Most small businesses don’t have the finances to pay a full-time professional to handle their accounting needs. Many small businesses hire someone on an as-needed basis to handle their bookkeeping and accounting needs, and sometimes the accounting is handled by the business owner themselves.

If you own a small business and you are handling your own bookkeeping and accounting, there are several things you need to take into consideration in order to avoid financial problems.

Cash Flow

Owners of small businesses have to collate big purchases with the money that is available. Small business owners who have recently started their businesses find that they have expenses before they have money coming in. This is why they need to find different sources of capital when they are making bigger purchases for their business. They can try using credit cards for purchases for new equipment instead of using cash taken from the business. Financing large purchases and spreading the payments out will build up cash for other purchases.

Taxes

Small business owners need to understand how to handle their business taxes. Most small business owners handle every aspect of their business, including taxes and accounting, especially when they are first starting out. If you aren’t 100% certain about dealing with the IRS and your business taxes, you should seriously consider hiring a professional to take care of your taxes. If you don’t take care of your taxes correctly, you will end up paying large fees and penalties to the IRS, which can potentially ruin your business.

Accounting Software

Your accounting system will dramatically change as your business grows. Within a year, the accounting practices you use when you first start your business could become useless. You may hire new employees and hopefully have more clients or customers. All of these things will change the way you handle your accounting. It’s important to know when these changes happen so your accounting software can change with them. You will most likely need to upgrade your software in order to keep up with these changes.

Understanding The Basics

It is extremely important that you, as a business owner, understands basic accounting, even if you have hired someone to handle your bookkeeping and accounting. If you have a basic knowledge of how your taxes work, you will be able to check for errors before there are problems. If you don’t have basic accounting skills, you may want to consider taking a course in business accounting. If this isn’t an option, make sure your bookkeeper/accountant can answer all of your questions to your satisfaction so you understand everything.

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It’s never too late, or too early, to prepare for tax season. Starting now will help you figure out what you can claim and deduct. Business owners will begin going through their accounts to make sure all of the numbers add up and see which expenses they will be able to deduct. Getting ready for the upcoming tax season will allow you to reduce the stress that comes with doing your taxes and take a look at your business expenses to see how well you did through the year.

As a sole proprietor or LLC, it is extremely important to prepare early because taxes are due on April 15^th, just the same as for individual taxpayers. The paperwork is twice as much for business owners as it is for individuals.

As a business owner, you already know that any money you received for goods or services is your income, but this article is going to focus on your business expenses. There are several expenses that you may be able to deduct, at least part of them.

Tax-Related Business Expenses

You can deduct any purchase you made that helps you run your business, as long as you can prove that it.  You will need receipts. Here are a few things that may be unclear:

Professional Fees: This is any money that is paid to lawyers, accountants or CPAs and consulting. These are itemized on Schedule C, Legal and Professional Fees.

Car and Truck vs. Travel: If you have to drive for your business, your travel expenses can be deducted under Car and Truck expenses. These include: repairs, insurance, gas, maintenance, and any tolls you may have to pay. If you travel out of your local area for your business, travel expenses such as, airline fees and car rental or taxi charges are deductible.

It is important to know the difference between car and truck expenses and travel expenses. For your vehicle, you can deduct the higher amount of your standard mileage rate or the actual expense.

Contract Labor vs. Wages: Many business owners get confused about this expense. If you send Federal/State, FICA and Medicare taxes to the IRS for someone who works for you, they are considered your employee and will need to fill out a W-2. What you pay your employee is their wages. If your business qualifies for the Work Opportunity Credit, you can reduce your wage amount.

If you hire someone who is under contract, but does not fall under professional fees, you don’t send any taxes to the government. It is the contracted employees responsibility, but you will send them a 1099 MISC form. Whatever you paid that person will be placed under Contract Labor on your Schedule C.

For more help about these, and other business tax deductions, talk to a tax professional.

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The new school year is here and many parents will be enrolling their children in school for the first time, as kindergartners. Some taxpayers have questioned whether they can claim the dependent care credit for full-day kindergarten as well as after-school programs.

In order to qualify for the dependent care credit, you must have paid for the care of your dependent child who is under 13 years of age, and you must be employed. Married taxpayers will be considered employed if at least one spouse is working full-time and the other works either full or part-time, or is enrolled in school as a full-time student. If you are married, you will have to file a joint return in order to claim the credit.

The percentage for the credit is 35% of your eligible expenses when you have an adjusted gross income (AGI) of $15,000 or less. For every $2,000 beyond this AGI, the credit will be reduced by 1%, but cannot drop below 20% for an AGI of $43,000 or more.

