Tax time can be especially stressful for small business owners. They invest a lot of time, money and effort to create a successful enterprise and they want to save as much money in taxes as possible. When it comes to bookkeeping, there are a number of common mistakes that business owners make that can cost them money or land them in trouble with the IRS.

Business owners must maintain communication with their accountants for effective services. If they outsource work or pay a bonus, for example, they need to inform their accountant and provide a receipt. Even the use of petty cash must be handled appropriately, along with categorization of accounts. Paper trails are critical.

Receipts

Business owners know the importance of saving receipts for high ticket expenses, but they often overlook receipts of $75 or less that can provide documentation in the event of an audit. It pays to embrace modern technology for this. Apps are available that enable people to snap a photo with their phone for filing purposes. There are also scanners that will scan receipts and automatically categorize them for retrieval when needed.

Reimbursable Expenses

These are expenses that a business owner may incur on behalf of their clients. That can include phone calls, travel, office expenses, delivery fees, conversion fees, or even lunch with a potential client. The expenses need to be tracked and documented. There are convenient apps for that.

Employees

Classifying employees can be confusing. There are regular employees, independent contractors and consultants, and freelancers in the gig economy. Misclassifying employees and contractors will result in expensive tax penalties and lawsuits.

Reconciliation

The books a business maintains must be reconciled with bank statements. It provides individuals with information about their business health and enables them to plan for things like equipment purchases or expansions. Reconciliation will identify bank errors, if more employees can be added, and how much money is available at any given time. It can be time-consuming and complicated without the assistance of an experienced bookkeeper.

Sales Tax

Failure to collect sales tax, or deduct sales tax, can turn into a nightmare due to the many ways in which business is conducted today – especially e-commerce. A tax professional should be experienced in the rules governing multiple types of commerce.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

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Practically every small business has receivables that it cannot obtain from clients. If your small business doesn’t have any such receivables, consider yourself lucky. For those small businesses that suffer from uncollected receivables, solace can be taken from the fact you can claim a tax deduction. 

A small business can write-off bad debt losses if it meets nominal requirements. To claim such a tax deduction, the following must be shown:  

1. The existence of a legal relationship between the small business and the debtor
2. The receivables are worthless
3. The small business suffered an actual loss

Proving there is a legal relationship between the small business and debtor is fairly simple. You must simply show that the debtor has a legal obligation to make a payment. Most businesses issue invoices or sign contracts with debtors and these documents suffice to prove the legal relationship. If you are not putting your business relationships in writing, you should begin doing so immediately.

Proving receivables are worthless is slightly more complex. A small business is required to show that the debt has become both worthless and will remain so. You must also show that you took reasonable steps to collect the receivables, but you are not necessarily required to go to court to meet this requirement. A clear example of where you would meet this requirement is if the debtor filed bankruptcy.

While proving that you suffered a loss may sound like the easiest requirement to meet, the issue is a bit more complicated. The Tax Code defines the loss as an amount that is included in your books as income, but is never collected. A classic example of such a situation would be a manufacturer that provides products to retailers on credit. The manufacturer can show a real loss if the retailer files bankruptcy.

Unfortunately, there is almost no way to claim a loss if you provide hourly services and use a cash accounting method. The IRS does not consider the expenditure of time and effort to be a sustained economic loss. 

Small businesses suffer all too often from uncollected receivables. If you failed to claim such losses as a tax deduction during your last three tax filing years, you should file amended tax returns to get a refund.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

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Here are seven ways for owners of small businesses to save money on their taxes.

1. Incorporate Yourself: If you`re still a proprietor or partner of a business, it`s time to incorporate yourself. Not only will you limit your liability, but you may enjoy lower tax rates on small business income and other tax advantages as well. 

2. Be Home Based: If possible, continue (or switch to) being a home based business. Not only will you keep your overhead down, but you will be able to write-off (or deduct) the business use of your home.

3. Income Split: Pay reasonable wages to your spouse and children. In this way, you can legally divert income taxed at your higher rate to your family members that are in a lower tax bracket.

4. Rearrange Your Affairs For Maximum Tax Savings: Can you make some changes to turn your hobby into a moneymaking business? Can you use that extra room in your house as a home office for your business? Can you arrange to use your car more for business purposes? Can you arrange for more of your entertainment expenses to be business-related? 

5. Document Your Expenses Well: Do you document your expenses well so that they would survive a tax audit? Have you kept a mileage log so that you can prove the percentage of business use you claim for your vehicle? Have you kept receipts for all your entertainment expenses and listed the business purpose on the back of each receipt?

6. Be Punctual: File all returns and pay all taxes due (income, payroll, sales, et cetera) on time. This way, you avoid expensive late filing (and payment) penalties and interest. 

7. Develop a Tax Planning Mindset: Some people only worry about their taxes during tax season. However, you will save a fortune in taxes, legally, if you make tax planning your year-round concern. Do you make business and personal purchases, investments, and other expenditures with tax savings in mind?

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

Contact Us Today