Business Tax Tips

tax calc penSix Tax Tips for New Business Owners
Are you opening a new business The IRS has many resources available for individuals that are opening a business. Here are six tax tips the IRS wants new business owners to know.

  1. First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types are the sole proprietorship, partnership, corporation, S corporation and limited liability company (LLC).

  2. The type of business you operate determines which taxes you must pay and how you pay them. The three general types of business taxes are income tax, self-employment tax, employment tax.

  3. An Employer Identification Number (EIN) is used to identify a business entity. Generally, businesses need an EIN. Visit www.irs.gov for more information about whether you will need an EIN. You can also apply for an EIN online at www.irs.gov.

  4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for Federal tax purposes.

  5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the two types of tax years used.

  6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and the accrual method. Under the cash method, you generally report income in the year that you receive it and deduct expenses in the year that you pay them. Under an accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them.

 

5 Year-End Small Business Tax Tips
As the year continues to wind down, it is never a bad time to think about small business taxes. Here is a quick look at some tax tips for small business that can pay big dividends for the year.

  1. Update Your Accounting - It's important as part of your year-end tax strategy to have a good understanding of your company's financial situation. Spend extra time ensuring your books and records are up-to-date and accurate. It would not hurt to plan time with your accountant for year-end advice, particularly to your operations.

  2. Defer Income - Any payments your company can receive during the first week of January, as opposed to December cuts your tax bill. Every cent deferred until January will not owe taxes until April of the following year. Any deferral strategy will depend on your profit and losses for the year and business legal structure (LLC, partnership, corporation, etc.)
    Depending on your income tax rates in the foreseeable new year, deferral of income can make the best sense for many sole proprietors, partnerships, LLC's and S corporation. Ensure that your cash flow can handle the deferred income.
    Don't forget to push any charitable donations for next year to the current year. Make sure you get a receipt for the tax deduction.

  3. Increase Expenses – Purchase items your business will require in the immediate future to maximize deductions for this year. If you see a need for goods and services in the first quarter of the new year, buy them now, if cash flow permits. Consider the following items for expenses:

    Office supplies: Stock up on fax paper, printer cartridges, stationery and other office items.

    Pay bills early: Pay your bills before the new year in such areas as: cell services, subscriptions, rent, insurance and utilities.
    Equipment purchases: if you will be buying new office equipment, consider purchasing now. You'll have to decide whether an immediate write off is best or spread the depreciation over a period of years. Consult with your accountant to examine your circumstances and company structure to maximize your deductions. In addition, your equipment will have to be in your office, "in use" by year-end.

    Other Items: This category includes: pre-payment of subscriptions, business travel bookings, equipment repairs, and maintenance.

  4. Inventory Write Offs - Depending on your accounting methods, you may wish to check inventory for goods that have been damaged or have become obsolete. The drop in market of the inventory can provide your company with added deductions.

  5. Contribute to a Retirement Plan - Make payments to your retirement plan or set one up before the year-end to reduce your income for this year. Check the contribution limits for your type of plan.

These year-end tips will apply differently to each business owner's situation and accounting method. The cash method of accounting allows for deductions and income for the year they are paid or received. The accrual method of accounting applies income and deductions in the year earned and incurred. Take the time to review the best strategy with your accountant and make the most of the year-end tax planning for your small business.

Individual Tax Tips

ideas save moneyOne of the largest expenses you have is the income tax you pay. If you continually pay more than necessary, you diminish your ability to build your wealth to accomplish important financial goals.

The only effective way to cut your taxes is to do regular tax planning. Always consider the tax consequences of any transaction before the fact; seek professional assistance any time dollar amounts are significant.

Following are a few tax tips for individuals. For assistance in identifying the tax-cutting strategies best suited to your particular situation, contact my office. I'm here to help you minimize your taxes – this year and every year.

  1. Don't lose your mortgage points deduction. When you refinance a mortgage, you're required to deduct the points over the life of the loan. But if you refinance again or sell the home, you can write off the remaining undeducted amount in that year.

  2. Check your exposure to the alternative minimum tax (AMT) as part of your tax planning. Because the AMT exemption amount is not indexed for inflation, this tax is hitting more middle-income taxpayers. You may need to consider moves to lessen the AMT's impact on you.

  3. Maximize dependency deductions. If you are helping to support an elderly parent, your college-age child, or others, know the requirements that will give you a dependency exemption. Don't let poor planning or paying for the wrong expenses cost you a tax-cutting dependency exemption.

  4. Don't aggravate your tax bill with penalty charges. If you are required to make estimated tax payments, be certain that you are paying the minimum required. In most cases, that's 100% of your prior year's tax liability.

  5. Give appreciated property to charity rather than cash. You'll generally get a charitable deduction for the property's market value without having to pay capital gains tax on the appreciation. Get details before you give, however, because other restrictions could apply.

  6. If you plan to sell a piece of investment real estate and replace it with other investment property, you should look into a tax-deferred exchange.

  7. Take a tax deduction for bad debts. If you lent money and it's beginning to look as though the loan is uncollectible, take steps to provide evidence of your attempts to collect. These steps will help substantiate a bad debt deduction on your tax return.

  8. Consider taxes in any major financial transaction. Before making any major financial decision, get the facts on the tax consequences involved. By structuring a transaction a certain way, you can often save significant tax dollars.

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