opportunities that your business is missing out on,” says Raleigh Leonard, CPA, of Thomas Howell Ferguson P.A. in Tallahassee. “Most laws have very specific time constraints on when and how events must take place to qualify, which can be overlooked if you wait to talk to your CPA when you provide them the information after the year is over.”

The objective when filing your taxes is simple: Save as much money as you can (legally, of course). That means searching every nook and cranny for deductions.

“The one thing you can do to help yourself is to make sure all your documents and records are in good order and you’ve accounted for all the deductible items you’re entitled to,” says Glenn Gillyard, CPA, CFE, a tax partner in the Destin accounting office of Carr Riggs & Ingram.

For example, you might be able to round up some business expenses that you missed, such as mileage.

“Oftentimes, expenses are incurred that aren’t recorded,” Gillyard says. “You have to have a good mileage log, for example, to account for business miles.”

Another possible deduction? Peterson suggests checking to see if your home office qualifies. You might be able to write off things such as rent, utilities, supplies or even housekeeping. It just depends on proportion.

“The deduction is a calculation of the expenses proportionate to the part of your home that is used exclusively for business,” he says.

So keeping tabs of all those expenses is very important, according to New York-based CPA Ryan Himmel. Himmel is founder of BIDaWIZ.com, a Web tool for small-business owners that can help answer tough accounting and tax questions.

“Having a proper bookkeeping system is needed for both tax purposes and for understanding the key financial business trends impacting your business,” Himmel advises.

Himmel says you should store your supporting documents in a safe and readily accessible place, and that it’s also a good idea to reexamine your specific business needs, because you may not need the most robust bookkeeping software out there. But whatever bookkeeping software you use, make sure that you integrate it with your merchant bank account, which will enable you to easily reconcile and export data from the bank account to compare with your actual books.

Creating a clear audit trail is another good idea.

“If possible, you’d like to have this trail automated so you can easily identify an issue with a transaction, should one come up,” Himmel says.

If your books and records are in good order, you’ll save yourself money, Gillyard says. That is, when it comes to using an outside accounting firm to handle your taxes.

“Most accounting firms charge based on time,” he says. “Their fees are based on time, and the better records you have and the better organized you are, the less time it takes, the cheaper the bill, and the happier the taxpayer.”

If your business has taken a hit this year, you might be able to work that to your advantage, according to experts.

“Because in this down economy we are having net losses instead of net income, our business expenses exceed our business income, which creates a net operating loss,” Gillyard says. “And an NOL can be carried back to a prior year to free up tax dollars that were previously paid.”

This means that if in 2007 you paid a tax and in 2009 had a net operating loss, you can carry that loss back and amend the prior year’s return, which will free that tax up. And that means you might be able to get that amount back in the form of a refund.

You may also want to consider — or reconsider — the type of legal entity your business operates as.

“You can operate as a proprietorship, or a single-member LLC, or you can be a Subchapter S corporation,” Gillyard says. “Each of those entities has advantages and disadvantages, and you have until April 15 to convert from a proprietorship to an S Corp and make it retroactive to January. You can change from one business structure to the other, if it’s more advantageous, in the early part of the year.”

(An LLC, or Limited Liability Company, is a legal form of business organization that operates like a partnership but has the limited liability of a corporation. The IRS taxes LLCs by the number of “partners” or members it has. If it has just one member, then it’s taxed as a sole proprietorship. A company that has 75 or fewer shareholders is allowed by the IRS to form a Subchapter S corporation, giving it the benefits of incorporation but taxing it like a partnership.)

“What was best for your business [tax-wise] when you initially made this decision could have changed, and the recent economic turmoil makes this decision more critical than ever, so don’t delay,” says Ed Godoy, CPA, a tax partner with BDO Seidman LLP in Miami.

You might also want to ask yourself some tough questions about the future of your small business, Godoy says. Business strategy and tax strategy are becoming more and more intertwined, especially in these economic hard times.

“What is your business going to have to do to survive?” Godoy asks. “As a business owner, what are you willing to do to ensure success? Talk to your tax adviser, and make sure your tax strategies align with actions the business may take in the coming year.”

Filing taxes is never an easy chore, but Godoy says 2010 might be the last calm before the storm, because there are pending tax changes on the horizon.

“It is an ideal time to focus on your business strategy and other related planning items before the flurry of changes expected (in 2010) and in 2011,” he says.

Words to the (Tax) Wise

Don’t Pay Tax on Out-of-State Sales to Your Home State: If you sell things outside your home state and don’t provide after-sale support or service, Public Law 86-272 says that 90 percent of that income can’t be taxed. Ask your accountant, though. This only applies in about half the states.

Going Green Helps: Federal and state governments are providing all kinds of incentives for small businesses to go “green.” In some states, small-business owners can use green credits to offset corporate and personal tax bills. Check out the Database for State Incentives for Renewables and Efficiency at dsireusa.org.

Seek Out Depreciation: Want to save the most cash? Depreciate the value of every bit of office equipment you have. Also, check into Section 179 of the Tax Code, which allows your business to deduct $100,000 worth of qualifying assets during the first year — but watch out, because these Section 179 write-offs can’t exceed taxable income.

Report Large Cash Payments: Cash transactions greater than $10,000 must be reported to the IRS via Form 8300. This covers payments in the form of cashier’s checks, traveler’s checks and money orders. You will need the Social Security number of the buyer.

Close Shop: If your business has suffered a catastrophic event requiring you to close down, there is a way to “abandon” it that might allow you to catch a break, tax-wise. Experts say that if you list it as an “ordinary loss,” you can use it to offset any other personal income, such as rent and salary.

Don’t Forget Those 1099s: Service-oriented small businesses can’t neglect to file the 1099-MISC form to all unincorporated people who provided a service. This includes attorneys and medical services.

Excerpted from forbes.com

Tips from Intuit Accounting Professionals

Work Opportunity Tax Credit (2010): Returning veterans and “disconnected youth” have been added to the list of new hires covered by the credit that businesses can claim for paying wages to targeted groups.

Renewable Energy Credit (2009 and forward): The $4,000 limit on the 30 percent tax credit for small wind-energy property has been repealed.

Making Work Pay Credit (2009 and 2010 only): The Making Work Pay provision of the American Recovery and Reinvestment Act provides a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.