Small Biz Owners: How To Legally Reduce Your Tax Bill

Stephen M. Moskowitz, Esq. for CBS writes: Tax planning is often the most overlooked business strategy applied by small business owners. Staying profitable in the current business environment takes skill and knowledge.

1. Writing It Off: Deductions. Businesses can deduct all “ordinary and necessary” business expenses from their revenues to reduce their taxable income. Some deductions are obvious — expenditures in such areas as business travel, equipment, salaries, or rent. But the rules governing write-offs aren’t always simple. Potential deductions to look for:

• Business losses. Business losses can be deducted against a business owner’s personal income to reduce taxes. Some of the year’s business losses can be used to reduce taxable income in future years and some losses can transfer to partners. Ask our firm about business entity formation to find out the best entity for you.

• Trips that combine business and pleasure. If the primary purpose of the trip is devoted to business, you can deduct the traveling costs, as well as other business-related expenses.

2. Employee Taxes. If a business has employees; a variety of taxes will have to be withheld from their salaries. The following withholdings can get businesses in trouble quickly when they are not paid on time:

• Withholding. Social Security (FICA), Medicare and federal and state income taxes must be withheld from employees’ pay.

• Employer matching. Businesses must match the FICA and Medicare taxes and pay them along with employees.

• Unemployment tax. Businesses must pay federal and state unemployment taxes.

3. Quarterly Estimated Taxes. Keeping up quarterly payments can make tax time more manageable. Many businesses get into a cash flow problem when they do not keep up with estimated tax bills. The IRS can also demand punishing IRS penalties. Some common questions:

• Who should pay? A business probably must pay quarterly estimated taxes if the total tax bill in a given year will exceed $500.

• How much should you pay? By the end of the year, either 90 percent of the tax that is owed or 100 percent of last year’s tax must be paid (the figure is 110 percent if a business’s income exceeds $150,000). Businesses can subtract their expenses from their income each quarter and apply their income tax rate (and any self-employment tax rate) to the resulting figure (their quarterly profit).

4. Sales Taxes. Most services remain exempt from sales tax, but most products are taxable (typical exceptions are food and drugs). If a business owner sells a product or service that is subject to sales tax, he or she must register with the state’s tax department. Then taxable and nontaxable sales must be tracked and included on the company’s sales tax return.

Typically the criteria used by the state to determine whether you are liable for paying state taxes is whether you have a “presence” in the state. If you do not have a physical presence in another state, but sell items by Internet or catalog in that state, you may be subject to a state’s “use tax,” but typically not to their state sales tax. A “presence” in another state does not necessarily mean that you have a retail outlet in that state. If you have an office, warehouse, or employees working for you in that state, the IRS may consider you to have a presence in that state. Make sure you are aware of your sales tax responsibilities in all states in which you are doing business.

5. Keep Tax Documents Forever. Over the years we have seen clients with good record keeping save money. Keep any tax-related documents (e.g., expense receipts, client 1099 forms, and vehicle mileage logs) forever. You may need these documents to prove a statute of limitation has run and be in the position of needing your records to prove the government is not entitled to examine you.

6. Charitable Contributions. Unless your business is a C corporation, charitable contributions typically “flow through” the business and are claimed as deductions on the individual tax returns of the shareholders of the company. That’s true whether you’re running a sole proprietorship, partnership, limited liability corporation, or S corporation.

If you want to get the maximum tax benefits, you should know these basic rules:

• Only contributions to charities listed as “qualified organizations” by the IRS are deductible. Consult IRS Publication 78 for a list of qualified organizations or search online at the IRS home page.

• Contributions of more than $250 require a qualified receipt from the qualified organization. For contributions of less than $250, a canceled check may be sufficient.

• In general, donations of property can be deducted for their fair market value at the time of the contribution. You cannot deduct a contribution that has already been written off as a depreciated asset.

• You cannot deduct the value of time or services that you volunteer but you may be able to deduct your related expenses.

