Posted on June 26, 2012May 31, 2016 by Jan Roberg

How Do I Write of a Bad Debt?

Photo by JamesCohen on Flickr.com

I recently received an email from a client about a bad debt. It’s the second time I’ve gotten that same question in one week, so it seemed like a good idea for a blog post.

Here’s the question: “I’ve had trouble collecting on a $500 invoice and I’m not sure it’s worth any more time and effort dealing with it. Is there a way to write it off and get some kind of tax advantage?”

Now most of my clients, including the person asking the question, are on what’s called a “cash basis accounting” system. If you’re on a cash basis accounting system, it means that you don’t record income unless you actually receive it. Same with expenses, you don’t count an expense that you’re going to pay, only ones that you’ve already paid. In a case like this–you don’t have to make a special line item adjustment for a bad debt–it’s just not counted in your income in the first place. So for this particular client, she doesn’t have to do anything (except fume over the dude who didn’t pay him for his work.)

But some businesses are on what’s called an “accrual” accounting basis–that’s where you count income as soon as it’s billed, not when it’s actually paid. Usually, businesses that have inventories, like stores for example, use an accrual basis method of accounting. With an accrual method of accounting, you’d report income as you billed it. Using the example from above, if the business owner billed the $500, he would have already counted it as income, even though it didn’t actually reach his pocket yet. For a business like that, you’d write the bad debt off as an expense. There’s actually a line right on the corporation forms for “bad debt expense”. While there’s no special line on the Schedule C for bad debts, you would just make your own line item for “bad debts” in part V–other expenses.

And that’s all there is to writing off a bad debt for a business. Now if you’re dealing with a personal bad debt–like a loan to a relative that’s never going to get paid, that’s a whole other story. I’ll write about those in my next post.

Posted on June 5, 2012May 31, 2016 by Jan Roberg

Your Weird Business Idea: And Why it Might Not be So Crazy

Photo by by hoyasmeg on Flickr.com

Sometimes it’s a little eye opening to hear how someone else describes your job. I got that little “aha moment” the other day when my daughter explained my business as, “My Mom does taxes for people with weird businesses.” Now that’s not entirely true–I have lots of clients with perfectly “normal” jobs, but it’s also fair to say that I have a higher percentage of clients with “non-traditional” businesses than some of my peers.
My foray into weird businesses started years ago, back when I was the “newbie” at the big tax company. Basically, the way things worked there was that the senior preparers got their choice of the new clients and I got tossed the dregs–anybody they thought was an oddball that they didn’t want to deal with became my client. And they were pretty picky–artists, actors, exotic dancers, magicians–they were mine. When the circus came to town and one of the clowns called up asking if he could get his taxes done while they were in St. Louis– his call got put straight through to me. He shouldn’t have even been my client (all he had was a W2) but the receptionist heard “circus” and “clown” and obviously the call had to go to Jan. I did the return anyway. How could I resist doing a tax return for a real live clown from the circus? Too cool!

And that’s the thing–these business returns that nobody else wanted to work on–I loved. I got to meet really interesting people and solve some interesting problems. Quite frankly, if you can make your bird disappear in front of a live audience, then I’m inclined to write off the birdseed as a business expense. And while the IRS generally frowns upon claiming “make-up” as a business expense deduction, if you’re purchasing eye lash glue by the gallon and using it to glue your costume in place so that you don’t violate local decency ordinances–well then I think it is an ordinary and necessary cost of doing business.

It doesn’t matter whether you’re a lawyer, you own a flower shop, or you do standup comedy–at the end of the day you want to make enough money to put food on the table and a roof over your head. Business is business and you want to make a profit or you starve.

One of the biggest problems people with non-traditional businesses face is the perception that they’re going to starve if they go forward with that business idea. Let’s face it; if everybody tells you your idea is bad–it kind of puts doubts into your head, doesn’t it? And doubt can kill a business.

