Tag: small business

Posted on by Jan Roberg

Filing Your Uber Driver Taxes

If you’ve been earning money driving an Uber in 2021, here’s some things that might help you when filing your taxes. 

Whether you’re doing them yourself, of paying someone to prepare your tax return for you, the most important thing you need is your Uber statement.  Here’s an example of one from the 2020 tax year. 

As you can see, it shows the gross payment, the expenses, and the net payout.  Also, what’s really important is that it shows the miles that you drove.  You really need that mileage number for your taxes. 

There’s a second page to that statement and it looks like this:

This is really helpful because it breaks down what those expenses were.  It also breaks down any additional compensation that you received.  You’ll see in this example that the taxpayer received $704.40 in incentives and $1.77 in other miscellaneous payment. 

You would think that Uber would send out a 1099NEC for the $9,622.15 – the gross payment that they reported on page one – but they’re a little different.  They only give you a 1099NEC for your Additional Earnings.  In this case, the taxpayer got a 1099 for the $706.  She still has to report the full $9,622 of earnings though. 

So how do you do that? 

For the vast majority of people, you’re going to be doing this on a form called Schedule C.  And it’s just another form that’s a part of your regular 1040 tax return.  You don’t file a separate return for your Uber income, it’s all combined with your main taxes. 

Here’s a link to get the form: https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Ideally, you should be using  tax software to prepare your taxes.  I’m showing you the forms and where things go so that you know what it’s supposed to look like when you’re done. 

You see that Box B?  Enter code from instructions?  If you’re an Uber driver (or Lyft, or Door Dash, anything like that) your code is 485300 for taxi, limousine and ride sharing services.   

One line F it asks your Accounting method:  you’re going to pick cash.

Line G – did you “materially participate” in the operation of this business in 2021?  Well Yes – if you drove, you participated.

Line H – you just check that box if it’s the first year you’ve done it.

Line I – Did you make payments that require you to issue a 1099?  Probably not.  Uber drivers are solo workers.  So you’re probably not issuing any 1099s.  If you’re an Uber driver who’s hiring other people to work for you, you should probably check with a tax professional.

Now we’re into the Income portion of your return.  Gross receipts.  That’s easy – It’s right on the Uber statement.  Using the example from above, you’d put $9,622 on line 1. 

A note about 1099s and computer software:  If you get a separate 1099 from Uber like the taxpayer in the example, you’re going to need to enter that 1099NEC as a separate document.  In that case, you’d enter the Gross Trip Earnings of $8916 on the Schedule C in your tax software and the  software should also send the 1099 income to the Schedule C, so you still wind up with $9,622 on line 1.  The nice thing is, the Uber statement breaks it out for you.

Now in the expense portion of the Schedule C – probably the most important part is your car and truck expenses which is line 9, but I’m going to skip over that for a minute and get the easy part first, which is your other expenses.  They would go on line 27a. I like to list them out separately, but that’s just me. I also round to the nearest dollar, the IRS doesn’t want to look at pennies and most tax software won’t even acknowledge cents.

A note about Cost of Goods Sold:  As an Uber driver, you’re selling a service, not a product.  You’ll leave the whole of Part III Cost of Goods Sold section blank.

So now you’ve got your main expenses in.  It’s time to add in your mileage. Mileage goes on page 2 of your Schedule C in Part IV. Let’s go over those questions one at a time.

Line 43: When did you place your vehicle in service for business purposes?  It means, when did you start driving for Uber that’s all that means. 

Line 44:  Of the total number of miles your drove your vehicle during 2021, enter the number of miles you used your vehicle for:

a.  Business

b. Commuting

c. Other

You have the easy answer to a Business miles – because Uber gives it to you right on the statement.  In this example, it was 6,992 miles.

Line B – you leave blank because really for Uber you’re not commuting.

Line C other – this seems to be the hardest one for most people.  How many non-business miles did you put on the car this year?  People often ignore this, but it’s important.  And if you ever get audited, the IRS will want to know.  In this example, the person only put 8,632 miles on their car for the entire year.  So we’d put 1640 down for other.  (8,632 miles for the year minus the 6,992 miles driven for Uber.)

