Keeping Tab on Taxes

IRS has introduced a new email newsletter called IRS's e-News for Small Businesses designed to inform small businesses and self employed individuals about taxes.

If you want to know about tax news and tax law changes pertaining to small businesses, this newsletter is a must-read. You can also get tax tips to ensure compliance with IRS rules. I'm sure most of us would rather not be at the opposite end of a table during an IRS audit.

The newsletter will be sent out every other Wednesday. Click here for a sample newsletter. Read about this new newsletter and subscribe at the IRS website.

How to Hire an Accountant for Your Business

The tax folks at J.K. Lasser sent us a press release today that provides tips on what a small business needs to look for when hiring an accountant. It is not easy to find an accountant that you can trust, much less really look out for your interests.

According to J.K Lasser, the following are the questions you need to ask prospective accountants:

• How are you going to help my business grow? Ask for an outline in writing.
• Are you a tax planner or a tax preparer? You will want to meet with your accountant once a year for both strategic and tax planning.
• What benchmarks will you help me set for my business, so that I can track my projects? An accountant specializing in small business finances should be able to help you set month-by-month goals to chart your progress.
• How tech savvy is the accountant? Are you going to have to print out your accounts to hard copy or can you simply transfer everything electronically? What kind of software are you going to have to buy?
• What overall services can the accountant provide besides business advice, like estate planning, gift planning, legal referrals, etc.?
• How do you calculate your fees? In a time-based fee structure, make sure to find out the hourly rate, as well as all fees for expense reimbursement.

Read the Questions to Ask a Tax Accountant

Importance of Good Bookkeeping

The tax deadline is almost upon us and I hope that most of you have completed, if not submitted your tax documents.

In talking to other entrepreneurs, tax time is either made easy or unbearable by quality of their bookkeeping. Some have it great with their accountants who do everything for them. However, many more do their accounting and tax work by themselves -- and some are pretty diligent about it and do it regularly; while others do it only before April 15 rushing to find all their receipts and listing their expenses and income. I know of many home-based entrepreneurs who don't even know how much they make in a month except what they see in their bank account!

If you will do it yourself, you need to have a system that you will work most for you.

It can be as simple as using a software such as Quicken or Quickbooks. Or it could be as easy as an Excel spreadsheet. You can also use a paper system such as any of the bookkeeping books sold in your favorite office supplies store.

Someone recently gave me a copy of the Tax Minimiser system. which is a paper based daily planner system designed specifically for keeping track of your business expenses and income. I haven't used it yet, but it seems that it is a simple enough system that even non-accountants can understand. I am hopeless with accounting and I don't even want to understand how Quickbooks work, so I am looking forward to checking out this paper based system.

Bookkeeping is one of the necessary constants in doing business -- whether you hate or love it, you have to do it.

Home Business Tax Deduction

While April is still a few months away, now's the time to start thinking of taxes. Start looking for all the receipts and documentation and start researching on what possible deductions you can get.

If you are running your business from your home, you may be able to deduct the expenses associated with running the business. Our article "Tax Time: Check What You Can Deduct from Your Home Office" explains what you can deduct from the business use of your home.it

While taking home business deductions can lower your tax liability, it is important to be careful about what you deduct and make sure that you follow the stipulations of the IRS. To qualify for home business deductions, you must pass the following test stipulated by the IRS:

• Exclusive Use - that part of your home must beset aside exclusively for the business.
• Regular Use - the place must be regularly used for business
• Trade or Business Use - Your principal place of business for any trade or business in which you engage;
• Principal Place of Business
• Place To Meet Patients, Clients, or Customers -- As a place to meet and deal with clients or customers in the normalcourse of your business
• Separate Structure - In connection with your trade or business if you are using a separate structure that is not attached to your home or residence (e.g. a studio, garage, or barn).

Following all these requirements is critical, lest you attract IRS attention and audit you. A few days ago, someone over at Yahoo Answers asked if he could deduct their pool because his wife who runs an unlicensed daycare from their home uses the pool with the kids she watches. That definitely won't fly with the exclusivity test as it can be hard to argue that the pool is used exclusively for the business and not used by the family including their own kids.

Taking careful scrutiny of what you claim as home business deduction becomes more important with the news that IRS will focus more on small and home based businesses this year. Tennessean.com even reports that "Nationally, small-business audits of all types increased 22 percent between 2001 and 2005." Hopefully, that won't include you or me.

Read the article "Home Business Tax Deductions: What to Watch Out For" to learn the things that you need to carefully check when using home business tax deductions.

Tax Deduction Considerations for Small Businesses

It's almost end of the year. Now is the time to make your last-ditch effort to maximize your tax deductions for next year. Here are some things you can do:

- If you are self-employed with no employees other than your spouse, you can open a Self Employed 401K. The main benefit of the self employment 401K is that generally, you can deduct the entire amount of your plan contributions from your taxable income each year. You can read more of how you can take advantage of the tax benefits of this retirement savings tool from the article Self-Employed 401K: A Retirement and Tax Savings Tool for Small Businesses

- Head to the nearest office supplies store and stock up on office supplies. You can then deduct those supplies from your 2006 income. Just make sure you keep all your receipts

- Time to spruce up your home office. Expenses that affect your home office such as repairs and painting are considered by IRS as "direct expenses." Painting the outside of your home is considered an indirect expense and you can deduct a pro-rata share of the cost based on the space allocation of your home office. Note though that home office deductions cannot exceed the business' net income

- Purchase equipment for your business. First year expensing (Section 179 deduction) allows a deduction up to $108,000 in 2006 and $2,960 for a car (certain SUVs the expensing limit is $25,000). So if you are thinking of buying your servers and computers, now's the time to save on your taxes for 2006.

What States are Tax Friendly to Small Businesses?

The Tax Foundation releases an annual study on the State Business Tax Climate Index and Ranking that looks at how tax friendly a state is to small businesses. They have developed a ranking that is a comparative measure that can provide insights on how the state tax system is “hampering the efforts of local entrepreneurs or the possible entry of new businesses.”

The study defines the best states as those who raise sufficient revenue without imposing at least one of the three major state taxes—sales taxes, personal income taxes and corporate income taxes.

According to the Index, the top 10 states with the best state business tax climate for 2007 are as follows:

1. Wyoming
2. South Dakota
3. Alaska
4. Nevada
5. Florida
6. Texas
7. New Hampshire
8. Montana
9. Delaware
10. Oregon

You can read about the 2007 ranking at the Tax Foundation

Start Thinking of Taxes

It's holiday time once again! From Veteran's Day, Thanksgiving, Christmas, Kwanzaa, Hanukkah -- it's that time of the year to celebrate.

Before you get carried away with the celebrations (and food!), you need to start thinking about your taxes. Tax time is not one of my favorite things. But like many things in life, it is something that you have to do whether you like it or not.

In my view, as long as I owe the government tax dollars, then it means business is good. But I also do not want to pay Uncle Sam without knowing what the law allows me to deduct as business expenses.

November is the time to catch up on what you are allowed to deduct to minimize your taxes. Do you need new computers? Do you want to buy new software? Do you need to spend advertising money? Have you opened a self employment 401K account? It's time to wade through your receipts, or start talking to your accountant about tax strategies.

It's also the period to start reading all these tax books for whatever changes in the tax laws that may affect you. I have recently received my yearly free copy of J.K. Lasser tax books, and here are some tips from these tax experts:

• Take the Bite Out of April
• Multiple Tax Bills and Mid-Year Law Changes Increase Savings and Complexity