Tax Basics: Reporting for Sole Proprietors

From the perspective of the Internal Revenue Service (IRS), a sole proprietorship isn’t a taxable entity. Assets and liabilities of the business are treated as belonging to the owner. As a sole proprietor, you report the profits or losses of your business on your personal income tax return, Form 1040. Your earnings are subject to income tax and self-employment tax, and you’re required to pay tax on income the year you earn it. At tax time, income and expenses generated by your business are reported on either Schedule C (Profit or Loss from Business) or Schedule C-EZ (Net Profit from Business) and submitted to the IRS along with Form 1040. You must pay tax on all profits whether or not you actually withdraw money from the business. There are no tax effects for transferring money into or out of a sole proprietorship.

Business Expenses: You can deduct some of the money you spend to generate income, including operating expenses, travel expenses, advertising, and a percentage of business-related meals and entertainment. You are also allowed to write off the cost of business equipment and other business assets as well as certain start-up expenses.

Self-Employment Taxes: Sole proprietors contribute to the Social Security and medicare systems through so-called self-employment taxes. Self-employment taxes are reported on Schedule SE (Self-Employment Tax) and submitted together with Form 1040 and Schedule C-EZ (Net Profit from Business).

Estimated Tax Payments: The IRS requires you to estimate how much tax you will owe each year and make quarterly estimated tax payments. Some states require this as well.

Why Good Accountants Are Wise Investments

With all the sophisticated bookkeeping, accounting and tax preparation software out there, you might think you don’t need to hire an accountant for your start-up small- or medium-sized enterprise. Think again.

An accountant is not a superfluous business expense. An experienced professional accountant who understands how to run a business in today’s economic environment can be a great asset to your business. A good accountant can provide essential support in many areas, including tax planning, strategic approaches, growth and expansion strategies, budgeting, financial forecasting, evaluating new business ideas, and, of course, keeping your financial records in order.

Although hiring an accountant may cost you up front, you’ll likely recoup the investment many times over. A good accountant can often find numerous ways for you to shave expenses, structure transactions, time payments and save money. Moreover, many accountants offer fixed or scalable fee structures, and some are willing to arrange their fee structures according to your cash-flow circumstances.

There are many benefits to using a professional accountant. The following are some examples:

Tax Savings: A qualified accountant possesses knowledge, training and experience in tax planning and tax strategies as well as in tax preparation. Often they can recommend legitimate ways to reduce your tax obligations.

Improved Profitability: In addition to overseeing the accounts, an accountant can assist you with budgeting and advise you on forecasting cash flow. You may be able to improve cash flow through better management of inventories, payables and receivables. As your business grows, your accountant may suggest ways to manage or direct growth to maximize profitability.

Up-to-date and Accurate Accounts: Timely, accurate financial information is crucial for all businesses. Knowing where you stand financially will enable you to understand your business thoroughly and optimize your business performance through economic cycles. This is especially critical if you are looking to expand, diversify or add new lines of business.

Expert Business Advice: Whether you’ve just started out or are on a growth trajectory, an accountant with knowledge of best practices and business conventions across a spectrum of industries is a source of quality professional advice.

Referrals and Business Networks: Don’t underestimate the value of being part of an accountant’s business network. Accountants who work with other small businesses can keep you abreast of trends and issues and also refer clients and vendors to your company.

Stay Ahead of the Curve: A savvy accountant will be aware of current legislation affecting small businesses and will make sure that you comply with legal requirements in an appropriate, timely and efficient way.

Spend Your Time on What’s Important: Financial matters can be frustrating and time-consuming. Delegating accounting and bookkeeping tasks to a pro frees up your time so that you can concentrate on making your business successful.

Gain Peace of Mind: Knowing you have a great accountant on your team will help you sleep better at night, secure in the knowledge that your business finances are in good hands.

Key Things Every Business Must Know About Sales Tax

Knowing your sales tax obligations is an important part of running any type of business. But the myriad taxes can be confusing to even the most astute professional.

A sales tax is a duty imposed on a retail sale or market transaction. There are several categories of sales taxes, based mainly on whether the tax is paid by the seller or the buyer.

In the vast majority of states, consumers bear the legal burden of paying sales taxes, and the seller is simply an agent who collects and remits the money to the taxing authority.

