Small Business Tax Credits

Like business deductions, tax credits reduce your final tax bill. However, tax credits go a step further and reduce your final tax bill on a dollar-for-dollar basis. 

For example, suppose you have business income of $100,000 after adjustments. Your business also has a $10,000 tax deduction available. Your company’s final tax bill will be $90,000 multiplied by its tax rate. Assuming a rate of 25%, the company’s tax bill will be .25*$90,000, or $22,500.  

Now, consider what happens if your business has a $10,000 tax credit available instead of deduction. In this case, you first calculate your final tax bill and then reduce it by the amount of the credit. In the above example, this would mean you first multiply your $100,000 income by 25%, and then subtract $10,000. This equals $15,000. The tax credit saved your company an additional $7,500. 

Here is a list of some important small business tax credits:

●      Employer Provided Health Insurance Premiums

●      Credit for Paid Family and Medical Leave

●      Work Opportunity Credit

●      Disabled Access Credit

●      Employer Provided Childcare facilities.

Tax credits may sound complicated but taking advantage of them is well worth your time and effort. For more details on the credits mentioned above, please visit our separate blog post [LINK] for additional discussion.

Start Early

A common trap many small business owners find themselves in is that they started organizing for tax season at the last minute. Starting early helps ensure you have the necessary documents to file, and that no deductions or credits are overlooked.  

Starting early includes getting organized early. A good practice is to set up a weekly or monthly schedule to update records, ensure all transactions are recorded properly, and any possible questions are answered timely. 

Summary

Tax season is stressful enough, so we hope our tax deduction checklist and discussion is helpful when you prepare your small business taxes. For more information on taxes and accounting, be sure to visit the rest of the Silva Tax & Accounting website!

How to Create a Tax Plan

As a busy small business owner, you probably have your hands in all aspects of the company. One activity that you may have put off until the business was up and running is to create a tax plan. Taxes and accounting can be intimidating, but if we break down the process into simple steps, you can create a robust tax plan. In this article, we will discuss business tax plan goals and the steps to create a tax plan.  

What Is Tax Planning?

You can probably guess that tax planning involves figuring out the best way to minimize your company’s tax bill. Along with that goal, tax planning involves an analysis of your small business’s overall financial health. 

For example, one of the first steps in calculating your company’s tax bill is calculating its revenue and expenses for the year. Comparing the same figure to the previous year can give you a good indicator of company health. Was there revenue growth? Have expenses grown faster than revenue?  

These are just a few of the questions you can answer when you create a tax plan.

What Is Your Business Structure?

The first step to create a tax plan is choosing the appropriate business structure. You can operate as a partnership, sole proprietorship, limited liability company (LLC), S corporation, or C corporation. Many business owners choose an LLC or similar entity because there is no “double taxation” as there is in a C corporation.

Instead, income “passes through” the business entity to its owners. The owner then pays taxes on profits received from the LLC or similar entity. LLCs also offer flexibility by allowing owners to customize the operating agreement, creating more business flexibility. 

Recordkeeping

A robust record-keeping system is essential to an effective and efficient tax strategy. This includes designated areas to store receipts, payroll records, previous tax returns, and additional areas you may need depending on your small business. This can be done electronically or physically depending on your preference.

For example, many small business owners take the home office deduction when calculating their tax liability. The deduction requires the taxpayer to have specific amounts deducted depending on the size of their office.  Documenting these measurements and keeping any receipts is necessary to claim the correct deduction amount.

Recordkeeping Schedule

In addition to having designated storage areas for specific records, dividing the recordkeeping throughout the week to ensure they are current is another good practice that helps during tax season. The following is a simple weekly schedule that does not require much time to complete:

●      Monday – Payroll record updates

●      Tuesday – Revenue transaction updates

●      Wednesday – Expense transaction updates

●      Thursday – Retirement/Miscellaneous transaction updates

●      Friday - Open

Use Separate Business Bank and Credit Card Accounts

A common accounting issue with new small businesses is mixing personal and business expenses. This refers to making business purchases with a personal bank account or credit card. Using a separate bank account or credit card for business purposes is a way to automatically categorize all the transactions on the business card as business expenses that may be deductible.

For example, suppose you plan to deduct gas expenses, as your business requires you to drive. If you accidentally use a personal card while filling your gas tank, you may overlook the transaction while reconciling your accounts as it was made with a personal card. 

Using separate accounts also fits within the weekly framework we just discussed. By dedicating a certain amount of time each week to recording and verifying business transactions, you are more likely to catch possible errors and save time during tax season. 

Manage Payroll

Managing payroll may not come to mind when thinking of tax planning but making the correct employee tax withholdings and paying the correct amount of payroll tax is an important part of paying taxes. 

