business expenses

Deductible Business Expenses

The best way to find out what business expenses can be deducted from your income is to consult with your Simma Flottemesch & Orenstein representative. Reducing your business’s income by expenses means you have less money to pay taxes on. However, the scope of potentially deductible expenses is a wide range. Do yourself a favor and keep as detailed records as possible, especially when it includes the following:business expenses

General Business Expenses

Unfortunately, there is no master list of what the IRS allows your business to deduct. Instead, your CPA can help you determine whether certain expenses are incurred as a “cost of carrying on a trade or business.” At a minimum, these may include:

  • Office supplies
  • Utilities
  • Furniture and equipment
  • Software
  • Advertising
  • Rent or mortgage payments
  • Wages, salaries, bonuses, commissions and employee health insurance premiums

The IRS also requests, in the classification of these expenses, that they be “ordinary and necessary.” It defines such as “an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.”

Other Business Expensesauto expense

You are allowed to deduct up to 50 percent of the costs of meals and entertainment when those outings are associated with business operations. Therefore, the event must take place immediately before, after or during a business discussion.

If you are staying on top of your business knowledge through the use of trade magazines, business seminars or other learning materials, these books, magazines and educational programs can be deducted from your taxes. Make sure the subject matter of these materials contribute to your ability to run, maintain or improve your business or trade.

When you start your business, any startup costs are considered capital expenses rather than business expenses, since business expenses cannot be incurred until your business is up and running. In the first year of business, up to $5,000 of your capital expenses can be deducted. What remains beyond that $5,000 can be deducted from your taxes for up to a 15-year period.

Special Expense Deductionshome office

Home office and auto expense deductions are calculated in two different ways. These methods include the standard method or the actual method. For auto expenses, the standard method is a deduction of 53.5 cents per business mile, plus toll and parking fees. The home office standard method allows a deduction of $5 per square foot, with a maximum of 300 square feet, or $1,500. Using the actual method for auto expenses requires you add up all auto expenses (gas, repairs, oil changes, etc.), and multiply the total by the percentage of miles that were used for business purposes. The actual method of calculating your home office deduction requires you add up all home expenses and multiply it by your home office percentage (office square footage divided by your home’s total square footage). For the home office, any expenses related to the space are included if the space is used exclusively and regularly for business.

Working with a CPA from Simma Flottemesch & Orenstein will maximize your business expense deductions by making sure all expenses relevant to your business are accounted for. Doing your taxes yourself often leads to these deductions slipping through the cracks or being inaccurately recorded. Get peace of mind when you prepare your taxes with a professional from our offices.

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invoice

Interpreting Invoices

Whether you are sending or receiving invoices, it’s important to understand the terms and conditions being dictated by the invoice. So much of doing business between a buyer and seller is about meeting or exceeding expectations. This not only includes what you are expected to delivery as a seller to your buyer, but also what you expect in terms of payment from that buyer.invoice

If your business is sending out invoices, for services rendered or products sold, there are a few options that you can specify in your invoicing that will relate back to payment terms. Sending out an invoice is only the beginning of collecting monies due. Payment terms will keep your cash flow on a more predictable schedule. First and foremost, a key component of receiving your money faster is by invoicing as soon as possible. Pushing back your invoicing pushes back your payday.

In general, keep your invoice verbiage both professional and customized to your client. This means: address the client specifically, clearly and politely describe the invoice terms, and show them you appreciate their business. Invoice terms will typically include information about the accepted forms of payment, a due date for payment, and late-payment penalty details, if any. For late fees, an interest charge is better than a flat fee. Opt for an interest charge over a flat fee, and continue to tack on these fees the for each term the invoice continues to go unpaid (Example: a 30-day invoice would charge 1.5-2% interest every 30 days past the initial 30-day due date).

For a long time, 30 days were standard payment terms. However, as modern invoices are being sent electronically, with the ability for online payments, 30-day terms are becoming less common. Invoices can be sent faster, and payment can be received faster. By setting shorter payment terms, today’s invoices are being paid faster. On bigger bills you may want to provide some leniency, but in these cases, you might consider offering a discount for faster payment. By knowing your industry and your customers, you can usually determine the appropriate length of payment terms for your invoices. Invoice terminology has been studied, and it has been determined that “days to pay” is preferred to technical terminology like “net 30.”invoice payment

Additional ways to speed payment

  1. Avoid confusion between parties by discussing payment terms before delivering on your product or service.
  2. Follow up with clients on unpaid invoices. Invoicing software will often let you enable automatic reminders to be sent to clients.
  3. Be as detailed as possible about what you delivered or performed for your client, while keeping the invoice clear and easy to understand.
  4. Continue to follow up with clients who let a due date come and go. By email, phone and face-to-face, don’t allow debts to go unpaid.
  5. Create a policy for late fees.

