disabled access credit

Business Tax Credits

Tax credits help your business save money by cutting your tax. Tax credits are especially beneficial to those in lower tax brackets. The key to utilizing these credits is understanding what tax credits your business may qualify for.

For a full list of possible business credits and their associated tax forms, click HERE. Otherwise, here are some more common credits available to you:

Disabled Access Credit

If you provide access to your business for people with disabilities, you could be eligible for a credit. This credit is applicable to the expenses incurred in making improvements to your business to increase access. The credit amount is up to 50 percent of the cost of your upgrades, but cannot exceed $10,000 per year.child care credit

Employer-Provided Child Care Credit

These days, child care costs are an exponential expense to your employees. Businesses who directly pay for the child care expenses of its employees can claim this credit. This credit is for up to 25 percent of childcare expenses, with a maximum of $150,000 per year.

Investment Credits

What does your business invest in? If you choose to invest in reforestation, building rehabilitation and alternative energy properties, you could receive a credit of 10 percent of these investments. This credit has a $10,000 per year limit.

Research Expenses Credit

This credit is in place to encourage domestic research and development. The calculation of this particular credit is less straight-forward, and the definition is broad. Generally speaking, the following activities may qualify your business for this credit: developing prototypes or models, streamlining internal processes, environmental testing, applying for patents, etc.research credit

Small Employer Pension Plan

You don’t have to be a big business to provide your employees with a pension plan. This credit applies to starting a pension plan for your employees. The credit is for up to 50 percent of setup costs, not to exceed $500 per year.

Work Opportunity Credit

If your business hires employees that have faced significant barriers to employment, you could qualify for this credit. Such individuals might include veterans, food stamp recipients or ex-felons. The credit amount is calculated based on the wages paid to these types of employees, but range from $1,200 to $9,600.electric vehicle credit

Electric Vehicle Credit

If you’re in the market for a new company vehicle, make it a car or truck that draws energy from a battery with at least 5 kilowatt hours of capacity. This hefty credit ranges from $2,500-$7,500 for qualified electric drive motor vehicles. The amount of the credit is largely determined by the battery capacity in excess of 5 kilowatt hours.

All of these potential credits should be discussed with your CPA to determine whether your business qualifies.

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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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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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supplies

Deductible Business Expenses for Small Businesses

The IRS requires that deductible business expenses must be both ordinary and necessary for business operations. If an expense is common to your trade or business, it is an ordinary expense. A necessary expense is helpful and appropriate to the operations of your business or trade. Deducting these qualifying expenses lowers your income tax bill. Even common business expense deductions may not apply to your specific small business. Working with a CPA from Simma Flottemesch & Orenstein will help you hone in on what expenses apply to your business, and how to make the most of these deductions.

Common small business deductions

Advertising: 100 percent of costs associated with advertising and promotion of your business, including business cards, are deductible.

Business meals: business-related meals that can be supported with proper records (amount, date, location and business relationship of other diner(s)) are 50 percent deductible. *Tip: on the back of the receipt, write down the purpose of the meal, who you dined with and what you discussed.

Business insurance: business insurance costs can be deducted on Schedule C.

Car: if your vehicle is used solely for business purposes, all the costs associated with its operation can be deducted. More commonly, vehicles are used for business and personal use, in which case only the costs associated with business-related usage can be deducted. When you claim mileage for business use of your vehicle, there are standard mileage deductions that change yearly, or you can deduct actual costs. In 2018, the standard mileage rate was 54.5 cents per mile, while that amount has increased to 58 cents per mile in 2019.car

Charitable contributions: both corporations and individuals can deduct charitable contributions to qualified organizations on their tax returns.

Depreciation: large business items depreciate over their lifetime of use. Higher priced items with a longer life of use should be depreciated, rather than deducted upfront.

Education: costs associated with training or improving the knowledge and skills of you and your staff add value to your business and are fully deductible. These costs, for classes, seminars, subscriptions, books, workshops, etc., must increase your expertise in your current field, not qualify you for a different career.

