Posted October 25, 2016
Starting and running a small business can be very challenging, but very exciting. Probably more of a pain in the butt, yet 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 and planning, recordkeeping of your small business tax deductions and money handling is a must. This is just the operational stuff- you also have to consider entity structure, exit strategies, risk mitigation, retirement planning and all that hoopla.
Small Business Tax Preparation
If you are a sole proprietor or a single-member LLC (SMLLC) without an S corporation election, your small business transactions will be reported on Schedule C of your personal tax return (Form 1040). As you might know, a single-member LLC is considered a disregarded entity, therefore it does not have a separate small business tax return- this is a common misconception. Our fee for this tax return preparation is typically $300 to $600 depending on how much stuff you have going on (and how organized you are).
For example, many small business owners have a home office, yet they might also have another work location. This needs to be handled correctly to not have the home office disallowed. Automobiles? Should the company own it, or should you? Mileage deduction or actual expenses? These too must be properly discussed and accounted for on your tax returns. We will also help with SEP IRA (old school) or solo 401k plan (new school) contributions calculations, and determine what the best course of action is.
If you created a limited liability company with your spouse, you can elect to be treated as a qualified joint venture. The IRS views a multi-member LLC (MMLLC as opposed to SMLLC) as a partnership, and therefore the IRS is expecting a partnership tax return on Form 1065 and K-1s issued to the partners. Yuck. However you and your spouse can elect to bypass this additional tax preparation, simply split the company’s financials and file this information on a individual tax return.
For small business tax preparation, click on the Get Started button above or use this button-
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? Spoiler alert- a pizza party for the office is 100% deductible, but if the office is just you, then No. But if the office is you and your spouse, then Yes. Boom!
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 several hundred dollars in taxes. Have you considered a Health Reimbursement Arrangement (HRA) or a Flexible Spending Account (FSA) for deducting dependent care benefits? Being a business owner has long hours and lousy pay- squeeze as much out of it as you can!
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.
Self Employed 401k Plan
Once you launch your shiny new small business, you might also consider the several small business retirement plans which include solo 401k plans, profit sharing plans, cash balance and defined benefits pensions. For example, with a solo 401k plan or self employed 401k plan piggybacked with a defined benefits pension, you could sock away over $192,000 at age 50. All tax deferred if you like, which could yield a savings of over $86,000 (assuming a 45% marginal tax rate with federal and state). Wow!
Can’t contribute to a Roth IRA because you make too much? Perhaps a solo 401k plan with Roth option is your best bet with high contribution limits and no income phaseouts. Fidelity, TD Ameritrade, Schwab, etc. offer solo 401k plans, but they do not have a Roth option in the plan provision. The Watson CPA Group is a 401k plan third party administrator (which means we created our own 401k plan document) that has a Roth option. In turn, the big boys at Fidelity, TD Ameritrade and Schwab will honor our 401k plan document to be the custodian of your 401k. Huh? Contact us for more information!
Note how we purposely did not mention SEP IRAs. These are old school and are usually designed to be crisis management tools (after the fact) rather than good planning tools and more product self employed retirement plans. Read more about the various self employed retirement options, including retirement tax bombs and the difference between tax deferral and tax savings below-
S Corp Package
If you make over $30,000 net income after all business expenses, you might consider an S corporation election and save 8-10% in taxes. Read more about avoiding self-employment taxes here.
The Watson CPA Group specializes in S corporations which have a small number of shareholders, and often just a one-person show. Because it is a core competency for us, we have created an S corp package that includes the following (No, the S doesn’t stand for stormtrooper)-
- S Corporation Tax Prep (Form 1120S)
- Individual Tax Prep (Form 1040)
- S Corp Payroll Events (required by IRS), Filings and Deposits
- Estimated Tax Payments (done thru payroll)
- Q3 Tax Modeling and Projection (Questionnaire)
- Unlimited Consultation and Periodic Business Reviews (PBR)
- Small Business Tax Deductions Optimization
- Annual Processing (W2s and other filings)
- IRS Audit Defense
Our annual fee for the S Corp package is $2,640 (or about $220 per month). Do you want to parse it out? Sure. If you did your own payroll processing, our fee reduces to $2,160. Perhaps saving $480 to add chores to your Sunday is a consideration (yup, that’s a bit sarcastic). If you do your own individual tax return, our fee reduces to $2,240. However, the benefit of the Watson CPA Group preparing both tax returns is that we slide things around depending on income limitations, phaseouts, alternative minimum tax (AMT), etc.
The button below links to our Periodic Business Review (PBR) Agenda. We use this throughout the year as a checklist for our business clients. We can also use it for any type of business consultation.
Since we are so far into the year, our fee for the rest of 2016 is a bit different-
- $375 for late S Corp election ($300 for timely elections)
- $300 for payroll setup
- $350 for Q4 payroll event (to encompass entire year), with consultation
- $700 to $950 (typical) for S corporation tax return for 2016
- Start with S Corp package on Jan 1 2017 (outlined above)
How does all this work? Let’s chat! Your unique situation will probably fit the S corporation world, but a dialogue is much better to determine the viability. Contact us to schedule a complimentary consultation. If all goes well, we will prepare a proposal which outlines the scope of services. View a sample proposal 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 company 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 and owned (and titled) in the business name, 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!
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)