And then you’ve got the Four Questions.

45. Was your vehicle available for personal use during off-duty hours?  Yes or No. 

46. Do you (or your spouse) have another vehicle available for personal use?  Yes or No

47a.  Do you have evidence to support your deduction?  Yes – because Uber gave you evidence.

47b.  If yes, is the evidence written?  Yes – because it’s written right in that Uber document. 

Now if you’re using tax software, it will compute the auto expense for you and automatically put it on line 9.  But if you’re doing this by hand, you’d take the 2021 mileage rate, which is 56 cents per mile, and multiply it by the 6,992 business miles and you get $3,915.52 – which you’re going to round up to 3916.

So, in this example, after you’ve taken out your expenses you’ve only got $2,684 of taxable income. 

(Gross income of $9,622 minus auto expenses of $3,916 minus other expenses of $3,022 equals net profit of $2,684.)

That number will flow onto line 3 of the Schedule 1 which flows onto line 8 of your regular 1040.  (Don’t be intimidated by these line numbers and schedules.  Use a tax software and it should all be automatic.)

The part that gets a little hinky is the Self-Employment tax.  Once again, the software should compute it for you.  I’m just telling you so that you know to look for it.  Self-employment tax is computed on Schedule SE.  If you’re doing this by hand, your net profit goes on line 2, then literally you’re following the instructions line by line until you get to the bottom of the page. 

The quick and dirty check to make sure the math is right is you take your net income and multiply it by .9235, then multiply that by .153.  That’s going to be your self-employment tax. That goes on line 12 of Schedule SE and on line 4 of your Schedule 2 and that flow onto line 23 of your 1040.  In this case, the self-employment tax is $379.  (2684 times .9235 times .153 = $379.)

And there’s one more thing.  I promise, this isn’t too bad.  You get a deduction for ½ of the self-employment tax that you have to pay.  We don’t want to miss any deductions right?  So if the self-employment tax is $379, half of that is $190 (because we rounded up).  It’s going to go on line 15 of Schedule 1 which will flow to line 10 of your 1040. 

I’m talking about a lot of forms and Schedules here and that sounds intimidating, but don’t let it scare you.  Your tax software should generate everything.  I’m mentioning the forms so that you know what to look for.  If you’re using to doing just a straight 1040 with no extra schedules, it might seem weird to have all these other pages print out.  But a lot of the forms only have one or two items on them. 

If you’re filing a return with Uber income on it, in addition to your 1040 tax form you should also have:

Schedule 1-Additional income and adjustments to income

Schedule 2-Additional taxes

Schedule C – Profit or loss from business  (This is the heart and sole of your business taxes.)

Schedule SE – Self-employment tax

Here’s a link so that you can see how they’d look using the numbers in the example. https://robergtaxsolutions.com/wp-content/uploads/2021/12/2021-Fake-Uber-Driver-1.pdf

I always recommend talking to a professional to do your taxes.  But I also recognize that not everyone can afford it.  Hopefully, this can help you with your Uber Tax Return. 

FAQs

I won’t have time to answer your individual questions on this, but I do have some questions that people ask me all the time so I thought I’d address them here.

Q: I drove more than the mileage it says on my Uber statement. Can I claim that mileage as well?

A: Yes. You’ll just need to document it with some type of a mileage log. I like the MileIQ app, but you can use whatever works best for you. (I don’t get paid by Mile IQ, I just like their app.)

Q: I paid a lot of money for my gas and car repairs. I want to claim those expenses. Can I add those to my mileage?

A: The mileage expense includes your gas and repairs. It’s an either/or type of deduction. If you prefer to claim your actual expenses, that’s fine. Just make sure you document them with receipts. Remember, the amount of your actual expenses you can claim is limited by the percentage you used the car for business. It’s also important to remember that if you claim your actual expenses the first year that you use a vehicle – then you can NEVER claim your mileage in a future year.