Many companies outsource their payroll. This can save time and money depending on the size of your business, but it is important to use a reputable company. For example, if your payroll processor calculates the incorrect payroll taxes for your small business, you may face IRS penalties for sending in an incorrect amount. 

Consult With An Accountant 

You will undoubtedly have questions even after going through the topics we just discussed. It is a good idea to write down any questions you have while going through the process so you can have a list ready when you meet with your accountant. 

Accountants can help with “fine tuning” your tax plan by advising on more complex issues, such as:

●      When to make retirement contributions

●      New credits and deductions, such as the Qualified Business Deduction

●      Setting up sales tax processing if necessary

●      Help with estimated tax payments

Summary

Tax planning is manageable if broken into smaller steps. Here is a summary of the major steps we recommend:

●      Set up proper business structure

●      Have a recordkeeping plan, including a weekly schedule

●      Open a separate business bank account

●      Decide on how you will process payroll

●      Meet with an accountant about more complex issues

We hope this article helps your business create a tax plan. For more information on taxes and accounting, be sure to visit the rest of the Silva Tax & Accounting website!

5 Tax Credits Small Businesses Should Know About

As tax season is coming up one of the goals of every small business owner is to minimize their tax bill. So, what are some of the ways to do that? You have probably heard that some business expenses are deductible. An even more effective way to reduce tax liability is through tax credits. In this article, we will discuss the definition of tax credits and the five tax credits small business owners should know about. 

What Is a Tax Credit?

Tax credits are a way for small businesses to reduce their tax bill. Unlike business expense deductions, tax credits offer a dollar for dollar reduction in tax liability for a small business. Some business owners are intimidated by the mechanics of tax credits, but this dollar for dollar reduction makes them one of the most powerful ways for a small business to minimize its tax bill. 

Let’s look at an example to help clarify how a small business tax credit works and how it differs from a small business tax deduction. Suppose your business has an adjusted gross income of $100,000 and has a $10,000 tax credit available. Your accountant has calculated your final tax bill to be $25,000. The tax credit reduces your final bill dollar-for-dollar, which leaves your business with a final tax bill of $15,000.

Now consider what happens if the $10,000 was a tax deduction rather than a credit. Instead of reducing the final tax bill dollar-for-dollar, the $10,000 would be subtracted from the company’s adjusted gross income of $100,000. Assuming a marginal tax rate of 25%, the company’s tax bill will now be (90,000*.25) = $22,500.  

You can see the power of tax credits in the previous example, as the tax credit brings an additional tax savings of $7,500. 

Employer Provided Health Insurance Premiums

One of the benefits to small businesses as a result of the Affordable Care Act is the ability to claim a tax credit in an amount up to 50% of insurance premiums paid under a qualifying agreement. You are eligible for the credit if:

●      You had fewer than 25 employees

●      Average annual wages less than $55,000

●      Pay at least 50% of premiums

●      Plan was purchased through the Small-Business Health Options Marketplace

Please note that the credit can only be claimed for two consecutive years after 2014.  

Credit For Paid Family and Medical Leave

The credit for paid family and medical leave was recently introduced to encourage businesses to provide paid leave to employees for events such as childbirth or health emergencies. If small business owners have a written policy that covers all qualifying employees, they are eligible for the credit. 

The credit amount ranges from 12.5% to 25% of wages paid to qualifying employees on paid leave for up to 12 weeks. The American Rescue Plan increased the cap on the credit from $10,000 to $12,000.  For more information and details on the mechanics of the credit, be sure to check out the IRS information page. 

Disabled Access Credit

This credit encourages small businesses to provide disabled access to facilities. The company can cover up to 50% of expenditures related to enabling disabled access, with a cap of $5,000.  Here's the IRS link for more details.

Employer Provided Childcare Facilities

Many employers cover childcare expenses for their employees either directly or by helping them obtain care. Employers that cover services are eligible for a credit of up to 25% of expenses, with a cap of $150,000 per year. 

Before the changes to the Child and Dependent Care credit for 2021, employees could actually save money by having their employers cover childcare expenses rather than paying for it themselves and utilizing the Child and Dependent Care credit. 

For example, if the employee paid for childcare expenses, they could claim a credit of up to 35% of expenses up to $3,000. This meant that the employee paid $1,950 per year for childcare. The employee would save the $1,950 if the employer paid for the childcare expenses. This may be an area for your small business to discuss to improve their childcare coverage policies that could lead to savings for both company and employee. 

Work Opportunity Credit

This tax credit incentivizes small businesses to hire underrepresented workers from groups including the following:

●      Veterans

●      Long-term unemployed

●      Ex-felons

●      Supplemental Social Security Recipients

●      Designated members of community empowerment zones

The amount of credit depends on which type of underrepresented worker your small business hires, but generally allows up to 40% of the first $6,000, or $2,400. Check out IRS Form 5884 for more details.