Overall, the best invoicing system is one that is streamlined and efficient. Modern software has helped this process, allowing for electronic invoicing, reminders and easy online payments for customers. Have templates and systems in place that allow you to cut down the time you’re spending on creating, sending, and chasing invoices.

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hobby

Hobbies vs. Side Hustles

These days, “side hustle” has become quite the buzzword. But what is the difference between a hobby that’s bringing in extra income and a business? Whether you’re selling your paintings, pottery or woodworking, this income needs to be reported on your tax return, although not in the same way as business income.woodworking hobby

So what’s the difference? The IRS declares that individuals “operate a business to make a profit,” while, “people engage in a hobby for sport or recreation.” To help you determine whether your activity qualifies as a hobby, the IRS has composed the following list of factors:

  1. Like a business, do you maintain books and records for this activity?
  2. When you invest your time and efforts into this activity, are you intending to make a profit?
  3. Do you depend on the income from this activity for your livelihood?
  4. Are your losses from circumstances beyond your control? (*versus a startup phase of a business)
  5. Do you alter your operations to improve profitability?
  6. Do you have the knowledge to conduct the activity as a successful business?
  7. Have you successfully made profits on these activities in the past?
  8. Are there certain years your activity makes a profit?
  9. Could you expect to make a future profit from the appreciation of assets you use in this activity?

Fitting one of these factors alone does not automatically deem the activity a business. Rather, it’s best to consider all of these factors and circumstances in respect to your activity.hobby

If it’s a business…you are able to deduct losses. However, you will have to complete Schedule C, as well as pay income tax and self-employment taxes.

If it’s a hobby…you can no longer deduct expenses related to hobbies. Report your income on Schedule 1, Form 1040, line 21 (Other Income).

In conclusion, it’s always best to keep as detailed records as possible, in case of an IRS audit. Don’t let the threat of taxes on your hobby income deter you from conducting your hobby. Continue what you love, and if you don’t want to pay taxes on this activity, don’t sell your goods for income.

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c-suite

Outsourcing C-Suite Roles

Increased technology has allowed the outsourcing of many business roles, but could this also include your C-suite, or leadership, roles? This is becoming especially common for the CFO (chief financial officer) and CMO (chief marketing officer) positions. Less common roles, like chief investment officers or chief information security officers, may be outsourced as well if they are required for the company’s operations. Companies today can hire for these roles on a part-time or fractional basis.c-suite

With the modern ability to work remotely, individuals in these roles have the ability to work for multiple clients from one source. Traditionally, companies have had numerous layers of management. But with the growth of information technology and increased automation, companies today are able to operate under a leaner structure.

Is it right for your company?

The companies benefiting the most from this trend of part-time executives are small and mid-sized companies. They can tap into the expertise and leadership of these executives without paying for a full-time role they can’t afford and realistically, don’t require for business operations. Cyclical or seasonal operations can produce long lulls for some of these roles, so it’s more cost-effective to pay a more qualified part-time executive than a less experienced, full-time executive.

The alternativec-suite

A small business owner’s first instinct is to not hire for the role at all, but instead, to try to take on some of the tasks in addition to their ownership and leadership roles. We caution, however, that this can end up being a more time-consuming, and less cost-effective, solution. Owners are already being pulled in numerous directions. Adding these additional roles to your plate, for the sake of saving some money, can lead to long-term costs from mistakes and errors that may be incurred by novice work.

Rather than take on these roles yourself, consider outsourcing as a solution for filling these roles with part-time, qualified candidates.

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summer work

Summer Success Strategies for Small Businesses

Memorial Day has come and gone, and whatever weather your June finds you in, summer is here. What does that mean for your small business? For some, it might mean a slower time in the office, but for others, it’s a time to capitalize on their seasonal business income influx. Regardless of your specific situation, everyone can make the most of their summer by taking notice of the goals and projects that are important to year-round business success.summer bench

Utilizing downtime

Do your employees take the kids on vacation and hit the river or lake in the summer? Are there fewer clicks on your website and social media pages? Get productive during this downtime, and set a few summer goals for your business. Improve operations that your company struggled with during a different time of the year or tackle a project that’s been on the back burner. Declutter, streamline, and generally improve your business and its systems.

