small business taxes

Timely Tax Tips for Small Business Owners

Annie Mueller — Sun, 16 Oct 2011 19:16:47 +0000

Link:

http://www.openforum.com/articles/timely-tax-tips-for-small-business-owners

Tax time cometh, and the small business owner runneth in fear to the caves.

But that's not really the best idea, is it? Fear not, friends. I contacted several tax professionals to pull together some advice and tips, especially for Q4 and end-of-year taxes.

Here are tips from Miguel G. Farra, CPA, JD, and principal-in-charge of the Tax and Accounting Department at Morrison , Brown , Argiz & Farra , LLC, a top 40 public accounting firm; Michael Carney, CPA and owner of MWC Accounting, specializing in small business taxes; and Matthew Brock, CFP and owner of Divergent Planning , LLC, a financial planning firm for self-employed and small businesses.

How can small business owners handle tax preparation properly, keep things in order, and not freak out when they realize that it's tax time again?

Carney:"Keep an accurate tax diary. Invest in a tax organizer, save all of your receipts, and educate yourself on small business tax deductions so that you know what to keep track of and don’t miss tax savings opportunities. Though many small business owners like to go it alone, in the long run, hiring a tax professional that specializes in small business taxes and can advise you year-round, is an investment that yields both time savings and financial savings."

Brock: "Make sure to be organized. Contact your CPA now and ask if they have a checklist they can send you so you can start to get all your documents and data together. Having your books updated and understandable will make your CPA’s job much easier."

What are some simple ways small business owners can better handle taxes and tax preparation?

Farra: "Consider setting up a defined benefit plan. Small business owners over the age of 50 can make a bigger contribution to defined benefit plans than to defined contribution plans."

Carney: "Considering the tax implications of all their business decisions. Before you make a big purchase, consult the current tax laws or your tax professional. The timing of business purchases can play a big role in what, how much, and how quickly you can write them off."

Brock: "If you are a 1099 employee and not paying quarterly estimates, consider talking with a CPA and setting this up. It can really help you manage your cash flow throughout the year."

Do you have any general tips on 2011 tax deductions?

Farra: "Consider adopting a Simplified Employee Pension plan or SEP. If you are self-employed with few if any employees you may be eligible to get a tax deduction for your contribution as late as October 15, 2011."

Carney: "Small deductions such as dry cleaning, business-related education, or a social event that turned into a business meeting are commonly missed, but add up. It’s in a small business owner’s best interest to educate themselves on all of these deductions, so that they can track them properly in their records. Improper categorization of expenditures can put you at risk of losing deductions. Deduction rules change from year to year, and not keeping up-to-date with current tax laws in your jurisdiction can result in a loss of savings."

Brock: "Remember to take your mileage deductions for any driving you have done. The new rates are here. If you haven't been tracking it throughout the year, it still may be worth it to spend a few hours on going back and tallying it up in a spreadsheet. Ask your CPA what they want for this specifically."

What are some specific tips for 2011 end-of-year tax preparation?

Farra: "For salaries received or paid during 2011, the 2010 Tax Relief Act reduces the employee's tax rate under the FICA tax by two percentage points to 4.2 percent. This also applies for self-employment income for 2011. Any 2011 bonus must be paid in 2011 for this to apply."

Carney: "Maximize your Capital Cost Allowance claim by purchasing any equipment or technology you may need in the coming year and delaying any disposing of depreciable assets. This is especially important to take advantage of in the 2011 tax year, as the deduction limits have significantly increased and there is a 100 percent bonus depreciation for new equipment (due to the Tax Relief Act of 2010 as well as the Jobs Act of 2010)."

Brock: "Revisit your budget or discuss with your staff what things you may need to purchase in the next six months or so. Consider buying them before the end of the year. This can include equipment, supplies, rent, insurance, or any bills you can pay early."

This article is from Annie Mueller of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Small Business Owners Feel High Tax Burden

Kate Lister — Thu, 21 Apr 2011 20:27:39 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/why-small-business-owners...

Have you seen the proposed new tax form?

Line 1 = Enter income from all sources
Line 2 = Send it in

This time of year, you’re probably not laughing.

A friend called in tears last week. She’d just spent a week doing tax prep work for her annual meeting with her accountant — enough to make any grown person cry. She was just about to print the final reports for her morning meeting when she noticed the puddle of ink under the printer. It was the second printer to fail in a week, the result of a leaky store-brand ink cartridge.

Lots of people are cranky this time of year thanks to our 10,000+ page tax code. A survey by the National Federation of Business (NFIB), the nation’s leading small business association, found that four of its members' top ten concerns were tax-related. Health insurance topped the list.

Another survey, just-released by the National Small Business Association (NSBA), found that more than a third of business owners (38%) spend two weeks a year dealing with federal taxes. Because of the complexity of the tax code, and fear of audit, almost nine in ten pay an outsider to prepare their returns.

The small business tax burden, both financial and administrative is overwhelming, and it’s not likely to improve any time soon. Just last month, the SBA Office of Advocacy determined that the study behind the IRS’s focus on small businesses as the nation's biggest tax cheats, was significantly flawed. And, at a time when more people are trying to earn a freelance living than at any other period in modern history — often the result of being laid off — Uncle Sam is targeting the companies that hire them, claiming they’re employees, not contractors.

Happily, one particularly egregious example of this tax-happy trend looks like it’s headed for repeal. Buried in the 2,400-page Patient Protection and Affordable Care Act that passed last year, was an expanded 1099 reporting requirement would have buried small businesses in unnecessary paperwork.

Right now businesses are required to send 1099’s to any unincorporated service provider they pay more than $600 a year. The new healthcare law would have added corporations to the 1099 hit list and it would have added payments for goods and property to the burden. That $699 iPad, for example, would mean a 1099 to Apple. For a typical small business that mails an average of sixteen year-end 1099s, the new law would increase that number eleven-fold (NSBA estimate).

What the heck is a change to 1099 reporting requirements doing in a healthcare bill anyway? Fortunately, that’s a question that NFIB, NSBA and others asked too. Thanks to their efforts, both houses of congress have called for a repeal of that part of the bill. The final nail in the coffin, the President’s signature, is expected shortly.

Small business may have won this recent battle, but with Federal, state, and local governments desperate for money, the war is far from over.

More than ever, small business owners need to stay informed about regulations, taxes, and other laws that could affect them; and they need to make their voice heard. Here’s how to do both:

Subscribe to the SBA Office of Advocacy’s Small Business Watchdog Blog or visit Advocacy’s regulatory alerts page;
Submit comments on proposed regulations to advocacy@sba.gov;
Report unfair regulatory enforcement to SBA’s Office of the National Ombudsman at ombudsman@sba.gov;
Join the National Federation of Independent Business (be sure to participate in their web site polls) and/or the National Small Business Association;
Join your industry trade association;
Tell your Congressmen and Senators what you think;
And, of course, stay tuned to American Express Open Forum.