Q: I bought a new Lexus for $40,000 and I want to write it off as a business expense. Can I do that?

A: That’s outside the scope of this blog post. (There’s a whole lot of issues there.) Generally, I’m not in favor of it, but this is one of those times where if you want to write of the purchase of a new vehicle, it’s worth the money to get professional tax help.

Q: I have other expenses besides my miles and what’s on my Uber statement. Can I claim those?

A: Yes. Some extra expenses might be bottled water or snacks for your passengers or your cell phone usage. Normal car maintenance would be included in your mileage, but one driver I know had to pay to have her car cleaned after a drunk passenger threw up all over her back seat. I wouldn’t consider that to be a “normal” auto expense so I included that as an additional business expense on her return.

Q: I didn’t just drive for Uber, I also drove for Lyft and Door Dash. Do I need a separate Schedule C for each job?

A: No. You can combine your Uber, Lyft and other driving jobs onto one Schedule C because they’re all in the same category. Now, if you drove for Uber and moonlighted as a DJ or some other completely unrelated job, then you’d want to prepare a separate Schedule C for that business.

Posted on by Jan Roberg

S Corporation – Computing the Tax Savings

 

Run the numbers.

When deciding if you should elect Sub-chapter S corporation status for your company, you need to run the numbers first!

 

Electing to be taxed as a Subchapter S Corporation instead of as a Sole Proprietor could mean big tax savings for you as a small business owner. Notice I said could–because it’s not always the case. It’s really important to run the numbers – all the numbers – and do a comparison so you can make an informed decision.

This post is going to be a little technical. I apologize for that up front. I’m going to try to keep it in plain English though, because even if you can’t run the numbers yourself, you need to see what I’m talking about so you can discuss this with your accountant.

Here’s an example where I think choosing to be a Sub S Corporation is the right choice for a business owner: Jack Sparrow is a single, self employed pirate with net self-employment income of $100,000. (Yes, Johnny Depp was on TV last night.)  Jack has no other income to report on his tax return.

I ran the numbers for 2014 and it shows the total tax on the 1040 return to be $30,680. ($16,550 for the income tax and $14,130 for the self employment tax.)

That’s a lot of taxes!

But what if Jack were to set up a Sub Chapter S Corporation? He’d have to set himself up to receive payroll–(that’s part of the deal with an S Corporation, you have to pay yourself a salary) but the rest of his income would be taxed at his regular tax rate (they call that ordinary income) instead of at the self employment rate.

So for my example, I set Jack up with a payroll of $40,000, his S Corp income is $56,340 (not $60,000 because he’s paying some payroll taxes that are deducted.) So when I run the taxes for that, I’m showing that his total tax on his 1040 is $17,400.

Right here you’re probably going, “$13,280 in tax savings per year? Awesome! Sign me up now!”

But it’s not that simple. Because remember, part of being an S Corporation means that you must set up a salary for yourself and pay the payroll taxes. If you don’t include the cost of those payroll taxes in your calculations, you’re not giving yourself a true comparison of the total tax cost.

For Jack’s example, we set up a payroll for $40,000. From his $40,000, Jack will have $3,060 withheld as his employee share of FICA-that’s the Social Security and Medicare tax that gets withheld from everyone’s wages.  Also, remember when I said his S Corp income was $56,340 instead of $60,000? That’s because as an employer, Jack also had to pay an additional $3,060 for the employer’s share of FICA, and I added another $600 for state and federal unemployment taxes. The unemployment tax will vary by state but $600 is a reasonable estimate.

When you add those payroll tax costs to the 1040 tax cost, Jack’s total S Corp taxes are now $24,1120. That’s still a big tax savings of $6,650! In this case, of course I would recommend that Jack go for the S Corp.

Just for fun, what if Jack were offered a pirate job as a wage earning position? All W2 income with no self-employment at $100,000 per year? Just running the numbers straight like that,  his 1040 taxes would be $18,341 and his FICA withholding would be $7,650 so his total tax cost would be $25,991 which turns out to be $1871 more than his S Corp taxes.