In some jurisdictions, however, sales taxes are imposed on vendors that may either absorb or pass the tax along to customers. And there are a few states where the tax is levied on the retail sales transaction itself, so the tax liability is shared by sellers and buyers. In addition, there are five states that do not have a sales tax: these are Alaska, Hawaii, Delaware, New Hampshire, Montana and Oregon.

Sales taxes are calculated on the gross transaction amount. Generally, the method of payment is irrelevant, and thus installment plan sales, layaway sales, and sales involving trade-ins or other property exchanges are still subject to sales taxation. In most states, certain items such as food and clothing are exempt from sales tax.

If you operate an Internet-based business, you are responsible for collecting and remitting applicable sales taxes. In addition, if your business has a physical presence in a given state, you must collect state and local sales tax on online purchases made by customers in that state.

Year-End Tasks to Help Start 2010 at Top Speed

There are several important year-end accounting, bookkeeping and administrative chores owners of small and midsize businesses must take care of before popping the champagne cork to ring in 2010.

Many tasks should be handled as close as possible to the calendar rollover. Don’t procrastinate. Schedule the tasks and make it a priority to get them done.

Several reports must be run at the end of every financial year. These reports summarize your entire business year. You’ll need a complete set of these basic financial documents:

•    Profit and loss statement
•    Balance sheet at year-end
•    Income tax summary
•    All transaction details by account for the year
•    Payroll tax and employee earnings summary

|The payroll tax and employee earnings summary will come in handy if an employee or former employee ever questions your withholdings.

Business owners must complete and submit all required tax forms. If you have employees or hire independent contractors, there are three essential forms to prepare before Jan. 31:

•    Form W-2 – Employers must file Form W-2 for wages paid to each employee. Anyone required to file Form W-2 must also file Form W-3 to transmit Copy A of the W-2 forms.
•    Form 940 – This form is used to report your annual Federal Unemployment Tax Act tax.
•    Form 1099-MISC – This form must be completed for each independent contractor you paid $600 or more to. Form 1096 must also be completed to transmit Copy A of Form 1099.

Make backups of all these important documents. There are a number of good, cheap and free online storage and backup services available.

In addition, print out all critical documents on paper, label them clearly and store them as part of your company’s permanent records.

Having hard copies of all your important financial records protects you in the event of software system obsolescence, data loss or other technological failure. It is wise to make several backup copies of these reports and store them separately off-site.

Another important year-end chore is a physical inventory. An annual inventory count can reveal shrinkage, losses, discrepancies or other problems that might not have shown up previously.

It will also signal when it’s time to clear out, dispose of or write off obsolete or spoiled stock.

If you need to meet with your accountant, attorney or any other professional to complete some or all of these annual tasks, schedule that meeting now and gather up necessary data and documents so that you’ll be prepared.

With these tasks completed and the knowledge that you have taken steps to set your business up for the year ahead, you’re all set.

You can go ahead and pop the cork on that champagne bottle and celebrate.

How to Make the Most of Business Credit Cards

When used properly, business credit cards can be a powerful financial and strategic tool for small-business owners. In addition to providing a cash infusion or capital for emergency purchases, using a business or commercial credit card can be a sound business strategy.

Business owners often rely on credit cards to deal with lumpy cash flows or to facilitate growth, expansion and acquisitions. Some business card issuers offer various payment options to help small- and midsize enterprises (SMEs) meet these specific needs.

Credit cards can also be a tool for record-keeping. Credit card statements can help SMEs monitor spending by category and assess the financial health of the business. Year-end statements can be invaluable for tax
preparation.

It is important to keep business and personal expenses separate. Never use a business credit card for personal expenses, and avoid accumulating debt on a business credit card. There are other benefits to using business credit cards:
•    Designated spending limits give business owners control over employee expenditures.
•    Business-friendly incentives, such as discounts on supplies, travel or business services, can add up for SMEs.
•    Reward benefits like frequent flier miles, restaurant and hotel points, merchandise rewards, or cash back help small businesses leverage spending.
•    Because there is no liability for unauthorized charges, business credit card owners are protected against fraud.

Are You Remembering These 5 Tax Deductions?

Granted, nobody loves the Internal Revenue Service (IRS), but the tax code provides a fair number of deductions for small-business owners.
Following are five not-to-be-missed tax deductions that can lower the annual tax bill for small-business owners.

