Small Business Owners: Are You Claiming Too Many Deductions?

The short answer:  probably not!

 

This is a sentence I hear at my tax desk every year, “I bought this for my business or I did that for my business but I’m not going to claim it because I have too many deductions!”   Seriously?  No you don’t.

 

I guess I should back track a little on this—if you’re claiming stuff you shouldn’t be claiming—that’s another story.  But if you own a business and you have a legitimate business expense—then claim it.

 

Often times, small businesses, especially in the beginning, have losses.  On your tax return it’s called a net operating loss or NOL.  If you have an NOL, you carry that back two years and use it to offset income that you had two years ago.  If you still have a loss, you can carry it forward for another 20 years!

 

Now sometimes you have an expense that gets limited if your business doesn’t have enough income—like a section 179 deduction or a home office expense.  That doesn’t mean that you can’t claim these things, they just get carried forward to be used to offset your future income.

 

Don’t skip your deductions!  I can’t stress this enough.  Often, at the “big box” stores, they’ll skip your home office deduction because they’re “saving you money by not claiming it” since they charge you for each form.  But it’s like that old expression, “pennywise and pound foolish.”  Sure, you save a few bucks by not filing the 8829 form, but you just lost the carry-forward of a few hundred dollar deduction.  This is especially important this year with taxes most likely going up next year.  Even if your deductions won’t help your tax return right now—do not just leave them off.  Otherwise, you would have to amend your prior returns to carryforward the deductions which will cost even more money in the end!

 

It’s still November, you have plenty of time to round up your receipts, review your mileage log, and make sure that you’re doing everything you need to be doing to maximize all of your deductions.  Obviously you can’t claim stuff that’s not a real business expense.  But you can claim everything that is a legitimate expense for your business.  Not only can you claim it—it’s the right thing to do.

________________________________________________________________________

For those of you who do not have a home office, these posts will help get you started:
http://robergtaxsolutions.com/tag/home-office-deduction/
http://robergtaxsolutions.com/2011/07/how-to-boost-your-home-office-deduction/

Small Business: Proving You Have Income Without a 1099-MISC

Now some people may be wondering, “Why would I want to prove I have more income than I have to?”   But for many small business owners, that’s exactly the problem—you have income, you want to report it to the IRS, and you’re having a hard time proving it.  This post is for you.

The number two reason for reporting your non-1099 income  (number one of course being basic honesty) is qualifying for the Earned Income Tax Credit.  2011 sort of hit small business owners who normally qualify for EIC with a one-two punch.  We had the new 1099 reporting requirements that upped the ante for so many businesses, and we had the new EIC tax preparer due diligence rules with one of the questions being “Do you have forms 1099-MISC to support the income?” With the next  question being, “If not, is it reasonable that the business type would not receive Form 1099-MISC?”  Here’s a clue:  if you answered NO to the first one, you have to answer YES to the second.

So what types of businesses wouldn’t normally receive a 1099?  Bunches of them!  Face it, if you’re reading this—I’m guessing that your business doesn’t receive 1099s.  Generally, it’s reasonable to expect that anybody who works for other people, as opposed to other businesses, would not receive a 1099.  House cleaners, dog walkers, handymen, lawn mowing services, daycare  providers, interior decorators, and even income tax preparers are all types of business that could easily never see a 1099.   (Yeah, me too!  Although I’m now getting 1099k forms because I take credit cards, I don’t get 1099-MISC for preparing personal tax returns.  Maybe I’ll see some 1099-MISC forms from some of my business clients this year, but I never used to get them in the past.)

So, how does a small time personal service provider prove his or her income to the IRS?  There are a couple of things you can do.  I’m going to start with my favorite:  the business bank account.  This is what I do and several of my clients do it too.   (Okay, because I’m their accountant and this is what I tell them to do.)   Get an Employer Identification Number (EIN) for your business and set up a separate bank account for your business in your business name.  Only business income goes in, only business expenses go out.  You may have to put some of your own money in for a start up, and once you’re making money you’ll take out a draw, but you’ll label those as such.  Other than those two items, your business checking account is pretty much your profit and loss statement as well.  Now for a bigger company that would be over simplifying things, but for us little folks–I’m spot on.  See this post for more information about getting an EIN number:  Free EIN