You can take the credit for the first $3,000 for one child, and $6,000 for two or more children. For taxpayers whose income is more than $43,000, you can qualify for $600 for one child and $1,200 for two or more children. Qualifying expenses are defined as payments toward babysitters, day care and pre-school. According to the IRS, summer day camp may also qualify for the credit, but not overnight camp.

Some have argued that parents who have to pay tuition for full-day kindergarten should be allowed to deduct some of those costs, but a 2007 IRS regulation stated that kindergarten is education and parents cannot take a credit for tuition costs.

The same is true for half-day kindergarten. However, if a parent pays for before- or after-school programs for a child who is in half-day kindergarten, those expenses are eligible for the credit.

Taxpayers need to take these credits into consideration when they are placing their children, aged 13 or younger, in the care of others. The credits can be a real money saver.

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College costs are getting higher while financial aid is dwindling, so now is the time to check into tax breaks for college students. There are several different ways you can lower your college costs by taking advantage of every break the IRS has to offer.

The IRS offers several deductions and credits for college students that you can use to help pay for your education. Below is a list of some of the tax breaks you should look into to offset the costs of higher education.

1. American Opportunity Tax Credit: You can save up to $2,500 with credits from the American Opportunity Tax Credit and could even be eligible for a $1,000 tax refund, even if you don’t owe any taxes.
2. Lifetime Learning Credit: With this credit, you can get even more tax credits for a longer amount of time, but you can only use one credit per year of college.
3. Tuition and Fees Tax Deduction: This is a deduction on your income for tuition and fees, not a credit. You can save on the amount that is equal to your deduction. You can save about $280 in taxes with this deduction. If you don’t qualify for credits because of your income, you can use this deduction instead.
4. Student Loan Interest Deduction: The average student loan amount is about $24,000 and interest on those loans can get expensive. But the IRS has offered a way for college students to take a deduction on their interest without itemizing. It is closely related to tuition and fee deductions as it lowers your taxable income.
5. Work Related Education Expense Deduction: If you don’t qualify for any other credits or deductions, you can take this deduction, but you have to meet some IRS guidelines. You can take this deduction if you are in college to enhance your skills in your current job field, and you would record it on Schedule A. This deduction is subject to a 2% of Adjusted Gross Income before you will save anything.

It is more important than ever for college students to find a way to save on their education because of the rising expense. Most taxpayers don’t know that these credits and deductions are available to them. To find out if you qualify for any of these savings, you can talk to a tax professional and financial advisor or call the IRS to request information. You can also visit the IRS website at irs.gov to get more information on these credits and deductions.

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Moving households can be a huge undertaking and is often very costly. The IRS has published a list of 10 tax tips to make the expense of moving less of a burden. If your move is related to a new job or new job location, you may be allowed to deduct some of your moving expenses. Here are some of the tips and qualifications for deductions. Check the IRS website or consult with a tax professional to get the most up-to-date information.

1. Your move must be closely related to start of work: You can generally take a deduction of your moving expenses within one year of your move, if those expenses are related to the start of your new job.
2. Distance Test: If your new job is more than 50 miles away from your last residence and job location, you meet the IRS distance test.
3. Time Test: You must have a full-time job, working no less than 39 hours per week for the first 12 months after you move, or 78 weeks during a 24 month period after your move if you are self-employed. If tax time approaches before the required amount of time, you may still be able to deduct your moving expenses, as long as you meet the time test during the next year.
4. Travel: You are allowed to deduct lodging expenses when you are moving. Transportation expenses, airfare, mileage, parking, and tolls can also be deducted, but only for a single trip.
5. Household goods: Your expenses for packing and transporting your household items may be deducted. You may also be able to deduct the cost of storing and insuring them during your move.
6. Utilities: The connection and disconnection of your utilities can be deducted.
7. Non-deductible expenses: You can’t deduct any expenses related to the purchase or closing on your new home, your car tags, drivers license, security deposits, or other storage costs.
8. Form: You are only allowed to deduct expenses that are directly related to your move. To figure the costs of your total moving expenses and their deduction amounts, use the 3903 Form, Moving Expenses.
9. Reimbursed expenses: Your employer reimbursements, if any, must be included on your tax return.
10. Update your address: Make sure you give the IRS and the post office your new address when you move. This way, you will receive any refunds or letters. You can use the 8822 Form, Change of Address, provided by the IRS.

You can find the IRS Publication 521, Moving Expenses, and the 3903 Form, Moving Expenses on the IRS website at irs.gov or by requestion  them by calling 1-800-829-3676.

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The thought of a large refund will make anyone happy. But, as the saying goes, if it sounds too good to be true, it probably is, and there is usually a catch. The IRS makes a habit of looking for large refunds so they can be audited. If it turns out that your large refund was given to you as a result of your mistake, your large refund could become a large debt to the IRS.

