News in the Bluff City Newsletter Special Edition
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Talking Business in the Bluff City 1.5
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Talking Business in the Bluff City Newsletter
Tax Planning Strategies for Small Businesses
According to the U.S. Census Bureau, approximately 99.7 percent of firms had less than 500 employees in 2011; approximately 89.8 percent of firms had less than 20 employees!
If they make up such a huge portion of all business, why are small businesses the ones getting “the short end of the stick?” Some small businesses are paying between 34 and 39 percent in taxes, while mega-corporations are paying less than 10 percent in taxes! How is this possible, you ask? It’s possible because mega-corporations know how to take advantage of tax deductions that a lot of small businesses are not even aware of.
As a small business owner, are you taking advantage of all the deductions you’re eligible for? Let’s review a couple of scenarios:
~ Many small businesses begin at home as one or two man (or woman) operations. An idea strikes and before you know it, you’ve started a business, working day and night, at the kitchen table, in the living room, in the comfort of your bed, or anywhere else you’re able to find some peace, in order to make your business a success. While I commend you for your hard work and dedication, there is a better way of handling this situation.
Instead of moving from place to place within your home, you should be working from a home office. Converting a room in your home into an office space is usually fairly simple and offers a ton of tax advantages! There are four tests that must be met in order for your home office to qualify:
1. Exclusive Use Test: Area of the home must be used only for business.
2. Regular Use Test: Specified area of home must be used for business on a regular basis.
3. Trade or Business Use Test: Area must be used in connection with a trade or business. Activities resulting in profit that are not considered a trade or business do not qualify.
4. Principal Place of Business Test: If there is more than one business location, the home office must be the primary location used.
Once all these tests have been met, say hello to your home office tax deductions! A portion of your utility, insurance, home repairs, and depreciation just became valid business expenses. Also, if you have more than one business location, your daily costs to commute from one location to the other are deductible.
The advantages to having a home office are bountiful, and could qualify the start-up small business owner to take deductions that he or she would otherwise not be allowed to deduct.
~ You have just begun your new business as a web-site designer. Because you’re the new business around town, competing against several already-established players, you realize you need to start looking for ways to improve your offerings and emerge as a leading quality web-site designer. In an effort to make this happen, you sign up for subscriptions to two web-design related magazines, Net Magazine and Digital Arts Magazine.
As time goes on, with the help of your two magazine subscriptions, you see your performance improve substantially, but still worry that it is not enough to put you ahead of the competition. In another effort to improve your skills, you grab your cellphone and call a local business consultant, whom you end up treating to lunch to discuss your options.
Your business consultant informs you that there is web-designing seminar coming to town next month; it will cost you $600 to attend the seminar, but your consultant assures you it will be worth it.
You’re finally starting to realize just how costly it can be running your own small business, and start to question whether or not you should just give up all together. HANG IN THERE! The majority of the expenses we have discussed are fully tax deductible!
~ Subscription to Net Magazine – TAX DEDUCTIBLE!
~ Subscription to Digital Arts Magazine – TAX DEDUCTIBLE!
~ Phone Call to Business Consultant – TAX DEDUCTIBLE! *
~ Lunch with Business Consultant – TAX DEDUCTIBLE! **
~ Web-Designing Seminar – TAX DEDUCTIBLE!
*Please note that only expenses related to business calls made on a personal cellphone are deductible. Non-business related calls made on a personal cellphone are not deductible business expenses.
**Please note that business meals and entertainment are not fully deductible expenses. These expenses are usually subject to a 50 percent limit.
Small business owners often pay more than their “fair share” of taxes. This is because many are unaware of the numerous tax advantages they qualify for. Are you or a small business owner you know paying too much in taxes? Contact us for assistance at 901.791.4643
The Wisdom of the Ant…
“Go to the ant, thou sluggard; consider her ways, and be wise: which having no guide, overseer, or ruler, provideth her meat in the summer, and gathereth her food in the harvest.” (Proverbs 6:6-8) The ant has often been used as an example of great industry and diligence. Even without any type of guidance, the ant does what is necessary. The ant does not wait until winter to gather its food; instead, the ant plans throughout the year for winter by gathering its food early.
