Kasfia Rashid - “Money Matters with Kash the Bookkeeper”
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Hello! Welcome to Money Matters- Ask the bookkeeper series, the accounting show answering burning accounting questions! You know, the ones you would only ask your best bookkeeping buddy!
Each show will have one main question from the audience with supporting questions from my various travels. Have a question to ask? Don’t be shy, step right on up! You can submit your questions directly to Hello@kashthebookkeeper.com! You may hear your question aired live across the globe!
Speaking of taxes, this is easily the number one question I get. Clients, friends, family, strangers on the street.. Everyone wants to know how they can save on their taxes! Fine, let’s discuss.
Ok, wait, before we can really talk about saving on taxes, let’s chat about how we get to that “pie in the sky” number.
Every country has different tax laws, forms, credits, and allowable deductions. I am not a tax expert in my own country, let alone the murky depths of international taxes ( shudder), so please, for the love of accounting, consult a local expert on the best tax strategies for you! Now thats out of the way; no matter which country you are conducting your business in, taxes are *generally* based on PROFIT. Profit = revenue - expenses. The profit is then multiplied by a tax rate, thus giving us the amount of taxes owed for that year ( or period ). While most see this as a “tax bill” or an “expense” it is more accurate to think of this as an outstanding liability. Businesses have owed taxes all year long, they are just finding out exactly how much once the year has ended ( atleast that’s how it works in the US…. ) Confusing yet? It get worse. That tax rate I just mentioned…? Yea, that changes.. .often.. And sometimes it changes based on the profit…
Show Objectives - The Why
Benjamin Franklin said there were only two things certain in life: Death and taxes. But in business there's only one certainty: taxes. Tax obligations go hand-in-hand with running a business. From the federal government on down to city hall, you need to be aware of which taxes your business needs to pay, how much in taxes you owe, and when you need to file. Make a mistake and your tax bill grows. At the same time, if you plan ahead, take the right available deductions, and prepare your tax returns properly, you can save on the amount of taxes your business must pay.
Taxes may be the least favorite topic for small business owners, but it's one of the most important. The steps you take before the end of the tax year can help your business save money almost immediately. At the same time, the beginning of the next tax year is a good time to review whether you are maximizing your deductions and maybe even get a second opinion on additional ways you can save on taxes. Knowing how to minimize the amount of taxes you pay means that you get to keep more of the money you earn. Failing to properly manage your taxes means that your business might wind up in trouble.
Sadly, this is where I see many small businesses fail. They do not put a portion of their income aside for tax obligations, nor do they feed the beast with quarterly payments. Why? Because it is difficult to determine exactly how much they should pay in to meet their obligations by year end. If you live in a heavily taxed area, just determining which taxes are due when may be complicated and confusing. Always seek help from a professional in your area and industry as early as possible to make sure all of the business obligations are being met.
What You Need to Know - The What
Types of Business Taxes
There are a variety of taxes for business. Here is a quick rundown:
Income taxes. There are federal and, in most cases, state income taxes to contend with, whether the business pays the tax (as in the case of a business organized as a C corporation) or the owner pays the tax on his or her share of business income and expenses (as in the case of a business organized as a sole proprietorship, partnership, limited liability company, or S corporation).
Employment taxes. If you have employees, you must withhold income taxes and the employees' share of Social Security and Medicare (FICA) taxes. You must also pay the employer share of FICA, plus state and federal unemployment tax. If your business is incorporated, you are an employee if you work for the business and you owe these taxes even if you're the only employee. If you are self-employed, you owe self-employment taxes (the equivalent of the employee and employer share of FICA) on your net earnings from the business.
Sales taxes. If you sell goods and services and you are based in a state with a sales tax, you may be required to collect sales taxes on your transactions. While the customers pay the sales taxes, you can be subject to penalties for failing to collect the taxes and pay them to the state.
Excise taxes. Depending on what type of business you operate, certain businesses may pay excise taxes on fuels, highway usage by trucks, and for other activities.
What You Need to Do - The How
Setting up books and records is the quickest and easiest way to track expenses and income for estimating taxes. This is easily done with computer-based recordkeeping solutions that enable you to handle this matter yourself, like QuickBooks Online. QBO,for short, can easily store required receipts for expenses, issue invoices for revenue and track inventory all in one place!
Maintain best practices for certain recordkeeping. For example, if you use your personal vehicle for business, you need to track your business mileage, QBO has that option as well. Or, if you reimburse your employees for expenses like meals or travel, these transactions need to be processed carefully.
Make smart tax elections
Under the tax law, most expenses incurred in business are deductible, while most income is taxable (there are, of course, some exceptions). The tax law gives you options on when and to what extent you claim certain deductions or report income. Here are some common deductions:
The cost of buying business equipment usually is deducted by claiming a depreciation allowance (fixed by law) over five or seven years, or longer periods. However, under certain conditions, you may qualify to elect first-year (Section 179) expensing to deduct the entire cost of equipment in the year it is placed in service. Making this election accelerates the deduction, giving you an immediate tax benefit for your outlay.
The expenses of a personal car or truck used for business can be deducted in one of two ways: claiming actual costs or relying on an IRS standard mileage rate. If you keep good records of your costs, you can then choose the deduction method that produces the greater write-off.
Selling property on the installment basis where at least one payment will be received in the year after the sale generally means that the gain will be spread over the period in which the installments will be received. However, you can elect to report the full gain in the year of sale, even though payments won't be received until later. This election makes sense when you have current losses that can be offset by the installment sale gain, meaning that the gain is fully sheltered from tax.
Lastly, keep current with law changes
The tax law is constantly changing, with major legislation, court cases, and IRS rulings appearing frequently throughout the year. Many of these developments present positive tax opportunities -- if you know they exist and you act on time. Often, waiting until the annual meeting with your accountant may be too late to learn about and act on these opportunities.
Want some more examples? Sure thing!
You can take advantage of some standard tax rules that can save your business money.
Contribute to a retirement plan. If your business is profitable, you can shelter income in a qualified retirement plan that will provide you with a tax deduction for your contributions, defer tax on earnings on contributions (tax is ultimately paid when you start taking money from the plan, usually at retirement), if you have employees, you can gain employee loyalty for providing them with a retirement savings opportunity.
Adopt an "accountable plan." If you have employees and reimburse them for using their vehicles on company business, adopt an accountable plan to save them income taxes and save the company payroll taxes. This arrangement lets you reimburse an employee for business expenses without having to treat the reimbursements as income to them. Result: the reimbursements are not included in the employees' W-2 form (the employees are not taxed on the reimbursements) and the company saves payroll taxes (FICA and unemployment taxes) on these amounts.
Defer income and accelerate deductions. There are several steps you can take near the end of the year to put off income into the next tax year and increase your deductions in the current tax year. For example, at the end of the year, deposit checks in the next year to lower the annual income and pay bills early to take advantage of the expenses.
Structure your business the proper way. Most businesses that start out small don't change the structure of their business when they should. For example, if you have a closely held company in which the income passes through to you, the owner, those are usually set up as an LLC or an S corporation. While there is nothing wrong with those structures, you might be able to gain tax advantages by structuring your company as a C corporation, in which the first $50,000 of your income is taxed at a rate of 15 percent as opposed to a 35 percent rate if you're in the highest tax bracket.
Consider adding to employee benefits instead of raises. One way to save on taxes for you and your employees is to compensate them by increasing your contribution to their health insurance costs instead of giving them the same amount in terms of a salary increase.
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Next: Ask the Bookkeeper- recap
Written by Kash the bookkeeper
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