• You cannot deduct the part of a contribution that benefits you. If you receive a gift in exchange for a charitable donation you can only deduct only the amount of the contribution that exceeds the value of the gift.

• In general, you can deduct contributions only in the year you make them. Pledged contributions cannot be deducted until they are actually paid.

7. Important Tax Deadlines for Businesses. Depending on our business entity and for other taxes due besides income tax, April 15 is not the only important date to keep in mind:

· Estimated taxes. Estimated taxes are due four times a year: April 15, June 15, September 15, and January 15.

• Sales taxes. Sales taxes are due quarterly or monthly, depending on the rules in your state.

• Employee taxes. Depending on the size of your payroll, employee taxes are due weekly, monthly or quarterly.

8. Deducting Loans. Most business loans are not considered business income. One notable exception is a situation in which you negotiate with a creditor or lender to reduce your debt. If any debt is forgiven, you will owe taxes on this amount, but you may have a different result if you have a bona fide renegotiation of the debt.

On the other hand, business loans can offer substantial tax benefits. The principal and interest you pay on your loan are business expenses, and you can deduct them from your taxes as such. In order to take advantage of a tax deduction, you must report the total amount of the loan, and the assets and expenditures financed must be necessary to operating the business.

9. Tax Audits. There are many different types of audits besides an IRS audit. Audits can range from a simple request for a particular piece of information to comprehensive reviews that cover every aspect of your business and your life. You are not alone in this; our tax law firm is here for you. Never hesitate to call even with the simplest of questions or concerns.

• Correspondence Audit. The IRS asks you to document an item or items on your return by a specified date. This is usually a test for compliance with certain items on your return.

• Office Audit. The IRS may ask you to report to a nearby IRS office and document one or more items on your return. You may be able to send them copies of this proof in advance of the appointment and resolve the issue without actually going to the office.

• Field Audit. The IRS will ask you to provide documentation of various items on your return and to meet with an IRS agent for a thorough review of your records and an interview of you. Answering the questions of an IRS agent is a complex matter. You should never lie to the IRS – that is a crime in and of it self. However, the law does not require you to provide testimony against yourself. It is very important to talk to us before you make the very important decision of meeting with the IRS agent

• Taxpayer Compliance Measurement Program Audit. This extremely lengthy and detailed audit asks you to document and prove every single item in your return. The IRS and Congress use the data from these audits for research and statistical purposes. These audits are arbitrary, and anyone can face them regardless of how carefully they prepare their tax returns.

• Criminal-Investigation “Audit.” If you are suspected of criminal tax evasion, the IRS may conduct a criminal-investigation of you and your business. If you are a target of a criminal investigation you should immediately consult with us prior to making the critically important decision of whether or not you want to speak to the criminal agent. A great deal of consideration must be given to this decision as it may be the difference between the criminal investigator referring your case for prosecution which could ultimately result in your being confined in a federal prison on felony charges or having the criminal agent close your case with no further criminal investigation or prosecution against you.

(About the author: Stephen M. Moskowitz is the Senior Partner ofMoskowitz LLP, located in San Francisco. His practice of over 30 years covers the entire spectrum of tax law for individuals and businesses.)

Obamacare Taxes Are Coming -- Here Are 6 Ways To Limit What You Owe

Miranda Marquit for InvestingAnswers.com writes: We all want to keep as much of our own money as possible, right?  Of course. And that's especially true when it comes to investments.  Starting this year, many investors likely will see tax hikes because of the new taxes imposed as a result of health care reform.   Because the only certainties in life are death and taxes, you likely will pay higher taxes no matter what you do. But you can soften the blow if you plan your tax strategy now.   But first, a little background on what you face, starting this year.   In 2010, Congress passed the Patient Protection and Affordable Care Act, sometimes called Obamacare. As many expected, this law included higher taxes on individuals who have what lawmakers consider high net worth.  Any couple making $250,000 a year or a single tax filer making more than $200,000 sees an extra 0.9% tax on income starting in tax year 2013. On top of that, if you fall into those income categories, you face a 3.8% Medicare tax on your unearned (read: investment) income.  If you want to reduce your tax liability and keep more of your money, do these six things throughout the year.
 