This article is from Kate Lister of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

State and Local Tax Surprises for Your Small Business

Barbara Weltman — Wed, 20 Apr 2011 22:14:15 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/state-and-local-tax-surpr...

Griping by business owners about federal income taxes on their hard-earned profits is common, and often appropriate. However, there may be even greater reasons for complaining about state and/or local taxes. Where your business is located can make a big difference in the amount of state and local taxes you pay.

Depreciation Rules

Usually, the cost of business equipment and machinery is depreciated over a number of years. However, for federal income taxes, there are two important tax breaks that apply for 2011 to accelerate write offs for the year in which the equipment is bought:

A “Section 179 deduction” of up to $500,000: This deduction, also called “first-year expensing,” applies to both new and pre-owned items, such as computers, office furniture, and other equipment. It can only benefit profitable businesses.
100% bonus depreciation: The full cost of new items can be deducted in the year of purchase instead of spreading depreciation write-offs over a number of years. There is no dollar limit to this deduction. The deduction can be used to create or increase a net operating loss for businesses that are marginal or in the red.

These tax breaks do not necessarily apply on the state level. In seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — there is no reason for concern because they have no income tax. New Hampshire and Tennessee tax only interest and dividends. Of the other states, some follow federal rules while others have “decoupled” their tax rules from federal law and apply their own rules when it comes to depreciation.

Not every state follows the federal rule allowing first-year expensing. Hawaii, Pennsylvania, and Wisconsin, for example, do not. California limits expensing to $25,000 (compared with the $500,000 federal limit).

New York does not allow bonus depreciation except for resurgence zone property and New York liberty zone property, which are specially-designated areas within the state. New York is not alone. Many other states (called “nonconforming states”), including California, Massachusetts, and New Jersey, do not allow bonus depreciation.

Other states have certain refinements for bonus depreciation. For example, in Connecticut, sole proprietors can use bonus depreciation but corporations cannot.

Capital Gains

For federal income taxes, capital gains are usually taxed at 15% (those in the 10% or 15% tax bracket pay no federal income tax on their gains). This rule is set to apply through 2012.

What’s more, those who acquire “qualified small business stock” after September 27, 2010, and before January 1, 2011, and hold it more than five years, will pay no federal income tax on their gain, regardless of their tax bracket at the time of sale. Qualified small business stock is stock in a C corporation engaged in technology, manufacturing, or certain other endeavors.

On the state level, however, these favorable capital gains rules do not necessarily apply. In California, for example, capital gains are taxed as if they were ordinary income. There is no preferential treatment given to capital gains; 22 other states apply the same treatment. However, there are some variations. In Minnesota, capital gains from most investments are taxed as ordinary income, but the state uses the favorable federal rule for gain on qualified small business stock.

Special Taxes

Some jurisdictions have special or unique taxes that do not apply at the federal level. For example, in the New York City metropolitan area, there is a Metropolitan Commuter Transportation Mobility Tax, referred to as the MTA tax, imposed on self-employed individuals and company payrolls. The tax rate is 0.34% of an individual’s net earnings from self-employment allocated to the Metropolitan Commuter Transportation District (the five counties in New York City and seven surrounding counties).

Bottom Line

While there is a level playing field under federal tax rules for businesses across the country, state and local tax rules can significantly alter your after-tax profits depending on where you are located. Learn more about your state taxes and how they stack up against other states from the Tax Foundation.

As always, the best course is to work closely with a tax professional who is knowledgeable about tax rules in your location. This will enable you to comply with tax filing and payment rules and avoid penalties and interest.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Writing Off Losses on Your Taxes

Thursday Bram — Thu, 03 Feb 2011 21:14:37 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/writing-off-losses-on-you...

When you sit down with your accountant to do the taxes for your business, it's important to keep in mind that you can deduct your company's losses on your taxes — provided that you meet certain requirements.

Writing Off Business Losses

In order to ease the impact of losses on a growing business, the IRS offers business owners the chance to write off a net operating loss — a loss where your expenses for the year are more than your income — as well as unpaid invoices. The IRS's Form 1045 is used to calculate what portion of your business losses can be written off on your taxes. Depending on the situation, you can choose to carry back your net operating loss over the past two years or carry it over into future years in order to be able to reduce your future taxes with past losses.

What you can write off is limited by several rules. The IRS does not allow you to deduct the following when calculating a net operating loss:

Any deduction for personal exemptions
Capital losses in excess of capital gains
The section 1202 exclusion of 50% of the gain from the sale or exchange of qualified small business stock
Nonbusiness deductions in excess of nonbusiness income
Net operating loss deduction
The domestic production activities deduction

Essentially, these limitations can cap the total losses you can write off on your taxes. Form 1045 walks you through the process of calculating the true amount of your net-operating losses that you can write off.

Writing Off Unpaid Invoices

If you find yourself in a positon where a client hasn't paid an invoice, you may be able to write it off on your taxes so that you don't get hit quite so hard by a client disappearing. However, you do have to use the accrual method of accounting in order to be eligible to deduct those unpaid invoices on your taxes. That means that the total for those invoices were already included in the gross income you reported to the IRS anyway, so it can be a little less beneficial to your tax situation as other losses you may be able to write off. If you use the cash method of accounting rather than the accrual method, you won't have reported those unpaid invoices as income and therefore won't be able to write them off. The IRS maintains Publication 535 to explain writing off bad debts.

Looking Beyond Your Business for Tax Decisions

When calculating a tax return, Martin James, CPA looks at more than just the business's taxes. Family and retirement planning can be big considerations when it comes to deciding just what approach will be the best for an individual small business:

As a CPA for many small business clients, when it comes to losses and how we handle them, a client's business entity and family dynamics determine how we handle the losses. Many times, especially if it is a sole proprietor or partnership, we will attempt to preserve some deductions such as depreciation for future years due to the potential savings in self-employment taxes. The ideal situation would to be able to zero out the income through depreciation elections and save deductions that can be used against self-employment income in the future. The downside to that planning is that the small business owner is paying less into Social Security. However, if refundable credits are coming in to play, then we attempt to maximize those refundable credits if it makes sense. Additionally, business losses can provide an opportunity to do a Roth conversion or make Roth contributions. A little planning before the tax return is completed goes a long way. Our experience is that small business owners rely on professional advice to make the most lemonade out of the lemons.

Get Expert Help with Your Taxes

Claiming losses on your taxes can be a tricky proposition, making it especially important to bring in a pro early in the process to help you make sure that you're handling every step correctly. It's important to work with a tax professional on any business matters, but it's doubly important when it comes to deducting losses.

Eva Rosenberg of TaxMama has had clients who thought that claiming losses would be a lot easier than it actually is.