On the flipside, does your business peak during the summer months? Perhaps you’re in the field of lawn and garden products, pool systems or air conditioning services? Evaluate your staffing needs so you aren’t surprised by a leap in demand. Capitalize on the business increase with employee incentive plans.grass laptop

Improve your business

If you haven’t already, get your business a mobile website that is optimized for search engine functionality. Get your business up and running on all the applicable social media platforms as well. While the clicks are down in summer, streamline these digital processes to make real-time engagement with your followers easier during the busier months.

Take this time to target your top prospects. If it’s a season for focus in your realm, it just might be their time to consider new offers as well. Use this period to plan for the rest of the year, especially for a big fall marketing plan push prior to the holiday season. Foresight in your planning will take some of the stress out of managing your small business. Is it time for a new look—for your office or your brand? Summer is a great time to work on rebranding anything and everything from your office space to your marketing materials.minneapolis summer

Increase employee productivity

Don’t let productivity slump this summer season. Gather employees and use the extra time on your hands to reconnect and get feedback. Host an employee appreciation party or campaign to encourage employees to continue to stay busy during the slow times. Offer an incentive for increased productivity with an employee promotion campaign. In companies where sales are a key component, offer an extra incentive for increased sales during the summer, much like you would during the holiday season.

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tax calendar

Tax Date Calendar for Small Businesses

April 15 may be in your rear view mirror, but your business still has tax-related obligations throughout the year. Don’t let these dates sneak up on you unexpectedly. Know what you need to file and when for the upcoming year:tax preparation

June 17, 2019: Q3 Estimated Quarterly Income Tax Payments Due

If your business pays estimated quarterly taxes, and these payments were prepared along with your Simma Flottemesch & Orenstein tax return, this is the deadline for your Quarter 2 payment.

September 16, 2019: Q3 Estimated Quarterly Income Tax Payments Due

Time to make your Quarter 3 payment.

September 16, 2019: S-Corp and Partnership Extension Deadline

Did you receive an extension for your S-Corp or partnership tax return? Then this is your deadline for submitting the return and payment.

October 15, 2019: Extension Deadline for Individuals, Sole Proprietors, LLCs and Corporations

This is the deadline for submitting your return and payment for any extended individual, sole proprietor, LLC or C-Corp tax returns.

December 31, 2019: 401(k) Deadline

Any contributions to you or your employee’s 401(k) but be completed by the end of the year if they’re to count toward your 2019 return.tax calendar

January 15, 2020: Q4 Estimated Quarterly Income Tax Payments Due

The taxes that were estimated for Quarter 4 are due in mid-January.

January 31, 2020: 1099 and W-2 Mailing Deadline

For your traditional employees, you must get their W-2 forms in the mail by the end of January. Any 1099s for contractors you worked with during 2019 must be postmarked by January 31 as well.

March 16, 2020: S-Corp and Partnership Tax Return Deadline

S-Corps and partnerships must file their 2019 tax return and submit payment by March 16, a month before the individual return deadline.

April 15, 2020:

  • Tax filing deadline for individual, sole proprietor, LLC and C-Corp returns
  • Q1 estimated quarterly income tax payments due
  • Simple Employee Pension (SEP) contribution deadline
  • IRA contribution deadline, for both traditional and Roth IRA accounts

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bookkeeping

Should I Hire a Bookkeeper?

When you’re running a business, determining where to spend your money can be a difficult decision. All businesses, but especially small businesses, look to make informed decisions on expenditures. With the growth of technology and software, some small business owners are opting to save money by doing their own bookkeeping. But is this option for everyone? No. Consider the pros and cons of diving into performing your business’s bookkeeping duties before you consider yourself a savvy spender.bookkeeping

CPAs vs bookkeepers

There are numerous functional differences between the roles and responsibilities of CPAs versus bookkeepers. While the two often work closely together to fulfill client needs, they are not interchangeable. Bookkeepers manage the day-to-day financial operations of the business. This includes recording all types of transactions related to money moving in and out of the company. This role also usually encompasses invoicing, bill paying and payroll processing. Additionally, bookkeepers prepare reports, both monthly and yearly, to provide a clear picture of the business’s financial standing.

