At the December Fuel Your Business Luncheon, Laura Canales with The CPA You Should Use Everyday, Nick McGhee of Idaho Central Credit Union, and Jason Melville of Hawley Troxell shared their insights into how to best prepare for tax season and tips for keeping your business and personal finances in order. The following is a summary of the discussion in a Q&A format; the content has been edited for length and clarity.
What is the most important thing a REALTOR® or small business owner needs to do to prepare their finances for the end of the year?
Keep your records organized throughout the year. It’s difficult to make good decisions about your business when you don’t know where you stand financially.
From a legal perspective, the beginning of the year is a great time to take care of any nagging legal issues, like making sure your business entity is formed correctly, and that your personal affairs are in order. Click here for more information from the Small Business Association on choosing your business structure.
If you’re planning to take out a business loan, talk to your accountant. Make sure that your business has shown a profit and/or income in the last two years, otherwise it may be difficult to get a loan.
When does a REALTOR® or small business owner need to enlist the professional services of a CPA?
A couple of months before you start your business is best. A Certified Public Accountant (CPA), along with an attorney, can help you decide what is the correct legal entity for your business, specific to your situation. A CPA can also get you on track for your record keeping so you know what you’re doing going forward.
How important is it for a REALTOR® or other small business owner to have a separate business tax ID?
If you are a sole proprietor you can you use your social security number as your tax ID number, but that isn’t ideal if you are providing that number to vendors and other people you interact with. Most people get a tax ID number just so they don’t have to use their social security number.
If you own a corporation or partnership, you are required to have a tax ID number. It’s very easy to get one online. You can do it yourself, or your accountant or attorney can do it.
How can a business banker help position your business for success?
Your business banker is your middleman, not the tax expert or legal expert, but they can point you in the right direction. Business bankers can be an excellent resource for referrals.
How are charitable contributions beneficial to year-end financial housekeeping?
Charitable contributions are great for community involvement, and for being recognized by potential clients/customers. If distributions from retirement accounts aren’t needed, they can be made directly to charity and they don’t have to recognize the income tax on those distributions.
In general, sole proprietorships, S corporations, and single member LLCs can’t take deductions for charitable contributions. If your business makes a charitable contribution, you won’t get a business deduction for that, those deductions flow into your personal return. If you have an S corporation, you can’t make personal payments with corporate money.
Be careful with what you’re doing with those types of things, if you have questions defer to your accountant or tax attorney.
As people are planning for 2017, what are some tips for budgeting with an inconsistent income?
When times are good, save your money, because you know there will be a drop in income. Write a budget, and then actually use it!
Know what your monthly expenses are, and understand the differences between your needs vs. wants. Know what your minimum expenses are, and make sure your income covers those expenses for the year. Keep track of your utility bills, your grocery costs etc. Think about ways you can save money. Most financial institutions offer budgeting tools, take advantage of these.
Do I need to keep all my receipts? For how long?
Keep receipts for things that might affect a future tax return (i.e. the purchase of assets your business, changes you make to your home, etc.) for the current year and three years back. If you don’t have a receipt, a bank statement might work. The IRS requires that expenses have a date, an amount, and what that expense is for. If the IRS finds an inconsistency during the last three years, they can go back another three years. If you don’t have records, the IRS can make decisions about what your business expenses were. In general, keep receipts for three years. If it’s payroll related, keep it for seven years.
For more information on what records you should keep, see this article from the IRS.
E-statements are a great thing to keep with your records. Generally, the bank will save them for seven years.
There is talk of changes to the tax code in 2017. Does that change any of your end-of-the-year strategies?
Tax code changes every year. We can speculate, but none of us can really guess what will happen. Even if there is change, it won’t happen immediately. If anything happens with the Affordable Care Act, it will likely be a repeal of the fines for not having health insurance.
Less than 1% of the population has to pay estate tax as the law currently stands. President-Elect Trump is suggesting a repeal of the estate tax but it won’t affect most Americans.
For more information on estate tax, see this article from the IRS.
At what point, do I become high risk for an IRS Audit?
