Business Taxes 101

With tax season rapidly approaching, business owners and executives should be getting organized. This handy tip-sheet can help.

• • Go digital
    Now, more than ever, businesses should be doing their banking and accounting online. Transactions are more easily tracked using online banking services and most online accounting services now allow you to link to your accountant or tax preparer for easier access and management throughout the year.

 

• • Know your capitalized and current tax deductions
    “Current” deductions are your business expenditures related to the day-to-day operation of your business. These can include rent, utilities, and supplies. “Capitalized” expenses are usually tied to asset purchases, such as office equipment, land acquisitions or vehicle purchases, and since they are expected to generate benefits into the future, they must be deducted differently than current expenses. Knowing the difference can save you money. For example, certain equipment purchases must be deducted over time unless your business can take advantage of special tax provisions.

 

• • Pay more than the minimum estimated tax
    Self-employed individuals and pass-through entities are required to make quarterly estimated tax payments. Generally speaking, the estimated taxes are based on the withholdings for the previous taxable year. Making timely estimated tax payments can make your life a lot easier at tax time, but paying more than the minimum can actually prevent unexpected tax bills that arise due to unforeseen circumstances.

 

• • Classify employees properly
    It can be easy to misclassify an employee as exempt or as an independent contractor. If your business relationship with a subcontractor has grown significantly, you may be at risk for misclassification. Employee classifications may appear highly subjective, but in fact, the IRS has a set of defined categories it uses to determine the differences. Be warned: the determination process can be complicated. If you do have employees, make sure to pay your payroll taxes on time; the IRS can recoup these costs by holding “responsible persons” personally liable for the deficiency.

 

• • Fund SEPs and other retirement plans
    Most people know that retirement plan contributions are deductible for employees. For employers, contributions to employee retirement plans are also deductible on the employer’s federal tax return. For small businesses, investing in a Keogh plan, a SIMPLE plan or a Simplified Employee Pension (SEP) plan can not only reduce your tax bill, but set you up nicely for the future by increasing your net worth and giving you and your family financial security.

 

• • Don’t be menaced by ghost assets
    Ghost assets are fixed assets that are either missing or unusable. Once discovered, decommissioned, missing or non-functional assets that remain on a general ledger are more than just a reconciliation issue–they must be written off. Not only can this adversely impact your company’s bottom line, it can add a whole new layer of complexity to your business tax return, as well. As if that wasn’t enough, if you don’t valuate the costs of the write-offs properly, headaches can ensue down the road. It’s best to undertake fixed asset accounting with a team of knowledgeable experts who have practical valuation experience.

 

• • Track payments to subcontractors
    Tracking the money paid to independent contractors is vital for the health of your business. Not only are amounts paid to an independent contractor deductible, it’s a great way to identify where your organization’s money is going. For any contractor to whom you’ve paid $600 or more, you’ll need to collect a W-9 and file a 1099-MISC form. Failing to file the appropriate forms with the IRS can result in your business paying more in taxes than it should.

 

• • Understand PA’s tax system
    Pennsylvania is currently ranked 34 out of 50 in the Tax Foundation’s State Business Tax Climate index, which puts it in the lower half. With a corporate income tax rate of 9.99%, the Commonwealth also ranks 46 out of 50 in that category. The state also has a capital stock and foreign franchise tax, for which special formulas are used to determine liability. Many people understand the concepts of these taxes, but without a tax advisor, complying with them can be confusing and time-consuming.

 

• Use a trusted preparer
  Finding a tax preparer is easy; finding a trusted business ally is less so. Many businesses tend to only communicate with their accounts or tax preparers during tax season, which can result in mistakes, clerical errors or overpayments. Find an accounting firm that also provides business advisory services, and tax time will be a simple process. When looking, see if you can identify a person or firm who understands your business and its goals, and the relationship will pay dividends for years to come.

If you’re looking for tax experts who offer business advisory services, look no further than Simon Lever. Contact us today, and let’s start a conversation.

 

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By Darren Finn,
Principal