One of the saddest stories about small business losses is the fellow who came into my office sometime in early March, with a nice, neat set of QuickBooks financial reports — Balance Sheet (BS) and Profit and Loss Statement (P&L) — proudly showing me his $20,000 loss in the first year. He was confident that he'd done a good job with his books — and that he didn't owe a dime in taxes, other than the annual minimum S Corporation tax...I really, really hated to burst his bubble. Once I moved his asset purchases (leasehold improvements, store fixtures, etc.) off the P&L, made a journal entry to record the value of his year-end inventory, and corrected a few other little things — instead of a $20,000 loss, he had a profit of $100,000! Naturally, not being prepared for it, he had not paid any estimated taxes — either corporate or personal — and was hit with a very, very large tax bill (on the corporate level, as well as personally for IRS and state). Not all losses are as they appear to be.

This article is from Thursday Bram of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

3 New 1099 Rules You Should Know About

Barbara Weltman — Thu, 27 Jan 2011 18:52:19 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/3-new-1099-rules-you-shou...

One method the IRS uses to ensure that income is being reported is to cross check it against information returns filed by third parties reporting the income. As the “tax gap” (the spread between taxes actually collected and what should be collected) has grown, the government has created new reporting rules. Here are three new 1099 rules that could affect you and your business.

Reporting of Goods and Services

Starting in 2012, businesses of all sizes — there is no small-business exemption — must start to report their payments for goods and services of $600 or more. This provision, which was a funding mechanism for the Patient Protection and Affordable Care Act of 2010 (“Obamacare”), has come under considerable criticism by business leaders as well as Congressional members and those in the Administration. It is an administrative nightmare! As a small-business owner you will have to track payments to all firms you do business with, obtain their tax identification numbers, and then issue a 1099 to them.

While several attempts in the fall of 2010 to repeal this rule failed, most observers expect the rule to be repealed soon. However, businesses should get ready for this reporting rule in the event that it is not repealed. This means:

Changing accounting systems to track payments to vendors, suppliers, and other companies you do business with.
Obtaining reporting information from these parties (e.g., tax identification numbers, addresses, etc.). It is not clear when dealing with one store in a chain whether the return must be issued to that store or corporate headquarters; no IRS guidance has been issued.
Obtaining a tax identification number for yourself if you are a self-employed person. This will help to preserve your privacy so your vendors do not see your Social Security number.
Planning to cross check 1099s issued to you against the income you actually received.

Implication: If the rule is not repealed, businesses will have substantial administrative costs for compliance. These costs will either have to be absorbed or passed on to customers. Note: If this new rule is repealed, businesses will still have to report annual payments to independent contractors of $600 or more; this rule is not under consideration for repeal.

Reporting of Credit Card Transactions

Starting with transactions in 2011, banks and other payment settlement companies processing credit cards, debit cards, and electronic payments (such as PayPal) will have to report annually to the IRS the gross amount of merchant (seller) transactions. Sellers with annual gross sales on their merchant accounts of no more than $20,000 or 200 or fewer transactions are exempt from this reporting; only those with annual gross amounts exceeding $20,000 and with more than 200 transactions will have their transactions reported to the IRS.

There is a new form 1099-K, Merchant Card and Third-Party Payments (PDF), that will be used to report these transactions. According to regulations, gross amount of merchant card payments reported on this form do not take into account any adjustments for credits, cash equivalents, discount amounts, fees, chargebacks, refunded amounts, or any other amounts. Sellers will have to enter on their returns the full amounts reported to them. The reporting, of course, does not prevent sellers from making subtractions from the amounts reported to reflect chargebacks or other differences in what is actually taxable to them.

Implication: Many online sellers who assumed that their sales were under the radar will not be able to avoid reporting income.

Reporting of Services to Landlords

Also starting in 2011, there is a new 1099 rule for landlords who are not in a trade or business. Even owners with a single property must report payments of $600 to service providers, such as painters, plumbers, management agents, and accountants. This new rule is the same one that has applied for many years to businesses; Form 1099-MISC is used for this purpose. Landlords will have to provide these information returns to service providers by January 31, 2012, as well as to the IRS on that date (or by February 29, 2012 if they file electronically).

Implication: Landlords who claim a rental loss deduction will be somewhat restricted in the expenses they claim; the IRS can cross check their expenses against the 1099s.

Bottom Line

More information reporting means more administrative work, which costs businesses money. Financial institutions that now have to issue returns for payment transactions will have to increase their fees in some way; businesses and consumers ultimately will pay the price. Whether the new reporting burden on businesses will be repealed remains to be seen.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Save Time and Money with Business-Friendly Smartphone Apps

Barbara Weltman — Fri, 14 Jan 2011 19:16:17 +0000

Link:

http://www.openforum.com/idea-hub/topics/technology/article/smartphone-apps-to-s...

You’ve made your New Year’s resolution to work smarter, and what better way to do this then to use a smartphone? The iPhone, Android, BlackBerry, and other smartphones are changing the way we do business. While only 17% of Americans own smartphones, nearly half of all small-business owners already have them. With the expected arrival of the Verizon iPhone in 2011, many more small-business owners will implement smartphone usage very soon.

Smartphones are not only for communication, although they are still a valuable tool for this purpose; they are also extremely helpful in handling various business activities while on the road. There are numerous apps for these devices that enable you to perform activities mobilely, which can save you both time and money, and more apps are being developed everyday.

Here are some ways in which smartphones can be used to simplify your company’s taxes, accounting, and other financial activities when you and/or your staff members are out of the office.

Accounting

Keep records of income and expenses up-to-date while you’re on the road using an app for your accounting system; your mobile entries sync with your desktop data. For example:

AccountingEdge lets you create quotes, orders, and invoices.
QuickBooks Online enables you to view your customer lists, look up accounts receivable, and check your credit card balances.

Taxes

Taxes require you to keep receipts and certain records to backup your claimed deductions. You can use smartphones to help with record-keeping such as:

Vehicle mileage: If you use a personal car or truck for business, keep a record of your business driving using Intuit’s Tap2Track, MileBug, Symply Soft’s Milog, or Trip Cubby.
T&E reports: Track travel and entertainment expenses with apps such as Concur.

Other Matters

There are an unlimited number of ways in which a smartphone can be used for a business’s financial activities:

Time tracking: Keep track of the time you spend on customer accounts using smartphone apps, such as HoursTracker or ClockIn.
Payment processing: Apps enable you to accept credit cards on the fly. Your smartphone uses an iTerminal/vTerminal to process payments using an app such as Authorize.net, Paytech PayPocket, and uCharge.
Credit card balances: You can view and manage your American Express credit card balance, for example, using an app. You can also receive text message alerts for payment reminders and irregular account activity.

Final Word

Be sure to check into cost (some apps are fee; others have a modest cost) and availability on your type of smartphone (some apps work only on iPhones, others on BlackBerrys, etc.). Also ask your CPA or other financial advisor which other types of apps can be used to help run your business more efficiently while you are away from your office.

Remember to address privacy concerns with smartphone usage. Issues include virus protection, data backup, and blocks for tracking your location. The International Association for Privacy Professionals recently called for privacy guidelines. And yes, there’s an app for privacy protection too (see MyLookout).

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Internet Sales Taxes Could Change Your Business

Tom Harnish — Thu, 13 Jan 2011 18:42:49 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/internet-sales-taxes-coul...

