If you started a small business this year there are a few things you should know to help yourself navigate the world of taxes. New clients often come to me after the fact and tell me they started a business.
My first question has to do with all things that you have to do from a housekeeping or bookkeeping side of things? A short list follows that lists items that are often overlooked or are not given enough attention.
- Do you have a set of books? This is not a spreadsheet, but an actual software package such as Quickbooks with a chart of accounts for your business needs. You have to keep the business activity separate from the personal activity. A chart of accounts is a good way to categorize income and expenses. My advice is to keep you chart of accounts simple as you can always add later. It is much more professional to be able to produce a trial balance and general ledger if needed. It shows a level of business acumen and sophistication.
- Did you set up the business as a single member LLC? You need to register with the Secretary of State in your resident state. There is a good website that will help you with questions in this area. Go to www.LLCuniversity.com.
- Did you apply for a Tax ID with the IRS? You can do so online. Need to complete Form SS-4.
- Did you open a business bank account to deposit revenue and pay invoices?
- Banks like to issue a business debit card with a business checking account. This is a convenient way to charge business expenses when needed and generate fees for merchant services. Help out your accountant with these charges that you incur. The information listed on the bank statement is abbreviated and could lead to miscoding of expenses on your books if you do not pay attention. Was the debit charge for gas or food as an example. I have seen business owners also use the business debit card for personal purposes. You are complicating your life and the life of your accountant. Personal expenses are not deductible as business expenses and are considered draws if paid using the business debit card if not reimbursed.
- Help your accountant to code any disbursements that might have special treatment such as a purchase of an asset or if you have organization costs of forming the business.
- Remember that you have to pay taxes on the income that the business generates. At the Federal level you have income taxes as well as self-employment taxes
On the income at a rate of 15.3% combined employer and employee portion of FICA and Medicare. You should plan to set aside money to make estimated tax payments. The Federal and State estimates are due quarterly. Talk to your accountant to address this area before you are in a cash bind. This is often overlooked in starting a business. Your business is not a free lunch.
If you want to be in business, then you must act like you are in business. The above points are necessary, and I speak from years of experience.
Now turning to some tax planning ideas for this year.
- Defer income-Cash basis businesses (accounting method) defer billing and collections for products or services until year-end.
- Accelerate expenses-by paying business expenses by year-end. Business credit card activity is deductible in the year charged rather than paid.
- Home Office deduction-The TCJA suspended the home office deduction for employees who work from home. However, this deduction still applies if you are self-employed and have a home office that is used primarily for business activities. The simplified safe harbor method gives you $5 per sq. ft times the amount of square footage dedicated to your home office. This is an easy deduction to take and I recommend this method over the more involved regular method. Give your accountant the square footage and he or she will take care of the rest.
- Acquire assets before year end-Business assets have favorable expensing provisions when you purchase fixed assets and place them in service before year end. Be careful with business computers, gigabit routers, or monitors. Is the asset a mix of business and personal use? Check with your accountant on the rules!
- Setup a retirement plan. If you are self-employed, consider setting up a SEP IRA. You have until the tax filing deadline, including extension, to set up this kind of retirement plan and make contributions for the year. There are other plans such as Solo 401k plans for a business owner if you have no employees. This is something to think about if your business has grown and you have the cash flow to fund retirement. Seek out advice in this area and also how you want to invest your money for retirement.
- Check to see if an annuity option fits in with your retirement plans.