Proverbs tells us that we should consider the ways of the ant and be wise. We should imitate the ant in not only our professional lives, but also in our personal lives. We should not wait until our work is being overseen to begin doing what is necessary, but rather we should take the initiative to plan ahead for what is necessary.
Often times, we look back with regret because we did not specify our financial destination and plan our financial steps before proceeding on our financial journey. Do not become the financial sluggard; empower yourself and your loved ones by developing, implementing, and monitoring your financial plan.
Financial Planning involves the analysis of your current financial position in order to predict your short term and long term needs (Investopedia). It is a method of planning in advance to help you reach your short and long term financial goals. Financial Planning can actually be summed up in 5 simple steps:
1. Find a financial planner who meets your specific needs.
Everyone’s financial situation is different. Different planners work better in different situations. Find one who will service your particular needs at a reasonable price.
2. Come up with a list of short term and long term goals.
These goals could involve being able to send your child to college, saving for retirement, investing in rental real estate, reducing your tax liability, leaving behind money for your family, buying that car you’ve desired since you were 15, etc. Anything that you are even considering doing financially should be put on this list and given to your financial planner.
3. Meet with your financial planner to determine how you will reach your goals.
After evaluating your current financial position and reviewing the list of goals that you have set for yourself, your financial planner will assist you in setting up a “roadmap” to your goals.
4. Implement your financial plan.
Now that the goals have been set and a way to achieve them has been established, it is time to start putting your plan into motion. Setting up goals and determining the plan means nothing if you do not follow through with it.
5. Continue to meet with your financial planner on (at least) a quarterly basis to monitor your plan.
Meeting with your planner on a regular basis is one of the most important steps. Having to meet with your planner regularly gives you someone to be accountable to, other than yourself, for meeting your goals. It also allows you and your planner to make any necessary adjustments to your plan based on how well or poorly you’ve done thus far.
While financial planning may require extra work on the front-end, it does eliminate the added burdens later, usually brought on by a failure to adequately prepare for the future. It is time to stop sitting idly by when you could be preparing for the future; it’s time to imitate the ant and consider its ways. The ant does not wait until winter to gather its food, so you should not wait until you’re in a financial bind to start planning for the future. The time is now!
To begin working on your financial plan, please contact us at 901.791.4643
The importance of Tax Planning
Erica is a single mother raising two children, a thirteen-year-old boy and a fifteen-year-old girl. She also has a 23-year-old son who recently graduated from college and has since moved out of state. Although Erica has a great work-ethic, working two jobs and volunteering at her local food bank one night a week, putting her son through college over the last four years has been a struggle. Because Erica had not saved any money for her son’s college expenses, she was left scrambling at the last minute to come up with thousands of dollars required to cover his tuition and living expenses.
What Erica experienced while trying to put her son through college is not uncommon. Many people fail to plan appropriately for the future. While there is not much that can be done about Erica’s previous lack of preparation, she can take steps to ensure she does not face this same struggle in financing the college education of the younger children. This is where tax planning becomes critical to achieving her financial goals.
Most individuals don’t begin thinking about their taxes until they receive their W-2s. By then it is often too late to implement any type of strategy to significantly reduce their tax liability. As Benjamin Franklin once said, “In this world, nothing can be said to be certain, except death and taxes.” As long as you are breathing and receiving income, taxes are certain to be a part of your life, so why not develop and implement tax avoidance strategies to intentionally build wealth as well as support the next generation?
Understanding how different life events and decisions can influence your tax liability is critical to keeping more of what you make. Going back to Erica’s situation, there are different tax planning strategies she could have employed in order to reduce the difficulties she experienced putting her son through college.