With federal and state budgets in deep trouble, lawmakers are looking for ways to increase the money coming into their tills. Sales taxes are about a third of total state tax collections, second only to personal income taxes as the largest source of state revenue. But the Internet Tax Nondiscrimination Act (P.L. 108-435) means states don't collect taxes on any out-of-state online transactions.

If you have a business in California, your website shopping cart is only required to collect taxes from people who use a California address. Or, seen from the other side of the process, if you live in California and buy from an online retailer in Vermont, you don't have to pay sales tax on your purchase.

Technically, customers in other states who buy from you are supposed to pay use taxes (and you're supposed to pay them when you buy out of state), but trying to enforce that is complicated and virtually impossible, pun intended. The reason is something called "nexus," or physical presence, a concept that originated with the very first use taxes 80 years ago during the Depression.

New York State decided to apply the idea to the Internet with what has become known as the Amazon Law. New York claimed that commissions Amazon paid to Empire State affiliates meant it had nexus in the state, and thus was required to collect sales tax. The state legislature passed a law supporting the claim. Amazon challenged in court and lost, but it is appealing on the basis that the affiliate relationships were simply is a means of advertising.

When North Carolina and Rhode Island passed laws similar to New York's Amazon law, Overstock.com (and Amazon) canceled affiliate programs in those states, putting some online retailers out of business. Fortunately, California, Hawaii, Colorado, and Virginia have defeated proposals to tax Internet sales. But other states, including Oklahoma, are going ahead with Internet tax measures based on nexus.

States such as Nevada, Florida, and Washington rely on sales taxes in lieu of a state income tax, so they have a keen interest in the issue and are working to broaden the definition of nexus.

Still, the lack of sales-tax and use-tax enforcement is attractive to online shoppers, proven by the 20% annual increase in online sales. With that kind of growth it's no surprise that there's a push for new tax legislation through the Main Street Fairness Act. The Act calls for an online sales tax to ensure online stores have the same tax regulations as retailers.

How this all plays out, we can only hope, will be based on business realities, not just legislative avarice.

With something like 7,500 unique tax jurisdictions in the United States, keeping track of changing tax rates will be a job that only a central service or software provider will be able to handle. But the problem is more complicated than that. Some states, for example, don't tax software and other digital products while others do, but they have lower tax rates for prescription drugs, clothing, and food.

Unless special Internet sales exemptions are provided, a seller would have to register in every state where it sells its products or services. For that matter, as it stands, sellers would have to register their businesses in every county, borough, parish, city, or town where they have customers. They’ll have to keep tax records for each jurisdiction too, of course, and make them available in the event of an audit...from any one of 7,500 regimes.

But Internet transactions aren’t the only ones under scrutiny. Catalog sales and interactive-TV sales raise nexus issues too. Even postcards inside magazines that a purchaser mails in to order a product raise nexus issues because the cards have codes that track sales back to the magazine.

In any event, unless a solution is found, your business could find itself in the unfortunate position of selling competitive products that cost your customers as much 8.25% more than other online retailers, simply because you have to collect state tax and they don't. Your choice, of course, is to reduce your price, but that means narrower margins.

One approach to solving this problem was the Streamlined Sales Tax Project (SSTP), created by the National Governor’s Association and the National Conference of State Legislatures in the fall of 1999 to simplify sales tax collection. The leaders of those two organizations were concerned that the 1930s sales-tax approach is just not relevant to 21st century e-commerce. So far, 44 states and the District of Columbia have adopted the approach which encourages "remote sellers" selling over the Internet and by mail order to collect tax on sales to customers living in the streamlined states. It levels the playing field so that local "brick-and-mortar" stores and remote sellers operate under the same rules.

But, according to Scott Peterson, executive director of the Streamlined Sales Tax Governing Board, "people have lost their enthusiasm and patience for the Streamlined Sales Tax project." Why? George Isaacson, representing the Direct Marketing Association as senior partner at Brann & Isaacson, said at a recent conference (mp3) that it was, at least in part, because SSTP had backed away from simplicity.

With states losing billions of dollars in revenue, it's a safe bet they’ll use whatever legal authority they have to chip away at the nexus issue. The unanswered question is whether the federal government will step in to defuse the issue, or at least make it equally painful for everyone.

This article is from Tom Harnish of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Invitations to an IRS Tax Audit

Kate Lister — Mon, 10 Jan 2011 12:57:43 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/8-invitations-to-an-irs-a...

If you aren’t thinking about a tax audit, you should be. They can be a nightmare even if you’re completely honest.

Thanks to the staggering federal deficit, the IRS is trying to close the $300 billion gap between what Americans pay in taxes and what the government thinks we should have paid. You aren’t paranoid if someone is really out get you, as the saying goes, and the IRS is out to get you.

Consider this recent IRS job posting:

Internal Revenue Agent (Abusive Transactions Group)

Agents of the Abusive Transactions Group will be conducting examinations of individuals, sole proprietorships, small corporations, partnerships and fiduciaries.

This group specifically goes after taxpayers who generally have higher incomes than most taxpayers, need to file more tax forms, and generally need to rely more on paid tax preparers.

But even if you aren’t wealthy, don’t operate a cash business, and you don’t have a CPA filing reams of forms for you, you still can easily become an IRS target.

Twice as many tax returns were audited in 2009 as 2000. Enforcement revenue over the same period was up 50%.

It’s important to note that in this land of equality, not all individuals or companies are treated equally when it comes their chances of an audit. About one in a hundred businesses with less than $10 million in assets is audited. That number jumps to 10 in a hundred for those with $10-$50 million in assets, and 1 in 4 for businesses with assets greater than $250 million.

Certain industries are scrutinized more heavily too. You can probably guess some of them — cash businesses are always high on the IRS hit list. But would you suspect Dr. Doggie, the vet, is a target too? It turns out the IRS has a special auditor guidebooks for veterinarians, and for ministers, laundromats, car dealers, and many others too. Their Retailer Guide offers specific strategies for interrogating e-commerce businesses, gas stations, direct sellers, mobile food vendors, pizza shops, and the like.

You can read all about how auditors are instructed to look for tax cheats in these publicly available guides. They’re not easy reading like a John Grisholm novel, but they will make the hair on your neck stand on end. Here are some "red flags" that commonly trigger an audit.

1. Math Errors

While an error in basic math might not instigate a full blown line-item audit, it’s the most common reason Americans receive those heart-attack inducing letters from their friendly local IRS office. Use a calculator and check your numbers twice.

2. Unusually High Itemized Deductions

The IRS uses a very secret formula to calculate what your deductions should be. If computer scan of your returns shows that your deductions for charity, travel and entertainment, and healthcare are out of line with your income, you’ll be on their radar.

3. Self-Employed/Schedule C Filers

Small businesses are suspected of being especially creative with their expenses. Be careful if you take a home office deduction, have lost money for several years in a row, and prepare your returns yourself rather than use an accountant.