Summary

We hope this discussion of the importance of small business tax credits and how they can reduce your tax bill has been informative. The list we covered is not exhaustive, and there may be additional tax credits your small business qualifies for. For more information on taxes and accounting, be sure to check out the rest of the Silva Tax & Accounting website!

6 Red Flags You Should Be Outsourcing Your Bookkeeping

As a busy business owner, you are undoubtedly involved in all aspects of your business. Bookkeeping is an area that small business owners may overlook or check when they have a spare minute. Keeping your books accurate and updated on a regular basis does take time but is extremely important to your company’s financial health. In this article, we will go over some red flags that indicate you should outsource your company’s bookkeeping.

Bookkeeping Is Taking Up Too Much Time

The first red flag your business needs a bookkeeper is bookkeeping takes a substantial amount of time. Small business owners take pride in being able to handle all aspects of the business on their own but spending too much time in any one area can decrease revenue or cause other issues. For example, if you normally spend 10 hours per week updating your books but a bookkeeper can do the same job in half the time, you could use the extra five hours on marketing, meeting with clients, or other company tasks. If bookkeeping is keeping you away from higher-growth areas of your company, this is a big red flag that you should outsource your bookkeeping.

Your Books Are Not Updated Regularly

Another red flag you should outsource your bookkeeping is that your books are updated at irregular intervals. For example, some small businesses only update their books in preparation for tax season. This can cause several issues including incomplete records and penalties for late or inaccurate tax filings.

A good practice is to do monthly bookkeeping updates. This helps detect and correct errors much quicker than semi-annual or annual bookkeeping updates, saving time and money overall. For example, many business owners have separate personal and business credit cards. If you mistakenly used your personal account for business expenses, your accounting would reflect less revenue and higher costs than were actually incurred. Monthly checks of your books can reduce these and similar errors. Monthly checks that consistently uncover errors is another red flag you should outsource your bookkeeping.

Overlooked Tax Savings

Many business expenses are tax deductible. Here is a list of the most common business deductions:

●      Home office deduction

●      Mileage deduction

●      Depreciation of equipment

●      Supplies

●      Insurance

Keeping track of all the deductions available to your small business can be time-consuming without some experience in the area. Hiring a bookkeeper ensures expenses are categorized correctly, which helps ensure no deductions are overlooked. 

Maximizing tax deductions has a significant impact on a company’s cash flow. For example, did you know that you can take a depreciation expense on your business laptop? If you use a laptop 100% of the time to run your business, you can depreciate 100% of its cost. Additional deductions commonly overlooked are professional fees, telephone and internet, and bank fees. Overlooked tax savings is another red flag your company should outsource its bookkeeping.

Your Books Are Always Out of Date

One of the main reasons to hire a bookkeeper is to make sure bookkeeping records are up to date. Outdated books prevent you from getting an accurate picture of the company’s financial situation. This can lead to issues with meeting payroll, making timely vendor payments, and creating accurate profit and loss reports. 

Organizing and documenting daily transactions can be daunting, but hiring a bookkeeper can make the process much easier. Effective bookkeepers specialize in properly documenting all business transactions and recording them in Excel or with an accounting program. Many programs such as QuickBooks have features that automatically categorize transactions according to preset rules. For example, if you routinely receive payments from customer ABC, QuickBooks will automatically categorize these payments as Revenue if the rule is implemented. 

You Are Paying Too Much to Your Accountant

A common misconception is that accountants and bookkeepers perform the same duties. However, there are differences between the two.  Bookkeepers record day-to-day financial transactions of your business, while accountants offer financial advice, create forecasts, and aid in tax preparation. Accountants cost more than bookkeepers because of their higher qualifications. If your business is using an accountant to perform day-to-day bookkeeping duties, the company can save a significant amount by outsourcing its bookkeeping and using the accountant for more specialized tasks. 

You Are Unsure About Your Company’s Financial Health

Constantly worrying about cash flow, profit and loss, or other financial issues related to your business is another red flag you should outsource your bookkeeping. Accurate books are the financial backbone of your company. If your books are error-prone or out of date, you won’t know how the current quarter’s profit compares to the previous quarter, or what services are coming in over/under budget.  Being unable to generate accurate financial reports whenever needed is another red flag your company should outsource its bookkeeping.

Additional Suggestions and Tips

So far, we have discussed some red flags indicating your company needs to outsource its bookkeeping, so let’s move to some suggestions to improve your bookkeeping process: 

●      Use a separate bank account/credit card for business expenses

●      Utilize accounting software to save time and streamline the bookkeeping process

●      Designate a place to store all important documents, both physically and electronically (backups are always necessary)

●      Request monthly or quarterly audits of company books to uncover common errors

●      Meet with an accountant annually or semi-annually to resolve any questions 

We hope this short article is helpful when planning your bookkeeping solutions.  For more information, be sure to check out our website!

