Hidden Tax Deductions

Waiting until the end of the tax year to find, verify, and record potential tax deductions can take a toll on what otherwise could have been more productive time spent growing the business. To make life easier, you can hire a professional bookkeeper to do this for you or use an outside service, like us. For anyone just starting a new business, we’ve put together a list of a few of the most overlooked small-business tax deductions.

starbucks blog#1 Fees paid to your accountant, lawyer or business consultant
To run small business successfully, you need sound advice and a great accountant and bookkeeper. Fees paid to these professionals are “ordinary and necessary expenses directly related to operating your business” and are deductible in the tax year they were paid.

#2 Losses on bad debts
If you paid advance wages to hire a hot-shot “marketing expert” and she bailed on you 10 days into the job because your dress code was just a ‘bit too conservative’ for her, the IRS allows you to deduct those lost wages. You can claim a deduction for most bad business debt, but only if you included the amount owed to you in your gross income.

#3 Carryovers
Carryovers are overlooked deductions from previous years. These are not “carryouts” —so Starbucks to-go while driving to work is not deductible. What if, for example, you started a home-based business and your expenses in the first year were actually higher than your income? You can “carryover” the loss to a future year when you did earn income.

#4 Startup expenses
Start-up costs are out-of-pocket costs for both looking into buying a business and getting the business started. These might include analyzing the marketplace and buying capital equipment like trucks or computers. Then there’s domain name registration fees, website and advertising costs, wages for new employees, consultant fees, costs to secure goods or licensing—the list can be seem endless. It’s a critical time to stay focused on documenting every cost so your accountant can maximize your tax deductions.

The size of the business does matter in terms of complexity, but whether a small business or large enterprise, it pays to keep impeccable daily records. Or simply hire us to do that for you.

How To Stay Positive

Starting, building and running a profitable business requires a positive mental attitude and an ability to roll with the punches. It doesn’t hurt to toss in a sense of humor.

It’s human nature that our brains to seek out negative information. Putting a positive spin on things—especially our slip-ups and failures—requires practice. When we acknowledge our mistakes, we open our minds to find solutions. Our acknowledgment is our way of saying, “next time I’ll do it differently, and this is how.”

We’ve all heard the expression “express gratitude for all things.” There are people who don’t go to sleep at night without first replaying their day in the heads, overtly expressing gratitude for both the things that went well and the things that went wrong. They are taking stock and putting balance back into the day’s experiences. This simple act trains our brain to think more positively.

milky way adYou never see a food add that says, “eat this to feel grumpy.” But you do see food ads that proclaim a certain product will make you feel great. Our favorite is a vintage ad from a 1931 Saturday Evening Post “There’s a thrill in every bite of Milky Way.” Think of your business life as a huge Milky Way that puts a thrill in everything you do, blocks out negative thinking, and predisposes you to think positive.

Even then, negative thoughts will arise and they are often self-deprecating. For example, the marketing campaign you designed had poor results. So you decide you are a failure. Or the sales numbers slumped last month and you take the blame for not motivating the salesforce properly. You may be right, but beating up yourself will not make next month better.

We can train our brain to respond to negative influences with positivity. One method psychologists teach is to learn to “separate” ourselves from the negativity. For example, when you have a negative thought, think of it as a “thing” and mentally “detach” it from yourself. Lay it aside, and walk away.

Successful people believe in their abilities, even when they fail. They are grateful for what they have and develop a mind-set to express gratitude daily. They look on the bright side and encourage those around them to do the same. Never satisfied with what they already know, they seek out books, lectures, podcasts and mentors to push them to stay positive and keep going. And finally, they set goals, mark their progress, and reward themselves often. Have a Milky Way today!

America’s Bad Mood

child-1548229_1920In the usual scores of political rants and patriotic essays that sprout up around Independence Day, one stood out this year. Published by The Guardian, Zachary Karabell wrote an opinion piece entitled Americans are in no celebratory mood this Fourth of July. But they should be. It’s a worthy read.

One section in particular resonated with me. It had to do with our “resetting of expectations” after the financial collapse in 2008-2009 that “shook confidence in our collective ability to keep economies afloat…

There has also been a continual resetting of expectations. There’s an old saying in the financial world that people always remember the most they made and the least they spent. It’s your grandparents tisking that something used to cost ten cents, without the context that was when an average salary was two thousand dollars a year.

As human life has expanded, as homes have gotten larger, calories cheaper, war less frequent, senseless death rarer, political injustice more the exception than the norm, people have become less tolerant of that which used to be tolerated. In short, it would seem that the more we have, the more aware we become of what we still lack.

I encourage you to read the entire article. It may just give you a fresh perspective this month as we celebrate the birth of our great nation.

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.