Now in real life, there would be other considerations – like health insurance and other fringe benefits that might make Jack want to jump at that wage position.  But I left all of that out for this comparison.

The chart at the bottom of the post shows the numbers for Jack’s case side by side so you can see how I got to my numbers, in case you want to replicate them for yourself.

So, how do you determine if YOU should have an S Corporation instead of a sole proprietorship? You look at these numbers and it’s pretty persuasive. If you could save $6,000 or more a year, who wouldn’t do that? But taxes have a lot of moving parts these days. Maybe you have investment income, maybe you have wages from another job. Maybe you have deductions that are allowed on a Schedule C that aren’t allowed for an S Corp. Healthcare costs can also make a difference and so can your retirement savings goals.

If you don’t run the numbers fully through a tax program, including the payroll tax costs, you could actually lose money going with an S Corp. I ran a scenario the other day – this is a real person’s actual numbers: her tax savings by converting to an S Corp–before adding in any payroll taxes, was only $1,338. She’d spend that much in accounting fees for the payroll and additional tax return. Adding in the FICA and employer payroll taxes we send her to the loss column. I never would have known that had I not sat down and ran the numbers based on her whole situation.

While that taxpayer’s situation was unique, your situation is also unique to you. Before electing to be an S Corporation, make sure you have all the facts and run all the numbers.  You’ll be glad you did.

 

Here’s that chart I promised you:

Comparison of wage, vs. self-employment, vs. Sub S Corporation taxes

Comparison of wage, vs. self-employment, vs. Sub S Corporation taxes

Posted on by Jan Roberg

Should Your LLC Be an S Corporation?

When should you be an S Corp?

If your small business has reached the point where your self employment taxes are really hurting you, choosing an S Corporation status might be the answer to your problem.

 

If you own a single member LLC, the IRS considers that to be a “disregarded entity.”  That basically means there’s no such thing as an LLC tax return.  So, if you don’t make an “election” to taxed some other way, you’re taxed as a sole proprietor on your 1040 personal tax return.  That means, you not only pay income tax on your LLC income, you also pay self employment tax on top of it.  Ouch!

 

But as a disregarded entity, you may make an election to be taxed as an S corporation (or even a C corporation if you want to) instead of being a sole proprietor.  So how do you know you might be ready to be an S Corp?   Here’s my top three criteria:

 

1.  Steady net income.  If you have a loss on your business, that business loss can offset your other income on your tax return.  One of the big benefits of an S corp is to reduce your self employment tax.  If your business has a loss, you’re not paying self employment tax anyway so the S corp status wouldn’t provide much benefit there.  A good rule of thumb, but certainly not a deal breaker, is to have a net income of about $50,000 to make the tax savings be greater than the additional cost of separate tax returns and payroll expenses.  I work with business that have losses and still are S Corps.  The $50K income isn’t a requirement, it’s just sort of a break even point on costs.

 

2.  Separate Employer Identification Number (EIN)  and bank account.  If your business is set up as an LLC, you should have a separate EIN and a bank account for your business already.  I’m always surprised by people who skip this step, but it’s important.  You can get an EIN number for free, online.  It takes about 5 minutes.

 Learn more here.

And you really need a separate bank account.  You don’t want to co-mingle your business funds with your personal money.

 

3.  Discipline to make monthly payroll deposits and quarterly reporting.  One of the requirements of an S Corporation is that the owner has to pay him or herself a reasonable wage.  That means, even if nobody else works for you, you still need to write yourself a paycheck and pay yourself like an employee.  If you’re already making your quarterly estimated tax payments–you’re probably able to handle doing a payroll.  If you’re scrambling every year, you can’t keep on schedule etc, then I say don’t do the S corp.  Not being up to date on your estimated payments can be a problem, but the IRS can get really nasty if you’re behind on payroll tax deposits.

 

If you have no discipline, and your business easily has enough revenue to handle the payments–and still want to do the S Corp, then pay the extra money to hire a payroll company to do it for you.