4. Lots of 1099s

In February of 2010, in hopes of adding billions to depleted U.S. Treasury coffers, the IRS began a three-year initiative to crack down on what they believe to be a common practice of misclassifying employees as contractors.

Six thousand businesses have already been targeted for audit, and the government hopes to hire 100 new Department of Labor employees specifically to police these abuses. And yes, the do share their successes with the IRS and State authorities.

5. Unreported Income

Be especially careful to report all your income. If you’ve received a 1099, so has the IRS and their computers will notice if they don’t match up.

The same is true for other sources of income. If your former spouse reports alimony paid and you don’t report receiving it, you’ve just painted a big bull’s-eye on your tax return.

6. Previously Audited

If you’ve been audited in the past don’t think you’re off the hook — especially if you owed taxes or fines. The IRS knows people have the mistaken impression that the auditor won’t come knocking twice. But, of course, just the opposite is true.

7. Shareholder

If you are an investor in a partnership or corporation that came under the gimlet eye of the Feds, you may be next in line.

8. Pissed Someone Off

Disgruntled former employees are a regular source of IRS tips. But payback isn’t the only reason people go the IRS — the agency is authorized by law to pay rewards to informants. In cases that involve huge amounts of money, the informant’s cut can be as high as 30% of what they collect.

Make no mistake, your IRS auditor won’t be jolly.

This article is from Kate Lister of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Your Business Owes Taxes When It Didn’t Generate Cash Profits

JoAnne Berg — Thu, 06 Jan 2011 02:35:38 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/why-your-business-owes-ta...

Your business has several silent partners: Uncle Sam and his state and local cousins. Many of the decisions you make on a daily basis will impact their take, so it’s wise to be at least somewhat familiar with the tax laws when you run your own business.

One of the most important financial metrics for most businesses is “How much cash did we generate?” However, business owners sometimes do not realize how much taxable income (not cash income) their business generated during the year. Then, at the end of the year, they get a tax bill that they do not expect. This can wreak havoc with cash flow and business growth plans.

Here are a few of the situations that can cause this, and some ideas for how to deal with them.

Your business is required to pay taxes based on the accrual method of accounting, but you’re keeping your books on the cash method.

Under the accrual basis of accounting, you must record income when you make a sale, not when you get paid. In general, this applies to any business that sells goods from its own inventory such as retailers, wholesalers, distributors, and manufacturers. However, the amounts you pay out for inventory are not deducted from your net income until the inventory is sold. For many businesses, a lot of cash is tied up in inventory, so it’s not hard to see how you could have taxable profits but no cash!

It’s extremely important to handle your inventory and sales accounting correctly. Be sure to have your bookkeeper or accountant prepare your monthly financial reports using the accrual basis. It’s worth spending a little more money here on good financial reporting.

From a business planning and management standpoint, this is where good inventory and credit management techniques come in. Learning how to manage your inventory levels so that you don’t have any more goods on hand than you need to run your business profitably and managing your receivables so that there isn’t a long lag between the time you make a sale and the time you get paid for it both make a significant difference in your cash flow and your profitability.

You paid off debt or bills from last year, during the year.

Debt repayments are not tax deductions! If you’re finally becoming profitable and paying off the loans and credit cards that helped you start your business, remember that you already deducted the expenses that those loans and credit cards paid for in a previous year. This means that your taxable income may be more than the net funds generated from the business during the year. From a business management perspective, ask your accountant to prepare a Statement of Cash Flows along with your monthly Balance Sheet and Income Statement. This will help you really understand what’s going on in your business because it reconciles your net income with your cash flow.

You’ve invested in equipment, vehicles, or other assets that are needed to run your business.

The Federal tax law allows for many of these purchases to be deducted immediately from your taxable income instead of being depreciated over time. This is often referred to as the “Section 179 deduction.” This is a great deal, but there’s a trap here. Many people do not realize that this is a tax deferral, not a tax savings. The tax savings reverses in future years because you won’t have the depreciation deduction in those years — you used it up when you bought the asset.

If you think your tax rate will be going up, you may be better off taking the depreciation deduction in future years, when it will save you more money. If you finance the purchase with debt, you need to be very careful. A typical scenario is that a business owner buys an asset, finances it, and then takes the Section 179 deduction, saving taxes in year one. However, in future years, they have debt repayments, which are non-deductible, and no depreciation expense to report. The result? Taxable income is higher than the cash generated from the business. This can result in cash flow problems if you haven’t planned for it. From a business planning and management standpoint, think of the tax savings from the Section 179 deduction as a loan from the government that you will have to pay back.

These are just a few examples of what can happen. Taxes can become complex very quickly when you have a growing business with multiple types of transactions. To avoid surprises, always have your tax professional do a tax projection for you well before it’s time to pay your taxes, so that you can make informed decisions when you’re running your business — you’ll be glad you did!

This article is from JoAnne Berg of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Year-End Actions to Improve Your Business

Barbara Weltman — Fri, 10 Dec 2010 14:38:14 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/5-year-end-actions-to-imp...

Most small businesses will be closing their books on December 31. That means there’s only a short time to take actions that can improve the operations of your company going forward and trim your federal income taxes now.

1. Work with Your CPA or Financial Advisor

Schedule a meeting as soon as possible to review your financial picture for 2010 so you can decide which actions to take now. For example, if you have a C corporation that’s been profitable this year, the business may want to pay out some of its profits to shareholders in the form of dividends. While not deductible by the corporation, shareholder-employees pay taxes at no more than 15% and the corporation saves on payroll taxes that would otherwise be due if these payouts had been compensation instead of dividends.

2. Purchase Equipment

If you need new computers, furniture, machinery, and other business equipment, buy them now. As long as the item is placed in service by December 31, you can opt to expense the cost (immediately deduct) up to $500,000 instead of depreciating it over five or seven years or even longer periods. This is called the “Section 179 deduction” and it applies not only to equipment, but also to off-the-shelf software and to qualified leasehold, restaurant, and retail improvements that would otherwise be depreciated over 39 years (although there’s a $250,000 limit for improvement).

This expensing option applies to both new and pre-owned equipment (as long as it’s new to your business). It applies whether you finance the purchase in whole or in part.

Caution: If you must replace or obtain equipment but aren’t profitable, don’t make this expensing election. Instead, merely rely on the 50% bonus depreciation allowance for this year to claim a sizable write-off for purchases; only new property qualifies. Bonus depreciation can be used to create or increase a net operating loss that can be carried back for a certain number of years (generally two) to generate a tax refund.

3. Set Up a Retirement Plan

If you’ve been profitable and want to share your good fortune with staff, you can set up a qualified retirement plan, such as a 401(k), for 2010. You’ll be able to use the plan as a way to attract and retain qualified employees while sheltering your business profits. Even if you work alone, you can use a solo 401(k) or other type of qualified plan for yourself.

As long as you sign the paperwork with a financial institution by December 31 to create the plan, you then have until the extended due date of the 2010 income tax return to make tax-deductible contributions.