Individuals rarely get randomly audited. Individuals who make $1,000,000 adjusted gross income and corporations are at a slightly higher risk. You may up your risk for an audit if you have a lot of miscellaneous expenses and inconsistencies in reporting expenses. If you’re statistically out-of-whack with your peers, you might be more likely to be audited.
How should I select bookkeeping software?
Use commercial bookkeeping software that you’re comfortable with and you’ll use. You can get P&L and balance sheet reports at a push of a button so you can do some analysis.
What advice would you have for someone just starting out?
An ounce of prevention is worth a pound of cure. Sit down with your accountant, attorney, and banker and make a plan, get your questions answered. Ask your attorney to review your employment agreement and contracts.
Separate your personal and business accounts, this will make doing your taxes easier.
Have a retirement plan other than, “I’m going to sell the business.”
Ask your business team for help. Work with your accountant, attorney, banker, financial advisor, insurance agent, these people want to help you. Have those names and phone numbers in your phone, call them up and discuss your plans. They will all help you grow your business.
How do you get business financing?
To get a business loan, financial institutions look at your past. They are looking for two years of taxes that show a profit, personal financial statements, P&L for the current year. Your assets need to be worth at a minimum of 20% of the loan to be approved. Underwriters see in black and white. Financial institutions must show a way to pay for the loan before approving it, so if the loan fails, it can still get paid.
What is the difference between a CPA and an accountant?
A CPA is a licensed accountant that can audit a financial statement, review financial statements, represent clients before the IRS without clients being there. Licensing requires essentially a master’s degree, working under a licensed CPA for at least two years, and passing a grueling exam.
What are some good apps for business?
Find a good mileage app to record your driving. Banking apps are great. Do be careful though what financial apps you use, they may not all be secure.
How much can you contribute to IRAs in 2016?
Per the IRS website, “for 2015, 2016, and 2017, your total contributions to all of your traditional and Roth IRAs cannot be more than: $5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit.” Read more about limits and IRA rules here.
What should you do first if facing a tax audit?
The IRS must contact you in writing FIRST. Don’t respond to a phone call or email from the IRS unless you have had communication with them before.
Call a CPA or tax attorney to help you, and let them know if you’ve been audited before. Have as many records available as humanly possible. The IRS will ask for specific line items from Schedule C. The items that often get their attention are the meal/entertainment expenses, telephone expense, auto expenses and anything from the “other line”.
On the other hand, don’t ignore letters from the IRS. Once you’re past the audit phase (which is your opportunity to dispute) and you are in collections, your accountant and/or attorney can’t perform a miracle. Your options get smaller and smaller the longer you put off communications from the IRS.
Don’t be afraid of an audit if you have the right records. If you are missing a few things, there are ways to find a record of it.
How do I switch from yearly to quarterly taxes?
This is very easy, your tax preparer can provide you with estimates and coupons you can send in each quarter. The first quarterly payment is due April 15, 2017. Don’t get behind, set money aside for taxes in your budget.
Set aside a minimum of 30%: 15% for self-employment tax, 10% for federal taxes, and 5% for state taxes. Your tax preparer can help you with estimates.
Where should I put the money I’m saving for taxes? Can I earn a return?
You could put it in a money market and see 0.2-0.4% return, but pay attention to the minimums for each account. You don’t want to pay more in fees than you make in interest. You could time the purchase of Certificates of Deposits (CDs) to mature as your taxes are due.
What is one thing I’ll forget to bring to my accountant to write off for 2016?
Most people forget to keep their mileage log throughout the year. You can recreate your mileage log with your appointment calendar and Google maps. However, don’t try to rebuild it once you’re in an audit situation.
To calculate your telephone expense, choose three random months of the year, and calculate the ratio of business calls to personal calls from a detailed phone bill. You can use that ratio for the rest of year. Update this ratio as your business changes.
NOTE: Boise Regional REALTORS® and its affiliates do not provide tax, legal, accounting or financial advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, accounting or financial advice. You should consult your own tax, legal, accounting and financial advisors about your specific situation.
