Posts by Danny Cesar

7 Ways a Business Owner Should Spend Their Tax Refund

It’s always a happy day: You received that fat, juicy tax refund check in the mail or deposited into your bank account. Perhaps your refund was due to the impact of the “TCJA” (“Tax Cuts and Jobs Act” of 2017) – Did your business overpay during the year due to the reduction in tax rates to 21% for corporations? Or did your partnership perhaps overpay due to the 20% deduction for pass-through entities, the so-called “QBI” (Section 199A “Qualified Business Income”) deduction?

Twiddling your thumbs in glee ( … in your office … with the door closed), you nonetheless ponder within yourself: Eeny, meeny, miny, moe – spending tax refund, saving tax refund, spending tax refund, saving tax refund? The good news is, since it’s your tax refund, really, you can enjoy a twofer, and both spend and save it. The even better news is, there are so many great ways you can invest that “found money” to improve your business operations:

1. Pay down debt

Interest costs may be one of the larger or typical business owner expenses you frown upon. That nagging loan may not have the most favorable terms, or that company credit card is carrying an exorbitant interest rate. Use some (or all) of the refund to prop up your income statement by reducing interest expense, or to breathe a sigh of relief when lightening your debt load. This is a classic scenario where spending money today saves money tomorrow.

2. Focus on marketing

An area worthy of your attention might be your company’s advertising or marketing efforts. Maybe you always wanted to try that catchy radio ad for your business? Perhaps you prefer to focus on your online business channel and so would like to do better on the SEO front? Whatever the endeavor, you know that spending the refund on marketing is beneficial to your business and, as such, money well spent.

3. Invest in your employees

Along with your customers, employees are the lifeblood of your business. You could implement a paid family leave policy under the new regulations and also get a tax break on some of those payroll costs. Consider sending your key people to seminars or continuing education, which helps them develop personally and professionally while also improving the quality of their work and potential contributions to the company. The ways in which you can make your employees happy today and improve your bottom line tomorrow are almost endless.

4. Invest in yourself

Yes, go ahead, as the owner you deserve it. The avenues open to you are innumerable here, too. Perhaps upgrading to that business smartphone you’ve been longing after will also bolster your work productivity by leaps and bounds? How is your SEP IRA, and how is your Keogh Plan looking these days – could it use a little bit of a tax-deferred boost? If for no other reason, then, a happier boss is also a better boss, right?

5. Purchase machinery and equipment

As far as business owner expenses go, you could reduce your taxable income and invest in that machine the business so badly needs – the new tax law allows for full write-off of business equipment the year it is placed in service. Yes indeed, 100%. Maybe it’s finally time for that new pick-up truck your business can’t live without? The favorable bonus depreciation and Section 179 regulations surely add incentive to invest in your company’s capital equipment.

6. Opportunity awaits

Opportunity Zones, that is. If your business had a capital gain in some area during the year, following certain procedures under the new law, you could invest it in a so-called “QOF” (“Qualified Opportunity Fund”) to defer taxes on it. At the same time, your investment helps raise the overall community economic situation, which in turn can only benefit your business, too.

7. Save some, donate some

There’s nothing wrong with saving some of that refund, either. Be it for a rainy day, or that one outrageous expense nobody could possibly foresee, saving money is always one of the wise choices in life. Perhaps you need to bolster your cash position to apply for that new loan you need to expand the business? You may be looking to grow the business through acquisitions, and that extra cash could certainly come in handy.

The flip side of the coin might be considered donating some of your refund to a charitable organization or cause. Aside from the true spiritual satisfaction of participating in a good deed, this is similar in some ways to an intangible asset:
your donation or contribution also enhances goodwill in the community toward your business and helps build a foundation for an excellent reputation.

In so many different ways and sometimes even inadvertently, spending money today can also be an indirect route to either saving money or earning more money in the future.

Finally, despite all of the magnificent options for what to do with your refund, it behooves us to still remember this basic principle: While bringing on a sense of elation at receiving this large stash of “extra” money, it is not, actually, “extra” at all. It is really just the return of an interest-free loan given – to some extent voluntarily and unnecessarily – back to its rightful owner by the national government.

Of course, we’re human, and we feel like jumping with joy when this unexpected “gift” comes our way. In this regard, though, it’s always useful to remind ourselves with a lesson from Finance 101 ( … yes, that class way back when, the one where we’d wake up with a calculator clenched in our hand…): the time value of money. In general, money is worth more the sooner it is received (and invested).

Possessing an extra $100 routinely each month during the course of the year usually just can’t compare with the gratifying jolt of receiving $1,200 in one big, celebratory chunk. We’re just human. So, it’s reassuring and comforting to know that there are – really, truly – wonderful options to spend your tax refund in a manner that significantly improves your business operations.

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Beating Business Taxes and the Art of the Reserve

Business owners face a lot of uncertainty. Will your product or service be a hit? Have you targeted the right audience? How do you build better engagement with customers through social media? These are all common questions, but one of the most frequently asked, particularly by new business owners, is how much they should set aside for business taxes. Understanding and familiarity come with experience, but if you’re just starting out, it can be daunting and confusing.

More Big Companies Using Reserves

While we mentioned that larger companies weren’t all that dismayed by their tax bill, that’s not entirely true. In fact, it’s becoming less true with every passing year. Today, most large corporations than ever before are setting aside a reserve to meet their tax obligations, and more of them are saving larger amounts than they actually pay in taxes.

The reason? Increasing uncertainty surrounding what they’ll owe and when they’ll owe it. In fact, the difference between what’s collectively paid to the IRS and what’s collectively kept in corporate reserves is measured in the billions of dollars. As a small business owner, you won’t need to worry about that quite so much, but you will need to know a few things.

When Should You Pay?