If you miss the December 31 deadline, you will still be able to set up and fund a Simplified Employee Pension (SEP) plan for 2010 up to the extended due date of the 2010 return (e.g., October 15, 2011 for a sole proprietor’s plan).

4. Hire New Employees

If your business is growing, you can improve operations by expanding your staff. If you hire certain workers, you’ll gain special tax breaks.

Unemployed worker. If you hire someone who has not worked more than 40 hours during the 60-day period preceding the date you put them on your payroll (and is not related to you), you’ll enjoy a payroll tax holiday for the rest of the year. This means you won’t have to pay the Social Security portion of FICA, a 6.2% employment tax savings. You’ll still pay the Medicare portion and withhold the employee’s full share of FICA. Make sure the new employee signs an affidavit that he or she meets the unemployment requirement; this can be done using new IRS Form W-11 (PDF). Then, if you keep this worker on the payroll for 52 consecutive weeks, you’ll be able to claim a tax credit of up to $1,000 on your 2011 tax return.
Disadvantaged worker. If you hire a worker from one of about a dozen targeted groups of economically disadvantaged workers, you can take a work opportunity tax credit. The credit generally is 40% of first-year wages up to a top credit of $2,400, but it may be higher or lower for certain workers. To claim the credit, the worker must complete IRS Form 8850 (PDF) when hired and you must submit it to the state labor department within 28 days of the hire date. If you don’t, you can’t correct this mistake and will lose out even if the worker is in a targeted group. Note: You cannot claim this credit and the payroll tax holiday with respect to the same worker, so choose the tax break that is better for your business.

5. Give Year-End Bonuses

If your business has survived and thrived in this economic downturn, you may want to reward your staff by paying year-end bonuses. The business can deduct bonuses (and related payroll taxes).

Businesses using the cash method of accounting deduct the bonuses when they are paid. Businesses using the accrual method of accounting have some leeway. They can deduct bonuses declared before the end of the year as long as they are paid by March 15, 2011.

Exception: Bonus payments to employees who are more than 50% C corporation shareholders and payments to owners of S corporation shareholders, regardless of their ownership percentage, are not deductible until actually paid to the shareholder-employees.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Last-Minute Business Tax Deductions for 2010

Scott Allen — Sun, 05 Dec 2010 17:19:23 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/last-minute-business-tax-...

It’s the end of the year, and you’re already thinking about 2011. If you’re looking at your first-quarter cash flow, one thing you can do to improve it is to minimize your 2010 tax bill (or maximize your refund). There are still several things you can do before the end of the year to claim deductions or take advantage of tax rules that are ending this year. Some may require spending a little money, while others are more a matter of timing.

Buy now, deduct now, and pay later.

“Deduct charged expenses. Both cash and accrual basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when paid.”

Macy Story
Tax Manager, BKHM CPA

If you’re planning any big-ticket purchases…

“It would be advantageous from a tax standpoint to buy any large fixed asset purchases by December 31, 2010 as opposed to January 1, 2011 because there are currently special bonus depreciation rules enacted for 2010 that allow an expense for 50% of the purchase.”

Brian Schlang, CPA
Morrison, Brown, Argiz & Farra, LLP

And if one of them is a car...

“Maximize auto depreciation for 2010 purchases. If you buy a new car and place it in service before the end of 2010, your first year depreciation deduction will be $11,060. If you wait until 2011 (assuming Congress doesn't extend the bonus depreciation deduction and the 2011 first year depreciation cap is the same as for 2010), your first year depreciation deduction would be only $3,060.”

David Kostmayer, CPA
Barrett & Kostmayer, PLLC

Do you have business property that you’ve held for more than a year and are considering liquidating?

“Due to the presumed expiration of the Bush Tax Cuts, you should review your investments and clean house as the Capital Gains rate increases to 25% from 15% as of January 1, 2011. Along with this change, the reduced tax rate treatment for some dividends also increases in a like manner. So, if you have investments that you are looking at changing up, do it before the end of the year to save some on the tax front.”

Eric M. Anderson, CPA
www.ema-cpa.com

Do you develop software? You‘re entitled to a little extra credit.

“Assuming Congress extends the R&D Tax Credit, 2010 is not limited by AMT (Alternative Minimum Tax). In your industry, identify what you've spent on any software development projects, whether for in-house use, or for providing value-add to your client base. These costs could include the salaries for your in-house coders, or the invoice dollars spent on outside developers. The R&D Credit reduces your tax liability approximately 7 cents for every dollar spent on these innovative efforts.”

Brian Lefever
VP of Operations, Titan Armor

Was this your first year in business, or are you considering starting a new venture soon?

“The Small Business Jobs Act of 2010 temporarily increases the amount of start-up expenditures entrepreneurs can deduct from their taxes for this year from $5,000 to $10,000 (with a phase-out threshold of $60,000 in expenditures), offering an immediate incentive for someone with a new business idea to invest in starting up a new small business today. ”

Michael Kaplanidis, CPA
Managing Director and Founder, Water Street Associates

And finally some food for thought, especially if you’re expecting 2011 to be significantly better than 2010...

“Normally tax professionals recommend that, to defer paying taxes, you claim whatever business deductions you can before the end of the current year and defer whatever income you can to the following year. However, 2011 is likely to see a tax increase, particularly for high-income taxpayers. Therefore, it's possible that a deduction claimed in 2011 will be more beneficial (save more tax) than the same deduction claimed in 2010.”

Jan Zobel EA
www.JanZtax.com

As you can see, some of these options could potentially save you thousands of dollars by acting before the end of the year — not just accelerating a year of cash flow, but in actual savings. These are provided here for educational purposes — a starting point for a conversation with your CFO, CPA, and tax attorney. Keep in mind that tax planning and tax preparation are two different things. If you’ve only hired your CPA to do your tax preparation, don’t expect them to get overly creative. Have a separate conversation with them about some of these options you may want to explore — the sooner, the better.

For more tax-break information, check out our articles on New Tax Breaks for the Swift and 31 Small Business Tax Deductions.

This article is from Scott Allen of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

New Tax Breaks for the Swift

Barbara Weltman — Tue, 12 Oct 2010 20:50:34 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/new-tax-breaks-for-the-sw...

The Small Business Jobs Act of 2010, which was signed into law on September 27, 2010, created new opportunities for businesses to save on their taxes in 2010 and beyond. To claim your share of the $12 billion in tax cuts, you need to act quickly as many breaks only run for a limited time. Here are some actions that can prove beneficial to you.

Buy new equipment and vehicles

Need a new machine? Want to upgrade your computers? Act now and you can deduct the cost rather than depreciating it over a number of years. You can opt to claim first-year expensing (the Sec. 179 deduction) of up to $500,000 for the cost of equipment and machinery in 2010 and 2011. Key points:

You must be profitable to benefit from this write-off.
It applies to both new and pre-owned equipment.
You can claim first-year expensing whether you pay cash or finance your purchase.