CPAs, on the other hand, are accountants that have passed the certification requirements of their state’s accounting board. This certification outlines the minimums on education and experience before these accountants can perform their role of advising business owners and preparing financial statements. An accountant will utilize the reports prepared by a bookkeeper to interpret the immediate and projected financial health of the business, as well as advise owners on financial decisions. CPAs are required to stay up-to-date on the latest laws and regulations that affect your businesses finances.bookkeeping

Bookkeeping applications

Accounting software cannot replace the knowledge and experience of your CPA. However, some businesses are seeking to replace their bookkeepers with modern bookkeeping technology. These computer applications aim to automate your financial processes, and the best versions do so by connecting the software to your business’s bank account and credit cards. When choosing a software, it’s also important to find a system that is capable of generating necessary financial reports. Both Quickbooks Online from Intuit and Xero are ranked high as software for small business accounting and bookkeeping. FreshBooks and Zoho Books are also in the top rankings, although FreshBooks is best for freelancers because of its strong invoicing tools and Zoho is best for really small businesses. All have monthly plans that are similar in price.bookkeeping

Considerations

Be cautious about that sticker price and take it at face value. While these automated tools may seem like simple, cheaper solutions than hiring a bookkeeper, there are some variables to consider. First, not all of these applications are easy to use or quick to learn. What is your time worth? Most business owners have a full plate of duties and responsibilities, so adding bookkeeping to that agenda can be a taxing endeavor. In which case, it may pay more dividends to enlist an expert. The money that automated bookkeeping services may save you could be eaten up by the time that it costs you to become familiar with it. These programs, while automated, are not one hundred percent reliable. There may be occasional downtime for updates and maintenance to the program. Also, it can difficult to know all the functions you will require from software when you start out doing your own bookkeeping, and customer service for these platforms is not created equal. Don’t jump into this decision lightly, and consider the pros and cons for yourself and your business by trying to tackle the task of doing your own bookkeeping.

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boss

Employees vs. Independent Contractors

What is the business relationship between you and the people who do work for you? Are they employees or independent contractors? The implications of these scenarios can have big effects on your business operations, especially for small businesses. The two are very different working relationships, and incorrectly classifying your workers will likely lead to repercussions with the IRS.employees

Employees

Employees provide services for an employer. They are under an implied or express contract of hire, and this contract allows the employer to determine the details of work performance. The IRS determines whether an individual is an employee or contractor based on degrees of control and independence in the working relationship. Under common-law rules, “anyone who performs services for you is your employee if you can control what will be done and how it will be done.” Employees will fill out a Form W2, while an independent contractor completes a 1099-MISC. The default classification for workers is W2 employees.

Pros

Employers have complete control and direction over an employee’s work and wages or salary during their work time. This means, they determine training, job requirements and responsibilities for the position. Full-time employees perform 30 or more hours of work for you per week. Less than 30 would qualify the worker as a part-time employee. Generally, employees have an ongoing commitment to you and your business. Employees enjoy job security, and the lack of job security for freelancers usually leads them to charge more per job. Tasks can be permanently delegated to your employees, while freelancers have no obligation to be on call for you or your business.

Cons

There are laws and regulations you must uphold, being in charge of employees. These are required by both the state and federal government, and include regulations related to pay, overtime and other work rules. In the tax realm, if you have employees, your business is required to comply with payroll tax requirements. This includes paying half of Social Security and Medicare taxes, and collecting the other half from the employee. You are also responsible for paying unemployment insurance and worker’s compensation insurance. The added overhead of these expenses is often what drives employers to misleadingly employ independent contractors. While you are not required to offer benefits like health care and vacation time, full time employees will often expect these fringe benefits.

Independent Contractors

The IRS qualifies independent contractors in the following way: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” Here, the other party is self-employed, so the two parties are acting in a working relationship between two businesses, where one is providing a service to the other. When you hire an independent contractor, you can assign duties or projects, with an imposed deadline, but you cannot dictate how the job is completed. Thus, most independent contractors are hired with a contract that provides a defined period of employment, with the option to renew as many times as needed.contractor

Pros

Independent contractors can complete work and projects for multiple employers, but often provide their own tools for completing the job. They are ideal for smaller, as-needed projects for your business. As a whole, small business owners prefer to hire as-needed freelance work. Pay is usually hourly or outlined in a contract, and you are not held to a salary. Besides being responsible for their own taxes, contractors are also responsible for their own permits and professional licenses, if needed for the task.

Cons

Independent contractors are entitled to set their own hours of work. There are very little tax responsibilities you will be held to for independent contractors you hire. You will report any contractor’s income on a form 1099-MISC, but, as the hiring agent, you do not have to withhold any taxes from your payments to a contractor. However, contractors have no responsibility to you or your company, in terms of loyalty. They are free to take on work on a first term, first serve basis. In addition, they work under their own brand, not your company’s.