Why does this make good proof?  Because you’ve got a monthly record of your income and expenses.  I also have deposit slips to back it up:  Mary Jones paid me $200, Fred Smith paid $250.   It’s a good solid audit trail.  Here’s another post about bookkeeping and your business bank account:  Banking and Bookkeeping

But what if you don’t have a separate account?   Maybe your business is just too small to bother with the expense of an extra account.  What if you’ve just got something really simple like watching the little neighbor kid for a couple of hours after school every day.  There’s no contract, no business cards, no advertising.   You get $100 a week from your neighbor friend.  She pays you in cash—it never sees the inside of a bank because that’s your grocery money.   It’s not much but it supplements your child support.  How do you prove that kind of income?

The easiest way to prove your income if you provided child care is to have the person you provided it for claim your services on their tax return.  You make them a daycare receipt, just like the ones regular day cares do showing the name of the child, how much they paid you and your EIN number.  (You can use your social security number but I never recommend that.  You can get an EIN number for free.  Protect yourself.)  This is doubly good because the IRS will get confirmation of your income from an outside source.  You prove income, your customer gets a tax deduction, it’s a win/win situation.
But what if your business isn’t day care?  What if you did something like mow lawns around the neighborhood and shoveled snow in the winter?  Nobody’s going to be claiming you on their tax return, what can you do?  In your case, I like receipt books.  You can find different kinds at Office Max or any office supply store.  I like the ones with a carbon copy—one for you, one for your customer.

Now if you have just one customer and you’re always going to the same place—you can just use the little one that just has a couple of lines and the amount on it.  You might write, “Mowing, Mr. Jones, $30, 5/15/2012” on it.  You know what you did, who you did it for, how much you got paid, and when.  If you have multiple customers you’ll want the larger receipt books that include the address and phone number of the customer.  If you do different types of jobs for different people, you might need the bigger ones so you can write down the type of work that you did for them as well.

You don’t have to have a 1099-MISC to prove your income to the IRS.  You just need to have a system in place to document your income and you’ll be fine.

Tiny Business Owners: When You Don’t Want to Reduce Your Income for Tax Purposes

I know what you’re thinking: “Come again? You must be out of your head! Don’t I always want to reduce my income for tax purposes?” Sometimes, the answer is no. Actually, I got the idea for this post from Howard, one of my readers with an accounting background and an owner of a struggling restaurant.

I’m walking on a tight rope here so I want to make sure that I explain this carefully. Under tax law, a small business owner is required to report all of his income and expenses accurately. I’m always telling people “don’t make stuff up” – that’s my rule and I stand by it. That said, there’s some leeway, like prepaying expenses at the end of the year to reduce your business income and stuff like that.

Where I’m going with this is there are some people who don’t want to reduce their business income for the tax year. One category is people who are applying for a home loan—you want your net income to be as high as possible, even if you’re paying self-employment taxes because the bank will be looking at your net income. The other category of folks who might not want to reduce their business income is people who may qualify for an Earned Income Credit (EIC).

Since leaving the big box tax company, I haven’t filed a lot of EIC returns; most of my clients are small businesses owners and have incomes that are too high to qualify. But last year, I had 5 EIC returns for people who had never even heard of EIC before, basically small businesses that had hit a rough spot with this economy. (I do lots of returns for people who don’t own businesses too. But I’m on a business roll right now.)

So here’s the thing: as a small business owner, you’re taxed 13.3% for your self-employment tax for 2011. If you make a net profit of $10,000 your self-employment tax is about $1,330. (Not exactly, it’s a funky equation, but that’s pretty close.) If you’re single with no children, the Earned Income Credit would be about $278, so it would make sense for you to lower your net income if you can so that you reduced the self-employment tax. But, let’s say you’re filing as head of household with 2 children – in that case your Earned Income Credit would be around $4,010 so reducing your net might not be such a good idea.

Bottom line: the tax strategies for a business owner who is a parent may be different than the strategies of a business owner with no children.

The IRS website has an Earned Income Tax Credit Calculator to help you determine how much of an Earned Income Credit you can receive if you qualify for one. Here’s the website: http://apps.irs.gov/app/eitc2010/SetLanguage.do?lang=en.

Remember, that’s just the EIC and it is an estimate. Remember that for your-self employment income, there’s also self-employment tax – the quick and dirty calculation for that is 13.3%. It will help you figure out where you stand with the EIC compared to self-employment taxes.