 

Setting a reasonable wage is usually the most difficult thing to determine.  You want to go by what a person in your line of work would get normally get paid, that’s not always easy to figure.  You should probably have your wage be at least 1/3 of your net income unless you can document that people in your line of work usually make less.

 

Now, these are just my guidelines.  There’s really no “set in stone” criteria for S Corp status.  And really, before you make any change to the status of your business, what you really should do is run the numbers.  Sit down with your tax professional and – using the most recent tax return – run the business numbers as if you were an S Corp, a C Corp, and as a sole proprietor.  Don’t forget to include the costs of your payroll taxes when running the numbers.

 

Everybody’s situation is a little different.  Compare your numbers side by see to see if changing to an S Corporation makes sense for your small business.  That’s really the best way to tell.

 

 

 

Posted on by Michael Siebert

Why Bank Reconciliations are Absolutely Necessary for Your Small Business

Great Depression Bank Runs

 

Why doesn’t my QuickBooks balance match my bank balance?

Whenever you issue checks to vendors, there is no saying how long it will take the vendor to deposit the check into their bank account.  This represents a “timing difference”.  For instance, if you issue a check on March 29th, and the vendor doesn’t deposit the check until June 29th (For whatever reason) there is a significant timing difference between when this check was entered into your accounting software and when it effectively hits the bank statement.  Timing differences are the main reason why your QuickBooks balance doesn’t match your actual bank balance and they happen quite frequently.

 

Your QuickBooks balance, assuming you are on top of your data entry duties, is a more accurate picture of your bank balance alone as it takes into account the floating checks and already subtracts that cash from the bank account balance. It also accounts for deposits in transit (deposits that have not yet hit the bank statement).  Timing differences won’t exist however, if your checks and deposits clear within the final days of the month.

 

The goal of a reconciliation is not to find the discrepancy between your accounting software balance and your bank balance because of timing differences.  These are normal discrepancies.  The goal is see if this discrepancy is a result of error from the accounting system or error from the bank (Yes-sometimes the banks screw up too!)

 

Think of it as a way to verify that your cash from your company books is consistent with your bank statement records.  Since the ability to acquire and obtain cash is the beating heart to any business, small or large, the cash account, or multiple cash accounts deserve specific attention.  The phrase “Cash is King” has been merited all these years with great reason.

 

The Bank Statement Formula

Consistent with any bank statement is the formula used to determine how we get to the ending balance from the beginning balance.  The formula is stated below:

= Beginning Balance
+ Deposits and other Credits
–  Withdrawals and other Debits
–  Checks
–  Service charges
= Ending Balance

This is the formula that is being used to determine the reconciliation difference.

 

Reasons to do bank reconciliations

  1. Internal control – tracking the inflows and outflows of cash is crucial in determining if someone with check writing authority is abusing their power.
  2. Determining if there are missing transactions—the bank reconciliation helps determine that all of your cash transactions are in your accounting system.
  3. To see if companies are taking advantage of you—Sometimes humans make mistakes and might run your card twice on accident but sometimes it’s no accident.
  4. Discovering bank errors or accounting software data entry errors
  5. To give a true accurate depiction of the money in your bank account.  For example, take a property management company.  They may manage properties in Florida, California, Missouri, and Illinois.  With hundreds of checks being written and mailed, it is absolutely crucial to know what checks are still outstanding because these vendors can deposit the check at any time.  Some vendors take months to deposit checks (I’ve seen it before and I’ll see it again.)

So there you have it.  Now that you know why you should do a bank reconciliation, read my next post about how to do a bank reconciliation.

Posted on by Jan Roberg

Understanding Your Small Business Balance Sheet

(Balance Sheets for Dummies)

 

Snowy Playground

Photo by elycefeliz at Flickr.com

 

I learned how to do balance sheets from an ex-Israeli special ops soldier turned CPA.  (Go ahead, take a minute and morph Judd Hirsch and Arnold Schwartzenegger, it’s more fun than math.)  Although my balance sheet training was a little “intense,” this is just a brief overview to help you understand your balance sheet.