What if American Idol was around back in the 60s? Picture Bob Dylan singing his heart out and Simon Cowell saying, “Well Bob, you seem like a nice enough young man and you play the guitar fairly well, but this is a singing competition and you’re just not cut out to be the next American Idol.” (Go ahead, take a minute and insert your own favorite rock icon in there and how they get rejected, it’s kind of fun.) The point is, Bob Dylan didn’t quit and he went on to make an indelible mark on American music. (Okay, if you’re too young to know who Bob Dylan is–check out this link: http://en.wikipedia.org/wiki/Bob_Dylan

So what about you? What’s your idea? Is it crazy? I would have thought Facebook was a crazy idea. How much money did Mark Zuckerberg get out of that IPO? Billions! Are you old enough to remember pet rocks? Pet rocks are the gold standard of dumb, yet profitable, ideas. Someone took plain old rocks, stuck them in a box and sold them as pets. Everybody was buying them, it was nuts! It was a totally stupid idea and I’m sure that guy laughed all the way to the bank. http://en.wikipedia.org/wiki/Pet_rocks

One of the advantages of having a non-traditional business is that you have to be twice as organized to come across as being half as legitimate. This is an asset. An attorney walks into a bank, says he’s an attorney, and everybody thinks, “Oh, this guy knows something.” While an attorney should know a lot about the law–some of them don’t know diddly squat about business. You walk into a bank, say you’re a professional geese herder and you sure as heck better have your ducks in a row (couldn’t resist the pun) if you’re going to get financing from them. (Yes, I know a professional geese herder–real business. Awesomely cool.) No one will take the geese herder seriously if she doesn’t know her stuff. Sometimes that uphill battle gives you the extra edge you need.

The bottom line is–if your business idea is a little strange, it doesn’t mean it’s not good. It could even be great. But you’ve got to do your homework. Know what it is you’re selling, who’s going to buy it, and how you’re going to get the product to the customer. A lot of new businesses get tripped up in the idea that they are “unique” and they don’t fit the basic mold. Here’s a tip for you–everybody is unique; everybody. Here’s my other tip–if you can’t answer the questions, what do I sell, who do I sell to, and how do I get the product to the customer? Then your business isn’t ready yet.

But if you know what you sell, who you sell it to, and how you get the product to your customer–then you’re in business!

Posted on June 1, 2012May 31, 2016 by Jan Roberg

Sole Proprietor: You Gotta Have a Home Office

Photo by f.x.l. at flickr.com.

Right now, I’m sitting in my comfy chair in the corner by the window of my home office and drinking a freshly brewed cup of coffee from my favorite mug. The dog has done her security patrol of the perimeter, deemed me to be safe from the local deer and bunny rabbits, and has settled in for her morning nap. I’m having one of those, “This is why I’m doing this,” kind of moments and it’s nice.

As a tax person who specializes in small businesses, I get asked a lot of questions about different business practices–Should I set up an LLC? I always answer, “That depends.” Should I lease a car or buy it? That depends. Should I set up as a sub-chapter S corporation? That depends. You get the picture. But when people ask me about a home office I always say, “Yes! Every small business owner who files a schedule C should have a home office.” My answer has nothing to do with the comfy chair and coffee either. As usual with me–it’s all about the money.

A home office is good for your tax return. First, you get to use a portion of your living expenses (that you would already be paying anyway) to offset your self employment income. Remember–your self employment income is taxed at 13.2% more than your regular income tax so even something like your mortgage interest-which is already deductible, is a better deduction when it goes against your self employment income. Kaching!

a home office is foThe other reason you want r your mileage. Yes, you read that right–you want the home office deduction to claim mileage. Here’s the deal–let’s say you’re a contractor, you drive to jobs all over town. You probably put close to 20,000 miles on your truck a year for business. You claim that on your tax return and get audited. (Side note: claiming exactly 20,000 business miles on your tax return will get you audited it’s a red flag.) Anyway, you go through the audit process and the IRS disallows all 20,000 miles because you’re commuting to those job sites from your home and commuting miles are not tax deductible. That’s over $3800 worth of tax money that you just lost right there. Add the fines and penalties and you’re well over 5 grand in tax debt.

But if you had a home office–all of that mileage becomes deductible because ou’re traveling from your office to a job site.

But what if I don’t really have a home office? Seriously, you need to set something up. It doesn’t have to be a whole room–it can be a corner of a room (like my comfy chair spot although most people have a desk or table.) You can’t just say you have a home office on your tax return and not really have one. (You’ve heard of fraud, right?) Be be realistic. If you have a small business–you’ve got something–files, or a computer, or make up, or something–and it needs to be put someplace. You need a spot to make phone calls from, pay the business bills, do your adminsitrative work–that’s your home office.