If you’re married and your spouse has income, that income will be included in the overall calculations, so EIC may not be a factor for you.

There are so many things to think about when you own your own business. It’s a good idea to get some professional help at least once every three years to make sure you’re on track and getting every deduction and tax credit you deserve. If you have made mistakes in the past, a professional can amend your prior year returns and get you refunds for what you’ve missed as long as you’re within that three year time limit.

2011 Year End Tax Tips for Tiny Business Owners

Tiny business owners, you know who you are: you’re a single member LLC or sole proprietor, or maybe you’re in business with your spouse. You might even have an employee or two, but that’s about it. When Congress passes laws to help “small business” they don’t mean us. This post is for you. If you are a Sub-chapter S corporation, I’ll post Sub S tax tips on Friday.

Number 1: If you’re going to be in the red for this year, you don’t really need to worry about reducing your business tax, right? Your negative business income will help offset your other income (if you’re lucky enough to have some). You can devote your energy to being profitable next year.

Number 2: If your business is in the black, congratulations! You’re going to want to look at cash flow and make sure you’re got enough cash to pay your upcoming expenses (like payroll and payroll tax if you’ve got it), but let’s look at ways to reduce your excess before the year is out.

Hire your kids: If you’ve got kids under the age of 18, you can hire then without having to pay FICA. The IRS just changed the rules on that; it used to be if you had an LLC, you paid FICA for your kids. Not anymore (and if you had paid FICA in the past you can amend your old payroll returns.) There are rules that have to be followed, but if you could use a little help at work this time of year you’d at least be keeping the money in the family. For more information check this: http://robergtaxsolutions.com/2010/12/last-minute-tax-tip-hire-your-kids/

Pre-pay business expenses: Most tiny business owners use something called “cash basis accounting”, basically, you’re taxed on what comes in versus what goes out. If you are cash heavy, you can pre-pay some of your business expenses for up to twelve months. For example: I lease my office space, I’ve got a one year contract so I know that I’m going to have that monthly expense for the rest of the year. If I were cash heavy (in my dreams) I could prepay my rent for the entire 2012 year and write it off on my 2011 taxes. But you see how you can play with that? While I won’t be paying a full year of rent in advance, I did pay a few January bills early.

Delay invoices: Remember, this only works if you’re cash flush. Let’s say you did a job and a client owes you $1000 and you normally would send out the bill with a due date of December 30th. Change to due date to January 15th—you’re pushing that income ahead to next year. Besides, your client might just appreciate the break at Christmastime. I set up a billing schedule for a client that didn’t start until January and I used “I thought you could use a little Christmas break.” She was thrilled and I delayed the income—talk about a perfect win/win situation.

Credit card purchases: Okay, I have a very strict rule with my company, “No Credit Card Purchases for the Business.” But that’s just my personal thing. If you use a credit card for your business, this might work for you. According to IRS rules, if you buy something with a credit card, you’ve bought it now. So, let’s say you’re a little cash poor right now but you’ll have the revenues next month to cover your expenses. Pay expenses with your credit card and it will count as having been paid when charged.

This one I don’t like to say, but buy equipment: If you need it. I almost hate to list this as advice because it’s the standard that everybody says every year. One of my clients fired his old accountant for saying it. Like he said, “I know what I do need and don’t need to run my business and I don’t need any more equipment. What other ideas you got?” In this same category is the buy a new SUV that weighs over 6,000 pounds so you can use 100% bonus depreciation to write off the whole thing. Here’s my advice, “Don’t buy crap you don’t need.” If you do need equipment, and you’re profit heavy, it’s better to buy in December than in January. But buy what makes sense for the business.

Get your retirement plan in place: If you’re just investing in an IRA, you don’t need to worry about that yet, you’ve got until April. If you’ve been wanting to set up a SEP or a 401(k), you need to get that done by December 31st. Contact your financial advisor about setting up your retirement plan.

Last, because this isn’t really business: charitable contributions. If you’re a sole proprietor, your charitable contributions do not count as business expenses. So if you give money to the Salvation Army, that’s a personal deduction, not a business deduction. Every year, I see a lot of people trying to claim their charitable contributions as business expenses and it won’t fly with the IRS. Even if you pay a charity from your business bank account, it’s not allowed as a business expense. Charitable contributions won’t help reduce your self-employment taxes. Please give to charities and give generously, but know that it’s a personal deduction, not a business one.

