It’s tax time again and with it comes the headaches of being a small business owner trying to make sure the paperwork is done correctly.
“One of the blunders that a remodeler is likely to make is not keeping enough records,” says Chuck Mollett, a CPA in San Jose, Calif. “We need simple things to make the correct deductions. Some people just don’t grasp that.
They used to work for someone else and now that they’re on their own they figure they don’t have to do all sorts of paperwork, but it’s their own money they’re losing.”
There are some vehicles that can be written off 100 percent, and there are some that cannot — like a light pickup or an SUV. For a vehicle to be 100 percent deductible it needs to be used exclusively for work; otherwise, a vehicle-use log is needed to determine how much the vehicle is used for work and how much time it is used for personal matters.
“A lot of times small business owners want to deduct things like meals, entertainment and promotional events,” explains Mollett. “They often don’t know what meals are deductible vs. the ones that are 50 percent excludable. They need to talk to their tax person and figure that out because they can really save themselves a lot of money in the meal and entertainment area just by how they keep their records.”
Home office deductions are a real problem on audits. What happens is that contractors who work from their home tend to not follow the rules, assuming because they’re working from their home, they can deduct some of their home expenses. If it’s not done right, nothing can be deducted. For instance, a home office has to be a designated office space.
“Looking into home office rules is critical,” adds Nancy Chillag, a construction attorney in Menlo Park, Calif., and columnist for Qualified Remodeler. “These days with downsizing, a lot of people are giving up their offices and moving back into their houses and they had better do it right. A dining room table that is cleared off for dinner doesn’t count.”
Independent contractor vs. employee is another area to be prepared for. Some business owners assume that because their employee is licensed they can treat them as an independent contractor, but that’s not the test. If they are considered an employee by the IRS, taxes should be withheld, or there can be huge penalties at tax time. On top of that, anyone who has access to the business banking account can be held liable for those taxes.
“Even the office manager who writes checks for the business becomes just as liable for those taxes,” explains Chillag. “It’s called trust fund tax liability. Some people think that if they’re incorporated and they get caught, they can just close down the business, but that’s not the case. Those taxes follow you personally.”
It’s also important, if the company is a corporation, for the business owner to make himself/herself an employee of that corporation and receive a paycheck with taxes withheld. If that is done, they are less likely to have estimated tax issues.
“What I would like to see is a contractor come in with a simple set of books and records,” says Mollett. “Quick Books or even Quicken is better than nothing. If they bring a copy of their database in to us, we can take a look through the records and make a lot of determinations instead of bothering them with a bunch of questions.”
Most tax preparers use an organizer that is sent out to clients. Taking the time to prepare the organizer will save money on accounting fees. A lot of accountants charge for the service they perform and not a flat fee. This also helps a business owner to go through their own records, see where they’re having problems and helps focus on those things where they need assistance.
“Some remodelers don’t understand that the IRS can come into their business and say they owe $1 million,” adds Chillag. “It’s up to the business to prove that they don’t. The IRS doesn’t have to prove a thing.”
It’s important for small business owners to have better contact with their advisers. They can advise on any state and federal tax credits that might be available for small businesses. In tough times, even though some give up that contact because it is seen as an overhead expense, it may be more important than ever to spend the money and bolster that relationship.
For more information on taxes visit www.IRS.gov for Publication 334, a tax guide for small businesses.