When growing a small business, company tax accounting is a very important issue. The annual tax bill will in part reflect your skills and knowledge and in part reflect the help received from a strong business certified accountant. Business owners will take every oppurtunity to reduce their taxes, but they also need to be sure they are meeting the standards of the IRS. The following 5 tips should make it easier to avoid some common mistakes and missed opportunities.
1. Good Records Are Vital
This tip is straight forward, but records sometimes slip through the cracks because of all the high priority taks a business owner must handle. Let me remind you of why accurate & timely recording is important.
Keeping good records allows you to accurately monitor the status of your business, and to see what changes are necessary to improve profitability. Good records are also needed to prepare financial statements and income tax returns. And finally,maintaining receipts and records of all expenses diminishes the chances of forgetting deductions on tax returns .
2. Correct Classification of Workers
When someone is hired you must label them as an independent contractor or an employee. Getting it right is important because errors can trigger an IRS audit and possible penalties and interest for failing to withhold and deposit payroll taxes.
According to the IRS website “In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.” Common law rules in categories of Financial, Behavioral, and Type of Relationship will determine the type of employment. When in doubt, a form SS-8 can be filed and the IRS will officially determine the worker’s status.
3. Appropriately Take Deductions
Businesses can deduct all “ordinary and necessary” business expenses from their revenues to reduce taxable income. Some deductions are obvious, like business travel, supplies, wages and rent. Some potential deductions are not as obvious or clear.
Business losses be deducted from the owner’s personal income if they wish to reduce taxes. If an owner’s losses exceed personal income for a year, some of the losses may be used to reduce taxable income in the future years.
Trips that combine business and pleasure can be tricky. If more than half the trip is devoted to business, the travel costs and other business-related expenses may be deducted.
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. The entire cost for small businesses adding equipment or software in 2010 could be written off on the year’s tax return if it was less than $500,000. In order to claim section 179 deductions, there are many limits and qualifications that must be met, but it would be an advantage to take this deduction when you can.
4. Make Sure Payroll is Correct
A companies payroll is a sum of all records of salaries for an employee, bonuses, wages, and deductions. In accounting, payroll is the total sum of money paid by a business to its employees over a set amount of time. Payroll needs special attention because of the negative morale affect it could have on employees if mistakes are made, and becasue of its financial affect on the company. Problems can occur in the following areas: improper set up, failing to record transactions, submitting deposits late or incorrectly, miscalculation of time or overtime, not updating your State Unemployment Insurance (SUI) Rate. Further discussion can be found here: Common Payroll Accounting Mistakes and How to Avoid Them http://www.efs-tax-accounting.com/accounting-services/payroll-accounting/
5. S Corp Shareholder Compensation
If you are a corporate officer-shareholder of an S corporation who performs services for the corporation, you must pay yourself a “reasonable salary” but the IRS has not defined reasonable compensation in the code or regulations. Various courts have ruled on the issue based on particular cases. S corporations should not attempt to avoid paying employment taxes by treating officers’ compensation as cash distribution or loans rather than as wages. If the IRS reclassifies these amounts as compensation to the employee it could result in additional taxes and significant penalties.
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