When should you pay your taxes as a business owner? The answer, despite the many different interpretations out there, is quarterly. This is particularly true for those who don’t fall under the heading of a traditional small business owner. For instance, freelancers, consultants, subcontractors and the like.

These professional will benefit greatly from ensuring that they’re paying their tax bill on time, all the time. Of course, that still leaves the question of how much you should pay, but we’ll cover that momentarily. For now, suffice to say that you need to account for your taxes quarterly, particularly your employment taxes (Social Security and Medicare).

What Do You Mean By “Reserve”?

When it comes to paying business income taxes, it is important to realize that only the largest firms can afford to pay their tax bill all at one time. Most companies need to save for the event. As a small business owner, you’ll need to save for it, too. This term for this is a “reserve”. Essentially, it’s the portion of your earnings that you reserve in order to meet your tax liability with the IRS.

How Much Should My Reserve Be?

Sadly, there is no one size fits all answer here. Too much depends on the variables in the situation. Some advisors recommend that you take 10% of every single payment you receive and sock it away against the need to pay business taxes during your first year. Why only 10%? Is that enough to cover your actual tax bill? No, it’s not. However, it gives you the means to build a sort of nest egg against the day that you do start paying taxes.

Here’s how things work. New businesses generally aren’t profitable. If you don’t make a profit, you don’t owe any income taxes (no income equals no taxation). However, you still take 10% of your income and put it away against future needs.

The second year of your business is also unlikely to be profitable. However, you still keep putting away 10% of your earnings. This ensures that if you suddenly do turn a profit, you have the cash to pay what you owe Uncle Sam. If you don’t become profitable overnight, then you have additional cash reserves for the third year.

Each year that your business fails to turn a profit, you show a loss on your taxes and write everything off as a wash. You keep whatever monies came your way. Here’s the thing – if your business is not profitable for too many years, the IRS may decide to step in. They’ll declare your “company” a hobby instead of a business. Guess what happens then? All those write-offs that were perfectly legitimate when you were running a business must now be paid back to the government because you owe money. If you still have that nest egg built by saving 10% of everything, doing so will be much easier.

When Do You Reserve More?

You will eventually start to put more money into your reserve. One your business is running smoothly and things have settled a bit, it will be time for you to save more. For instance, once you’ve accounted for your operating expenses, you’ll need to begin reserving around 40% of your profit for tax purposes (15% for your self-employment tax, and the rest for income taxes). Of course, the actual amount reserved will depend on a couple of factors.

Your tax bracket is the most important. For instance, the 40% is only applicable if you’re in the 25% tax bracket. You could earn more or less, which will change that. You also need to consider whether or not your state requires you to pay state income tax. While you can claim that on your federal income taxes, you’ll still need to pay it out to the state, which means you need to save it in the first place.

What If You’re Profitable Off the Bat?

Some businesses are profitable immediately – freelancers, contractors and consultants come to mind. The 10% rule discussed previously will not apply here. Instead, you need to reserve around 30% of your income for business taxes. This ensures that you have ample money to cover both income taxes and self-employment taxes.

Finding the Right Path

Charting the right path for your business can be difficult, particularly if you’re new to the whole process. Working with a tax professional can help ensure that you’re able to save an ample amount of money for Uncle Sam while also making sure that you have enough for operating costs. As a note, make sure you’re working with a professional with plenty of experience helping small business owners reserve money for tax purposes.

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Hiring an Accountant Vs Preparing Your Business Taxes with TurboTax

When it comes to filing taxes, there has been one question that has been the bone of contention; to hire a certified public accountant to do your taxes for you or to buy a tax filing software program such as Turbo Tax?

One thing is for certain; taxes are costs in and of themselves. Therefore, if there is a way to automate the tax preparation and filing process, one should, by all means, consider it. And that is what tax filing software programs are purported to do.

However, even though these programs are quite straightforward to use, Turbo Tax and other tax filing software suffer from certain issues that are typical of any robot.

These issues become more evident when your financial situation starts becoming broader. At this point, it becomes wiser to spend extra and hire a professional.
This article will discuss why you should stop using tax software and hire a professional instead.

What You Need to Know About Tax Software

Whenever the tax conversation is taking place, people are usually either talking about tax planning or tax compliance.

Tax planning refers to the process of planning transactions way ahead before you actually do them. This allows you to make more thoughtful decisions that work towards minimizing the total amount of tax you need to pay.

On the other hand, tax compliance refers to the process of the actual preparation of your returns. Thus, it involves filling out your forms while making reports on transactions that have already happened.

And this is where the bone of contention actually lies. Tax preparation and filing software are designed for one job only; tax compliance. Thus, it will do the actual job but it will not help you make better decisions that will reduce the total amount you pay in taxes.

Consequently, as you broaden and diversify your financial profile, you will have to make increasingly complicated decisions. These decisions will be greatly affected by the amount of tax knowledge you will have, thus the dire need for financial planning. And that is why you need an accountant.

What You Should Know About Using an Accountant

A certified public accountant is the name given to a qualified accountant. For one to attain that title, they are required to pass certain numerous rigorous examinations in order for the government to grant them a license to work as a CPA. Nonetheless, CPAs in the United States are limited by geographical jurisdictions. Thus an accountant from one state cannot work in another.

CPAs, therefore, are tax experts who have intricate knowledge about taxes and the various laws affecting them. Knowledge combined with experience allows them to know what your business can do to reduce its tax costs.

This means that every business needs to seek regular advice from such a professional. However, when are the times that you absolutely need a professional?

Situations Where You Need an Accountant

1. You Find Tax Preparation and Filing too Complicated

As mentioned earlier, tax filing programs such as Turbo Tax allow you to learn how to perform your filing. While they are not that hard to use, you will need to invest your time so as to perform that task.