1. Reduce Your MAGI
The income thresholds layed out by Obamacare are based on Modified Adjusted Gross Income, so it's important you manage this income. This works best if you are reasonably close to the threshold. If you plan it right, and with a tax planner's help, you can avoid the Medicare surtax altogether.  However, some won't be able to finagle their finances that far. So the following strategies focus more on how you can invest your assets to avoid the label "unearned" income.
 
2. Municipal Bonds
The federal government doesn't tax you on munis, so the Obamacare tax doesn't apply to this income. It's an investment loophole you can use if you don't mind moving some of your money into tax-exempt bonds.

3. Tax-Deferred Investments
If you aren't too attached to your investment income right now, you can take a long-term view and put more assets into tax-deferred accounts. If you qualify for a retirement account or HSA -- and have room for more contributions -- you can move your income-producing assets into these accounts. Later, you can withdraw the money during retirement when you have a lower income and may not reach the threshold.  Other investors like tax-deferred annuities, but that's an individual choice you can make with a financial planner's help.
 
4. Put Some Of Your Investments In Your Child's Name
Give some of your income assets to your children. The results might be subject to kiddie tax rules, but it will avoid the previously mentioned 3.8% tax. The main drawback is that once your child comes of age, he or she will control the investment.

5. Switch Your Rental Income From Passive To Professional
When you invest in rental property, it's common to decide to stay out of it as much as possible and just enjoy the income. Unfortunately, there are many cases in which rental income is considered "passive" -- and subject to the 3.8% Medicare surtax that comes with Obamacare.
To get around that, take a more active role in managing your rental assets so you can be considered a "real estate professional." With this designation, your rental income avoids the surtax.

6. Boost Your Business Participation
Business owners might reduce their participation in their business, retain interest in the company and enjoy the income it provides. If you have interest in a business, but don't "materially participate," your income is unearned and it will be taxed under Obamacare. Avoid this fate and become a material participant again. Meet the minimum for participation in a year, and the income suddenly becomes earned.

The Investing Answer: Taxes like the 3.8% Medicare surtax need to be planned for all year. Approach your situation in a way that legally reduces your tax liability under the new Obamacare rules.  You'll need to employ long-term tax planning to reduce your liability in subsequent years, so stay on top of your tax situation.

Tax Handicapped? Automate Your Process / Automate 1099 tax return eFiling, contractor management and IRS audit protection. Developed by CPA tax professionals.

Marissa Feinberg, Contributor for Forbes writes:  So, if you’re a business paper-filing your 1099s and W9s, you’re brushing right up against the end of February deadline. If you’re e-filing, you get another month.  If you’re a contractor/freelancer, you should have received your 1099s from the businesses you worked by the end of January. Got any delinquent client companies? Are you being a delinquent client company?  I think small business owners and starter-uppers face the biggest handicap when it tax time comes. They’re doing everything by themselves in the first place, and here’s one more responsibility. If it’s their first startup, the process and regulations are completely foreign. If it isn’t their first, sorting out what’s going on where among multiple ventures can be forehead-vein-bulging stressful.

And so, we trod off to tax accountants’ offices, at the mercy of any fee that suits their whimsy. Worse, you’re subject to judgmental glares and sighs as you shuffle through your disorganized stack of the year’s paperwork.  It’s not just you, though. Cameron Keng once worked on an audit of Goldman Sachs, and the company had lost 20% of their paperwork (!) — he had to recreate all those missing pieces.  Thoroughly traumatized by that experience, Keng is now a warrior against AWOL tax documents. He built autotax.me to retain all your contracts and tax filings and those of your contractors, helping to protect you against audit.