 

The basic accounting equation (there I go with the math, don’t get scared off yet)  for a balance sheet is:

 

Assets = Liabilities + Owner’s Equity

 

Assets are the good things like cash and equipment.  A more politically correct accounting definition is “Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”

 

Liabilities are the stuff you owe like credit card bills and loans.  You could also say liabilities are “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

 

Owner’s Equity is what’s left over (assets minus the liabilities).  On your tax return, owner’s equity is referred to as “Retained Earnings.”  Another technical definition is “the residual interest in the assets of any entity that remains after deducting liabilities.

 

So let’s take a simple balance sheet.  A small business runs on a cash basis.  It has no equipment and no debt.  There’s $2,000 in the bank account.

Assets                   =             $2,000 cash in the bank

Liabilities              =             $0

Owner’s Equity                 =             $2,000

 

In this simple example, as cash comes into the company, the owner’s equity goes up.  As cash goes out, the owner’s equity goes down.

 

Here’s the important part: When the owner takes the money out of his company for his own use (which he does because it’s his money) the owner equity in the business goes down because he took the cash out of the company.

 

For example:  Sarah and Peggy have a Partnership.  They started the year with $2,000 in their checking account.  After expenses, they netted $100,000.  Now if they kept all of that money in the company, their balance sheet balances would read:

Cash:                     $102,000

Owners Equity:                 $102,000

 

But Peggy and Sarah like to eat and pay their rent so they each took $45,000 out of the company (that’s $90,000 altogether) so at the end of the year, the balance sheet balances would have looked like this:

Cash:                     $12,000

Owner’s Equity:                $12,000

 

This is important to know because many software programs will just plug a number into owners equity to make it tie out.  Sometimes the plug goes into cash.  If Sarah and Peggy didn’t check their balance sheet, in a few years it could look like they have half a million dollars of equity sitting in their company that’s just not there.   I’m not joking about that.

 

I once had to amend ten years worth of tax returns for a business owner trying to sell his company.  His balance sheet had $2 million dollars worth of equity but the figure should have been closer to $200,000.  For ten years his tax preparer had let the program “adjust” his balance sheet.  The taxpayer didn’t know any better (and clearly that preparer didn’t either.)  Sadly, the owner had quite a bit of a “smack down” when he tried selling his $2 million dollar company that was really only worth $200,000.

 

That’s why it’s so important to be able to read your balance sheet.  If you own a business, you need to know what’s on there and why it’s there.

 

My next post will add some common balance sheet items so you can see a more complete picture.   The bottom line is—your balance sheet should tell you what your company is worth.  If the “owners’ equity” doesn’t jive with what you think your company is worth—then it’s time to start asking questions.

Posted on by Jan Roberg

Top 5 Reasons Your Tiny Business May Not Be Doing As Well As It Could Be

Take care of your business

                                         If you don’t take care of your tiny business, it’s like flushing money down the toilet.

The government defines small businesses as companies making less than $7 million a year or having fewer than 500 employees.  The companies I work with generally have three or fewer employees and only dream about seven million dollar revenues.  I call these “tiny” businesses.

 

As tiny businesses, we’re generally ignored by the government.  When you hear something in the news about Congress passing legislation to “help” small business owners—they don’t mean us.  That’s okay with me.  We tiny businesses can get into enough trouble all by ourselves.  Here are my top 5 picks for tiny business problems.

 

1.  Not working around Roadblocks.   Every tiny business has roadblocks; you need a license, or special training or there’s a law change.  No matter what type of business you have, there will be roadblocks.   The successful tiny business finds a way to work through or around them.

 

True story:  There was a small business owner who was basically ready with her business; the only thing left was to get her web-site up.   She had asked me for some help.   Mind you, the only thing stopping her business from getting off the ground (at least as she explained it to me) was her website.  I gave her names of people who could make her website for a fee and  I also gave her free website resources as budget was an issue for her.

