Top 3 Tax Mistakes

1.    Mixing Business with Personal Finances

Law doesn’t require that you keep business and personal accounts separate, but it sure makes bookkeeping a whole lot easier. Separate accounts will ensure that your financials reflect all relevant activity. Income and expenses may be inaccurately reported or missed entirely when your accounts are commingled, and that could mean penalties and missed deductions for you.  And if you are an LLC or corporation, commingling of your personal and business activity could put you in jeopardy of losing the liability protections these types of organizations provide.

2. Misclassifying Labor

Are you reporting labor correctly? If you’ve reported an employee as an independent contractor, you may owe penalties and interest on the employer share of employment taxes. Ensure your employees are classified correctly with these guidelines from a previous post.

3. Missing Out On Deductions

Good books will ensure that you have everything you need to validate deductions come tax season. I’ve put together some helpful tips for smart spending and tracking expenses (mileage deductions, equipment purchases and strategic spending, but you may want to consult with a tax professional for additional deduction strategies. 

Avoid a Tax Fiasco

The mistakes listed above really boil down to one thing—poor preparation. An organized bookkeeping system will be your best friend come tax season. A little research and consistent practices will take you a long way! And if you are struggling to find time or the proper system to get your books in order, it may be time to call in a professional. Email David@DEKEbookeeping.com to learn more. 

 

Tracking Mileage for Tax Deductions

Mileage

Do you use a personal vehicle for business purposes? Are you maintaining detailed mileage logs? Mileage can account to a sizeable tax deduction, but if documented incorrectly, the cost can be even greater. If your books are subject to an IRS audit, your inadequate mileage log could cost you your deduction as well as time and money spent defending yourself in court.

Spend some time setting your records straight now to avoid owing the IRS later. To prove that you are entitled to a mileage deduction, you must document the following for each and every trip:

  • How far you drove
  • When you drove
  • Where you drove
  • The business purpose for which you drove

It can be a hassle when you are running late or in a hurry, but this information is absolutely necessary to justify your deduction(s).  And while a good, old fashioned paper log will suffice, a lot of business owners are turning to mobile apps to stay more organized. Here are a few that you may want to consider…

  • MileIQ
  • The Mileage Ace
  • TripLog
  • Mileage Log+

Visit americanexpress.com to learn more about other apps that can help you to track business expenses.

Are you using a mileage app? If you’ve found a good one, email David@DEKEbookkeeping.com. We would love to share your find with others!

 

Strategic Spending

As the year comes to a close, many small business owners are realizing significant profits. If you fall into that category, congratulations! Now may be a great time to consider using a portion of those profits to prepay some expenses for 2014. Strategic spending now may help to reduce your tax burden later.

Some of the most common prepaid expenses include:

  • Rent
  • Utilities
  • Insurance Coverage
  • Other Goods and Services

Keep in mind that some vendors may even be willing to extend discounts for prepayment.

Your unique financial situation will dictate whether or not expense prepayment is appropriate for your business. Unsure of where your business stands on the profit/loss spectrum? Email questions to David@DEKEbookkeeping.com or schedule an evaluation to learn more!

Purchasing Equipment

We are ¾ of the way through the fiscal year, and you likely already know where your business will fall on the profit/loss spectrum. Armed with that information, now is the time to explore the variety of ways to increase profits or decrease tax liability (depending upon your business and personal goals). 

In an effort to decrease their tax liability, many business owners opt to purchase new equipment, furniture and/or vehicles for deduction purposes. The concept is relatively simple, but there is certainly more than one way to approach deductions (i.e. deduct the total cost, deduct portions of the purchase over time, etc.)  

Deducting portions of a fixed asset purchase over time (depreciation) may be an appropriate method. Alternatively, many business owners take advantage of the accelerated depreciation opportunity provided by the IRS. Accelerated depreciation allows for greater deductions to be taken in the earlier years of an asset’s life (to include fully depreciating the cost of a fixed asset in the year the item is purchased). This results in an immediate reduction in business profits and ultimately tax liability. 

So what makes sense for your business? Contact David Knab to learn more about simple ways to reduce your tax liability. 

  

Determining Profit

Small business owners often adopt an accounting system (or bookkeeping system) for the sole purpose of determining profit. The concept seems pretty simple, but there is much more information that can be gleaned from a good accounting system than just the amount of money coming in. 

It's More than Simple Subtraction

The ability to determine profit starts with the diligent tracking of income and expenses, but an accounting system should provide insights beyond simple subtraction. Business owners should be studying their profit and loss statement to identify ways to increase profits. Which products or services are best sellers? Which customers purchase the most? This is the sort of information that will help to fuel profits in the future.  

Keep in mind that reports can be relatively useless without a point of comparison. Compare profit findings from period to period. Are there any trends? 

Most of us are setting goals, but how can we track the progress? How should company money be spent? Is it a good year to purchase new equipment or take a big business trip? The proper accounting system is crucial to answering these questions. Business owners who possess a firm understanding of profit (the amount, its sources, etc.) are better equipped to manage cash, minimize tax liabilities and achieve sustainable growth. 

In Review: Tips for Determining Profit

  • Diligently track income and expenses.
  • Subtract expenses from income. 
  • Determine the best sources of income (i.e. which products/services are best sellers and which customers are buying the most). 
  • Compare findings to previous periods. Look for trends.  

Need help determining your profit? Submit an inquiry or call (843) 225-6522.

 

Setting the Records Straight

Diligent bookkeeping can be overwhelming, largely because business owners don’t think much about it until tax season. The truth is that there is no better time than now to set your bookkeeping records straight. 

Every small business owner wants to minimize his or her tax liability, but it is impossible to do so without the proper documentation. Are your bookkeeping records in order? Not sure?  It may be helpful to consider some of the following:

  • Tracking Expenses 
  • Expense Payment/Prepayment
  • Tracking Income
  • Determining Profit
  • Deferring Income

Over the next few months I will be expanding upon the items listed above, so stay tuned for details!  

Want to learn more about the benefits of proper business bookkeeping? Contact me for more information.