Home office: the IRS has standardized this deduction—you can deduct $5 per square foot of your home that is used for your business. This amount maxes out at 300 square feet. It’s important that this area of your home qualify under three areas: exclusivity, regularity and precedence. This means that the area must be used exclusively for business, be used regularly for business operations or responsibilities, and be used as the principal place for conducting important business activities. A portion of renter’s or homeowner’s insurance can also be included in this deduction.home office

Insurance premiums: whether your business owner’s policy covers malpractice, flood insurance, cyber liability coverage, business continuation insurance or all of the above, the costs are fully deductible.

Interest and bank fees: interest that is incurred on business loans or credit cards, in addition to fees and bank charges on your business bank accounts, can be claimed on Schedule C.

Legal and professional fees: the fees charged by Simma Flottemesch & Orenstein to prepare your tax return are included in these deductible fees. These fees would also include any bookkeeping fees charged by a bookkeeper or bookkeeping service.

Medical expenses: as a small business, you may qualify to claim a tax credit up to 50 percent of premiums paid for employees, which would be a better tax break than a deduction. If you are self-employed and paying your own health insurance premiums, those costs are generally deductible. However, there are some exceptions, like if your spouse has an employer plan you could opt to participate in. Consult your tax professional to determine how this deduction applies to your specific situation.

Rent and utilities on business property: if your business operates in a rented space, the cost of renting the facility is fully deductible. Additional deductible utilities for the operation of this space include electricity, internet and phone charges (mobile or landline).

Salaries and wages: what you pay employees for salaries, wages, bonuses, commissions and taxable fringe benefits are deductible business expenses. Owners do not qualify as employees.

Supplies: business office supplies, furniture and other equipment are all deductible. It’s important to keep all receipts related to the purchase of these items. In today’s digital age, office electronics can also be included. Think of your laptops, tablets, smartphones and the software used to operate them in relation to business activities.supplies

Travel expenses: a business trip will only qualify as business travel if it is ordinary, necessary and away from the city or area in which you conduct business. Travel must last longer than one normal day’s work. Potentially, the deductible expenses from this travel may include transportation-related costs, meals, lodging, parking, tolls, tips, business calls, etc.

This list is by no means exhaustive, but it is a starting point for determining what business expenses are deductible on your return. Every scenario is different, and your tax professional will determine which deductions you qualify for. It’s important to keep records throughout the year of these expenses.

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Business Structure: Tax Implications

This post marks part three of our blog series debunking the business structure selection process. Today, we look at the tax implications of the structure you select. Perhaps less of an influence on your decision-making process and more an effect of the choice you’ve made, keep these items in mind this tax season and beyond. 

In a sole proprietorship situation, your business and personal taxes will not be separate because your sole proprietorship income is your income. Think of it as one income with one return. The business will not need to file its own return. This does allow you to receive the lowest tax rates of any of the business structures. Filing will involve a Schedule C (to report profits and losses) and the Form 1040 usually involved in your personal return. All profits will be taxed in the year they are earned. First-timers should prepare themselves to pay self-employment taxes. This means you are solely responsible for your social security and Medicare contributions. partner

Similarly, in a partnership arrangement, the partners will need to pay taxes on their share of profits from the business, even if that money is staying in the business. Like a sole proprietorship, an LLC is a pass-through entity. In this situation, Schedule K-1 of Form 1065 will be critical to filing.  Again, self-employment taxes will come into play on your personal return.

On the federal level, taxation of Limited Liability Companies will treat the business as either a corporation, partnership or disregarded entity. If there are two or more owners, the LLC will be taxed like a partnership: with pass-through taxation, and taxes paid on the personal tax returns of its owners rather than at a business level. If the LLC has only one member, it will be treated as an entity separate from its owner. In either case, if the LLC files Form 8832 it will affirmatively elect to be treated as a corporation. However, LLCs also have variable state tax implications based on your individual state.