However, if tax filing is not your cup of tea or would rather focus your efforts on the aspects of your business that you are good at, then you are better of hiring an accountant to do that for you.

CPA for business taxes only makes for enhanced efficiency in your business since each process is going to be handled by someone who is good at it. Nonetheless, when you decide to hire a CPA, keep in mind that you will still be responsible for gathering all the data your tax professional needs to do your taxes.

2. It Is Still a New Business

If you just recently purchased your business from another person or it has been less than a year since you opened it, using an accountant is only wise.

This is because, unless you have experience running a similar business in the past, it is highly likely that there are tax laws and deduction rules that you do not know of. Hiring an accountant will ensure that you do not make costly mistakes that most entrepreneurs make when their business is still in its infancy.

3. The Status of Your Business Has Changed

There are certain complicated business moves that you can make that might warrant the need for a CPA for business taxes. One such move is a business state change.

For example, let us assume that you decided to convert your business from a sole proprietorship to a corporation. Part of this change means making sure that you properly file all the relevant paperwork. Moreover, you also need to calculate all your expenses and deductions for both types of business status to ensure that the business has no shortcomings.

This is easier said than done since you will be essentially dealing with new laws. Any errors that arise will result in fines and potential legal action. Getting an accountant to do this for you will ensure you avoid costly mistakes.

4. You Moved During the Year

As mentioned earlier, a CPA from one state is not usually able to practice in another state, and for good reason; tax laws vary between states. This means that if you move from one state to another, your tax situation is likely to get complicated.

This is why you need an accountant to help you sort your taxes out while determining how to divide your taxes payable or the refund owed between states.

5. You are Passing Through a Major Life Event

Marriage, getting kids, or divorce are life events that will impact your tax situation. If you just got married, how will you proceed to file your taxes? Will you do it separately or jointly? An accountant will help you understand the best way to go around that situation.

The same also applies to when you have kids. Another benefit of that bundle of joy is that it comes with certain tax deductions. But do you know the full extent of those deductions? A professional accountant will help you know what your options are so you can start enjoying some tax write-offs.

Divorce is an all-around messy situation. Which parent will claim the children as deductions? What rules govern taxes when it comes to child support and alimony? An accountant knows everything there is to know about these murky waters. They will help you navigate your way through them to ensure that you not only avoid problems with the law but to also ensure that you get the best deal possible.

6. You Want a Peaceful Life

Establishing a long term relationship with an accountant is one of the best life decisions you could make. You will never have to worry about your taxes being off, moreover, you will continue to enjoy their advice as your business continues growing. This means that all your ducks will be in a row at any single time. This not only helps your business but also enhances the quality of your life.

Tax filing software programs such as Turbo Tax can be beneficial when looking to save on filing costs. However, they do not give you insights that will help grow your business. An accountant not only takes care of all filing processes, but they also look into how they can help your business make better decisions so as to reduce those expenses. This results in major savings and growth in the long term.

Looking for an accountant to help you with your business taxes? Talk to Choice Accounting Solutions today and we will customize a solution for you and your business.

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2019 Tax Penalties Small Businesses Need To Avoid

As any business owner knows, tax season is filled with plenty of stress. With the tax code changing annually, it is difficult to keep up with the various changes. Because of the complexities associated with small business taxes, it is never smart to trust your fate with the IRS to an amateur who knows little about how to properly file tax returns for a business. After all, it just takes only one or two mistakes to not only find yourself owing more than you thought, but also possibly facing fines and a potential audit. Rather than spend the 2019 tax season facing these prospects, here are the most common tax penalties your business should avoid.

Late Filing Penalties

While filing your taxes may not be the most fun thing you will ever do in 2019, it is best to complete the task as soon as possible. If you procrastinate until the last minute, you may find yourself facing tight deadlines, which if not met can result in costly penalties. As an example, if your business is classified as an S Corporation or Partnership, the late filing penalty is done so as a dollar amount per-owner per-month. For 2019, this amount is $200 per owner for each month the tax returns are late, which as you can see can add up in a hurry. In addition to these penalties, it’s important to note that while April 15 is the standard tax filing deadline for individuals, small businesses have a deadline of March 15, so it’s best to get busy as soon as possible.

Estimated Tax Penalties

While it can be difficult to accurately estimate how much your business will owe in taxes, failing to so can prove even more costly in the long run. If you wind up underestimating what you owe, you’ll be facing additional interest charges from Uncle Sam. Based on current guidelines, which can be adjusted on a quarterly basis, this penalty stands at four percent. To avoid this problem, most tax experts recommend business owners simply estimate their 2019 taxes at the same amount they paid in 2018.

Failing to File W-2 Forms

Since each employee of your business must be issued a W-2 form, it is crucial you remember to file a form for each employee. If you fail to do so, expect the IRS to be standing around with their hand out, waiting for your contribution. As the current guidelines stand for 2019, if you file the elusive W-2 forms within 30 days of the January 31 deadline, your penalty will be $50 per W-2. However, if you file between February 1-August 17, the fine doubles to $100 per form. And if you really procrastinate and file the W-2 forms after August 17, be prepared to pay $260 per form. As you can see, it will be much simpler to work with a seasoned tax professional to make sure each and every employee on your roster has a W-2 form that has been filed.

Trust Fund Penalties

Considered one of the costliest penalties enforced by the IRS, trust fund penalties can be a tremendous headache to any small business owner. According to IRS guidelines, as a business owner you are required to deposit withholding amounts from your employees with the United States Treasury. If you fail to do so, even through no fault of your own, be prepared to pay significant penalties. In these situations, you will be held personally liable for all deposits that have not been made, up to 100 percent of the amount of the deposits. To avoid facing these substantial penalties that could possibly put you and your business through severe financial hardship, always verify these deposits are made correctly and on time, especially if you use a third-party payroll company.

