Starting and running a small business can be very challenging, yet very exciting. Most business owners start a company to do something they love. That passion can be a great motivator, but it can also be a detractor. Proper tax preparation, recordkeeping of your small business tax deductions and money handling is a must.
Small Business Tax Preparation
If you are a sole proprietor or a single-member LLC, your small business transactions will be reported on Schedule C of your personal tax return. As you might know, a single-member LLC is considered a disregarded entity, therefore it is reported on your Schedule C. Our fee for this preparation is typically $300 to $600 depending on how organized you are and if you use our simple, customized online submit forms.
Home office and mileage deduction, calculating maximum SEP IRA or retirement contributions, and deducting Accountable Plan reimbursements (such as self-employed health insurance) will slightly increase your preparation fee (don’t worry- we are not out to gouge our clients).
If you and a partner formed an LLC, even if that partner is your spouse, then a separate partnership tax return (Form 1065) is required unless you live in a community property state such as CA, ID, WI among others. Contact us for more information.
For small business tax preparation, use our online submit forms to detail your small business or LLC income and expenses-
Small Business Tax Deductions
There are several tax deductions available to small business owners. The obvious ones like printer paper and business cards are easy. But what about cell phones? What is the business use of a shared family plan? How about home offices? Meals and Entertainment- is it 50% or 100%? When can a meal be 100% deducted?
Self-employed health insurance and health savings accounts (HSAs) can be tricky, and many small business owners leave money on the table by deducting these on Schedule A versus Form 1040. This little gotchya could cost you over a $1,500 in taxes.
These are the type of things the Watson CPA Group will consult with you. Oftentimes the taxpayer or small business owner gets in trouble because he or she did not understand the rules. Once you know the rules and how to apply the rules, owners can take advantage of small business tax deductions without worry or concern.
Small Business Retirement Planning
SEP IRA? i401k? Solo-K? How much? Limits? All good questions. And Yes, we have the answers. SEP IRAs are great for the LLC or sole proprietor, but not ideal for S Corporation owners. i401ks are great for all small business owners, have next to zero in costs, and afford a much larger deduction with less money. Can’t contribute to a Roth IRA because you make too much? Perhaps a 401k with Roth option is your best bet with high contribution limits and no income phaseouts. Check out our Retirement Planning chapter in our Taxpayer’s Comprehensive Guide to LLCs and S Corps book at-
The Watson CPA Group are tax and business consultants, not just number crunchers. Anyone can balance a checkbook. Anyone can put the right number in the right blanks. But we take a consultative approach to your small business tax preparation. You can always find someone to do it for less- of course. However consider the solid back-end support which you will get with the Watson CPA Group that other tax preparation companies might not provide. Read more about our Value Proposition here.
Keeping accurate records is actually pretty easy, especially if you have a dedicated checking account for the business. Two elements are required to meet IRS standards- a written log or record of the business purpose, and evidence of the amount paid, date and to whom. Bank account or credit card statements in conjunction with financial or accounting software such as Money, Quicken or QuickBooks will cover most of your business expenditures. A trip to WalMart or Home Depot would probably require a detailed receipt since you can buy paper and diapers at a WalMart.
Read more about proper small business recordkeeping here.-
The biggest and most repeated mistake that small business owners commit is to spend “corporate” funds on personal items. Do not pay the house mortgage with your business checkbook! Write a check to yourself (or make a transfer), and then write the mortgage check. Items such as gas for your car seem business related- unless the vehicle is 100% business use, then it becomes a mixed use vehicle, and the gas purchase should be handled the same way as the mortgage check. Then, you turn in expense reimbursements to your company for the expense. This is called an Accountable Plan- contact us for more details.
Hobby Versus Business
Is your business really a hobby? There several step by step criteria that the IRS and Tax Courts will use to determine if you have a genuine profit motive, or if you are just playing around with your business. There is no hard and fast rule such as the ubiquitous three years of consecutive losses rule. Recently the Tax Court upheld a track coach’s eight years of consecutive losses as a legitimate business.
Read more about hobbies here-
Business Coach, Advisors, Consultants, et al
The Watson CPA Group can also help you with business decisions such as marketing, hiring and training a staff, logistics, supply chain, and other issues that entrepreneurs face every day. We also have experience with business acquisitions, valuation, SBA loans and lending, and designing exit strategies. Most business owners don’t think about exit strategies, but this becomes critical when getting involved with another partner.
Other things to consider are expense reimbursements, liability issues, retirement plans including annuities, life insurance, key person insurance, defined benefits plans, death clauses, divorce clauses, long-term care, health insurance, etc. Schedule a consult today!
Avoiding Self-Employment Taxes
Small business owners are required to pay taxes on two levels- one is income tax. The other is self-employment taxes (or FICA and Medicare in the W2 world). These combined taxes could easily be 25% to 30% of your net income. If you see yourself earning more than $40,000 net income, you might want to consider electing to be taxed as an S Corp. You can save about a minimum of 4.6% in taxes, perhaps upwards to 6% or 7%.
Read more about S Corps here-
We are your Colorado Springs Accountants, and your Denver Accountants too. We look forward to working with you! And even if you don’t live in Colorado, we can still provide excellent service through modern technology and our client portal. If you live somewhere really cool like Santa Barbara or New York, our team is more than willing to travel. Even Chicago has its moments.
The Watson CPA Group (team profile)