One strategy Erica could have employed would have been to establish a 529 Plan, a tax advantageous plan to help save for college. This would have allowed her to save money for her son’s education while earning tax-exempt interest (as long as money is withdrawn to pay for qualified education expenses).
A second tax planning strategy that could have aided Erica in her quest to put her son through college would have been to establish a Traditional IRA. While a Traditional IRA is a retirement account, it could prove to be very advantageous in planning for a child to go to college. Not only would this have allowed Erica to begin saving for her retirement, but it also would have allowed her to withdraw the money before she reaches retirement without any type of early withdrawal penalty as long as the money was used to pay for qualified higher education expenses. This type of tax plan becomes even more advantageous for someone looking to lower their tax liability sooner rather than later, as contributions made to a Traditional IRA are not included as part of taxable income. You don’t pay taxes on this money until you withdraw it!
Tax planning is often a forgotten field, as most individuals don’t consider the ramifications of their financial decisions until the first of the year rolls around. By taking the time to map out what you already intend to buy or sell in the coming year, your financial goals for the next three to five years, and your long-term financial goals, you are more enabled to determine the best time to conduct transactions (whether it be the first part of the year, the middle of the year, the last part of the year, or a different year entirely) and how you can reach your short and long term financial goals in a tax advantageous way.
Don’t wait until it’s too late to start thinking about next year’s taxes! For further information on tax planning or to begin working on next year’s tax plan, feel free to contact us at 901.791.4643
It is Tax Season…
Legally Reducing Your Tax Liability
Author and Criminal Minds stand-in, Morgain McGovern, claimed more than $19,000 in employee business deductions in 2009, all of which were later thrown out by the IRS; these claims included vehicle, travel, cell phone, and meal expenses. Although McGovern was on the right track to reduce her tax liability by keeping up with the deductions that she was entitled to, she failed to maintain adequate records of these expenses. This led to Ms. McGovern not only losing all of her itemized deductions, but also owing the IRS almost $2,000. Ms. McGovern may have failed to legally reduce her tax liability, but that doesn’t mean you can’t still legally reduce yours!
The key to reducing your tax liability is simple: you must either know the tax code very well or know someone who does. While the tax laws are not all that complex, keeping up with all the deductions and/or credits you are entitled to and knowing how to maintain adequate records can sometimes be a challenge. Many people end up paying more in taxes simply because they are unaware that the new business they started is eligible for a start-up cost deduction of up to $5,000 or that those payments made to their non-dependent child to take care of their dependent sibling while they were at work qualifies them to take the dependent care expenses credit.
Nonetheless, perhaps the most commonly forgotten deduction is the itemized deduction. The most recent report by the United States General Accounting Office stated that only 30% of taxpayers choose to itemize their deductions, leading to about 2.2 million taxpayers overpaying their taxes. Although many taxpayers assume that their itemized deductions will not exceed their standard deduction, taking the time to figure up your itemized deductions can be the difference between owing the IRS and receiving a hefty refund.
Knowing the vast number of deductions and/or credits you are eligible to take is the best place to start to reduce your tax liability. However, the work is not finished once you have identified those deductions and credits. This is when knowing how to maintain adequate records becomes important. Look back to the opening story on Morgain McGovern. If she had kept more suitable records detailing the date, location, amount, and business reason or relationship for her expenses, she would have been able to reduce her tax liability significantly. Regardless of how deserving you may be of the deduction and/or credit you are seeking to take, if your records are not sufficient enough to support your expenditures, you will not be allowed to take them!
Remember, reducing your tax liability is not complicated. It merely takes a high-level knowledge of the tax code. Knowing what deductions and credits you are entitled to and how to keep the appropriate records for such deductions and credits is a great start. Keep in mind that every situation is different; just because Angela from across the street, who may have a situation similar to your own, takes a certain credit, does not mean you will be able to. If you are unsure about whether or not a deduction or credit applies to you or how to adequately maintain records, we highly recommend that you seek the advice of a professional tax preparer. Contact us at 901.791.4643