Accuracy Penalties

While it stands to reason that the tax returns for your business must contain accurate information, there are additional IRS penalties that can be levied against you and your business, especially if the IRS determines the income and expenses on your returns are grossly underestimated based on a blatant disregard for its rules and regulations. To ensure Uncle Sam does not throw a temper tantrum at your expense, make sure you receive tax advice from a knowledgeable and experienced tax expert who understands the ins and outs of working with small businesses. Otherwise, expect to be hit with a 20 percent penalty for underpayment.

1099 Penalties

Just as it is important you file the necessary W-2 forms for your employees on time, you must also do the same for 1099 forms you use with any independent contractors to whom you have paid at least $600 over the past year. If you fail to file these forms in the proper manner, you can expect the same types of penalties you’ll incur for failing to file W-2 forms. In fact, the IRS is so concerned about your possibly forgetting to do so, they have made the fines the same for both W-2 and 1099 late filings. Therefore, if you remember from earlier, you can find yourself paying anywhere from $50-$260 per form that is not filed. To keep this from happening, be sure you remember all independent contractors with whom you did business over the past year, since forgetting them will take plenty of money out of your pocket.

Excessive Contribution Penalties

While it seems logical that the IRS will penalize you and your business for failing to contribute enough to employee retirement plans, you can also find yourself in trouble with Uncle Sam if you make excessive contributions. But while it seems as if you cannot win any way you go on this issue, all hope is not lost. Though the penalty for making excessive contributions to employee retirement funds is currently six percent, and will be applied to you each year until the error is corrected, getting solid tax advice from the outset of tax season will help you avoid this expensive mishap.

Tax Fraud Penalty

If there is one thing that will get Uncle Sam and the IRS mad at you in a hurry, it is having them believe you committed tax fraud. If this is the case, not only will you be facing harsh financial penalties, but also possible criminal charges against you and your business. Needless to say, this is one scenario you want to avoid at all costs. However, if the worst happens and the IRS determines you did indeed commit tax fraud, expect to be hit with a penalty of 75% on your tax return, which could result in thousands or even millions of extra dollars you will be expected to pay. Therefore, while it may seem as if everyone fudges a bit on their tax returns, it is best to file returns that are true and accurate to the best of your knowledge. Along with getting the best possible individual to prepare your taxes, always have the services of a tax attorney nearby as well. By doing so, you can be sure any and all questions you may have can get answered.

While it appears as if the IRS is simply waiting around for you to make one error after another on your taxes, the fact is virtually all these penalties can be avoided rather easily. By putting your trust in a seasoned tax professional, staying up-to-date on the latest changes, and being proactive throughout the year, the 2019 tax season can come and go without any unexpected and costly surprises.

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Average 2019 Cost of Accounting Services for Small Businesses

The costs of small business accounting services can vary depending on the size of the business. Other factors to consider are the types of services needed and if they are ongoing throughout the year. The professional background and experience of the accountant should also be considered when weighing the costs. The price of accounting services can differ from a one time consultation fee to short term problem solving to a full time service. According to a recent survey by the National Society of Accountants (NSA) for the years 2016-2017, fees charged on average for business needs can be broken down into several categories:

  • 57.3% of gross income goes to tax return preparation
  • 15% goes to write ups
  • 8.9% goes to payroll
  • 3.6% goes to bookkeeping and Quickbooks
  • 2.6% financial statement presentations
  • 5.2% from other services

The cost of accounting service from the survey are a good way to measure fees for small business accounting and tax preparations in 2019. The accounting services that participated in the survey predicted raising their fees by 6.1% on average in 2017, higher than the 5.3% increase of 2016. Almost 50% of accounting and tax firms automatically increase their fees biannually. Almost 75% of accounting firms charge extra for incomplete and messy files which requires more time. The standard deadline and extension fees are also extra. Extra charges also apply for speedy returns. Therefore according to history it is possible to expect for 2018-2019 to also have an increase in costs for these services.

Will There be an Increase or Decrease in Demand and Service Prices?

The demand for small business accounting services is predicted to keep growing up to 10% from 2016 to 2026. Many accountants will be retiring and new jobs are being created while others still need to be filled. According to accounting web.com, the number of small businesses is growing with the economy. This creates demand for accounting services. For instance, there have been a lot of IPO’s in recent years. When a company goes public on the market, the responsibility of financial reporting necessary requires a professional accountant. This trend has also been fueling the need for quality accounting services.

Daily accounting responsibilities are getting more and more automated due to advancing technologies in the field. Qualified accounting services will need those who can take charge and move into advisory and analytical positions for small businesses. Globalization means more clients worldwide. More small businesses are doing business all over the world through websites on the Internet. This requires complicated multiple tax codes from more than one country. More complicated tasks will reflect the cost of accounting services. We will see the biggest demand for professional accountants in the states of Texas, New York, California, Pennsylvania, and Florida.

The bureau of Labor Statistics has predicted a higher than expected 19% increase in demand due to steady growth from 2016 to 2026. Financial Managers handle accounting, auditing, investments and goals for small businesses. The need for cash and risk management will bring more growth with the growing economy. The Bureau of Labor Statistics is predicting even higher demand as growth is expected to continue for small business accounting services with no decrease in demand in sight.

Different Pricing on Services

At choiceaccountingsolutions.com, they can help with the needs of a growing small business with affordable and competitive cost of accounting service. We are based in Miami yet our pricing is in line with other online accounting services. Accounting costs are decided in part by how big the business is and what services are needed. A consultation is alway a good idea to communicate with the small business and offer pricing they can afford.
Below you will find several services we offer and how the cost of accounting service can vary.