Estimated Taxes for Small Businesses

I’ve gotten this question twice in the past week so I thought I’d post it on my blog:

I pay my estimated taxes out of my personal account, but really I’m paying estimated taxes for my small business, shouldn’t I take the money out of my business account?

That’s a really good question, and the answer is “It depends.” If you own a C corporation, then the answer is yes. But most of the small businesses I deal with are Sole Proprietors and Sub S Corporations; if you have one of those, the answer is NO!

Here’s why Sole Proprietors and Sub S Corporation Owners should not pay their estimated taxes out of their business accounts: All of the profits from these kinds of companies are taxable to the individual that owns them. The companies themselves pay no tax, the individual owner does. Because the owner, not the company, owes the tax, the owner must pay from his personal account.

Let’s do an example: Daisy Duke owns Daisy’s Delightful Doggie Daycare (D4). It’s basically a pet-sitting business she runs out of her home. Daisy’s pretty savvy about accounting, so she maintains a separate bank account for her business and she claims every legal deduction she’s entitled to. She runs all of her business expenses through her business account.

For the quarter, Daisy has $10,000 of income and $6,000 of business expenses. She wants to make an estimated payment on the remaining $4,000 of income. Daisy determined that she spends 40% of her net income on federal taxes so she’s going to send $1600 to the IRS. This check is not written on the D4 checking account, but instead on Daisy’s personal account.

Note that Daisy runs all of the business expenses through the business account, but because the taxes are not considered to be a business expense, they can’t go in there. If Daisy were to take her kids to Chuck E. Cheese’s for pizza, she would not pay for that out of her D4 account either. Now it’s sounds crazy equating estimated tax payments with Chuck E. Cheese’s Pizza but to the IRS’s eyes, they’re the same thing—a personal expense.

So here’s the next question that people always ask: What if Daisy doesn’t have enough money in her personal checking account to pay the taxes? That’s another good question. Remember, though, that the reason Daisy has to pay estimated taxes is because she’s making a profit. She’s got that $4,000 of profit sitting in her business bank account. She can make a payment to herself because she owns the company. She’s paying herself a draw (or maybe with an S Corp a salary), but when you own the business and you have a separate business account, you are allowed to pay yourself from the account.

Next question: But isn’t it a waste of time? Aren’t you writing two checks-one to Daisy and then one to the IRS, when writing one check directly to the IRS would solve the problem? No, it’s not a waste of time because it’s worth the extra five minutes to keep your books straight.

If you keep your business books strictly for business, with no personal expenses running through there at all, the IRS is going to think you’re pretty boring and not worth wasting much time on trying to audit you. This is one of those times where boring is good! Remember, paying your estimated taxes out of your business account is seen to be the same as taking your kids to Chuck E. Cheese’s Pizza. It’s a cheesy expense! (Sorry, that pun flew out of the keyboard, I couldn’t stop it.)

Many small business owners get into tax trouble because they wind up using their business accounts for personal spending. While your estimated tax payment seems like it would be a business expense, it’s not and you have to keep it separate.

See also: http://robergtaxsolutions.com/2011/04/how-do-i-keep-from-owing-so-much-tax-next-year-estimated-tax-payments/

ATMs and the IRS: Why Your Business Shouldn’t Take Cash Out of the ATM

You should never take cash out of the ATM using your business bank account. Never.

If you never have and never will take ATM cash out of your business account, you’re done here. Go read a different post, I’m not worried about you. If you still think it’s okay to make a cash ATM withdrawal from your business account, keep reading. Imagine you’re routinely getting whacked upside the head with a rolled up newspaper about every two minutes until you learn this lesson.

Why not use the business account for the ATM?

1. It’s a blazing red flag to the IRS that you’re doing something naughty. Even if everything you do related to your ATM withdrawals is 100% legitimate, to the IRS it says, “I’ve been a scumbag! Make me pay more taxes!” It’s really not a message you want to convey.

2. It’s bad bookkeeping practice. You have income and expenses. You take money in and you spend it. You need to account for how you spend it. An ATM cash withdrawal doesn’t give you the paper trail you need for your expenses. Even if you’re good about keeping those receipts (and believe me, you’d be the exception) you’re still stuck with issue number 1 – blazing red flag to the IRS.