7 Signs Your Business Needs a Bookkeeper

Small business owners take active roles in all aspects of their company, from marketing to client meetings. Bookkeeping is an area that business owners may not spend as much time on as they would like. Accurate and timely bookkeeping is essential for a company to meet its goals. In this article we will discuss the importance of bookkeeping, the signs your business needs a bookkeeper, and some suggestions to find the right bookkeeper for your company. 

What Is Bookkeeping and Why Is Bookkeeping Important?

Bookkeeping is the process of recording all your company’s financial transactions such as income and expenses. Accurate bookkeeping provides information about how your business meets its budget, current profit and loss figures, and whether the business has enough cash on hand to meet its obligations. Good bookkeeping and organization also make tax preparation much easier. 

Strong Signs Your Business Needs a Bookkeeper

It is common for new business owners to perform bookkeeping duties themselves, but as the business grows, owners must spend more time on other areas of the company. In these situations, it is good practice to hire a bookkeeper. Below we discuss some signs your business needs a bookkeeper.

Expansion  

Business expansion is a goal of every business owner and requires a great deal of time and effort. A natural consequence of expansion is less time available to spend on various aspects of the business. Because good bookkeeping requires attention to detail and accuracy, spending less time on bookkeeping often leads to errors and inaccurate information. For example, if a company purchases a new laptop for an employee but fails to record the expense in its books, the company’s recorded expenses will be less than actual expenses. If left uncorrected, this leads to higher taxes paid as the laptop expense which would have reduced taxable income was not recorded. 

Incorrect Transaction Categorization

One of the most important duties of a bookkeeper is to properly categorize transactions. Whether they are income or expenses, incorrect transaction categorization can lead to higher taxes paid and potential penalties from the IRS. For example, suppose a company uses the same account for both business and personal transactions. If a transaction is incorrectly categorized as personal instead of business, the company loses a valuable business deduction. The opposite is also true. If a company inadvertently takes a personal expense as a business deduction, the business may need to file an amended return or send an explanation to the IRS. 

You Constantly Have Bookkeeping Questions

The Internet is a fantastic resource for answering frequent questions on several topics. However, if you constantly find yourself spending time researching bookkeeping questions, you might be better served to hire a bookkeeper. Your time is valuable, and the time saved from taking bookkeeping duties off your plate can be used in other areas such as marketing or client contacts. 

Books Are Not Updated Regularly

Small business owners are extremely busy. Not having enough time to update business books is a strong sign that hiring a bookkeeper is a good idea. Updated books provide accurate profit and loss reports, budget analysis, and additional information so business decisions are much easier to make. Many businesses only update their books to prepare for tax season, which increases the chance of errors when filing their tax. Regular bookkeeping updates can detect errors more frequently, save time, and avoid IRS penalties.

Sales Are Growing, But Profit Is Not

Profits remaining steady while sales continue increasing is frustrating for any business owner. This can be caused by several reasons, and the first place to investigate is a company’s books. Having updated and accurate books will help the process immensely and help identify reasons why profits are not increasing with sales. The issue can be as simple as unrecorded payments or might need more research and analysis. Having a bookkeeper ensures the information needed to make profit-maximizing decisions is updated and accurate. 

Payroll Issues

Many businesses have employees along with independent contractors, which can complicate the payroll process. For example, employees have income tax and FICA withholdings from their paycheck, while independent contractors do not. Ensuring the proper payroll deductions are made requires time and accuracy. Qualified bookkeepers often handle company payroll, saving time and adding value. 

Should Your Business Hire an Employee or Independent Contractor?

Businesses can use employees or independent contractors to fill their bookkeeping needs. Employees work full-time, have designated hours, and often perform additional duties.  Independent contractors work according to the terms of their contract and earn income on a per-project basis. 

Employees generally cost more as they receive medical benefits, life insurance, and payroll taxes. If you want to hire someone for full-time work and gradually increase their work responsibilities, an employee is your best bet. If you are looking for just bookkeeping help, an independent contractor is a more cost-effective solution.

Bookkeeping Suggestions

There are several things business owners can do to streamline their bookkeeping, whether done themselves or by a bookkeeper. Here are some common suggestions:

●      Use separate bank accounts and credit cards for business and personal expenses

●      Take advantage of accounting software such as QuickBooks Online

●      Perform periodic audits of books to ensure accuracy

●      Meet with an accountant at least twice per year to resolve any questions

●      Create checklists of bookkeeping tasks to ensure nothing is overlooked

We hope this short article has been helpful in explaining the signs your business needs a bookkeeper. For more information on bookkeeping and accounting, be sure to visit our website!