Note: This week’s guest on Talk Business With Howard on the Blog Talk Radio network is Barbara Weltman. Barbara is a well-known advocate of entrepreneurs and small business. She is a guest columnist for the Wall Street Journal and U.S. News and World Reports. She is also a contributing writer to American Express Open Forum, Startup Nation and MyVenturePad. Barbara recently received the 2012 Book of the Year award from SmallBizTrends in the economics category. Thank you, Barbara, for writing this guest blog post on business taxes and for being on the radio show this Wednesday, May 9th at 11 AM/ET. Topics to be discussed include: taxes, legal and financial issues CEOs, presidents and business owners are facing in today’s economy. You can listen to the audio replay of the show right here on this page. -Howard-
Business owners know that it’s not what they earn but what they keep after tax that matters. Today, however, we are in an era of tax uncertainty that makes it difficult to get a handle on tax planning. More than 50 tax rules expired at the end of 2011 and the Bush-era tax cuts are scheduled to run out at the end of 2012. Ongoing politics in Congress, as well as the upcoming Presidential election, only add to uncertainty. What can you do now to favorably impact your taxes?
Avoid IRS hot buttons
You may not be able to plan ahead when it comes to tax-saving breaks, but you can avoid problem areas likely to trigger IRS examinations. Here are some key areas in which you can take action now to minimize run-ins with the government.
Worker classification. Treating a worker as an independent contractor when he or she is really an employee can result in reclassification by the IRS (as well as by states) that will trigger back taxes, interest, and penalties. Reclassification can also mean you’ll have to pay a worker back benefits (e.g., health coverage and retirement plan contributions), which are amounts that would have been due had the worker been properly classified from the start. Make sure you understand the “control” indicators for employee classification. If you have the right to dictate when, where, and how the work gets done, the worker is very likely your employee. Also, understand your industry practices about worker classification. Think before you engage a new worker.
Owner compensation. Financial considerations, such as cash flow and profitability, usually drive decisions about compensation to owner-employees. However, tax implications can be an important contributory factor when it comes to compensation. If you have a C corporation, only payments deemed “reasonable” are tax-deductible by the corporation. If you have an S corporation, an owner who works for the business must take reasonable compensation; FICA tax cannot be avoided by ducking salary payments. Failing to adhere to these rules can invite IRS inquiry. Note: If you have an unincorporated business, an owner’s draw has no impact on taxes.
Claim your breaks
Tax law requires you to have records to support claimed write-offs. If you don’t have required records, you can lose out on legitimate deductions and credits. Recordkeeping can be a time-consuming chore, but what choice do you have?
Consider using apps on your smartphone or tablet to simplify recordkeeping. For example, there are apps to help you:
- Track the mileage on a personal vehicle used for business driving.
- Record T&E expenses, such as wining and dining customers and prospects.
Work with a tax advisor
The old expression that you have to spend money to make money applies to tax savings as well. You have to spend money—with a CPA or other tax advisor—in order to save taxes. A good advisor will discuss ways in which you can save money now by changing what you are doing (e.g., making changes in inventory accounting). An advisor should also alert you to any tax law changes that you can take advantage of to save taxes.
Barbara Weltman has been named as a Small Business Influencer by SmallBizTrends. Barbara’s website is: www.BarbaraWeltman.com. On the site you will find Barbara’s Idea of the Day and the newsletter, Big Ideas for Small Business. She is also the host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.
And remember to listen to Barbara and I on the audio replay of the show, which is available on this page. We talk about business taxes, financial and legal issues that are on the minds of CEOs, presidents and business owners on Talk Business With Howard on Blog Talk Radio. You can also Click here for a link to the show page. Thanks for listening.