But I own the business and it’s my money, why can’t I just make a withdrawal? Good question. Let’s say you’re just a plain sole proprietor, nothing fancy. You’re absolutely right; that’s your money and you’re entitled to use it as you see fit. If you’re keeping a separate bank account for your business, then you should write a check from your business to you for your “draw”. That’s legit and it gives you a paper trail. Whenever you take money from your ATM, it is considered as going to you and you’ll be taxed as that being your profit.

Here’s an example: Fred takes $200 a month out of his business account to pay some contract laborers. He occasionally hires some kids from the local football team to help him with his moving company. He pays the boys in cash and has never paid any one boy more than $600 so he hasn’t had to issue a 1099 (1099s must be issued if you pay $600 or more.) Fred gets audited by the IRS. He’s claimed $2400 in expenses for contract labor. That’s the $200 a month cash he’s paid to the boys on the football team to help him with some moving projects. What the IRS sees is $2400 in ATM cash paid directly to Fred and they charge him $1200 in taxes and penalties for under-reported income. Fred will have a very difficult time fighting this. It’s possible that he can fight and win, but why be in that position in the first place?

Let’s move it up a notch, what if Fred has an LLC-a limited liability company? Let’s say Fred takes an ATM withdrawal from his business account so he can take his wife out to dinner. Once again, its Fred’s money and he has that right. But now Fred is treating his business account as a personal account. This messes up his “limited liability” status. If you don’t keep a strict line between your business account and your personal account, you risk losing your limited liability protection. This makes it even more important for Fred not to use his business ATM card for cash if he has an LLC.

How’s your head? Been smacked enough times? Bottom line: never make an ATM cash withdrawal from your business bank account. If you want to pay yourself, write yourself a check. If your business needs to use cash, set up a petty cash account and fund it by writing a check for petty cash. A clean paper trail will keep the IRS off your back and that means money in your pocket.

Five Things You Can Do to Reduce Your Self-Employment Taxes

A fellow business owner told me that he was really surprised last year at tax time. His business had done well and he didn’t have many expenses to offset his income. You want to have income—it’s sort of necessary if you like to do things like eat, wear clothes, and have a roof over your head, but the more income you have, the more you pay in taxes. These tips are things that you might be spending money on anyway that can help reduce your “business income” and reduce your self-employment tax.
Claim a home office. If you are working for yourself, you should have a home office. I actually have two offices: one in an office building where I meet clients, and my home office where I perform administrative duties like paying my company’s bills. If you have more than one office, your home office should be your administrative office—doing so makes your commute to the other office a deductible expense (normally, commuting is not deductible).
If you’re already claiming a home office, make sure that you’re maximizing your deduction. Did you know that hallways, stairways, crawl spaces, and bathrooms don’t count towards your total square footage? And don’t forget to claim the depreciation on your home. I’m always amazed at the number of folks who don’t claim it. If your business has a loss, the deduction carries forward to next year.
Hire your kids. If you have children under the age of 18, you can pay them to work for you and you aren’t required to pay FICA, and you don’t have to pay Federal Unemployment tax on them either. The work has to be real and the wages have to be commensurate to what you’d pay someone who is not your child. They also have to do work for the company, not things like clean up the kitchen for this to count. Have them keep a time sheet so that you have documentation of the work in case the IRS checks on it. For this you must be a sole proprietor, you can’t be an LLC or Sub S corporation.
Hire your spouse and set up a Section 105 Health Plan. Sure you can deduct your health insurance on the front of your tax return, but it doesn’t affect what you pay in self-employment taxes and it only covers your health insurance. With a Section 105 Health Plan, you hire your spouse as an employee and the compensation package includes 100% health coverage for him (or her) and his family (which includes you). This has the effect of putting all of your family’s health care expenses as a deductible business expense. Just like with hiring your kids, your spouse will have to perform a real job for the company, keeping a time sheet, etc. (Must be a sole proprietor, LLC is okay. Cannot be Sub S Corporation.)
Maximize your auto deduction. The majority of people claim auto mileage for their business because it’s easier (I’m talking about claiming real mileage and not the folks who go around claiming 40,000 business miles a year on a car that’s only been driven 12,000. I like to stick with honest deductions). For a lot of folks, it’s worth it to claim your actual expenses, especially now with the price of gas so high. Take the time to really keep track of your actual auto expenses for one year. This will vary a lot depending upon your auto usage, but for some people it’s a big savings.

