Heading into the fourth quarter, many small business owners have two things in mind: The first is the holiday season, when (particularly with retailers) a large part of annual revenues are often recorded. The other (and perhaps less exciting) topic is taxes. In their quest to boost revenues and eke out profits, entrepreneurs often overlook important tax matters that could end up costing their venture real money.
Bill Hampton, general partner and Robbie Hampton, managing partner at <b><a href="http://www.bishophampton.com/" target=_blank>Bishop, Hampton & Associates, LLC</a></b>, a Stockbridge, Georgia-based certified public accounting and business consulting firm, say many entrepreneurs don’t regularly look over the company financials. As a result, they’re unaware of the true financial health of the business.
The duo offers the following advice:—<em>Alan Hughes</em>
<b>Consult with a Certified Public Accountant.</b> "From my experience I see that the vast majority of small to medium sized business owners consult with a CPA when they are in over their heads," says Robbie Hampton. "Establishing an ongoing relationship with a CPA is critical to a successful business."
<b>Review your year to date profit and loss statement.</b> "I guess most small-to-medium sized business owners, they’re so busy running their business, they don't have time, or they don’t make the time and set it aside and make it a priority to actually see how their business is doing financially," says Robbie Hampton. "They assume that, if they have money in their bank account at the end of the month, they’re doing great. That’s not always the case."
<b>Take advantage of the tax healthcare credit.</b> If a small business pays at least half of health care premiums, the business can obtain a tax credit. This applies to businesses with 10 or fewer full-time employees with annual wages that average $25,000 or less. The break phases out for firms with 25 employees or that pay average wages above $50,000.
<b>Maintain records</b>. Print and review all bank statements, credit card statements at the end of each month. Review them for accuracy and to determine if all documents are in your possession. "Since many business owners wait until it’s too late or until right at the tax deadline to file their taxes, a lot of them have to go to the bank or try to get statements from months ago," says Robbie Hampton. "So, what I usually recommend, even if you do online banking, at the end of each month, go ahead and print the paper statement."
<b>Find out if you qualify for the Section 179 Deduction.</b> This rule expires at the end of 2011 and allows you to write off the entire cost of the tangible personal property you use in your business. The maximum write-off is $500,000 in the first year, regardless of whether you made the purchase with cash or credit. Also, the $500,000 limit applies on a per-taxpayer basis and is expected to remain in effect through 2011. You are eligible for the deduction on a wide range of property, from computer software to office equipment.
<b>Remember Issue 1099 for contractors that have been paid over $600 for the year.</b> At the end of the year, all the amounts that you’ve paid to contractors (where the company doesn’t deduct taxes) require
you to issue a 1099 if you paid them more than $600. Consult with a CPA to assist you with determining amounts paid to contractors for the year. “For you to deduct it as a business expense, you need to prepare
a 1099 and report it as an expense on your taxes, and they need to report it as income,” says Bill Hampton.
<b>Accelerate your payments and delay your collections.</b> Towards the year end, purchase any needed supplies and delay any collections. Purchasing supplies will lower your profit thereby reducing the amount of taxes paid in the current year. Delaying collections will lower your income level, thereby reducing the tax amount owed in the current year. Although the taxes will not be assessed in the current tax year, they will be delayed to the next year. “I definitely do caution business owners because, if they spend too much at year-end, in January, some companies, they’re struggling to make payroll,” says Robbie Hampton. However, this strategy really only works when the company is profitable.
<b>Contribute to your retirement account</b>. "Business owners pay themselves, but they don't take the time sometimes to set up a retirement account. They have options to set up a Simple IRA, a SEP IRA," says Bill Hampton. "There are a number of different options, depending upon their situation." He recommends speaking with a financial services professional and maintaining the discipline to contribute to the retirement account regularly. "It’s recommended you put it in every month because, at the end of the year, you may not have a large chunk of money to do it."
<b>Don't forget about the home office deduction.</b> If a business owner has a home office, a portion of utilities and certain expenses can be tax deductible. "Say for instance, you have 1,000 square feet of living space and your home office is attributable to 250, that’s about 25%. So, 25% of your utilities, of your internet expenses, of any expenses attributable to having that home office can be tax deductible," points out Robbie Hampton. "The key is it really has to be a home office. If it's a home office/gym/spare bedroom/kids' playroom, then that’s not reasonable."
<b>If you have considered starting a business, now is the time.</b> Expenses attributable to starting a business can be tax deductible. This includes licensing fees, attorney, CPA fees, insurance, rent, supplies, travel and any business related expenses. "Sometimes, business owners forget that the amount they paid out to start the business are deductible, when you’re forming that idea, and when you’re meeting with those key people and doing your research, those items can be tax deductible, consulting with a lawyer, a CPA," says Robbie Hampton. "If it’s related to that business, it can be tax deductible."