Although a cooperative operates as a corporation, its operations pass-through income to its members. As we’ve seen in previous examples, this means the individual members will pay taxes on their cooperative gains when they file their personal returns. Certain cooperatives do obtain tax-exempt status. Based on these variables, tax forms for cooperatives may require 1099-PATR or 3491 Consume Cooperative Exemption Application. team

Electing to structure your business as a corporation will make it a separate legal entity from its owners. These entities will file taxes with a Form 1120 or 1120S. The primary difference between the two main types: S-Corps and C-Corps, is the tax implications.

S-Corps receive some tax savings compared to their C-Corp counterpart. Owners treat taxes on income as they would for a partnership or sole proprietorship. Shareholders are taxed on the dividends they are paid. Any remaining income is paid to owners as a distribution and thus taxed at a lower rate. Businesses might not elect to be a S-Corp because they have too many shareholders (there’s a 100 shareholder limit) or because they want to keep money in the business, a benefit to the C-Corp structure.

Corporate taxes are often lower than personal taxes, but C-Corps can incur double taxation. First, the corporation is taxed when it makes a profit. Second, these same funds are taxed when dividends are paid to shareholders or when owners draw a salary. Then again, owners will not be taxed personally if the money remains in the business.  

 

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Choosing a Business Structure: Types of Entities

You’re starting your own business, but what type of legal entity will you establish for the business? It can be difficult to balance the advantages and disadvantages of these structures. So let’s review the options and simplify those considerations:

Sole proprietorship:

A sole proprietorship is the simplest form of business entity. In this scenario, one person is responsible for the company, its profits and its debts. The most common way to structure your business, it is easy to form and gives complete managerial control to the owner. At the same time, the owner is then personally liable for all financial obligations to the business.

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Partnership:

When the entity is owned by two or more individuals, it is a partnership. The partners agree to share in both the profits and losses of the business. These profits and losses are reported on the partners’ individual tax returns. However, each partner is still personally liable for the financial obligations of the business.

  1. Limited partnerships (LP): when one general partner has unlimited liability, and the other partners have limited liability. The limited liability partners also tend to have a limit on their controls over the company, as documented in a partnership agreement.
  2. Limited liability partnerships (LLP): limited liability is given to all owners of the company. An LLP protects partners from the partnership’s debts, so they are not responsible for the actions of their partners.

Limited liability company (LLC):

This business structure is a hybrid that limits personal liability for its owners, partners or shareholders, while enjoying the tax and flexibility benefits of a partnership. Therefore, personal assets will not be at risk if the LLC faces bankruptcy or lawsuits.

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Corporation:

Corporations are viewed as entities that are separate from their owners. Therefore, a corporation has legal rights that are independent of its owners. Corporations come in five different types:

  1. C Corporations: these legal entities are separate from their owners. Therefore, they make profits, are taxed and can be held legally liable. Shareholders are provided with strong protection against personal liability, and the departure of a shareholder or sale of stock doesn’t disturb the continuation of business by the C Corporations.
  2. S Corporations: much like partnerships or LLCs, owners have limited liability protections and avoid double taxation by passing profits and some losses directly to the owners’ personal income while avoiding corporate tax rates. There are special limits on S Corporations.
  3. B Corporations: benefit corporations are driven by mission and profit. So while they service society in some way, they maintain a for-profit structure.
  4. Closed corporations: traditionally smaller companies with an informal corporate structure, closed corporations do not participate in public trading and are typically run by a few shareholders without a board of directors.
  5. Nonprofit corporations: organized for the purpose of charity, education, religious, literary or scientific works. As benefits to the public, they are tax-exempt.

Cooperative:

Cooperatives are owned and operated for the benefit of those using its services. Cooperatives are generally run by an elected board of directors or officers, while regular members have voting power to contribute to the direction of the cooperative. Members join by purchasing shares, but the amount of shares they hold does not increase or decrease the weight of their votes.

In our next blog, we will dive deeper into the advantages and disadvantages of these structures, and the tax implications of each. Visit the Simma Flottemesch & Orenstein blog to follow along.

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