There are some deductions and credit mistakes people make that can get them into trouble with the IRS when they file their taxes. Below is a list of some of the common areas where mistakes are commonly inadvertently made.

Child tax credit: This is the most common. In order to take this credit, the child must be related to you in one way or another, or you must be the child’s legal guardian. Also, you have to show proof that you cared for this child for at least six months out of the year you are filing.

Charitable Donations: When the IRS questions charitable donations, they are usually referring to large donations. If your donation was worth more than $500.00, you have to submit a receipt and a signed statement from the organization that proves your donation was made to an IRS qualified charity. If your charitable donation is deemed to be unqualified, you will owe the money you deducted for the charitable donation that resulted in the large refund.

Business Deductions: Many small businesses have a hard time figuring this one out. The IRS looks very closely at the differences between business expenses and personal expenses. Keep all of your receipts when you purchase anything for your business. You must also show the IRS proof that the expense was necessary for the running of your business. Computers and office equipment to keep your business running smoothly, especially if your business is growing, is considered a legitimate expense. Luxury items that do not enhance the growth of your business will not be accepted as a legitimate expense.

Travel expenses are tricky as well. You must submit your travel receipts when you are filing your taxes to prove that these expenses were made solely for business purposes.

These are only a few examples of credits and deductions that could send up a red flag with the IRS. It is very important to keep all of your receipts for everything you intend to take a deduction on or claim a credit for. If you have any doubts, talk to a tax professional. They will be able to figure out what you can and can’t claim, which will keep your refund from becoming a debt.

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Many taxpayers are busy updating their resumes and going to job fairs during the summer. The IRS wants everyone to be aware that most people can tax deductions on their tax returns for some of their job hunting expenses.

Here are 7 tips from the IRS regarding taking deductions for job search expenses.

1. All of the expenses must be related to your job search for your current career. You can’t take a deduction for job search expenses for a new career.

2. You are allowed to deduct expenses for employment agency fees while you are looking for work in your current career field. If those fees are paid back by an employer, you have to include that in your gross income.

3. You are allowed to take deductions for copies and mailing of your resume to employers if you are looking for a job in your current career field.

4. You may be allowed to deduct travel expenses to and from an interview that relates to your current occupation. Travel expenses include mileage and gas, but only if it’s related to your job search.

5. You may not take a deduction for job searches if there is a major gap in your employment. Check with the IRS website to find the specifics of this rule.

6. You may not take deductions if you are looking for your first job.

7. Your job search expenses are limited. You may only claim 2% of the adjusted gross income of your previous employer. You may figure your deductions on Schedule A when you file your tax return.

For more detailed information and instructions on deducting job search expenses, see Publication 529, Miscellaneous Deductions. You can find this publication on www.irs.gov or by calling 800-829-3676.

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Most working parents still have to work during the summer, even when their children are out of school. Because of this, there are extra expenses for child care if you have a child 13 years of age or younger. These expenses add up, but there is now a tax credit for parents who send their children to summer day camp.

 The Internal Revenue Service recently announced that expenses for summer day camp for your child could give you tax credits on your federal tax return.

Dianne Besunder, media relations spokesperson for the IRS said, “If you pay someone to care for your child, spouse, or dependent, you can claim the Child and Dependent Care Credit on your federal income tax return.”

People who are working, or looking for work, need to have child care while they do so. Day care and summer day camp qualify for this tax credit, which can be up to 35% of your expenses, depending on your income.

There are 9 qualifying factors that allow you to claim the Child and Dependent Care Credit.

1. Care must have been given to at least one qualifying person. This would be your dependent child who is 13 years old or younger, a spouse and anyone else who is physically or mentally disabled whom you care for. You must list each person on your tax return.
2. Care must be given so you, or your spouse, can work, or look for work.
3. You, or your spouse, must have earned income from wages, salary, tips, or earnings from self-employment. If you, or your spouse, were a full-time student, or care for a disabled person, you may qualify as having earned income.
4. You may not pay your spouse or other dependent, for the care. Your child may not be 19 years old or older at the end of the year, even if they are not your dependent. The care-giver must be identified on your tax return.
5. You must file as single, married filing jointly, head of household, or qualifying widow(er) with a dependent child.
6. The qualifying person must have lived with you for at least six months out of the year. The only exceptions are birth or death of the qualifying person, or if the child is of separated or divorced parents.
7. For the 2011 tax year, you are allowed up to $3000 of your expenses for the year for one dependent and $6000 for two or more dependents.
8. The expenses must be reduced by the amount of dependent care benefits that are provided by your employer which are deducted or left out of your income.
9. If you pay someone to care for your dependent in your home, you may have to withhold social security and Medicare tax, and also pay federal unemployment tax. Publication 926, Household Employer’s Tax Guide, explains this in detail.