1. Start-up Cost Deductions

You can deduct up to $5,000 in start-up and $5,000 in organizational costs for the first year of business. The IRS allows small- and medium-sized businesses to write off or amortize market research, advertising, employee training, business-related travel, legal advising and a number of other costs.

2. Education Deductions

You can deduct education expenses related to your current business, trade or occupation. The education must pertain to maintaining or improving skills required in your present employment, be required by your employer, or be a legal requirement of your job. Transportation to and from classes may also be deductible. The cost of education that qualifies you for a new job isn’t deductible.

3. Vehicle Deductions

Auto deductions are clearly delineated under IRS rules and tend to be among the more scrutinized items, so accurate record keeping is critical. If you use your personal vehicle on the job, keep careful records of where you go and the nature of your business. The IRS stipulates that personal auto use cannot be written off as a business-related expense, so be sure to follow the guidelines in Publication 463.

There are two methods of claiming vehicle expenses:

  • Actual Expense Method: You keep track of and deduct all of your actual business-related expenses.
  • Standard Mileage Rate Method: You deduct the standard mileage rate for each mile driven, plus all business-related tolls and parking fees. In 2009, the standard mileage rate is 55 cents per business mile driven. The rate was 50.5 cents per mile for the first half of 2008 and 58.5 cents per mile for the second half of the year.

You can write off a newly purchased vehicle (even a used one) in one deduction or through depreciation. You can also receive up to $3,150 from the government if you have purchased a hybrid for your business since 2005. Check out Form 8910 for more details.

4. Equipment Deductions

You can take a deduction for new or used equipment that is newly-purchased and will be used at least half of the time for your business. Equipment includes computers, machines, furniture, cars and other movable items (but not property). You can opt to take the full, immediate deduction or you can write off portions of the equipment purchases over several years through depreciation.

5. Entertainment Deductions

You can deduct up to 50% of entertainment expenses that are not reimbursed for business gatherings. The entertainment must be within a “clear business setting” such as at a conference or meeting, or should immediately precede or follow a business meeting. If you are self-employed, the 50% deduction limit does not apply.

How Businesses Can Plan Ahead in Changing Times

Depending on who you listen to, the economy has or has not bottomed out, nationwide unemployment will or will not reach double digits, consumer demand has or has not stopped declining, and commodity prices will or will not stabilize in the next quarter.

To say the least, economic forecasting is an imprecise tool, but it is essential for small- and medium-sized enterprises to anticipate market trends, adapt to the changing economy and make proactive decisions to position themselves for what lies ahead.

Using predictors such as the consumer confidence index, the stock market, interest rates, unemployment statistics and various other measures, businesspeople try to gauge everything, including sales trends, product demand, future inventory levels, website traffic, and exposure to fraud and risk.

The data can be scrutinized using estimation functions such as time-series analysis, causal models and regression analysis. Data mining is a popular method of business forecasting that uses predictive models based on existing and historical data to project potential outcomes of business activities and transactions.

One of the newer forecasting techniques is called “scenario forecasting”. With this method, companies identify changes that could happen in the world economic and political situations and determine the possible effects those changes would have on their businesses. They then decide in advance how to react if those scenarios come to pass. The idea is that the exercise will make them better prepared to take action if the scenario occurs. Forewarned, as they say, is forearmed.

Small Businesses Have a Range of Financing Options

Although small and midsize enterprises (SMEs) are considered the backbone of business and a key source of economic growth and dynamism, they often have difficulty getting financing to expand, innovate and provide jobs.

There are many reasons for this. SMEs, start-ups and solopreneurships typically lack a long business history and track record of success. In addition, they usually do not have a large asset base to serve as collateral for loans, they often operate in high-risk industries, and they tend to show volatile patterns of growth and earnings.

Seed money to start a business generally comes from personal funds or from friends and family.

However, financing needs evolve as a business grows, and the funding sources used at the start-up stage of development are not the same as those used by established firms that have built up equity and collateral. The range of options for financing small and midsize businesses includes:

•    Owners’ personal savings, credit cards and lines of credit
•    Loans or investments from friends and relatives
•    Trade credit from suppliers
•    Government loans and grants
•    Loans from employees
•    Retained earnings
•    Business angel financing
•    Venture capital
•    Bank loans and lines of credit
•    Commercial credit cards
•    Factoring and invoice discounting
•    Equity financing

Increasingly, business angels – such as investors who provide risk capital in return for a stake in the company – are a key link in the financing chain for SMEs, as they bring business experience as well as capital to the table.