 

Six months later we met again.  She still didn’t have a website.  The work was stalled because she couldn’t find the “right” art for it.  She wanted a picture of a compass.   She had hired a high school kid to draw it for her for free.  He wasn’t done yet.  Okay—go to Google images, type in compass and you get hundreds of pictures.  Granted, she’d probably have to pay to use one of those pictures but her “free artist” hadn’t gotten the work done in six months.

 

And letting a high school kid that you’re not even paying be the reason your business hasn’t gotten off the ground?  That’s ridiculous.  Now in fairness, the compass idea was a cool idea and it tied to her business theme.  But—it wasn’t necessary to her business.  She could have already been up and running for 6 months while waiting for this art that she wanted so badly.

 

Sometimes, we’re our own worst enemies.  If you’ve got a roadblock that’s holding your business back get a second opinion.  There’s usually more than one way to skin a cat.

 

2.  Not knowing who your customers are. If you own a business you’re selling something.   The tough question is who’s going to buy it?

 

I once knew a woman who had started a business making bows.  She had made hundreds of bows, invested in a bow making machine and lots of expensive ribbons.  She hadn’t sold a single one.  She really liked making bows so that was what she was doing with her time, but she hadn’t figured out who would buy them.  At that point, that wasn’t really a business it was just a hobby. You have to have customers, someone willing to pay for what you’re selling to be a real business.

 

3.  Partner problems.  Recently I was asked, “Why do you hate partnerships?”  It was a fair question, I was being pretty negative.  The truth is, I don’t hate partnerships, I’ve just had to dissolve too many of them.  Partnerships get started because two or more friends decide they want to go into business together.  Good friends (or spouses) do not always make good business partners.  If there is a disagreement—how do you settle it?

 

I recently sat down with a couple that had a pretty good business plan and they seemed to be a good choice for a partnership.  But I was asking a lot of questions and I’m glad I did.  It seemed that Adam and Eve each had two income streams that they were thinking about for the partnership—sales of widgets and sales of thingamajigs.  Adam was going to cut back on his widget sales to pursue the thingamajig sales full time in the partnership.  Eve couldn’t sell thingamajigs she was just going to help Adam with that and in the meantime she would still sell widgets.  It all sounded like a good plan.

 

Except:  Widget sales was technically another job.  The money Eve earned selling widgets was outside the partnership—just as Adam’s widget sales were outside the partnership.  Adam was counting on Eve’s widget income to help support him because he knew that the thingamajig income wouldn’t be enough to support him during the first year.  Eve was hoping the thingamajig income would supplement her widget income; she wasn’t planning on turning over half of her widget income to Adam.

 

The bright side to this scenario is that they were thinking and talking before they made the partnership.  They hit a roadblock, yes, but they’re smart and will work around it somehow.  Too often I see partners who went into business together and later wind up fighting because they didn’t spell out their expectations up front.

 

4.  You gotta work at your business—I can’t tell you how many times people have come to me because they bought a business or invested in a business that required no work—and they lost their money.  If it sounds too good to be true, it probably is.  And if you’re picking a business, do something you love to do—because you’re going to be at it a lot.

 

5.  Not planning for your taxes—This wouldn’t really be a tax blog if I didn’t mention taxes now would it?  The whole idea about owning a business is that you want to be profitable.  If you’re making a profit, then there are going to be taxes.  If your small business is making enough money to support you and your family then you know you’ve got self-employment taxes to pay.

 

Screwing up one year—that happens.  Screwing up two years—you need to be more careful.  But if you screw up and don’t make your estimated tax payments after you’ve been profitable and owed tax money for three years in a row—you’re asking for trouble.  Our business cards say, “If you don’t have a strategy for your taxes, you’re probably paying too much.”  Taxes take a huge chunk out of your earnings.  Don’t let IRS penalties and interest make matters worse.

Posted on by Jan Roberg

Small Business Owners: Are You Claiming Too Many Deductions?

Photo by Herkie at Flickr.com

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/

Posted on 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 by Jan Roberg

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

Small restaurant in Forks

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 by Jan Roberg

Year End Tax Tips for Tiny Business Owners

 

Taxes for small 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.