Use the 2441 Form, Child and Dependent Care Expenses, to figure you credits, and send it in with your tax return.

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One of the most common questions asked at tax time is, “How do I avoid being audited?” The question itself is more common than the probability of actually being audited. Only 1% of all taxpayers have actually been audited.

When you know what information on your return will trigger an audit, it will help you to avoid one. It is by no means a guarantee, but it will definitely reduce your chances. By looking at past audits, you will see what common issues you need to take a close look at.

High deductions – Deductions that are unusually high compared to your income sends a red flag to the IRS. They annually publish the “Statistics of Income” and, although the book offers a range for typical income, you have to use common sense here. If you are at the lower spectrum of the income bracket, and you happen to claim high deductions in association with that lower bracket, you might trigger an audit, despite the fact that the deductions may be valid.

High Income – Higher income is usually considered an advantage, but from the IRS’s perspective, it causes them to look a little closer, which can be a disadvantage. Past audits show that a chance for an audit of a taxpayer who makes less than $100,000 is 0.93%, whereas a taxpayer whose income is over $100,000 has a 1.77% chance of being audited. With income over $200,000, your potential for an audit jumps to 2.87% and anyone who makes $1 million will  have a 9.37% chance of being audited.

Cash Income – When you work in a profession where you handle cash, such as receiving tips, it makes the IRS curious. They will most likely compare your bank deposits and the income you have claimed on your taxes. If they don’t add up, you may find yourself being audited.

Self-Employment – Self-employed taxpayers tend to write-off as many expenses they can in order to keep as much of their money as possible. The IRS is sure to verify that these expenses and deductions are legitimate.

But just because some items on a tax return might trigger a red flag with the IRS, it isn’t a guarantee that you will be audited. Your best bet to avoid an audit, though, is to expect that it will happen. Make certain that your deductions are correct and you have a record of every expense and pay stubs to show the IRS, just in case.

Of course, not having to deal with an audit is the best thing that could happen, and if you keep yourself apprised of the issues the IRS looks at, you will avoid that letter from them.

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Sub-contractors and real estate and insurance agents are just a few occupations that receive a 1099-MISC. These people are independent contractors and are considered self-employed. They are responsible for paying their own taxes. Taxes are not taken out through the year. They have to make sure they withhold enough every time they are paid for their work.

For self-employed people who have some knowledge of taxes, or have retained the services of a tax professional, using the 1099 can be a good thing. If they are newly self-employed, however, there could be some major issues come tax time.

Regular employees have federal, state and payroll taxes taken out of their net wages every pay day. These employees are not completely responsible for their taxes, but someone who is considered and independent contractor is. Every quarter, an independent contractor needs to pay into their taxes. The way to figure your taxes is either 100% of last year’s tax liability or 90% of this year’s tax liability. If you don’t pay enough throughout the year, you will end up owing at tax time.

Another important factor about being an independent contractor is to keep track of ALL of your expenses through the year. Those who receive 1099′s can deduct expenses like a business owner can. Many small business owners and independent contractors use the same Schedule C to report their income.

Auto expenses and mileage are the most important expenses an independent contractor needs to keep detailed records of. The IRS allows for 50 cents for every mile driven for business purposes, plus gas, repairs, depreciation, and insurance. You will have to decide if you want to take the actual expense deduction or the standard mileage rate.

You must also take into consideration the actual definition of business miles. You cannot claim all miles you have driven, only those miles that are used for business purposes. Miles driven from your office to, say, appointments, are considered business miles. Miles driven while not working cannot be deducted.

If you choose to use the actual expense method, you can figure your deductions by totalling your auto expenses and multiplying that number by how many miles driven.

Some other expenses you can deduct as an independent contractor are:

~ Advertising expenses
~ Office supplies
~ Cost of uniforms/Equipment
~ Utilities
~ Insurance
~ Interest paid
~ Legal/professional services
~ Meals and Entertainment Expenses
~ Lodging expenses

The last issue an independent contractor needs to be aware of it the home office deduction. If you use part of your home strictly for the use of your business, you can take a deduction. It offers the ability to deduct part of your living expenses, which include rent or mortgage, insurance, taxes, and utilities. This deduction will also let you use some of your commuting miles into business miles.

If you have two offices or work locations (one outside the home and one in your home), you can use commuting miles as business miles. In addition to the Schedule C, you will have to file an 8832 form to take the home office deduction.

An independent contractor and self-employed person needs to understand what they are able to deduct in order to save money on your taxes. Purchasing tax software with expense and deduction spreadsheets or hiring a tax professional are two ways to help you save as much money on your taxes and may keep you from owing the IRS at tax time.

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