You can also claim "bonus depreciation," which is another first-year write-off for equipment purchases. You can deduct 50 percent of the cost in the first year. This break is only for 2010 (unless Congress extends it beyond this year). Key points:

Bonus depreciation only applies to new equipment.
It can be claimed in addition to first-year expensing.
It can be claimed regardless of profitability. If you have a loss for the year, bonus depreciation can create or increase a net operating loss, which can enable you to use a net operating loss carryback to obtain a tax refund from prior years.

If you need a business car, light truck, or van, a purchase of a new vehicle this year has a higher first-year write-off due to bonus depreciation. For example, if you buy a new van used exclusively for business, you can depreciate the cost in the first year up to $11,160; without bonus depreciation, the depreciation allowance would have been only $3,160.

If you need a cell phone for yourself and/or staff, note that this item is no longer treated as "listed property" for depreciation purposes. The "delisting" of cell phones starting in 2010 makes it easier to write-off their cost.

Make improvements to your space

If you make certain leasehold, restaurant, or retail improvements, you can deduct the cost up to $250,000 rather than depreciating it over 39 years. For two years — 2010 and 2011 — these improvements qualify as Sec. 179 property subject to first-year expensing, but the dollar limit on the deduction is capped at $250,000, rather than $500,000. Be sure to determine which types of improvements can qualify for this accelerated write-off. For example, exterior improvements or any internal structural framework do not qualify.

Get medical coverage

If you're self-employed and pay for health insurance, the premiums in 2010 reduce your net earnings from self-employment for purposes of the self-employment tax. The Social Security portion of the tax is 12.4 percent of net earnings up to $106,800; the Medicare portion is 2.9 percent on all net earnings.

If you decide to get coverage now and pay for three months of premiums at $1,000 per month, your savings on the self-employment tax would be over $450. This tax break applies only for 2010, unless Congress extends it.

Note: The premiums continue to be deductible for income tax purposes.

Invest in a corporation

If you buy stock in an eligible small corporation and hold it for at least five years, you won't pay any tax on your profits. To qualify for this important tax break, you must meet all of the following conditions:

The stock must be issued after September 27, 2010, and before January 1, 2011.
The corporation must be a C corporation (not an S corporation).
The assets of the corporation can't be more than $50 million.
The corporation must be an active trade or business.

If you can't close the deal on time, then half rather than all of your gain will be exempt from capital gains tax as long as you hold the stock for at least five years.

Start a business

If you're thinking of starting a business — your first or your 50th — you can deduct in your first year of business the costs you paid before commencing operations. For instance, the travel costs, research expenses, grand opening invitations, and other costs you had before you opened for business are deductible in your first year of business. For 2010, the dollar limit on the deduction for startup costs is $10,000, or double what it was in 2009 and will be in 2011.

Note: Businesses with sizable start-up costs — amounts over $60,000 — lose some or all of the initial write-off. These costs can be deducted ratably over 180 months (15 years).

Final word

Don't delay acting on any of the new tax rules that could be beneficial to your business. Work with your tax adviser to determine which may apply to you and what needs to be done to nail down the tax breaks.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Planning in the Last Quarter of 2010

Barbara Weltman — Mon, 27 Sep 2010 17:58:47 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/planning-in-the-last-quar...

Between now and the end of the year, businesses should take various actions to help their bottom line for 2010 and to get ready for 2011. Here are some actions to consider:

Schedule your annual meeting

If you have a corporation (C or S), hold your annual meeting of the board of directors before December 31 (even if only you and a spouse constitute the board). Failure to hold the meeting, which is required by state law, can enable creditors to "pierce the corporate veil" and hold you personally liable for corporate debts. Below are some items to put on your meeting's agenda. Enter any items that have been approved into your corporate minutes.

Year-end bonuses. Decide whether and how much the corporation can afford this year.
Declare a dividend. If the corporation has earnings and profits, now is a great time to pay them out as dividends. While dividends are not deductible by the corporation, individuals who receive them will pay income tax at no more than 15 percent this year. (Tax rates on dividends could rise substantially next year).
Authorize retirement and other employee benefit plans. If the company wants to provide health coverage, a 401(k) plan, or other plan in 2011, put this in the corporate minutes (and add costs to the budget explained below).
Authorize borrowing. If the corporation wants to borrow money, even from owners, this action must be approved by the board.

Even if you're not incorporated, it's still a good idea to meet with owners and financial advisers to discuss similar actions for your company.

Do year-end tax planning

Determine whether you expect 2010 to be a profitable or losing year. Your conclusion will dictate tax moves to make before the end of the year to optimize your tax position. For example, if you expect to be profitable in 2010, you may want to adopt a qualified retirement plan and make certain equipment purchases before the end of the year to maximize write-offs that reduce your taxable income.

Year-end tax planning is complicated this year due to the fact that tax rules for 2011 are uncertain. The Small Business Jobs Act of 2010, which is currently pending, would make some changes in 2010 tax rules. There may be additional clarification forthcoming about tax rules after 2010, so stay in touch with your tax adviser to learn which strategies are best for your company's situation in light of any tax changes.

Budget for 2011

Now is the time to gather information you'll need to complete your budget for next year. Get data on:

Salaries. Are you planning on increasing wages to staff? The average increase in 2011 is expected to be 2.9 percent, according to Mercer's 2010/2011 U.S. Compensation Planning Survey. Social Security and Medicare (FICA) tax rates remain unchanged; the wage base for the Social Security portion ($106,800 in 2010) is expected to be the same in 2011.
Health care costs. Your premiums likely will rise (perhaps significantly). Larger employers expect increases of 8.9 percent; small employers and individuals can expect even greater increases. Ask your agent or the insurance company for costs.
IT costs. Are you planning to upgrade to Windows 7, add new software, or buy new hardware? Factor this cost into your budget.
Travel costs. If you and/or your staff travel for business, note that airfares and hotel rates worldwide are expected to increase in 2011. For example, hotel costs will probably increase, according to American Express' North America Business Travel Monitor (BTM).

Also make projections for increases (or decreases) in other anticipated expenses for 2011, such as utilities, workers' compensation, and other budget items.

Final word

Schedule an appointment with your accountant or other financial adviser to review your company's financial picture and to discuss actions to be taken now.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Tax Breaks for Booming Businesses

Barbara Weltman — Sun, 01 Aug 2010 21:23:52 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/tax-breaks-for-booming-bu...

Despite continued concerns of many struggling businesses, there are other businesses that are thriving today. If your business is booming, take advantage of tax rules to make sure that Uncle Sam doesn't earn more than you do from your efforts.

Invest in Machinery and Equipment

Now is a great time to buy new items — computers, furniture, heavy machinery — that can help your company run more efficiency and do more business. There may be attractive (low-rate) financing from sellers to help swing your purchases.

If you buy no more than $250,000 worth of equipment in 2010, you can opt to deduct the cost this year rather than depreciating it over five, seven, or more years (the length of time is fixed by the tax law, and the dollar limit phases out for purchases up to $800,000). The $250,000 expensing limit for 2011 is scheduled to be only $25,000, unless Congress changes the law.