Aren’t I more likely to get audited if I claim a home office? To be honest, I keep hearing that, but my experience says no. The only time I’ve seen home office expenses audited was when they really were wrong and it was part of a broader audit. (Oh yeah, and when I redid those numbers correctly the taxpayer got a bigger home office deduction.) Be honest about it and you’ve got nothing to worry about.

But what if I have a real office in a business building that I go to every day? Can I still have a home office? Yes you can. You make your home office your administrative office. Like I said, pay bills, balance the business check book. I never meet clients in my home office, they always come to my “business office” location. My business office doesn’t prevent me from having an “administrative” office at home.

If you’d like more information about claiming a home office, try this link: http://robergtaxsolutions.com/2010/09/can-you-claim-a-home-office-deduction/ It has more information about the rules and what the IRS is looking for. But seriously, if you’re a sole proprietor, you need a home office.

Posted on May 15, 2012January 14, 2017 by Jan Roberg

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

Good records will prove your income to the IRS.

For some small businesses a simple wire bound receipt book is all you need to substantiate your income.

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.

Posted on January 31, 2012May 31, 2016 by Jan Roberg

1099K – What To Do With It

Photo by Eliazar Parra Cardenas on flickr.com

Did you get a 1099K form in the mail? Are you wondering what to do with it? I was a little confused when I saw the first one because I was told they weren’t going to be happening. Oops. Somebody didn’t get the memo.

Anyway, if you’ve gotten a 1099K – that’s the form from your credit card company that says how much money was charged on credit cards to your business – you’re probably wondering how to report it. If you’ve been looking for information, you may have noticed that there’s conflicting information out there. It’s because there isn’t a definitive “this is what you’ve got to do” answer from the IRS. So here’s how I will be doing it on my returns; I think it makes sense and will be good with the IRS.

You’ll note that the line that says 1099K income doesn’t work when you try to input it into your software. That’s because the IRS won’t be using that line. Your computer’s not broken, the software isn’t broken. The change came sometime in August and the new line was already put into the forms. The IRS decided that since the line was coming back for 2012, they’d leave it there but just blank it out for now. You’re not crazy, it’s the way it was set up.

Even though you don’t get to use that line, you still want to report that income. This is how I say you should do it:

Make a worksheet for your income line. Show the 1099K income reported as one number. Show your other income reported as another. The total should read as the total income for your business.

Here’s an example: let’s say you took in $50,000 in revenue for 2011. You know your total revenue figure. You receive a 1099K that says you were paid $20,000 with credit cards. On your income worksheet you list:

Credit card income reported on 1099K – $20,000
Other revenue not on 1099K – $30,000

Easy enough, right? That’s my recommendation. In fairness, the CPA down the hall says to just ignore the 1099K and report the $50,000 straight. Here’s why I disagree. I do audit work for a living. If this comes back to bite you in the butt, you’re going to be glad you listed the 1099K as a separate line item. It’s not that the CPA dude is wrong, it’s just a covering your behind kind of thing.

If your credit card company is sending you an IRS reporting form, it’s highly likely that they’re sending that same form to the IRS. If the IRS pulls your return up for audit, don’t you think they’re going to ask about the $20,000 on the 1099K? If you’ve already listed it separately, well, that’s an audit letter they might not need to send.

Here’s some other issues you may have with the 1099K:

The credit card company reports the full amount of the charge, not the amount less fees withheld. For example: lets say you charge your customer $300. The credit card company withholds their fees and only sends you $292.50. You’ll have to think about how you’ve been reporting that. Lots of businesses record their revenues as the actual income that comes into the bank – charge less the fees. Your 1099K will report the income as $300–you’ll need to make sure that you expense those fees out.
Same issue with sales tax. Many retailers just record sales and keep the tax separate. Your 1099K will give the whole dollar amount charged – you’ll need to remember to back out your sales tax.
Restaurant owners, beauty salons, anyplace that accepts tips: if a customer charged a tip, you’re going to have to back out the tips paid to your workers. The entire charge is being reported on the 1099K.

Are you starting to see how this could be a bit difficult? Don’t forget places that give “cash back” to customers, that’s going to be another expense you’ll have to remember.

Bottom line – there will be a lot of forgiveness this year in the reporting of your 1099K income. People are going to be confused and the IRS is fully aware of it. But if you’re already getting 1099K statements, you’ll want to do your best to report it correctly now. It’s so much easier to do it right the first time than to be “forgiven” for doing it wrong.

Posted on December 13, 2011May 31, 2016 by Jan Roberg

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

Photo by Derrick Coetzee on flickr.com

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.

