BY STEVEN ELLWANGER CPA, PLLC
Its time for accountants and business owners
start thinking about their 2014 tax returns and
do planning and some projecting for the coming
year. It’s infinitely easier to strategize and put a
plan into place now than to run around at year end
or after year-end tying to pick up the pieces.
There are standard year-end tax planning
strategies, such as buying new equipment now
instead of waiting till after Jan. 1; starting a
retirement plan; and accelerating deductions
and deferring income. But small business owners
already know these strategies. Here are a
few topics that are much more useful.
Take some time with your accountant to
evaluate your legal structure. If you are a sole
proprietor, does setting up an LLC make sense?
Or does an S corp or C corp make more sense?
Did you know that if you have an LLC already
in place, you can elect to be treated as an S
corp for tax purposes without changing your
legal structure?
This is an especially important consideration
if your business is netting at least $60,000
per year. That choice has to be made up to 12
months prior to the effective date, or 75 days
after. So most taxpayers, have until March 15 to
be effective for Jan. 1. Reporting your income
as an S corp can save money by treating a portion
of your income as passive income, and not
subject to self-employment tax. Discuss with
your tax professional if electing to be treated
as an S corp would save money.
Always be prepared for an audit. The most
common audits are sales tax and unemployment.
New York state is still struggling financially
and is looking closer at these areas for
revenue. Sales tax audits can be stressful for
everyone involved. Sales tax law can be very
complicated,and the methods used to audit
a business can be surprising, like the classic pizzeria audit, where the auditor counted pizza
boxes purchased to determine how many pizzas
were sold.
Contractors have a difficult time with sales
tax laws regarding capital improvements vs. repairs
and maintenance, and must be very clear
on their invoices of what work was done. Tax
professionals are well versed in audit methods
and can strategize to minimize the taxes due
if anything is found.
Unemployment audits were, up till last year,
very uncommon. But the classification of employee
vs. contractor has become the hottest
topic of 2014.
Small businesses are being audited by
Unemployment more than ever, and sadly
employers are losing the battle. Auditors are
looking much closer at the factor of control. If a
business has any control of someone that works for them, they want to classify that worker as
an employee.
Make sure that if you have people who work
for you, that you treat as a subcontractor, that
you are following certain rules regarding control.
If someone works an hourly basis, they are
an employee. If they have to be at your office
during certain hours, they are an employee. If
you give them benefits or expense reimbursements,
they are employees.
If you tell them where to go, what to do, and
how to do it, they are employees. Just because
you give them a 1099-misc at the end of the year,
and they agree to it, does not mean they are considered
a subcontractor in an audit situation.
Business can save a lot of money by not paying
employment taxes, unemployment taxes,
workers’ compensation insurance, and disability
insurance with subcontractors, but it’s
important to talk with a tax professional if you
have concerns that you might be pushing the
envelope when it comes to your subcontractors
who may be employees.
Most importantly, get a good bookkeeping
system. This seems like a no-brainer, but many small business do not have good bookkeeping
systems in place. Once you have a good bookkeeping
system, you can use that information
on a weekly or monthly basis to see exactly how
you are doing and react accordingly.
Compare the numbers to the prior year to
see where you are doing better or worse, and
make adjustments instead of waiting till after
year-end. Bookkeeping should not only give
your tax professional information, it should be
a vital part of running a business.
Whenever there is substantial change in the
business’s bottom line, it’s time to visit a tax
professional. When things are going well, it’s
time for tax strategy. When things are going
bad, there are ways to strategize to make sure
you get all the credits you deserve, as well as
being able to make the best use of losses. It’s
getting harder to run a business in New York.
Stay educated, and surround yourself with
professionals that can help take your business
to the next level.
Ellwanger runs his own office in Saratoga
Springs, offering accounting, auditing, consulting,
and tax services.
Photo by Tammy Loya