Calculating Wealth: A Primer on Assets and Liabilities

All money coming into or going out of a business is recognized on the balance sheet as an asset, a liability or owners’ equity.

An asset is anything a company owns that has future value. Cash, property, equipment, inventory, accounts receivable, investments, vehicles, and intellectual property such as copyrights, trademarks and patents are assets.

Assets can be current or long-term according to the ease with which they can be liquidated. Current assets can be easily converted into cash within a year. Examples are cash, checking accounts, accounts receivable and notes receivable that are due within a year.

The term “fixed asset” refers to land, buildings and equipment that are used in connection with the business. Although land is considered a fixed asset, it is not depreciated like other fixed assets because it doesn’t wear out.

Fixed assets such as buildings, office equipment, machinery and vehicles are depreciated over time.

Liabilities include all debts and obligations owed to outside creditors, vendors, employees or banks.

Common liabilities are accounts payable, payroll, and building or equipment lease costs.

Total current liabilities is the sum of all liabilities that must be paid within one year. Long-term liabilities are debts or obligations owed that are due more than a year out.

At any given time, a company’s assets must equal its liabilities plus owners’ equity.

Understanding assets and liabilities can help a business owner gauge his or her company’s financial health and plan for future growth.

Top Accounting Software for Small Businesses

Every business – large or small – needs to keep track of how money comes and goes.

There are numerous free and low-cost accounting software programs for small- or medium-sized enterprises and solopreneurs that simplify accounting tasks, generate reports and provide tools that help you use your financial data.

Intuit QuickBooks is a popular accounting, bookkeeping and payroll program designed for small businesses. QuickBooks is available in several editions. The Pro edition includes management tools such as a Vehicle Mileage Tracker and a Cash Flow Projector.

The free Simple Start version keeps data organized, tracks sales and expenses for up to 20 customers, creates invoices, pays bills and prints checks. Simple Start tracks tax-related income and expenses, and generates essential reports on sales, expenses, profits and losses. It comes with step-by-step tutorials and 30 days of free email support, and it interfaces easily with Excel. Your data transfers easily to other versions when you are ready to upgrade.

Simply Accounting by Sage offers First Step, Pro, Premium, Enterprise and Accountants editions. Professional versions can track customers and suppliers, manage inventory, prepare invoices and process payroll. The First Step version is designed for start-up, small and home-based businesses and can perform simple entry-level accounting tasks such as preparing invoices, paying bills, and tracking revenue and expenses. The Simply Accounting First Step free trial version is available to download and use for 60 days. Simply Accounting First Step Express is another downloadable version available free to Canadian users.

A key feature of Microsoft Office Small Business Accounting is its tight integration with MSOffice applications such as Excel, MSMoney and Outlook’s Business Contact Manager.

Office Accounting Professional has a slate of add-on features that can create purchase orders, track inventory, assess finance charges, support foreign currencies, do payroll and manage fixed assets.
The basic version called Office Accounting Express is free. It has the look and feel of familiar Microsoft Office products and can create quotes and invoices, write checks, track expenses and reconcile online bank accounts. A start-up wizard and step-by-step instructions get you up and running quickly. Office Accounting Express 2009 is designed for U.S.- and U.K.-based small businesses and does not support local requirements beyond these two countries. Both the free version and the Pro version offer bilingual English and Spanish interfaces.

NolaPro v4.0 is a free web-based business management and accounting suite. It includes all standard accounting modules as well as order entry, inventory tracking, payroll services, and plug-ins such as point-of-sale, a business-to-business web portal and an e-commerce shopping cart. It has a flexible interface with customizable options for colors, icon sets, and menu displays. NolaPro allows multiple sets of books and unlimited simultaneous users, and it has no data restrictions and no license expiration. It features a high level of security for regulating user permissions by module area.

Optional fee-based add-ons include training, live 24/7 support, technical consulting, financial auditing and on-demand hosting. NolaPro includes international features such as VAT support, a built-in language translator and currency symbol/decimal options.