Posted on December 9, 2011November 29, 2016 by Jan Roberg

Sub-S Corp Year End Tax Tips

As the year comes to a close, make sure you do everything you can to reduce your tax liability.

Updated for 2016

You read a lot of news stories about year-end tax tips, but you don’t see a lot of things specifically targeted at Sub-S Corporations, and there’s nothing out there for the single owner S Corporation. It’s kind of sad because most people with Sub-S Corps are set up that way for the tax advantage. If you own a Sub-Chapter S Corporation, then you need to make sure that you maximize your deductions. These tips are especially for you:

First, and most importantly, if you’ve got a profit this year, you want to make sure that you are paying yourself some type of payroll. This is one of the most common mistakes that S Corps make. The point of having an S Corp is to protect some of your income from self employment taxes. (Notice I said some, you can’t protect yourself from all self employment tax.) S-Corporaton owners need to pay themselves a salary. In the early years of a business, there’s often a loss and the salary isn’t important, but once the business is in the profit side, the owner should be paying a wage that is commensurate with what he or she’d be earning if he worked the same job for someone else. If you don’t do this, the IRS can come back and assess self-employment tax on 100% of your S corp profit. That would completely defeat the whole purpose of being an S Corp, so that’s the first thing you want to handle.

Reimburse yourself for your employee expenses: Write yourself an expense report and have the S Corp write you a check. For example: let’s say you took a business trip for a convention and your travel expenses cost $1000. You paid it out of your own pocket because it was easier at the time and you just figured that you’d write it off on your taxes later. But that’s a stinky idea. Here’s why:

Even though you are the owner of the business, you are also an employee. As an employee of the S corp, you would put the $1000 travel cost on your schedule A as an employee business expense. When you do it that way, the expense would be subject to the 2% limitation rules. Meaning, you can only deduct expenses that are over 2% of your adjusted gross income. The higher your income, the smaller the deduction you get to claim. If you pay Alternative Minimum Tax, or don’t itemize your deductions, you could even get a zero tax benefit from putting it on your schedule A. So putting the expense on your schedule A gives you a much smaller tax benefit than if it’s on your S Corp return.

When you do an expense report, and reimburse yourself through the business you get 100% of the allowable business deduction. Isn’t that much better?

Next up: Pay your health insurance through your S Corp: This is a little convoluted, but stick with me. If you claim this deduction, you want to do it right. As an employee of your S Corp, you can’t claim the self-employed health insurance deduction like you could as a sole proprietor. Your health insurance would go on your schedule A subject to a 10% limitation before anything could be deducted (for most people that’s a zero deduction.) We don’t like zero deductions! So you have to do the S-Corp health insurance dance. It goes like this:

Your S Corp pays your health insurance, then it comes to you as a taxable fringe benefit. When you do it this way you get to deduct the cost of your health insurance on page 1 of your tax return (just like a sole proprietor)—a much better place to put a deduction. You do not pay FICA on your health insurance.

So let’s say your wages from your S corp are $10,000 and your health insurance is $5,000. In box 1 of your W2, it would say wages $15,000. In boxes 3 and 5 – the Social security and medicare wages, it would say $10,000. You would then deduct the $5,000 that you paid in health insurance under the self employed health insurance line. (Line 29 in the 2015 return.) Yes, I realize that this sounds like a cockamamie way to do the accounting for your health insurance–but those are the IRS rules. ‘Nuf said, right? And while I realize that this sounds crazy, that’s really how you do it.

Another expense you don’t want to miss out on is to reimburse yourself for your home office deduction: It’s hard to claim a home office deduction on a Sub-S corporation. Like other employee expenses, it would go on your Schedule A and be subject to the 2% limitation rules like any other employee business expense. Many accountants won’t even touch a home office for a Sub-S Corporation.

Some people try to charge rent to their S Corps for their home office, but that’s just moving your income from one taxable entity to another so you don’t really save anything on you taxes that way either..

What you want to do is reimburse yourself for your home office deduction in a fully accountable plan. That’s a phrase that you want to remember: fully accountable plan. Prepare a form 8829 Home Office form like you were doing it for a sole proprietorship and use that report to determine how much you should reimburse yourself for your home office. Remember, it’s a reimbursement, not a rent payment. It reduces taxable income to the company, but it is not taxable to you because you have “accounted” for the expenses. For more information about home office deductions, you might want to read this post: How to Boost Your Home Office Deduction

If you’re interest in more year end tax tips, you might also want to check out: Year End Tax Tips for Tiny Business Owners.