Why Closing the Tax Gap Won’t Solve America’s Budget Crisis

According to reports from Washington, instead of raising taxes or cutting spending we could solve America’s debt crisis simply by going after uncollected taxes. It’s claimed that over $400 billion dollars a year go uncollected. The difference between what is actually collected on time and what the IRS believes should be collected is referred to as the “tax gap.”
While I am quite certain that there is a gap between what is owed and what gets paid, I am equally certain that the tax gap is significantly under $400 billion per year. Working from the other side of the table, I find it very rare that the amount the IRS claims someone to owe in debt is accurate.
One case I worked on involved a young woman who received an IRS notice stating that she owed over $2 million in taxes. Yes, two million dollars! Clearly, there was a mistake. Once we sorted the whole thing out, it turned out that she owed $13. That’s not a typo; the IRS said she owed $2 million when she really owed $13. How many more mistakes like that are out there?
Although the $2 million case is an unusual example, the taxpayers I work with who receive collection notices from the IRS often wind up receiving refunds after I’ve finished processing their paperwork. This is not because I’m some kind of master tax genius (although I‘d like people to think so), but merely because I’ve done the paperwork correctly.
The tax code has become so complex that even college educated professionals have trouble navigating the tax code. This is my job, I have training and experience, and it’s not always easy for me to interpret the tax code. Sometimes, even IRS personnel have trouble interpreting the tax code. I recently represented a taxpayer at an audit that was very focused on one item on the tax return. Although it was implied that the taxpayer had prepared the information “wrong,” there were no guidelines as to how to do it “right.” I asked the auditor, “Tell me how you want this done. I will do it.” She couldn’t answer me. Not because she was stupid or incompetent, but because there are no IRS guidelines for that particular issue (Yes, we won that audit).
One particularly galling point in the “tax gap” argument is a claim made by Benjamin Harris, a research economist at the Brookings Institution. He was recently quoted in an article in the St Louis Post Dispatch, “You kind of feel like a sucker as a wage earner. Here you are paying taxes because someone else is paying you, but if someone else is getting paid on their own, they pay taxes at half the rate.” As a self-employed business owner, this makes me furious. First, I pay taxes at a higher rate than Harris because I have to pay my self- employment tax over and above my regular tax rate. Additionally, as an employer, I pay my share of my employee’s FICA taxes, a benefit that Mr. Harris receives but appears to be blind to. To see the entire article, here’s a link: http://www.stltoday.com/news/national/article_890fa85f-c788-5a96-978c-d90edae37593.html?print=1
Are there people who cheat on their taxes? Certainly, and they should be caught and prosecuted to the full extent of the law. However, do not assume that all business owners cheat on their taxes. They probably don’t owe what the IRS says they do.

Tax Tips for Artists: Why You Might Not Want to Donate Your Art

If you’re an artist, you may have been asked to donate a piece of your artwork for a good cause.  You might have also been told that it’s good PR for you, because people at the event will get a chance to see your work and bid on it.  And of course you’ve been told that your donation is tax deductible.

While it’s true that your donation is deductible, it’s not nearly as deductible for you as it is for me.  Come again?  You heard me right—your art donation is not as deductible for you as it is for me.  Let me give you an example:  Let’s say you donate a painting that would normally sell for $500.  If I bought that painting and donated it to a charity, I’d get to write off the full $500 on my tax return as a charitable deduction.  If you donate that painting instead, you can only write off the cost of the materials that you used to create that painting—depending upon what materials you’re using, that’s maybe $50 to $100.   

Additionally most artists are sole proprietors, their art income goes on a Schedule C on their regular 1040 tax return.  Your charitable donation can’t be counted as a business expense, it must go on your Schedule A with your other personal itemized deductions.  If you don’t already itemize your deductions on a Schedule A, that donated painting gives you no tax benefit whatsoever.

I’m not saying that you can never donate to charity, I like charities and I think they deserve donations.  It’s just that when you donate your art, you’re not getting much bang for your buck.  So what are your alternatives?