Payroll Processing

Payroll is a continuous process that needs attention regularly. Each employee’s paycheck and taxes must be calculated and processed. Payment to the IRS as well as employees need to be correct and on time all the time. This can be a daunting extra task for a small business owner to take on top of other daily duties. Choice Accounting Solutions can advise and get the groundwork done as well as take care of any inconsistencies.

Bookkeeping

Bookkeeping like payroll is an ongoing job. For a low price of 99$, Choice Accounting Solutions has customizable packages that can be tailored to fit your small business needs. Certified Bookkeepers prepare your taxes, generate reports every month, take care of regular data entry, and general bookkeeping. To keep it simple as possible, all your small business has to do is upload your financial business documents every month. Choice Accounting Solutions will do the work from there. Then we send the business files back via Dropbox for your small business approval. They can also help with preparing for a business loan should you need one. With a free consultation you’ll see how the price of accounting service is affordable and doable.

Tax Preparation

Small businesses have to pay taxes at the local, state, and federal levels of government. They are also required to pay them quarterly with the balance due at years end. This is a huge responsibility that has to be done right to avoid many headaches with the IRS! Choice Accounting Solutions can get it done so you can avoid the hassle of penalties and late charges with the IRS.

We are also able to help with the IRS Debt Negotiation process. Sometimes small businesses can get behind and fall in debt to the IRS. If this should happen, it is wise to seek professional help immediately. The IRS does have debt relief help. We can help you with an “Offer in Compromise”. This is a settlement with the IRS for less than what you owe and gets it taken care of so you don’t have to lose sleep!

Choice Accounting Solutions can help with all your small business needs. Located in Miami we service nationwide online. Our prices reflect and are in line with or better than other online accounting services. Get in touch with them today for your free consultation and your small business will be ready for 2019!

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Accounts Receivable and Bad Debts Expense

Most of us are used to exchanging money for goods and services. This makes transactions easy and prevents issues of debt collection. In most lines of business, however, credit is essential. We sell our products and services with the assumption that the customer will receive their invoice and promptly remit payment.

There are several advantages to offering credit to your buyers. First, you will open up your business to a wider market, as many prefer the sale/invoice/payment model. Second, you will incur occasional losses when your customers don’t follow through.

In accounting, a sale on credit that is not paid in a timely manner is known as a bad debt expense. Handling this issue carefully is essential to keeping your books and your business on track.

The Basics of Accounting for Bad Debts

In the accrual method of accounting, a sale is recorded as soon as it is made. When you make a $100 sale, you record $100 income. This then increases your revenue and net income. Whether and when the buyer pays is an issue between them and your billing department.

When a buyer then fails to pay, you must reduce the amount of revenue accordingly. In addition, you list these unpaid funds as a bad debts expense (or credit loss) on your income statement. These adjustments should be made as soon as possible, although the losses cannot be claimed and written off on taxes until a later date.

This may sound simple, because it is a very simplified version. In reality, the issue becomes much more complicated.

Assessing Credit Risk

One of the best ways to handle bad debts is to prevent them. This can be done by carefully assessing the credit risk of your customers.

A customer with bad credit already has a history of unpaid debts. This should be considered carefully before extending credit to them. You may not want to become yet another creditor whose calls they are ignoring.

Before giving a line of credit, do a thorough credit check. Some companies even ask for references. However, even with these checks and balances, occasional bad debts will occur. Some people experience sudden changes in financial resources and simply cannot pay.

Every company that sells on credit will eventually have credit losses. It is important to include bad debts as well as projected bad debts in your receivable accounts.

How Bad Debts Affect Accounts Receivable

When you first sold the item, you recorded the sale as income called accounts receivable. However, there is a good likelihood that a certain percentage of your clients simply will not pay up. This can become a problem because the income you are owed is reported as one of your assets, which means your income reports and company balance sheet are not accurate.

Business owners often have to supply documents such as income reports and balance sheets when they are applying for credit, when they are working with investors, and in their own tax accounting. It is important for these documents to paint as accurate a picture as possible, which means accounting for this lost income and projecting how much income will not be paid.

Dealing with Bad Debts Expense: The Allowance Method

Most companies account for bad debts using the Allowance Method. This involves estimating a dollar amount or a percentage of their accounts are not eventually paid. They then amend their income reports with a negative contra-asset amount that is called Allowance for Doubtful (or Uncollectible) Accounts. This allows an imprecise but more accurate financial picture.

This method is popular because you can complete your accounting and income report without needing to know exactly who will not pay nor the exact amount. It simply gives an estimate of how much income you will actually be receiving in the near future.

As you bring in more income, you will need to adjust your Allowance for Doubtful Accounts and subtract the additional projected bad debts from your income.

How do you decide on a percentage or a dollar amount for this method? If your company has been offering credit for a long enough period of time, you can simply project based upon your past. Otherwise, many people project conservatively, erring on the side of projecting more unpaid debt than they will likely have. Many people struggle with whether to choose a percentage or a firm dollar amount. A firm dollar amount is usually the simplest method because it does not require constant recalculation. You can easily add to it if your sales increase to the point where it is no longer enough.

Using this method, when a debt is not paid, you simply remove the amount from your Accounts Receivable and your Allowance for Doubtful Accounts. No further action is needed. If the debt is paid later, you can reverse both of these changes.

Dealing with Bad Debts Expense: The Direct Write-Off Method

Most companies use the allowance method in dealing with income reports and similar documents. However, the IRS requires a different type of calculation called the direct write-off method.

In this method, the company only reduces their account receivable when they know that the debt will not be collected from that customer. This can take several months and leaves your income artificially high in the intervening time, which is why investors and banks prefer the allowance method. The IRS, on the other hand, is invested in seeing your profits over-reported and your losses under-reported.

