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It’s that time again and the holidays are fast approaching. It’s a time of excitement, family, get togethers, and…finances! For most, year-end is the time when we start thinking about taxes and our financial situation for the year. December 31st is too late, but if you’re reading this now, you have a good chance to get things in order to make tax time and other year-end tasks less stressful. Keep reading to see how to get ready!
If you have some a back log of bookkeeping to do, now is the time to get caught up and ready for January. Bookkeeping can be as simple as a spreadsheet if you’re a sole proprietor, or if you have LLC or Corporation, then you really should use software like Xero. Don’t spend hours and hours on this. Technology is come along away in the past 5 years so chances are “there’s an app for that”!
Having your books caught up will tell you how much income and expenses you have for the year. Once you know that, then you’ll have a good idea of what your tax bill is going to look like.
If you’re self-employed chanced are that you should be paying estimated tax payments–which are basically tax prepayments. Reviewing how much you’ve paid in, and making any necessary catch up payments will help ensure you don’t have a large tax bill and will help you avoid any pre-payment penalties.
Additionally, you should review your net income to ensure you aren’t getting caught with a large unexpected tax bill. Reviewing this will help you know what to expect when it’s time to file taxes. And if you have extra cash, you can even pay some or all of your tax liability before you file your return.
Saving for retirement has almost become a cliché term. But did you know most business owners aren’t taking advantage of having their company pay themselves for retirement? It’s one of the great tax planning tools that a business owner can use! The company (which you own) pays into a retirement account for you. So it’s like getting a double benefit! Every business owner should be doing this.
There are many different options for retirement accounts. Whether it’s a 401K, SEP, or SIMPLE IRA, find the one that works for you and get it started.
End of year is a great time to look at your pricing and costs. It’s also a great time to review your Gross Profit % and make sure you’re charging enough for your products/services, or adjust your Cost of Goods Sold (COGS). Keep in mind that generally speaking, your COGS should be no more than 30% of your revenue. If it is, you could be bleeding cash and you may soon run out. If you run out of cash, guess what? The jig is up and you may be out of business. In order to do this you’ll need to of course have your bookkeeping caught up so do that first, and then review these numbers.
…your COGS should be no more than 30% of your revenue
Finally, review your internal systems and processes. Or, maybe this is the time where you commit to write them down. Mapping out your systems and processes does a few things for you:
As business owners we should all be moving away from the technical side of the business so we can work on the vision and growing the company
This isn’t meant to be an exhaustive list by any means, but it should get you started. If you need help, just ask! We’ve helped countless businesses do these things and we can offer down-to-earth advice that will make doing this, easy!
Going through an IRS Audit can be a big deal if you’re not prepared. But with today’s technology, we’re going to show you an easy way to make sure you have all the documentation you need to prove your business expenses. I’m not saying that all audits are the same, but most of the ones we’ve helped clients through ask for substantiation, or proof, of certain expenses that you’re claiming on your tax return. If you can’t provide adequate records and prove the business purpose, then the IRS could disallow those expenses—and you don’t want that!
We spend lots of time vetting out new technologies to find the ones that work well, and the ones that don’t. Part of this process is actually using the apps, and analyzing a few things: 1. How easy is it to use and 2. Does it work well with a general small business work process? Our favorite app for retaining information is Evernote. If you’ve never heard of Evernote (that would be surprising), we recommend checking them out on the web. We’re going to show how to use Evernote to audit-proof your business.
Evernote is a like a central hub for all data you want to put into it. For me, I use it like an external hard drive for my brain! The power of Evernote lies within it being accessible on every device you own, easy to get information into it, and easy to find the information later when you need it. For the purpose of this post, we’re going to cover:
To audit proof your business you need to track key elements about your expenses.
Most of the time a receipt covers all that quite nicely. The only thing you should add is Business Purpose (which we’re going to show you). You should also keep bank/credit statements, and even cleared checks.
At the very basic level, Evernote is structured as Notebooks and Notes that live within those Notebooks. You can also use Tags to help you organize and search easier.
Step 1: Create a Notebook called Receipts
Step 2: Use the mobile app to snap scans of your receipts as you make purchases
Notice that the Notebooks is “Receipts” and we’re using a tag called “office supplies” so that we can easily search for office supplies. Also, you’ll notice we put the business purpose as the name of the note. You can do this on your computer, or on your mobile device.
Step 3: Do the same process for every receipt you get. Evernote will become your repository for all your receipts. You can easily search for your receipts by tag if you want to see all of your Office Supply receipts.
After using Evernote you’re going to find more useful ways to use it in your everyday life. One key feature is being able to keep and store attachments in notes. Now, downloading your bank statements and putting them in Evernote is not that hard, but it’s also not that convenient. Remember we said that one of the key features to apps we use is convenience?
The solution to this is to use an Evernote Marketplace app called File This. File This is simply an app that will automatically retrieve your bank, credit card, utility statements, and put them where you tell it. While it will export directly to popular cloud-based file sharing apps like Google Drive & Dropbox, you can also connect it to Evernote.
Once you have it File This connected to Evernote, your bank statements will automatically appear in the designated Notebook within Evernote. File This is pretty robust and even has a free version for you to get started on.
Scanning your receipts and storing bank statements within Evernote will start you down the path of preparedness if the IRS decides to “knock on your door”. Of course, in order for this system to work you have to be committed and adopt it as a workflow/system you use in your day to day life. We use this system, we have clients using this system, and we can tell you that with a bit of discipline, it works!
Want to learn more about Evernote? I’m an Evernote Certified Consultant so drop us a line and we’ll help you figure which version is best for you, and discuss how you can use it in your business.
Here are some useful links where you can sign up for free trials:
If you’ve been in business for any amount of time, you’ve probably heard something about keeping your receipts. And we’ve heard some good myths about when and when you don’t have to keep them. We’re here to set the record straight and tell you exactly when you need to keep receipts.
First, let me explain that there are different suggested records for different types of transactions. For example, what you keep to prove the purchase of inventory is different than gas for your car. We’re going to explore two categories today: General, and Travel/Entertainment expenses. But there are many more that we’re not discussing today.
What are they?
General expenses are things like paper, utilities, cell phone, etc. Those types of expenses must be be proved with a bank/credit card statement, receipt, or invoice that shows the date, amount, and busienss purpose.
How long should I keep records for?
Generally speaking, you’ll want to keep records for at least 3 years from when you claimed them on your tax return. The good news is that you can keep them in paper form, or electronically. We’re a big fan of using the mobile app for Xero to take a snapshot of the receipt, and recording the transaction right on the spot when it happens. You can also use other systems like Evernote, Google Drive, Dropbox and Box to store your records. If you choose to keep paper, then have a good file system organized by year and type of expense, at the very least.
What are they?
Just as it sounds, expenses you incur to travel, take clients out to lunch. It also covers lodging, rental cars, transportation, and a host of other things. See IRS Publication 463 that is referenced below for more things that qualify as travel and entertainment expenses.
How should I keep records and for how long?
The trick here is to have “adequate” records. There are 4 main points that you must prove in order to have a deemed adequate expense in this category:
What that basically means is that you must have a receipt, log book, or some kind of record that proves those 4 main points for each expenses you deduct. Estimates don’t count. The long and short of this is: that you keep all receipts/invoices for each expense in this category. There are only a few exceptions, one of them being that if your expense in under $75 (except lodging), you can simply provide bank statements to prove you expense. Of course there are more exceptions, but we don’t have time to go into them in this post.
And like above, you should keep these records for 3 years after you file the tax return for the year you’re taking the deduction in.
The IRS has some pretty elaborate articles and publications on this topic. We referenced IRS Publication 463. Feel free to check it out if you need to dive in a bit deeper. Or, leave a comment and reach out to us and we can help you navigate the murky waters of business deductions.
Ok, you’re a personal trainer, and it’s tax time. Does your tax bill hit you like a ton of bricks? Chances are you’ve experienced this pain. But, there are ways you can plan so that your not working for “Uncle Sam” and paying too much of your heard earned money!
The first thing to consider is how you’re getting taxed–as an employee or contractor? If you just filed taxes, then this is easy to find out. If you received a 1099, then you are a contractor. if you received a W-2, then you are an employee.
What’s The Difference?
If you are a contractor getting a 1099, you are technically self employed. Meaning, that you will owe self employment tax on whatever your net income is. This also changes how you file your tax return by requiring you to report your income, and any expenses associated with that income, on a business form called Schedule C.
Getting a W-2 is inherently easier. You report the W-2 as wages, and there is no self employment tax.
Which One Is Better?
There is a good, and a bad list to each one. If you’re detailed, you can save a lot of tax by being self employed. However, it’s much less complicated to receive a W-2 and report the wages. Whatever you’re preference is, there are ways to make sure you’re minimizing your tax.
If you need help or have questions, feel free to reach out or leave a comment! If you have friends that would find this useful, tweet, share, plus this over to them!Read More
April 15 is the tax day deadline for most people. If you’re due a refund there’s no penalty if you file a late tax return. But if you owe taxes and you fail to file and pay on time, you’ll usually owe interest and penalties on the taxes you pay late. Here are eight facts that you should know about these penalties.
1. If you file late and owe federal taxes, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late.
2. The failure-to-file penalty is usually much more than the failure-to-pay penalty. In most cases, it’s 10 times more, so if you can’t pay what you owe by the due date, you should still file your tax return on time and pay as much as you can. You should try other options to pay, such as getting a loan or paying by credit card. The IRS will work with you to help you resolve your tax debt. Most people can set up a payment plan with the IRS using the Online Payment Agreement tool on IRS.gov.
3. The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes.
4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.
5. The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.
6. If the 5 percent failure-to-file penalty and the 0.5 percent failure-to-pay penalty both apply in any month, the maximum penalty amount charged for that month is 5 percent.
7. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.
8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time.
Reach out to us if you have questions, or think you’re going to owe penalties and interest! No one wants to pay more than they’re fair share to the IRS!Read More
In our effort to educate the small business owner in how to keep more of their hard earned money, often we get asked: So what is better ROTH or Traditional IRA’s? So we asked a local Financial Expert to explain the differences.
Roth: Tax-free growth. Tax-free qualified withdrawals.
Traditional: Tax-deferred growth. Contributions may be tax-deductible..
Roth: Any age with employment compensation.
Traditional: Under age 70½ with employment compensation.
Taxation at Withdrawal:
Roth: Contributions are always withdrawn tax-free. Earnings are federally tax-free after the five-year aging requirement has been satisfied and certain conditions are met.
Traditional: Withdrawals of pre-tax contributions and any earnings are taxable when distributed.
Penalties at Withdrawal:
Roth: A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies. (A distribution from a Roth IRA is federally tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, qualified first time home purchase, or death.)
Traditional: Withdrawals before 59½ may be subject to a 10% early withdrawal penalty unless an exception applies. (For Traditional IRAs, penalty-free withdrawals include but are not limited to: qualified higher education expenses; qualified first home purchase (lifetime limit of $10,000); certain major medical expenses; certain long-term unemployment expenses; disability; or substantially equal periodic payments.)
Required Minimum Distributions (RMD’s)
Roth: Not subject to minimum required distributions during the lifetime of the original owner
Traditional: RMD’s starting at 70½
For both 2013 and 2014: $5,500 ($6,500 if you are 50 or older) or 100% of employment compensation, whichever is less
* Catch up contributions: Individuals age 50 or older (in the calendar year of their contribution) can contribute an additional $1,000 each year
** Contribution deadline: Tuesday, April 15, 2014, for the 2013 tax year
Note: A Rollover IRA is a Traditional IRA often used for rollovers from an old workplace plan, such as a 401(k).
If you run a small business, then chances are you maybe required to file 1099’s. These are probably one of the most misunderstood forms business owners file.
Form 1099 is used to report money paid to individuals who are not your employees. The IRS uses your 1099 to make sure the people you pay are reporting the income on their tax returns.
File a 1099 for everyone that is not an employee (individuals you’re not withholding taxes for) that you pay more than $600 to in a calendar year. You are not required to file 1099’s for money paid to company’s (LLC, Corps).
There are many service providers that will do this for you. Whether it’s your accountant, or a web service, we recommend using one to assure that they are accurate, and filed timely. All 1099’s should be filed and in the mail by Jan 31st. But if you’re a DIY (do it yourself) type of person, there are plenty of services on the web that do this for you at a very reasonable cost. Our favorite is Track1099
This is easily done in accounting software like Xero and QuickBooks. You can designate contacts/vendors as 1099 recipients, and as long as you record all your transactions, you can run a report at the end of the year that will tell you how much to file them for. We recommend using Xero for this. It’s easy, and will be a breeze to setup and do.
You may get away with it…for awhile. But if the IRS decides to audit you, and you didn’t file, then watch for penalties coming your way!
Easy, reach out to us and we can take care of from start to finish! We can help no matter what state you live in.
Have questions, feel free to leave comments and we’ll answer them ASAP. Want to reach out directly, fill out our “Contact” page and we’ll get back to you within 1 business day.
Thanks for reading!Read More
Health Care Reform is here! We’ve invited a special guest to discuss what to expect. The rest of this post is written by John Heaton of JMH Insurance Solutions. This is a MUST read for any small business, especially if you are in California!
It is finally here. We are three weeks into open enrollment. The Affordable Care Act has definitely seen its detractors but it has survived up to this point. No matter what happens in Washington D.C., the exchange in California is here to stay (that is, at least for 2014).
So after 3 weeks what have we learned?
For those of you who are still in the dark about “ObamaCare”, you are not alone. Here is a quick rundown …
Covered California is the new state run exchange that serves as a market place to shop for and purchase health insurance. On the exchange you can see the different carriers, plans, and if you qualify for premium assistance. I was asked the other day, “Do I have to buy on the exchange?” The answer is no. You will be able to purchase health insurance on or off the exchange. As a matter of fact, the only reason to purchase on the exchange is if you want to qualify for a premium subsidy or a tax credit if you are a business owner.
Here a couple of highlights about the new health care law:
As the short history of this legislation has shown, I anticipate more changes to the program in the next few months as we get closer to the actual roll-out of coverage Jan.1, 2014.
November 7th we will be hosting a special webinar dedicated to explaining what health care reform means to the small business. Stay tuned for more info on how to sign up!Read More
We send out accounting tips to make your scariest numbers into friends. Here is our Newsletter Sign-up Page!
Here are some tips from the IRS on tax recordkeeping.
• You should keep copies of your filed tax returns as part of your tax records. They can help you prepare future tax returns. You’ll also need them if you need to file an amended return.
• You must keep records to support items reported on your tax return. You should keep basic records that relate to your federal tax return for at least three years. Basic records are documents that prove your income and expenses. This includes income information such as Forms W-2 and 1099. It also includes information that supports tax credits or deductionsyou claimed. This might include sales slips, credit card receipts and other proofs of payment, invoices, cancelled checks, bank statements and mileage logs.
• If you own a home or investment property, you should keep records of your purchases and other records related to those items. You should typically keep these records, including home improvements, at least three years after you have sold or disposed of the property.
• If you own a business, you should keep records that show total receipts, proof of purchases of business expenses and assets. These may include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices. Also include credit card receipts, sales slips, canceled checks, account statements and petty cash slips. Electronic records can include databases, saved files, emails, instant messages, faxes and voice messages.
• If you own a business with employees, you should generally keep all employment-related tax records for at least four years after the tax is due, or after the tax is paid, whichever is later.
• The IRS doesn’t require any special method to keep records, but it’s a good idea to keep them organized and in one place. This will make it easier for you to prepare and file a complete and accurate return. You’ll also be better able to respond if there are questions about your tax return after you file.
What are you thoughts on these? Do you have any questions?
Give us a call or shoot us an email if you have questions about any of these recordkeeping topics!