One thing is to pay to “advertise.”  For example:  I support a small, local ballet company.  I used to just donate money to them, but now instead I purchase an ad in their performance program.  They get the money they need and I get a business deduction for advertising.  This is especially good for me.  Before, being in the 25% tax bracket, my $100 donation was worth $25 off my taxes.  Now, as a business expense, my $100 advertisement reduces my taxes by $40 ($25 from my regular tax plus an additional 15% for my self-employment taxes.)  The advertising option gives you the best tax value on your donation because you can use it to offset your self-employment taxes.

Do be careful about the charity advertising though.  I once did an ad thinking I was supporting a local organization, when really the money was going to an advertising agency.  The organization got some money, but most of it went to the promotional company.  I won’t make that mistake again. 

Another option for you is to donate the profits from one of your art pieces.  For example, let’s take that $500 painting; assume you paid $100 for your materials,that’s a $400 donation to the charity.  Most likely, that’s a better donation than what the charity would gain if they auctioned one of your pieces off.  If you’re in the 25% tax bracket, you still get a $100 reduction in your taxes.  It won’t help with your self-employment tax, but you do get the good feeling of making a donation and your art work sells for its actual retail value instead of some discounted auction price (another disadvantage of donating your art for charity.) 

There are many worthwhile causes out there that need and deserve your help.  If providing a piece of your art work is how you want to help, by all means do it.  Just remember, it’s not your best tax strategy.

Small Business Bookkeeping Tips, for People Who Hate Bookkeeping

I hate bookkeeping!  I know, you probably found this site looking under “accountants” but I hate doing bookkeeping.   I’ve found that many other small business owners do too.  So if you’re like me, you want to keep your bookkeeping time spent to a minimum so you have more time to work on the part of your business that you love.  Here are some of my tips to keep things simpler:

 Make a separate bank account for your business and keep it apart from your personal money.  Income goes into the business account, expenses go out of the business account.  If you do this one step, your bank statements become a perfect record of your business. 

What if I accidentally make a business purchase with my personal funds?  Write yourself an expense report,  just as if you were working for a major corporation- attach receipts, and write a check to yourself as an “expense reimbursement.”

What if I need to take money out of my business account to pay for personal stuff?  Once again, you write yourself a check, label that as “owner’s draw”.  One business owner I know writes checks for his reimbursements and uses account transfers for his draw so that it’s easier for him to keep track of what is what.  The important thing to remember is that your draw is not an expense, that’s part of your profit.

Never take cash out of your business account with your atm card.  Never.

What if I don’t have enough money to pay my business bills with my business account?  Can I pay my business bills with my personal checking account?  No.  You should write a check from your personal account to your business account and pay the bills from there.  Keep track of that.  When your business is doing better, you can reimburse yourself.

I get a 1099 at the end of the year and I write less than five checks a month for expenses, if even that.  Do I really need a separate bank account?  In a case like this, probably not, you could get away with a handwritten log of your expenses.  The point is to do what’s easiest for you, in this case separate accounts might be more of a headache.

I’ve got the opposite problem.  I’ve got lots of little expenses from all over the place.  It takes me hours to load it all into Quickbooks.  Any help for me?  Maybe, here’s a tip I learned from one of my clients that might work for you.  This fellow had lots of expenses, but the vast majority of them fell into two categories:  production and shipping.  He got two credit cards, the Visa he used exclusively for his production expenses, and the Mastercard for shipping.  Any other expenses he put on his debit card or wrote checks for, but they were minimal.  Each month, as he paid his credit cards he entered that one expense as his production or shipping expense instead of the dozens of smaller charges that he had been entering.  If you’ve got a business where you can group your expenses like that, this might be helpful for you.  Make sure you save all your receipts in a file with your credit card statements to back up those entries in case you get audited.

If you’ve found a tip that helps you keep your small business bookkeeping simple, please share it here.  Thanks.

Next Page »

• Yahoo Answers from Roberg Tax Solutions

• Archives

  Select Month May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 March 2010 February 2010 January 2010 November 2009

• Recent Posts

  • How Long Should I Hold My Tax Returns? Forever If You Live in Missouri!
  • How To Claim a Youth Opportunities Program Tax Credit for Missouri
  • Is Your 401(k) Helping or Hurting You?
  • The Tonight Show Tax Credit
  • Tax Dilemma: Give your tax debt a second chance!