This method is also preferred by the IRS because it is very precise and deals only with information available right now, rather than projections. In addition, it is easy to fix your accounting if the situation changes. If a debt is somehow repaid after you have directly written it off, you can simply subtract the amount from your credit losses and add it to your income.

Which Method Should You Choose?

In an ideal world, accountants and business owners would choose the method that works best for them and stick with it. In the real world, this is usually not possible Using the allowance method is best practice in the world of business accounting. On the other hand, the IRS demands that you instead use direct write-off. Ultimately, most businesses will have to be familiar with both and use both on a regular basis.

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Understanding Business Taxes: Is Schedule C Right for Me?

Everyone has to file their taxes with the US government. That applies to everyone who earns an income, whether you’re an employee or a business owner. Of course, while filling personal taxes can be complicated and painful, filing business taxes can be even more confusing. Take Schedule C for instance – while it’s one of the most commonly used forms for business owners filing their taxes, it’s not the right option for everyone. Is it right for you? Let’s dig into the question a bit more.

What Is Schedule C?

According to the IRS, Schedule C is “the tax form filed by most sole proprietors. It Is used to report both income and losses. Many times, Schedule C filers are self-employed taxpayers who are just getting their businesses started. In addition to those who do well at the start, this group can also include new business owners who make very little or no profit, or even lose money.”

So, from that explanation we can gather a few facts. First off, Schedule C is designed primarily for small business owners. More specifically, it’s the most frequently used tax form for sole proprietors. Second, it’s primarily used by business owners, entrepreneurs, or self-employed professionals who don’t make a great deal of money (there’s also a Schedule C EZ form).

What Is Schedule C EZ?

The Schedule C EZ form is similar to the standard Schedule C form, but it has been simplified. It’s analogous to the 1040 and 1040 EZ forms, but geared for business owners. Like the 1040 EZ, only certain people can use the Schedule C EZ form. You need to have earned a profit with your business, but cannot have more than $5,000 in expenses. You also cannot have any inventory or employees. To file, you cannot be using depreciation to save money on taxes, and you cannot deduct the cost of your home, either.

Who Cannot Use Schedule C?

Now that we’ve established what Schedule C is, let’s consider who can (and should) actually use this form. Basically, the form is primarily designed for sole proprietors and for single-member LLCs. If you don’t fall into those two categories, then Schedule C is likely not the right form for your particular needs. Not sure what form you actually need to use? Work with a professional tax preparer to ensure that you’re using the right forms and maximizing your tax savings.

Tips for Filing Schedule C

If you’re not able to file Schedule C EZ, then the standard Schedule C form will likely be what you need to file. Below, we’ll cover some important tips for completing this form accurately to help avoid the chance of an IRS audit and to ensure that you’re reducing your tax liability as much as possible.

Pay Early: You need to ensure that you’re paying your Social Security and Medicaid deductions to the IRS quarterly. While you can wait until the end of the year, it’s better to pay those regularly.

One Business, One Form: It’s important to note that the Schedule C form represents the profit and loss for only a single business. You cannot use it for more than one business. So, if you own multiple businesses and they all qualify, then you’ll need to file a Schedule C form for each of those businesses.

Business Code: Make sure you choose the right business code for your organization. There are quite a few different codes in use, and they have a direct impact on your business taxes. If you cannot find the code that best represents your business, speak with a professional tax preparation expert.

Record the Right Income: The heart of the Schedule C form is the income allocation section. Here, you list the income that your business earned throughout the year. As a sole proprietor or a single member LLC, that income may come in one of many forms. For instance, it could be income earned as a freelancer. It could be income from independent contracting. It could be income generated by consulting for other companies, or even the government. It might be income reported from self-employment. Note that you can fill out Schedule C even if you did not make an actual profit – it’s possible to earn income without profiting.

Have the Right Information: When filing a Schedule C with the IRS, you’ll need to make sure you have the right information and documentation to support your filing. You’ll need a profit and loss statement covering the entire year (you might be more familiar with this as an income statement). You’ll also need your year ending balance sheet, as well as a statement about any assets purchased during the preceding tax year (2017 for those filing in 2018).

You will need to prepare a cost of goods sold calculation based on your inventory if your company deals with physical products. You’ll also need other information related to expenses, such as vehicle maintenance and travel, meals, entertainment expenses, accommodations during travel, and any other qualifying home-business expenses. Make sure you keep accurate records throughout the year. You don’t want to be scrambling to find this information when tax time rolls around – save receipts, and keep meticulous notes about qualifying expenses.

Not Sure How to Complete Schedule C?

If you’re not sure you can complete Schedule C accurately, or want to ensure that you’re not handing over money that you could otherwise save for yourself to Uncle Sam, the best option is to work with a professional who specializes in business taxes. Trying to go it alone here can mean paying far more than you should in taxes, missing important deductions and exemptions, and could even mean increasing the likelihood that you’ll be targeted for an IRS audit. Working with a professional helps ensure that doesn’t happen to you.

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The Benefits to Completing Your Personal Taxes on Time

No one looks forward to tax time. In fact, your dread could be so strong that you put it off until the last minute, or even beyond. While you can file an extension if you’re running behind, it’s actually better to file your taxes on time, or even early. Why should you get a jump on things? What advantages do you see by having your personal taxes handled as quickly as possible? Below, we’ll run down a few important things you should know about filing in a timely manner.

What Does “On Time” Mean?

First, let’s start out with defining what we mean when we say “on time”. We don’t mean early. Filing too early is silly – you won’t get your refund any faster than someone who files on time. Depending on how early you file, you may have to wait as long or longer for your refund check to arrive than those who file weeks or even months after you do. So, file on time, not super early.