To take advantage of this "expensing" rule, you must be profitable. However, the write-off applies whether you buy new or pre-owned equipment. It also applies whether you pay cash or finance the purchase in whole or in part.

Find more about expensing in IRS Publication 946, How to Depreciate Property.

Hire New Employees

Now may be an ideal time to add to your staff so that you can handle your growing sales.

Payroll holiday: If you hire someone now who has not worked more than 40 hours during the 60 days ending on the date you hire the worker, you won't pay any Social Security taxes on wages to this worker through the end of the year. This is a 6.2% savings on the wages that you would normally have paid as part of the employer share of FICA. This break applies only to qualified workers hired before January 1, 2011. Find answers to questions about this payroll tax exemption from the IRS.
Retention credit: If you keep this new worker on your payroll for 52 consecutive weeks, you'll be entitled to claim a $1,000 tax credit next year. There is no cap on the number of such credits you can take, so if you hire five new qualified workers, your tax credit in 2011 will be $5,000. A tax credit is even better than a tax deduction because it reduces your tax bill dollar for dollar.
Work opportunity credit: If you hire a worker from a designated group, you may qualify for a different tax credit. The work opportunity credit in most cases is 40 percent of up to $6,000 in first-year wages, for a top credit of $2,400. The designated groups include vocational rehabilitation referrals, ex-felons, and long-term family assistance recipients. For 2010, two special groups include unemployed veterans and disconnected youth. (These groups do not apply in 2011 unless Congress changes the law).

To claim the credit, you must file a certification form with your state workforce agency within 28 days of hiring; use IRS Form 8850, Pre-Screening Notice and Certification for the Work Opportunity Credit for this purpose.

Note: If you hire someone eligible for both the work opportunity credit and the payroll holiday, you must choose the tax break that is better for you; you can't use both for the same worker.

Save for Retirement

Business owners weary (and wary) of Wall Street may not give much thought to saving for retirement. However, doing so on a tax-advantaged basis can provide current tax savings. Contributions to qualified retirement plans are tax deductible (within limits). What's more, having a plan is an important way to attract and retain qualified workers who value this fringe benefit.

There are many types of qualified retirement plans from which to choose for your business. The one you select depends in part on your goals: whether you want to maximize your personal savings, minimize company contributions, or achieve some other objective. For example, if you set up a Simplified Employee Pension (SEP) plan, you can add up to $49,000 for yourself. However, the contribution rate you use for yourself must apply to other participants (most employees must be included); all of the contributions are tax deductible. Use the IRS Retirement Plans Navigator to compare your plan options.

Tax bonus: If you don't yet have a qualified retirement plan for your business, you may qualify for a tax credit of up to $500 for the first three years of the plan to cover administrative costs. To qualify for the credit, the plan must cover at least one person who is not an owner or owner's spouse; there can be no more than 100 employees in the company. Details about the small employer pension-plan startup credit can be found in the instructions to Form 8881.

Final word

If you've had a great year so far, don't delay action that can help you achieve tax savings. Even if the first two quarters of the year have not been stellar but you expect the next two to be much better, these tax-savings strategies are worthy of your consideration. Since this is the mid-point of the year for most companies, now is a great time to meet with your CPA or other tax-adviser to discuss these and other ways to save taxes for 2010 and for years to come

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Common Money Mistakes Small Business Owners Make

JoAnne Berg — Fri, 08 Jan 2010 20:17:01 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/6-common-money-mistakes-s...

We’ve all known businesses that appear to be doing well, but end up going out of business because they’ve made major mistakes in pricing, cost control, or financial management. Here are some of the areas where these problems arise, and some suggestions for how to avoid making the same mistakes.

1. Pricing Strategy

Pricing is probably the most important decision you make every day. If your prices are too high, you won’t do enough volume. If you set them too low, you may get lots of sales, but you will lose money. So how do you find the right price?

If you’re in a business where your prices can be directly compared to your competitors’ (shoes, for example), your flexibility is limited. You can always run specials and have sales, but your competitors may follow. You’re better off trying to create a sense of immediacy so that your customers buy as much as possible at full price. This is where good marketing makes all the difference. Try different approaches, track customer behavior, and make adjustments as you learn what works.

On the other hand, many non-retail businesses and businesses with patented products have more flexibility in their pricing. It’s common here for entrepreneurs to actually under-price their products. Most advisors recommend starting a little high and monitoring the response — it’s easier to lower a price than to increase it.

2. Tracking Gross Profit

Many small businesses do not correctly account for the full cost of their products or services. It’s much more complex than many realize. For example, if you are a clothing retailer, the cost of the freight to your store is part of the cost of the clothes. You also need to track and factor in shrinkage, damages, and unsalable returns — all of those costs that can eat up your profit margin.

If you’re a service provider, the wages that you pay the employees providing the service; including payroll taxes, insurances, and benefits; should be considered “cost of services provided.”

Accurately accounting for cost of goods sold is important so that you can control those costs and also so that you can easily monitor gross profit, which is the difference between sales dollars and the cost of goods or services sold. It’s not enough to just monitor sales volume — what matters is the profitability of those sales.

If your gross profit percentage starts to slip, you need to immediately find out why and fix it. It could be caused by a cost issue, a pricing problem, or both. Don’t wait until the end of the month to look at your gross profit numbers — put a system in place where you can monitor them weekly or even daily.

3. Credit and Collections

Many small businesses do a poor job of credit and collections. In many industries, customers expect to buy on credit, and in many service businesses, fees are billed after services are performed. This means that your business is making an investment in your customer or client’s company. Treat this with the seriousness it deserves! Use a solid credit-checking process, set realistic credit limits, be very clear about what your credit terms are, and stick to those terms. You can also ask for a deposit up front, or a retainer if you are providing services. You may lose a sale or two, but it’s better than never getting paid.

4. Budgetary Controls

Every business has overhead expenses, which can get out of control. These are things like rent, utilities, administrative employees, insurance, and office supplies. You should prepare an annual budget for these. Have your accountant load it into your accounting software, and then run a “budget vs. actual” report each month. This will show you where spending is creeping up.

5. Necessary Business Infrastructure

Small businesses often skimp on the personnel, resources, and infrastructure needed to run a business effectively. You need top-notch accounting help to track your day-to-day activity as well as a good CPA. You also need a robust accounting system, a great attorney and insurance broker, good computer systems, and a responsive IT firm to keep your systems running, Make sure these are in your budget.

6. Taxes

You need to be informed on tax issues in order to make good business decisions. These taxes include income taxes, sales and use taxes, payroll taxes, and business property taxes. Don’t be afraid to ask questions of your tax advisor when you need to. The cost of non-compliance, especially with payroll taxes, can be staggering, and knowing how to manage your business decisions with income taxes in mind can leave more money in your pocket.

Even if you’re already doing a good job in these six areas, you may be able to enhance your profitability by making small improvements to your current procedures. If you’re not doing these things, I encourage you to start implementing them. You’ll be amazed at the results.

This article is from JoAnne Berg of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: