Starting and running a small business can be very challenging, yet very exciting. Most business owners start a company to do something they love. That passion can be a great motivator, but it can also be a detractor. Proper tax preparation, recordkeeping and money handling is a must.
Small Business LLC Taxes
LLC taxes can be misleading. If you are a sole proprietor or a single-member LLC, your small business transactions will be reported on Schedule C of your personal tax return. Our fee for this preparation is typically $200 to $275 depending on how organized you are. This includes home office and mileage deduction, calculating your net income and maximizing your health insurance deduction. If you and a partner formed an LLC, even if that partner is your spouse, then a separate partnership tax return (Form 1065) is required. Contact us for more information. For tax preparation, use our online submit forms to detail your small business or LLC income and expenses.
Keeping accurate records is actually pretty easy, especially if you have a dedicated checking account for the business. Two elements are required to meet IRS standards- a written log or record of the business purpose, and evidence of the amount paid, date and to whom. Bank account or credit card statements in conjunction with financial or accounting software such as Money, Quicken or QuickBooks will cover most of your business expenditures. A trip to WalMart or Home Depot would probably require a detailed receipt since you can paper and diapers at a WalMart. Read more about proper small business recordkeeping here.-
The biggest and most repeated mistake that small business owners commit is to spend “corporate” funds on personal items. Do not pay the house mortgage with your business checkbook! Write a check to yourself (or make a transfer), and then write the mortgage check. Items such as gas for your car seem business related- unless the vehicle is 100% business use, then it becomes a mixed use vehicle, and this should be handled the same way as the mortgage check. Then, you turn in expense reimbursements to your company for the expense. This is called an Accountable Plan- contact us for more details.
Business Coach and Advisors
J. Walter Michael can also help you with business decisions such as marketing, hiring and training a staff, logistics, supply chain, and other issues that entrepreneurs face every day. We also have experience with business acquisitions, valuation, SBA loans and lending, and designing exit strategies. Most business owners don’t think about exit strategies, but this becomes critical when getting involved with another partner.
Avoiding Self-Employment Taxes
Small business owners are required to pay taxes on two levels- one is income tax. The other is self-employment taxes (or FICA and Medicare in the W2 world). These combined taxes could easily be 25% to 30% of your net income. If see yourself earning more than $30,000 net income, you might want to consider electing to be taxed as an S Corp. You can save about 4.6% in taxes.
Small Business LLC Taxes
Hobby Versus Business
Is your business really a hobby? There several step by step criteria that the IRS and Tax Courts will use to determine if you have a genuine profit motive, or if you are just playing around with your business. There is no hard and fast rule such as the ubiquitous three years of consecutive losses rule. Recently the Tax Court upheld a track coach’s eight years of consecutive losses as a legitimate business.