Make Sure You Have Your Paperwork in Hand

Make sure that you have all your forms in hand. If you’ve worked for multiple employers during the year, either as an employee or as a subcontractor, you might have forgotten about one or two. Jumping the gun here can mean big problems down the road. Make sure you have tax documentation from all your employers/jobs over the course of the year.

Don’t Jump the Gun

Finally, avoid filing too early, because the IRS can make changes or amendments to forms, policies and rules all the way up until the final date. You’ll need to file an amended return if that’s the case, and get it to the IRS before the filing deadline.

With all that being said, there are far more benefits to filing your taxes on time, rather than waiting even for a little while. Let’s consider a few of them.

More Time

One reason to at least start preparing your taxes early is this – it lets you maximize your return. In fact, the IRS reports those who file their taxes early receive $300 more per return than those who file late. This isn’t because they earn more money per year necessarily, but that they have more time to maximize their deductions. If you’re in a rush, you’re more likely to miss deductions that could save you a lot of money. If you start early, you’re more likely to get all the deductions available to you. Also, working with a professional tax preparer early on in the process helps ensure that you’re not missing out on some of the more commonly overlooked tax deductions.

Reduce Your Stress

Let’s face it, filing personal taxes is always a stressful, harrowing business. You’re worried that you’re missing deductions, that you will earn too much to receive a refund, and more. By filing early, you have time to come to grips with your filing situation, find workarounds to your issues, and make sure that you’ve got all your I’s dotted and T’s crossed. Of course, working with a professional tax preparer will also reduce your stress level dramatically.

Plan for Bill Payment

Make too much last year? Owe Uncle Sam more than the IRS withheld? By filing early, you gain the advantage of additional time – time you can use to plan about how to handle your additional tax debt. Those who file late don’t have that benefit. In fact, those who owe and file late many times end up filing for an extension. During that time, they’re accruing additional interest on the money they owe the government, and deepening the hole they’re in.

No Wait with Preparers

We’ve mentioned the benefits of working with professional tax professionals, and starting early offers benefits on that score, as well. By getting a jump on things, you’re able to avoid the tax-time rush. That not only reduces your stress, but it ensures that your professional preparer has as much time as possible to work on your return and maximize the amount you get back.

Get a Jump on Life Changes

You cannot rush into some of the big decisions in life. However, you need to have financial information before making a choice. Filing your taxes early ensures that you have access to the information you need when you need it. For instance, your child might need tax information to file for financial aid to get into their school of choice. You might need that financial information if you’re planning to buy a new home, a second home or a vacation home. Get a jump on your taxes so you have a leg up on the process.

Lessen the Chance of Identity Theft Affecting Your Taxes

Identity theft is a huge industry today, and thieves are targeting more and more people. A thief can take your name and Social Security number, file a fake tax return and obtain cash from the government. By the time you file your actual return, the government has recorded your situation as paid. It can take months, even years, to get this straightened out. By filing early, you get the jump on would-be identity thieves and ensure that any return the IRS mails goes to you.

In Conclusion

When it’s all said and done, filing your personal taxes early is not just a smart decision, it’s a crucial consideration. It gives you more time, flexibility and the added benefit of being able to maximize your return with deductions that you could miss if you were rushing through the process. Work with an expert tax preparer and get a jump on things this year.

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How to Calculate How Much You Owe in Business Taxes

For employees, filing taxes can be complicated, but the process is pretty streamlined. Your employer withholds what you elect from each paycheck, and pays a portion of your taxes for you. The employer sends that money to the government over time, and you file a return at the end of the year. If you’re lucky, you get a return. If you’re not, you owe and must pay. It’s not that simple when it comes to business taxes, though.
If you’re a business owner, or even just a self-employed professional, you have quite a few more hoops to jump through to pay your taxes. You have a lot of work necessary just to figure out how much you’ll actually owe, much less make the quarterly payments required of you. The good news is that estimating ow much your business will owe in taxes doesn’t need to give you an embolism.

The Two Surprises

If you’re a business owner and this is the first year your company operated, or the first year you’ve turned a profit, you’re in for a couple of surprises. We’ve already touched on the first one – as a business owner, no one is turning in taxes for you throughout the year. The second one is that you are still responsible for Social Security and Medicare payments, and no one is paying those regularly either.

The Good News

The good news is this – it’s possible to estimate what you’ll owe in business taxes. If you have a ballpark estimate, you can pay enough to avoid IRS penalties. The rule of thumb here is that the IRS requires you to pay at least 90% of all income taxes during the year. So, you have a little bit of leeway in case your estimated taxes are under the amount you actually owe.

How to Figure Out What Your Business Owes

When it comes to determining how much your business owes in taxes, it’s best to start with a determination of whether or not you’ll have to file quarterly or not. The answer is yes for most businesses. However, if you owe taxes of under $1,000 for the year, you won’t have to file quarterly.

Once you determine whether you need to pay quarterly or not, the next step is to figure out what you’ll owe per quarter. To do that, you need to estimate quite a few things, including the following:

  • Your taxable income
  • Your deductions
  • Your adjusted gross income
  • Your tax credits

In most cases, you can use your previous year’s numbers as a guide to estimate what you’ll owe this time around. However, if this is your first year as a subcontractor or freelancer, or the first year running a profitable business, that won’t work. In that case, simply take your income up until the current quarter as the base and extrapolate from that point.

You will also need to estimate your business expenses for the quarter, as these will balance against your income. Again, you can use the numbers from last year if you want, or you can use the numbers you’ve generated so far this year to figure it out.

Finally, you need to include your personal income information. Note that this does not apply if your business is a C Corporation. Your personal income information, all of your deductions, and your credits/exemptions will come into play here.

To start estimating how much you’ll owe in business taxes, you have two options. You can do it yourself using Form 1040-ES and the accompanying tax calculation worksheet. You can also work with a tax preparation professional that specializes in helping business owners stay ahead of the IRS. Such a tax firm will be able to help you create as accurate an estimate as possible, and even help you make timely payments every quarter.

