10 Top Tax Mistakes

We are small business accountants, not CPAs or tax attorneys (though we know some great ones), but when we can help an owner avoid the top mistakes made by small businesses owners, well…we will!

Top 10 Tax Mistakes

  1. Using the wrong legal entity. Your small business is designated as a sole proprietorship? If so, you are more likely to be audited, have the least allowable deductions, and no legal protection.
  2. Classifying employees incorrectly. Because employees are about 25-30% more costly, due to income tax withholding, one in three workers is an independent contractor. It’s important that you get the classification right and treat them appropriately from a tax standpoint.
  3. Not properly deducting startup expenses. Most startups miss one of the most beneficial IRS deductions—the allowable $5,000 to investigate markets, product analysis, etc. and another $5,000 to get a business ready to operate, including consulting fees and travel. That’s $10,000 in deductions in year one!
  4. Doing your own taxes. You can run your business or read the federal tax code. In 2016, it was 74,608 pages long. Are you really up for that?
  5. Using the wrong tax professional. Your business is unique; your industry or marketplace is unique. Find and use a tax professional who understands your business. Just because a tax preparer is licensed, you need the right person who can legally minimize your tax expense.
  6. Mixing personal and business expenses. You’re too busy or don’t know how to correctly distinguish personal expenses from business expenses so you mis-report or under-report, or over-report expenses. They add up over time and are the #1 reason small business owners get audited.
  7. Failing to plan for taxes. Instead of rushing to finish your taxes weeks or days before the filing deadline, business owners should look at tax consequences throughout the year with the goal of getting a better net effective tax rate.
  8. Not keeping accurate records. There’s really no excuse in the era of digital tools to not track expenses and receipts, yet many small businesses pile scraps of paper in the shoe box or file cabinet that, at tax time, can be overwhelming even for a professional tax preparer to figure out.
  9. Not using carryover deductions. Expenses incurred in one year but exceeded the allowable deductions for expenses can be used the following tax year. Unless you maintain accurate records, these deductions may be forgotten. An expensive oversight!
  10. Not filing on time. Why pay a 5% penalty for every month your return is late? The penalty cap is 25%, but depending on your bottom line, this amount could be substantial.

The Internet of Things

communication-1927697_1920The Internet has connected us as never before in the history of mankind. Never have grandparents been able to keep up with the daily lives and photos of grandchildren living hundreds of miles away, or sweethearts separated by wars and oceans stay so connected. Never before has business tapped into the hearts and minds of their customers through social media and interactive websites. But we haven’t even started. Prepare for The Internet of Things.

Known by its acronym IoT, The Internet of Things speaks to a system of interrelated computer devices, machines, objects, people (even animals) that are provided unique identifiers and the ability to transfer data over a network without human-to-human or human-to-computer interaction.

The first IoT appliance was a Coke machine at Carnegie Melon University that was hooked up to the internet so programmers on the top floor could check the machine’s supply of cold beverages in the coke dispenser on the bottom floor before making the trip.

The Fitbit is a modern example. Wearing a Fitbit bracelet on your morning run gives you immediate feedback on your heart rate so you can adjust your effort for maximum impact. Daisy the Cow injected with an ID chip under her hide is protected from farm theft and should she wander out of the dell, she can be indisputably returned to her rightful owner. Our cars and trucks have sensors to alert us about low tire pressure, oil changes, faulty airbags and a slew of other safety issues.

The first computers relied on human beings for information. But we were too busy to take the time to tell our computers everything they were capable of knowing. So we designed computers to capture knowledge without any help from us, then ask our computers to analyze all that data to help us make life easier, do more with less effort, track and count things to reduce waste, to know when things need repaired or replaced, or when our bodies are operating at peak performance.

Conservationists put IoT to work for good in the Amazon rainforest. A Brazil-located services company places sensors in protected trees. If a tree is cut down or removed, the sensor sends a message to law enforcement with the exact GPS location and time of the felled tree.

In the financial industry, we successfully used Internet technology to serve our customers better and to be more efficient. How will we use IoT? After all, we deal with information and numbers rather than physical objects, like a heart or a tree.

There’s talk about insurance companies using IoT to record driver behavior and to charge insurance rates accordingly. What sensors could be deployed in finance that would address risk management concerns and security? Short of communicating to their financial advisor when a certain piggy bank used for retirement savings was smashed open, we’re not certain. But one thing is certain with The Internet of Things—someone will find a problem not yet solved.

