Where are your records?
Tax time is rolling around again so what can you do now to ensure a less painful tax preparation this year? The easiest thing to do is keep a record of your transactions. Sounds easy but we all forget to save those receipts or print out those statements.
What records and receipts should you be keeping? Well, did you purchase a car in 2009? If so, keep that receipt as you may be able to deduct the sales tax you paid. Did you buy or sell stocks? You need to know what your basis was in those stocks, which again means that you need to know what you paid for the stock, the commission you paid to purchase the stocks, and any stock dividends you received that were reinvested in stocks. This might not be too bad if you only make one or two stock purchases a year, however, once you reach the level where you buy and sell stocks several times a month, this can be a nightmare.
Other receipts that you might want to save are your medical receipts. For example, you need evidence to show how much you paid for the year in after tax dollars for your medical premiums. You also want to save receipts for copays, prescriptions, and other medical expenses. Many stores make this easier now by showing you at the bottom of the receipt the amount that qualifies as a medical expense.
Do yourself and your tax preparer a favor and keep your receipts and print out and save your monthly statements. You can make life even easier by sorting the receipts and statements out by category, at least you can do that if your New Year’s resolution was to get organized.
Financial Fortunes
Understanding finances and how to keep track of your finances can make or break your business. Keeping track of your finances is especially important for small cash based businesses. It is very easy to forget or lose track of what you make, the taxes you need to pay on your sales, and what was sold if you don’t develop a system to keep track of everything. This can land you in hot water not only with the IRS and your state, it will also make it hard when you need investors or try to get a loan from a bank.
Many small businesses don’t realize the importance of keeping good records. They want to try and hide some of their income in order to keep taxes down. However, while this might save them a few dollars in the short term, this gamble could really hurt in the long run. If the IRS finds out that you are not properly reporting all your income, including any cash tips or sales from other items that are not the main part of your business, they will not only collect the back taxes for that income, they will also impose fines and charge interest on the back taxes owed.
There are plenty of good accounting systems available that will help you keep track of your inventory, sales, invoices, expenses and income. I frequently use Quickbooks. Ask your accountant or other business owners for what they recommend.
Special Tax Treatment for Family Employees
Wages of children under 18 years of age who are employed in the family business are not subject to social security or Medicare taxes. However, this holds true only if the family business is a sole proprietorship or a partnership in which both partners are parents of the children.
If the children are under 21 and perform only domestic services, they are not subject to social security taxes or Medicare taxes. These domestic services must be performed for the parents though and be provided in the parents home only.
In addition to not being responsible for social security and Medicare taxes, the income of children who fall under either of the categories above is not subject to federal unemployment tax. However, this income may still be subject to federal income tax withholding.
Tax Deduction for Business Start-up Expenses
When starting a new business, there are plenty of expenses. You have to file a fictitious name with your state. If the business is going to be a partnership, corporation, s corporation or LLC, you need to file with the state and pay for someone to create articles outlining how ownership is divided, what rights and responsibilities each person has, how you can make changes to the articles, and much more. It takes money to do these things.
Section 195 of the Internal Revenue Code allows businesses to deduct these start-up expenses, up to $50,000, in the initial year of business. However, if the start-up expenses exceed $50,000, the amount the business can deduct in the initial year of business is reduced. The start-up expenses can still be deducted, but instead of deducting them all in the initial year of business they are deducted over a period of 180 months.