Reduce The Barrier That Stands Between You and Clean Books

Autotax isn’t meant to replace accountants. It’s a software as a service (SaaS) that helps businesses deal with their 1099s and W9s Keng wants Autotax users to get a lot of the tax-filing pre-work done ahead of time automatically, and to have control over the process to understand it — confidence that will help you need less work from the accountant (and maybe negotiate those fees). Autotax is free for independent contractors; for business, subscriptions come with a free trial and prices are rock-bottom low compared to other tax services. At last, a near open-source solution.

Cameron came to a Green Spaces Idea Bounce a few months ago, when Autotax was still in beta, asking for feedback on his startup-supporting startup. We overcame our own brains’ fierce resistance to even starting to think about taxes to help him come up with ways to get other entrepreneurs and small business owners to finding a less terrorizing approach to tax time.  And as of this posting, you’ve still got one and a half months til tax day for your own taxes. I’m wishing you, along with Cameron, a very stressless tax season.

Square launches iPad-based 'Business in a Box' point-of-sale system Read more: Square launches iPad-based 'Business in a Box' point-of-sale system

Square, the company making commerce easy for everyone, now offers brick-and-mortar stores all the hardware to run a business in one convenient and affordable package. Square Register serves as the full point-of-sale system for businesses to accept payments, track sales, and share item and location information.  Neighborhood merchants are increasingly adopting Square Register for its simple interface, smart analytics, continuous updates, and low processing fees. With Business in a Box for Square Register, merchants can now simplify their countertop with an affordable and comprehensive package that includes two Square Readers, an iPad stand, a cash drawer, and an optional receipt printer. All work wirelessly with Square Register.  Historically, business owners were forced to piece together multiple hardware components from various manufacturers, manage complicated contracts and pricing structures, and pay for expensive software licensing and service plans. Now, they can be up and running with Square Register in minutes.  For more than a decade, Holly Pils of Boopa’s Bagel Deli has been baking for the Fort Worth, Texas community. From her printer to her cash drawer, she runs her business on Square.  “We’re a neighborhood business that has been in the community for more than 13 years and we need to make smart decisions so we can make great bagels for decades to come,” said Pils. “My customers and employees love Square and it could not have been simpler or quicker to set up. Square has saved us time and money. It is truly a blessing.”  Hardware packages start at $299 and are customizable according to customer needs. There are no commitments and free returns within 30 days.  Learn more and place orders at http://squareup.com/register/hardware.

5 Reasons to Sync GoPayment with QuickBooks POS (Point of Sale)

Chris Martin for Intuit writes: Back in June, Intuit launched QuickBooks Point of Sale 2013, a new version of its popular accounting software that enables mobile-payment processing by integrating GoPayment. The combined products give the nation’s 2.8 million small, independent merchants a “robust mobile point-of-sale solution.”

1. Automatically sync up sales with bookkeeping. GoPayment’s software boasts many helpful features, but most business owners still have to combine its transaction information with the rest of their back-office functions. With the integration of GoPayment and QuickBooks POS, your transaction data is automatically synced with the accounting software on an hourly basis (or more often, if you wish).

2. Leverage customer contact information. Customer data collected during transactions (names, email addresses, phone numbers, etc.) can be transferred from the GoPayment-enabled device into QuickBooks POS. This allows you to better manage this data and use it to send out alerts, offer personalized discounts or gift cards, and even keep tabs on loyalty programs.

3. Track inventory. When GoPayment is synced with QuickBooks POS, your business inventory information is adjusted each time a mobile transaction is completed. This lets you monitor what’s in stock in real time and reorder products when your inventory falls below a certain level.

4. Monitor activities at multiple locations. Let’s say you have several different mobile devices equipped with GoPayment card readers, and they’re being used simultaneously at different locations inside a store or at an event. QuickBooks POS lets you monitor sales from all of the devices on one computer instead of having to check each mobile device manually.

5. Access business reports. With QuickBooks POS, you can generate numerous different reports to identify purchasing trends and track inventory and sales on a daily basis. Syncing GoPayment with QuickBooks POS incorporates all mobile credit card transactions into your bookkeeping so that you can determine how well your mobile-payment initiatives are working.