Caring for Mom’s Nest Egg

Lillian was having problems paying bills on time and managing her life’s paperwork. She worried about it constantly, but didn’t want her grown children to know—after all, they had their own families to tend to and didn’t live close by. Since her early 70s she’d noticed her memory slipping, but after Joe her husband of 53 years passed a few years ago, life had become stressful. Joe had done everything around the house, including the bill paying. By her 76th birthday, Lillian was still in fairly good shape physically. She stayed active and tended to her dietary needs. However, her short term memory issues worsened so that some bills were paid late. Developing cataracts made close-up work difficult and bill paying a frustration.

After an honest and loving conversation between Lillian and her adult children about these struggles, the decision was made to engage a Daily Money Manager (DMM).

birds nestNot exclusively for seniors, DMMs have been in demand by the wealthy for generations. As the population aged and it became the norm for children to leave the hometowns they grew up in, daily money management filled a growing need. The computer age and the increase in fraud, especially scams that prey on seniors, called for a stronger degree of financial oversight for seniors. Whether living at home or in senior housing, elders without that oversight might see their nest egg gone.

Daily Money Managers provide services that are highly customized to their client’s needs. Nowadays, clients have their bills sent directly to the DMM company, which scrutinizes them for accuracy then pays them out of the client’s checking account. If anything irregular appears on a bill, they verify the payment with the client beforehand.

Had Lillian engaged with DLMoneyMatter’s DMM division, she would now be enjoying her retirement free from the worries of managing her daily financial affairs—and her children would have the peace of mind that Mom is safe from late fees, fraud, and daily money worries. If you have a Lillian in your life, or know someone who does, please forward this email or refer them to us for a free, no-obligation quote on Daily Money Management services with us.

Tax Cut Plan—Risk or Reward?

What small business owner wouldn’t want to wake up one morning with a tax rate of 15%? Sounds risky? Naysayers forecast the move could add $3 to $5 trillion to the federal deficit, while supporters forecast that it will stimulate economic growth that will offset a short term revenue decline. They remind us that we sustained economic growth around 4.5% in the 1960s and early ’70s. Considering that we have a unique and unprecedented businessman in the White House, this could be America’s opportunity to do it again.

It’s prudent to discuss the pros and cons. As Mary Ritter Beard, an early activist of labor and women’s rights, once said, “Action without study is fatal. Study without action is futile.”

In the investment world there’s a term: risk averse. The term describes investors who, when faced with two investments with a similar expected return but different risks, will prefer the one with the lower risk. Small business owners take risks daily. Mark Zuckerberg once told a group of young entrepreneurs, “In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” Bill Gates was not risk averse; he dropped out of college to start Microsoft.

Naysayers of the tax cut plan are risk averse: it’s safe to cite all the reasons why an innovative solution to a problem won’t work. Supporters of the plan are gamblers, betting on human nature and the American spirit. Should the tax stimulus pass, we think things could get worse before they get better. But they will get better because Americans are brimming with optimism regarding the economy. I believe it was Helen Keller who said “Optimism is the faith that leads to achievement.”

Digital Media Matters

DL Money Matters is a small business. One of those “backbone of America” type small businesses that make up 99.7 percent of the U.S. workforce. Most of our new clients come to us from personal referrals. We don’t spend money on magazine advertisements or billboards, but we do have a website and a branded Facebook business page. Why does this matter?

It matters that our clients trust us and believe in our mission. It matters to us that we can provide a stable, fast, and informative website so Cincinattians who seek a certified daily money manager or small business accounting support can find us on the Internet.

It matters to us that those potential clients referred to us via word of mouth can check us out online to decide for themselves whether we’re a good fit.

It matters to us that we share our insights with those we serve. To do that efficiently, we post blog articles a couple of times a month on subject matter we believe our clients want to read. We deliver them via email — but only to those inboxes for which we have permission to use. We let anyone opt out anytime, we don’t share customer information, and we encourage people to share what we have to say by forwarding our email.

We use social media to post our articles on Facebook to make them easy to find and share again and again because what we do might be exactly what someone else is seeking.

Our Facebook page has the look and feel of our website and is used solely as a tool to share interesting information and our blogs. It also helps Google keep us visible in search results.

This month, our marketing services team at ActiveCanvas posted an article that tackles the use of social media platforms for business and their insights on the new challenges we all face using “conversational commerce” in a crowded cyberspace. Read article »