The difference

If the work required needs to be completed under your supervision or you have control over the tools and equipment used to complete the work, then you are hiring an employee. Also, if the work is long-term or essential to your business, you are employing an employee, not an independent contractor. If the work is not essential to your business operations, is short-term and can be done without supervision, then hiring an independent contractor is applicable.

Misclassifications

If the IRS believes you are misclassifying your workers, it may be cause for an audit. If you incorrectly classify an employee as an independent contractor, you could be liable for unpaid employment taxes. Workers who feel they have been misclassified can file Form 8819, Uncollected Social Security and Medicare Tax on Wages for the entire duration of their compensation period. If you are still having trouble deciding which category your workers fall into, file Form SS-8 with the IRS: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

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records

Retaining Your Tax Documents

Whether the results of this most recent tax season had a positive or negative impact on your bank account, it’s important to consider how long you should retain your tax documents. This includes a copy of your tax return and any documents providing support of income or deduction items, as well as evidence for any credits received.  A period of limitations is determined by the IRS based on the time in which you could amend a return to claim a credit or refund, or during which the IRS can assess additional tax.

The general rule of thumb is three years. This means you should retain a copy of your return and supporting documents for that return until three years from the filing due date. For example, you should keep the information regarding the return that was due April 15, 2019 until April 15, 2022, at the very least. Keep in mind, these periods are federal guidelines. States may have their own statute of limitations.tax records

Exceptions

There are a lot of “buts” in tax circumstances. Fittingly, if you claim a bad debt deduction or a loss from worthless securities, retain your records for seven years instead of three. If you have ever filed a fraudulent return, or forgotten to file a tax return, the IRS requires you keep your financial records for your lifetime.  Finally, if for some reason, 25 percent of your income was not reported on your tax return, the IRS has up to six years to impose additional tax.

Period of limitations

The IRS has provided the following information on a period of limitations for different scenarios:

  1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
  2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
  3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
  4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  5. Keep records indefinitely if you do not file a return.
  6. Keep records indefinitely if you file a fraudulent return.
  7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.shred

Disposal

A good scanner has made the electronic retention of these records fairly efficient. However, when disposing of your records and prior tax returns, it’s important to shred any physical documents that may bare identifiable information. Poorly disposed of documents could make you susceptible to identity theft. For electronic information, be sure to have strong security software in place. Keep in mind, that although the IRS may no longer have a use for your records, they could be needed by your insurance company or creditors, in some cases.

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ben franklin

Tax Day | A Brief History

Today’s the day: tax day, April 15. This day is as much ritual to our country as national holidays. However, despite the ceremonious processes that accompany it, it’s more of an anti-holiday in the eyes of most taxpayers. Some years, tax day shifts slightly to accommodate Emancipation Day (a holiday in the District of Columbia), but for the most part, falls on April 15 if the date doesn’t fall on a weekend. So how did April 15 become the deadline for settling our debts to the government?  We bring you a brief history of Tax Day.we the people

The 16th Amendment to the Constitution, ratified in 1913, established the right of the federal government to directly tax individuals. This Amendment was adopted on February 3, 1913, so Congress opted for March 1 of 1914 to be the first filing deadline. However, this amendment didn’t impose an income tax—that arrived with the passage of the Revenue Act of 1913 on October 3, 1913. This act stipulated that individuals with an annual income exceeding $3,000 for single filers or $4,000 for married couples were required to file a return. Those numbers sure have changed!

The new deadline became March 15 when the Revenue Act of 1918 was passed, giving taxpayers a couple extra weeks to gather their tax materials. It wasn’t until 1955 that the Internal Revenue Code of 1954 established April 15 as the new deadline. The explanation for the change was to help taxpayers as the tax laws became more complex and convoluted. House Ways and Means Committee Chair, Daniel A. Reed, expressed that this extra month would also help accountants, tax preparers and the IRS spread out their tax season workload. Another theory arose: that as the income tax applied to more of the middle class the government was issuing more refunds, and the extension of the deadline allowed the government to otherwise utilize those funds longer.taxes

Interestingly, the previous deadline of March 15 symbolically corresponded with the Ides of March—a date on the Roman calendar that served as a deadline for settling debts. As Benjamin Franklin famously said, “In this world nothing can be said to be certain, except death and taxes.” While he wasn’t referring to federal incomes taxes at the time, it’s a fitting sentiment. Taxes are woven into the fabric of our country from their establishment in the Constitution. While today may not feel like a holiday to you, tomorrow is a holiday of sorts for your CPA. Congratulations to you and your CPA on surviving another tax season.

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