Posted on December 6, 2011November 27, 2016 by Jan Roberg

Year End Tax Tips for Tiny Business Owners

Planning ahead on your taxes could save you money!

Updated for 2016!

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 have a Sub-chapter S corporation, I’ve got some different tips here: Tax Tips for Sub-chapter S Corporations

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 some ways to reduce your excess income 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. It used to be if you had an LLC, you paid FICA for your kids but that changed in 2011 so even if you have an LLC, you don’t pay FICA on your children’s wages. 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: 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 next year and write it off on this year’s 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: 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. I always like to be cautious about credit card spending–hate those bills, but it’s a good solution for some businesses.

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?” 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 to do that. 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 business 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.

Posted on December 2, 2011May 31, 2016 by Jan Roberg

Tax Tips for Daycare Providers

Photo by Angela Vincent on flickr.com

First things first, let’s tackle the big “problem” many daycare providers have – licensing. The IRS demands that you report all of your daycare income, but if you’re not licensed, you don’t qualify to claim any of the deductions. Now the whole licensing thing varies by state. Here in Missouri, you do not have to have a daycare license if you care for four or fewer children who are not related to you. If you’re exempt from licensing requirements for your state, then you’re qualified to claim all of the federal tax deductions relating to your daycare business. Different states have different rules. Just across the river in Illinois, the licensing requirements are much stricter. Be sure to look up the rules for your state before you claim daycare deductions.

Your daycare income will go on a form called Schedule C which will be part of your regular 1040 tax return. You are required to pay self-employment tax on your daycare income; that will be 13.3% for 2011, generally it’s 15.3%. Self employment tax is in addition to your regular income tax, so you can see why claiming your expense deductions can come in kind of handy.
The first, and probably the biggest, daycare deduction is for the business use of your home. That’s going to go on a Form 8829 and it’s going to be linked to your Schedule C. You won’t be able to deduct all of your rent, utilities, and expenses, but you’ll be able to deduct a portion of them as a percentage of how much of the home the kids have access to and how long you’re open. Kids put a lot of wear and tear on your home so definitely take advantage of this deduction.

Another big expense for many daycares is food. You can deduct as a business expense 100% of the cost of the actual food the kids you care for eat. If you’re doing your taxes yourself when you’re looking at the actual Schedule C form, there’s a section for “meals and entertainment” –you don’t want to use that line. That only gets counted as a 50% expense – that’s for sales people taking clients out to lunch and stuff like that. You’re going to want to put the food for kids on a separate line in the “other” expenses category. Call it “food for kids”. (Okay, that seems pretty “duh” but I didn’t have a better way to say it.)

If you get reimbursements under the Child and Adult Food Care Program of the Department of Agriculture, that’s not taxable unless you get more money than you actually pay out for food for the kids. Usually, you’ll get a 1099 showing you received a payment. If that’s the case, you must report it as income on your Schedule C, but then you’ll deduct the cost of food in the expense category. (If you get a 1099 and don’t show it as income, you’ll get a nasty IRS letter—that’s why you want to show it on the Schedule C even though it’s not supposed to be taxable.)
If you’re deducting food, keep separate receipts for your daycare food from your family food. (Right, I know, that’s not easy.) But remember, you can’t take a deduction for the food you feed to your own family. Now let’s get real: you just shop and buy groceries for your daycare kids and your family in one fell swoop don’t you? (Okay, that’s what I’d do, and I’m one of those anal retentive accountant types!)

Here’s how you solve that problem. The IRS has official “snack and meal rates”. Granted, they haven’t been updated since June of 2010 but I’ll work with what the IRS gives me. The rates are as follows:

Breakfast: $1.19
Lunch: $2.21
Dinner: $2.21
Snack: $0.66

Alaska and Hawaii have different rates:

Alaska: $1.89, $3.59, $3.59, $1.07
Hawaii: $1.38, $2.59, $2.59, $0.77

So let’s say you take care of Oliver 5 days a week. His parents take care of breakfast and dinner, but you do provide lunch and a snack every day. Oliver stayed home two weeks over Christmas and one week over Easter, other than that you’ve had him all the other days. You take $2.21 for lunch and add $0.66 for lunch and that makes $2.87. That’s what you spend on Oliver’s food on a daily basis. You multiply that by 5 days a week and get $14.35. You multiply that by 49 weeks (there’s 52 weeks in a year and you didn’t have him for 3 weeks) and you get $703 spent on Oliver’s food that you can deduct from your income.