Of course, you can also use tax software to estimate your tax liability, but this is only a single step above doing your business’ taxes on your own. Note that you must make sure that self-employment tax is included with each quarterly payment (that’s your Social Security and Medicaid liability per quarter).

Perhaps the simplest method is this – average your income for a year, then divide that into four parts. Each part corresponds to one quarter of the year and will tell you want to pay the government.

Know Your Corporate Tax Rate

If you run either an S Corp or a C Corp, you’ll need to know the corporate tax rate for the year. Note that this doesn’t apply to companies that are not incorporated. The maximum for a C Corp is 35%, but that doesn’t apply to an S Corp. This is because all profits and losses for S Corps are passed along to the shareholders, who claim them on their personal taxes in proportion to their ownership in the business.

For C Corps, the tax rate is 15% if you earn $50,000 or less. If you earn between $50,000 and $75,000, the tax rate is $7,500 plus 25% of the amount beyond $50,000. If you earn between $75,000 and $100,000, the tax rate is $13,750 plus 34% of the amount beyond $75,000. If you earn $100,000 to $335,000, the tax rate is $22,250 plus 39% of the amount over $100,000. If you earn between $335,000 and $10,000,000, the rate is $133,900 plus 35% of the amount over $335,000.

Moving Forward

When it’s all said and done, the best thing for small business owners to do is to work with a trusted tax professional. While estimating what your business owes each year can be relatively easy, it’s imperative that your estimate is accurate. Otherwise, you could end up digging a deeper and deeper hole with the IRS, which is never a place you want to be in.

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Business Taxes – Should You File Form 1120 or 1120S?

Tax time – it’s not something any business owner looks forward to, but it’s far less onerous if you prepare for it. One of the pressing questions you may be facing as a business owner is whether or not you should file form 1120 or 1120S when it comes time to pay your business taxes. Which form is right for you? What are the differences between the two? Let’s take a closer look.

C Corp or S Corp?

To answer the question of whether to file form 1120 or 1120S, you simply need to answer one question. Is your business a C Corp, or an S Corp? If you’re a C Corporation, then you’ll need to file form 1120. If you are an S Corporation, you’ll need to file an 1120S. If that’s the only difference, then why is there confusion surrounding the matter? A lot of it deals with how corporations pay taxes.

The Difference between an S Corp and a C Corp

When it comes to business taxes, there are only a few differences between S Corporations and C Corporations, but they’re pretty important distinctions. Really, it comes down to the fact that S Corporations pass their taxable income or loss to their shareholders directly.

Each shareholder must then pay income taxes based on their stated ownership in the corporation. With a C Corporation, the company pays income taxes on the income directly. There is no pass-through to the shareholders. In addition, C Corps are allowed to carry losses forward and backward, while S Corps cannot. Losses must be passed through to the owners in the year they were suffered.

Most of the other considerations here are the same. For instance, both types of corporations re required to keep personal and corporate books separate. Personal transactions should not be mixed with business. Your state of residence may also require that you file a statement of officers, and you’ll likely pay a fee. The IRS requires that both types of corporation hold annual board meetings, and that you list all working owners on payroll.
Another consideration here is the fact that 35% is the maximum corporate tax rate for a C Corp. However, shareholders in an S Corp could face taxes as high as 39.6% if they fall into the highest tax bracket for earners. The only way to offset that potential is to apply the losses from another endeavor, or to use the losses in an S Corp to offset the earnings from something else. Otherwise, you face significant tax liability.

With that being said, there are some serious differences in how the business’ money can be used. For instance, a shareholder in a C Corp can’t simply decide to draw funds and use them for whatever they want, while the owner of a sole proprietorship or a partner in an S Corporation can. The IRS counts any funds drawn outside the norm within a C Corp as dividends and double taxes them. In contrast, an S Corp shareholder is free to draw any money they might want without it being counted against them, as the IRS will ultimately tax the funds as personal income, anyway.

While this might seem to imply that filing as an S Corp is the better option for most companies, that’s not the case. For instance, understand that you cannot take the 50% gain exclusion on the sale of small business stock as part of an S Corp. In addition, only shareholders the government deems “eligible” can transfer stocks in an S Corp.

Finally, each shareholder within an S Corp will need to file additional paperwork. The IRS expects you to send in not only your standard personal income tax paperwork (generally a form 1040), but also a Schedule K-1, which will spell out your income, deductions and credits in much greater detail.

There is one additional caveat – not all corporations are able to file as S Corps. You must run a “qualifying small corporation” to do so. The IRS has stringent rules here, and you’ll need to ensure that your business meets them.

How to Change Your Filings

You may have noticed that the IRS is treating your company as a C Corporation. There is good reason for that. The IRS treats single corporation as a C Corp initially. You must take steps to change how the agency treats your company. To do that, you’ll need to file a form 2553. What’s more, you must file this form within two and a half months of founding the corporation.

Note that you will need to file this every single year that you want the IRS to treat you as an S Corp and to file an 1120S. Note that if you do NOT file form 2553, you cannot file an 1120S. The IRS will flag this activity and alert you to the fact that you’re missing form 2553. This could lead to you only being able to file at a C Corp for that year, using a form 1120, but working with an experienced tax preparer who specializes in corporate taxes can help you avoid this fate.

In the End

When everything is said and done, filing as an S Corp does have its advantages. However, there are cons to it, as well. If you’re not sure whether you should file as an S Corp or a C Corp, working with a professional tax preparer specializing in business taxes will ensure that you have access to the advice, guidance and expertise you need. Corporate taxes are a delicate matter, and really do require the help of an expert.

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