You may think a tax accountant is only necessary from January to April, but you will be surprised to learn that an accountant brings real value year-round. Tax accountants know you will save the most when you have a tax plan in place. If you do not have a tax accountant or are on a budget, we have created a guideline for business owners to consider as they prepare for the 2019 year.
Why is Tax Planning Necessary?
How many business-related miles did you drive in 2018? How much space does your home office take up? Chances are, if you know the answers to these questions you understand the value of tax planning. Those that utilize tax planning recognize petty cash receipts, miles logged, and charitable contributions all can add up to significant deductions. These deductions can be especially useful for small businesses and startups that are trying to cut costs.
Do I Need a Tax Plan if I Have an Accountant?
If you have an accountant that you work with year-round, they have probably been tax planning without telling you. Tax planning is merely the process of knowing what tax code relates to your business, keeping tidy books, and spending money in a way that can benefit your deductions when possible.
For example, many people think a charitable contribution can include donating to a church for a missionary abroad. However, this is not deductible as a charitable contribution. True, it might be deductible under another category, but it is not a charitable contribution. (Source: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions) If you are looking to max out your charitable contribution, this mistake could cost you. This is a prime example of why having a tax accountant year-round can help you save money.
What if I Did Not Tax Plan For 2018?
Tax planning is not required. The IRS will not come after you nor charge you a fee. Tax planning is just as it sounds, planning. You are not required to plan, but you are required to state your income accurately. You are not required to report all of your expenses, but in most cases, it benefits you.
If you did not have a tax plan in place for 2018, you could still find big savings. The deductions may be a bit harder to track down, and you may not guarantee every eligible deduction.
Tax planning does not need to be a long, complicated process. By just visiting the How to Create a Tax Plan for 2019 Guideline offer page, you can download our FREE guide to learn how to tax-plan for your business.
How to Create a Tax Plan
Filing your taxes alone can be a struggle, but now you have to tax plan too? Not to worry! Tax planning can be a simple and straightforward process that saves you cash. Consider our 3-step process to promise you a smooth tax season next year.
Step 1 – Get Organized
Whether you work with a CPA or tax software, you are going to be asked specific questions about what you made and spent over the prior year. Reporting these numbers accurately is essential for both legal and cost-saving purposes.
When your records are in order, you can answer questions like how many business-related miles did you drive or what was your cost of goods sold? Details both large and small can add up to significant savings.
If you are unsure on how to organize your books, consider talking with one of our accountants. We can help guide you on how to get set up.
Step 2 – Know Applicable Deductions
Know what deductions you may be eligible for so you can spend your money accordingly. Each deduction usually comes with a footnote explaining how much you are allowed to deduct or how to calculate the deduction. Some may not even apply to your business. Read each one carefully to understand how it may apply. If you are not sure, ask your accountant for clarification.
- Business Expenses – Deductible business expenses must be both ordinary and necessary. The IRS defines ordinary as, “one that is common and accepted in your trade or business.” While necessary, it is defined as, “one that is helpful and appropriate for your trade or business.” (Source: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses) For example, a writer can deduct the cost of a laptop. It is common in the field of writing and an accepted form of performing work. It is also helpful and appropriate because the computer allows a writer to quickly complete work. The computer will not be permitted if it is primary purpose is for personal use.
- Cost of Goods Sold – If your records are in order, the total amount of cost of goods sold should be reasonably easy to find. The cost of goods sold is the expense incurred when building a product. These expenses include the cost of raw materials, freight, storage, direct labor (including pensions or annuity plans), and factory overhead. There are a few footnotes if you are considered a small business taxpayer or if you also have indirect costs and do not qualify as a small business taxpayer. Consider talking with your accountant to see if you are eligible as a small business. (Source: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses)
- Capital Expenses – These are assets, start-up costs, or improvements that you can deduct or amortize over a period. There are going to be some specifics in regards to what start-up costs are included, but the deduction is limited to $5,000 with any remaining carried over to the following year. (Source: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses)
- Home Office – Many small businesses start in the home, which is great for tax purposes. Whatever percentage of your home office is to the entirety of your house, can be deducted as a business expense. These costs can include your mortgage, utilities, or insurance. (Source: https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction)
- Car – This one can be a bit tricky if you use your vehicle for both business and persona. A car that is only used for business purposes can be deducted in its entirety. When the car is also used for personal purposes, you will have to record the miles driven for business. While you may not enter in your books “drove 25 miles today”, you can keep separate documents stating how far you have driven. The number of miles you have driven on business will be multiplied by the IRS issued rates in center per mile allowance. The established rated can be found here, https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction.
- Other – Other types of business expenses range in employee pay and retirement plans, to interest, taxes, and insurance.
- (Source: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses)
While this list does not mention every type of business expense allowed, we hope you see the value in recording everything spent by your business. More often than not, you will find a tax deduction associated with the cost. Some may seem obvious, but others may pleasantly surprise you. Learn more about the deductions that are most are often forgotten by business owners here: 8 Deductions Most Often Forgotten by Business Owners.
Step 3 – Understanding the Tax Credits
Tax credits are a great way to maximize your savings. There is a limit on the number of tax credits you can claim, but they can be carried forward and backward! Rather than listing out every credit and the information that qualifies you for the credit, we will list some of the most common ones and provide you with a link to the form you will need to complete to obtain this credit.
- General Business Credit – Form 3800 (Source: https://www.irs.gov/pub/irs-pdf/f3800.pdf)
- Investment Credit – Form 3468 (Source: https://www.irs.gov/pub/irs-pdf/f3468.pdf)
- Work Opportunity Credit – Form 5884 (Source: https://www.irs.gov/pub/irs-pdf/f5884.pdf)
- Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips – Form 8846 (Source: https://www.irs.gov/pub/irs-pdf/f8846.pdf)
- Credit for Small Employer Pension Plan Startup Costs – Form 8881 (Source: https://www.irs.gov/pub/irs-pdf/f8881.pdf)
- Credit for Employer-Provided Childcare Facilities and Services – Form 8882 (Source: https://www.irs.gov/pub/irs-pdf/f8882.pdf)
- Energy Efficient Home Credit – (Source: https://www.irs.gov/pub/irs-pdf/f8908.pdf)
- Alternative Motor Vehicle Credit – (Source: https://www.irs.gov/pub/irs-pdf/f8910.pdf)
Any of these sound like they may apply to your business? Visit the form linked to include on your upcoming tax return or find ways to make them apply for the following year.
***Please note, the linked forms are for the 2017 tax year. They cannot be used for any other year. The content of each form may change but the form number should not.
We often talk about how taxes, bookkeeping, and accounting is not for everyone. We understand how it can be the most challenging part of your business to understand, which is why we like helping businesses. It frees up your time so you can do the things you love.
An alternative to creating a tax plan on your own is to work with an accountant. A tax accountant can create financial targets, filing systems, and organized bookkeeping. When tax season does come around you can quickly put together your information accurately, while making sure you are taking advantage of every deduction available to you.
Here at ProAdvisor CPA, we specialize in working with startups and small businesses. For a free consultation on your situation, reach out to us by contacting us HERE.
This publication is designed to provide information of federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.
This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.
This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.