In order to have a successful tax season, there must be year round planning to maximize your deductions in direct relation to the size and income of your small business. This means keeping the upcoming tax season in mind at all times, constantly looking for ways to decrease your bottom line while making the company more profitable.

Start-Up Expenses

The most commonly overlooked expense for small businesses to take advantage of during tax season is the one that got them where they are today – the expense of going into business. Capital expenses, the money used to pay for marketing, overhead and other related expenses, must be deducted over the first five years you are in business. One thing to remember is that these write-offs cannot be deducted before your doors are open and cash is beginning to flow through your business.

Continuing Education And Training

Any education related to your current business, can also be deducted. For instance, a veterinarian specializing in equine medicine can deduct the costs of attending a conference on new cancer treatments in horses. Because this course is related to the veterinarian’s field, the seminar is deductible from yearly taxes.  However, if the veterinarian specialized in small and domestic animals, the conference would not be deductible. There are strict rules to follow about which types of classes actually qualify for deductions.

Professional Service Fees

The fees charged by your accountant to do your taxes, are actually tax deductible. The only rule for this deduction is that if the work being done relates to future years, the deduction must be taken over the complete term of the benefit.  An example of this would be hiring an architect to help design a building that will take two years to construct. The fees for the architect must be spread over the two years in which the building is actually being constructed.

Bad Debts

If you are in the business of selling goods, and a customer doesn’t pay you for the goods you sold them, that debt is deductible.  However, businesses that provide services instead of goods cannot take this type of deduction because it would be difficult for the IRS to prove a bill was not “inflated” for services provided in order to claim larger deductions for the bad debts.

Other Deductible Expenses

There may be other expenses that are tax deductible in your business.  You can start by referring to the IRC § 162, which outlines different trade and business expenses. This section of the Internal Revenue Code is the basis for determining whether or not a taxable expense is deductible. If the wording is confusing, take the code to your tax accountant along with the expenses you are questioning. Your tax accountant will be able to point you in the right direction and clear up any confusion.

Don’t guess about your small business deductions.  Ask your tax accountant to be sure you’re handling every deductible properly on your small business tax return.

Imagine having this nightmare:  The IRS suddenly audits you for a mistake you made on your tax return ten years ago. It seems you transposed two numbers and now you owe the federal government because you filled in a box with the number 730 instead of 370.

If this happened to you, what would you need to bring to an audit?  Would you still have your documentation?  How long should you actually keep your tax documents? Good question.

Let’s take a look at a few situations and the suggested length of time to hold onto your documents.

If you have been withholding taxes from your paycheck but find that you still owe additional taxes when you file, the rule of thumb is to keep these records for three years. There is one exception to this rule and that is if you do not report income that should have been reported at the time you filed your tax return. If the additional funds are more than 25% of the gross income you reported when you filed, those records should be kept for six years.

There are times when tax information should be kept indefinitely. This procedure needs to be followed if you file an inaccurate return, fraudulent return, or if there is no tax return filed at all. The reason these files should be kept indefinitely is because you will need to show proof of income when the IRS requests it, which could be at any point in time.

Special consideration is required if you have a small business.  Employment tax records are important documents and require special handling. These records should be saved for at least four years from the date the tax is due, if paid on time. If the payment is late, the records need to be kept for four years after that date in order to verify employee incomes if requested.

Filing tax credits after filing your return can also add additional time to your record retention time. In order to determine how long you should keep the files, choose the latest date between when you filed your original return and when you actually paid the tax and keep the records for three years from whichever date is later.

When you file a claim for a loss from worthless securities or take a deduction for bad debt, you will need to keep the records for seven years. This allows the IRS ample time to investigate your claim. When filing a bad debt deduction, it’s imperative to hold onto the files and have adequate records to prove your bad debt claim.

The general rule of thumb is to keep your tax documents until the period ends when you are able to file a tax credit or refund, or, until the IRS closes your case file. In most cases, retaining records for about 4 years is adequate. There are some cases, however, that require tax documents be kept anywhere from three years to ‘indefinitely’ so check with your tax accountant before you discard any tax files.

The IRS is all about accuracy and proof, so make sure you keep impeccable records and retain all your records for the appropriate time frame. These steps will keep your finances safe and  make tax time go a little more smoothly year after year.

Recently a tax client was upset that their K-1 indicated that they had “Ordinary business income” of $1425, when they didn’t actually receive any cash from the business. This was my explanation..