Granted, you probably spend more than that on your daycare kids, but at least this gives you something to work with, especially if you haven’t been keeping good records.

Don’t forget the other deductible things either: money you spend on toys and games, and extra costs of laundry and cleaning supplies. If you take the kids on field trips, be sure to keep track of your mileage and the cost of admission to events. And remember that if you’re reading magazines to help you with taking care of the kids, those can be a business expense too: things like Family Fun Magazine that give you tips on things to do with kids, that’s work reading.

Taking care of other people’s children is hard work. You deserve every penny you earn. My job is to help you keep it.

Posted on November 1, 2011May 31, 2016 by Jan Roberg

Small Business Owners: Are Your Workers Employees or Contract Labor?

Photo by Tess Aquarium on Flickr.com

The biggest issue you’re going to face as a small business owner this year is whether or not the people you hire to work for you are employees or contract labor. This is such a hot topic with the IRS right now that they’re currently running a Voluntary Compliance Program—giving businesses a chance to “change their minds” about how their workers are classified. It’s called the Voluntary Classification Settlement Program (VCSP).

Basically, with the VCSP, if a business has been calling workers contract labor when they really should have been labeled as employees, you get a chance to go in and change your employee’s status before the IRS nails you instead.

So how do you know if you’ve got an employee versus a contract labor situation? That’s a really tough call sometimes and the law isn’t very clear. It’s all based on what’s known as “common law,” which means the issues have been settled in court cases instead of legislation spelling out the rules for us. The basic common law rule that defines an employee is that the service recipient (in English that’s the boss) has the right to direct and control how the service is performed.

Let me use an example: let’s say you hire me to do your taxes for you (Good idea, actually). In this case I would be contract labor to you. You will tell me what you need done, and supply me with the information to do it, but I’m going to use my software programs, my office, my stuff in general. I’m going to do it my own way, when I want to, and wear my pajamas at work if I want. That’s contract labor. (By the way, I never wear pajamas to work but I sometimes wear a St. Louis Cardinals jersey.)

But I used to be an employee at a large tax company. While I was working there, I used my boss’s software, I had certain hours that I had to be in the office, I arranged the paperwork for the files exactly as I was instructed (with the staple in the top left hand corner horizontal to the box in the big numbers in it) etc., etc.. My Cardinals jersey would have been a dress code violation and I would have been sent home. I could have even done your taxes while I was working for that company, but you weren’t really hiring me, you were hiring that company that I worked for.

You see how those two examples are different? Even though there isn’t an absolute, defining definition of what makes a person an employee, it’s sort of like Justice Potter Stewart’s famous quote about obscenity, “…I know it when I see it.”

I work with a lot of clients who are classified as 1099 contract laborers but should be labeled as employees. Most of them will never file a complaint with the IRS for fear of losing what jobs they do have, so employers have been pretty safe up until now. But the IRS isn’t stupid (Yes, I put that in writing). If I can look at a 1099 MISC and figure out that the person is really an employee instead of contract labor, the IRS is able to set up a computer screen and they’re going to be able to target suspicious 1099s as well. Did I mention, they’ve been updating their equipment? Faster, stronger, better—it’s like the $6 million man but more expensive.

So how do the people you hire stack up? If you’re paying people as employees, and properly paying your withholding taxes, then you’ve got nothing to worry about. If you’ve got employees but you’re paying them as contract labor it’s time to take a good hard look and decide if you’re doing the right thing. Using the common law test of “direct and control” are these people really contract labor or should you reclassify them as employees? If they should be called employees, you’ll want to find out more about the Voluntary Classification Settlement Program.

The VCSP has a whole list of requirements and there will be costs attached. Although that’s a little scary, it’s much better than the costs associated with an audit over your worker classification. To find more information about the VCSP, here’s a link to the IRS website: http://www.irs.gov/businesses/small/article/0,,id=246013,00.html

It’s perfectly legal to hire contract labor—it’s a very normal, regular part of business and many businesses couldn’t function without it. When you cross that line, when you’re really hiring employees but you’re just calling them contract labor to avoid paying payroll taxes– that will get you into trouble.