“The K-1 doesn’t necessarily show money you received. It shows your share of the business’ income for the year. As one of three equal partners/owners, you are entitled claim to 1/3 of any losses the company may experience, but you are also responsible for paying 1/3 of the tax on any gains the company may experience.

“This does not mean that you actually received the money. The cash itself can stay in the business’ checking account. The place where each year’s gain and/or loss shows up is on the balance sheet. Each owner’s share of the gains and losses are reflected in that particular owner’s “Equity” in the company. If you were to take a draw (take money out), it would then reduce your equity in the company.

“So your share of the company’s 2009 gains was added to your equity in the business, on the balance sheet. If you want to take a cash draw, you will need to arrange that with your partners, since the business checking account may not have the funds available at this time.

“The tax on your portion of the earnings of the company needs to be paid whether you received the cash or not. In the future, you will not have to pay tax on any  draws you take, up to the amount of equity you hold in the business. If your withdrawals total more than your equity, then you would pay tax only on the withdrawals over and above the amount of your equity.

“For an LLC, the company’s gains and losses flow through to each owner’s personal tax return at the end of each year. If you want the gains and losses to stay within the business as a separate entity, you would need to convert the business from an LLC to a C-Corporation (the standard corporation type). Then, the gains and losses will stay within the business and be carried forward on the business’ tax return from one year to the next.

“However, keep in mind that if the business were to experience a loss during a particular year, that loss would not be able to be carried over to your personal tax return and you would therefore not be able to take the loss as a write-off on your personal taxes. A C-Corporation’s gains and losses cannot be transferred to the individual owner’s tax returns, until that owner sells or relinquishes their interest in the business, at which time, they may take the gain or loss (whatever the case) on their personal tax return.

“Again, the decision to incorporate is something you would need to discuss with your partners, since it would affect their tax status as well. Generally, it is not advised to incorporate for a business as “small” as yours, but if it really bothers you that the business’ gains and losses are flowing through to your personal tax return, then you may want to explore that option.”

Most business owners subscribe to the thought that you “must spend money to make money”. This can be true, but you also must know exactly where that money is going and the results it brings.

Some ways that your business might waste money includes the following:

1. Manage your credit cards – If you have several cards, develop a computer program that will show you the exact balances, due dates, and the interest rate you are paying. Always be aware of other solicitations that save you money and possibly change your balances over to a new company. If you have any employee cards, see if you can set a limit on them. If not with the credit card company, make sure that the employees know their limits. Manage your credit cards wisely and never, ever miss a due date.

2. Develop an annual plan so you know where you will spend money. This helps you in several ways. The business person will be aware of what portion of the profits are going to advertising, towards incentives, towards accounting and other internal expenses, etc.

3. Do not over-purchase any products or services for a business. If you buy in bulk, the money is tied up and a place must be provided to keep the extras. That might be an unnecessary expense.

4. Developing an advertising budget and knowing just what resources to use is key to keeping money under control in a small business. You must advertise, but you also must get value for your money or you will soon be out of business. Keep a record of how much is spent, can you get payment terms, when is the most efficient time to advertise your particular product or service to get the most value for the dollar. Every dollar must be accounted for in advertising because the lifeline of your business depends on new and paying customers. Advertising is the way to get the word out to the community or the Internet.

5. A small business owner will sometimes be under self-induced stress to manage all aspects of the business. Sometimes, leaving the control and decisions to others that are qualified is the best way to manage the business. Releasing control may be hard to do sometimes, but in a lot of businesses, money can be wasted because the owner cannot possibly be as efficient as the person who has studied or is knowledgeable about a particular field. For instance, if a business owner does not know accounting, many mistakes in reporting income and taxes can be made. A qualified accountant can possibly save more than the cost of their services in reduced taxes.

Take a hard look around your business and do not let anything be set in stone if saving money is the goal. Challenge everything that will cost money and see what can be done to change the situation. Any money that is saved is money that can be put back into the business either in profits or in growth.

A business owner wants their business to be successful and will work hard to sustain growth. A business owner wants a way to continue making and growing money from a product or service that is interesting to them. After growing a business and being smart with cash flow, many business owners will sell their businesses only to start another business.

The reason is that business owners are independent types and challenges are rewarding when met and faced. Saving money through every day operations will help the business owner to meet their financial and emotional goals.