Bookkeeping

General

Categorizing transactions

You’ll mostly use your bookkeeping software to categorize transactions. This includes simple transactions like marketing and software expenses as well as complex ones like wages and loans. There are many training courses offered that help you understand how to categorize transactions, or you may choose to outsource this task to an accountant.

Chart of accounts

The chart of accounts lists all the categories available in your bookkeeping software. In a larger organization this is a rigid list managed by the CFO. In small businesses this tends to be more fluid as cloud-based bookkeeping software allows you to add accounts on the fly.

Financial statements

The three main financial statements are the income statement (or profit and loss statement), balance sheet, and cash flow statement.

/a-guide-to-the-top-three-financial-reports-for-small-businesses/

Income statement

The income statement is a simple report that shows the money that your business received from selling products or providing services less the expenses your business incurred to provide those products or services. The income statement does not include any loan payments or asset purchases. Often, what isn’t included in this report is what business owners need to understand more.

Balance sheet

The balance sheet shows the balances in all your accounts. Depending on your industry, this report might only include your bank account or it might be the backbone of your business if you have many assets. The balance sheet is almost exclusively reported on an historical cost. This means, for example, that if your business purchased stock 30 years ago for $500, it will still show as a $500 asset and not at its market value today.

/how-small-business-owners-can-perform-a-year-end-balance-sheet-audit/

Cash flow statement

The cash flow statement shows the cash that has been going in and out of your business that didn’t make it to the income statement. For example, if you took out a loan, then you will have a big deposit to your bank account. This is not revenue, however, so it will be on your income statement. The cash flow statement also shows how much money was distributed to owners or investors as dividends.

Setup

Choose a provider: QuickBooks Online (QBO)

There are many bookkeeping providers online. We recommend choosing an easy-to-use cloud-based software that has helpful videos and training. Although it’s not the cheapest, QBO has a simple interface that lets business owners keep up with their transactions as well as a plethora of helpful training courses and videos.

Link your accounts

After setting up your QuickBooks Online or other bookkeeping software, link your bank and credit card accounts to your software. This will ensure that all your transactions download automatically. You should periodically check your connections to make sure they don’t need to be refreshed.

Verify starting balances

When you connect a new account, the opening balance sometimes updates based on the current date instead of a historical one. Double check that your starting balances are correct to avoid propagating an incorrect balance from the beginning

Maintenance

Categorize new transactions

When your bank account is linked to your cloud-based software, new transactions will automatically download. Be diligent in categorizing them. The categories available to you are those in the chart of accounts. It’s good practice to use existing categories and avoid creating new ones on the fly. If you do need to create a new category, review your chart of accounts first.

For most small businesses, almost all transactions will be either Sales or Expense transactions. All sales for new businesses can be lumped into a general Sales category without further breakdown. As the business grows, use multiple sales categories to track disparate sales channels.

Group expenses by function. Cloud-based bookkeeping software is preloaded with general Expense categories such as Marketing, Professional Fees, Subscriptions, Software, etc. These are sufficient for most small businesses but some customization may be needed. These changes are done in the chart of accounts.

https://www.forbes.com/sites/forbesfinancecouncil/2021/12/27/five-common-questions-to-ask-yourself-about-tax-deductible-expenses/

Check bank connections regularly

After you initially link your bank account in your bookkeeping software, it should generally stay connected. However, those connections are not infallible. Regularly check your bank connections to ensure they are still downloading new transactions.

https://www.forbes.com/sites/forbesfinancecouncil/2021/03/30/tips-for-making-your-ai-based-small-business-accounting-system-work-for-you/

Verify balances quarterly

The most ubiquitous errors in cloud-based bookkeeping are duplicate transactions and missing transactions. These errors typically occur from the bank feed’s connection but can also be caused by improper transaction processing.

Perform a simple balance sheet audit to double check that all transactions are present and categorized.

Account One: Bank Balance

Before you begin a financial audit of your company, verify that the bank and credit card statement balances match your accounting system balances. If you use a bookkeeper, this should never be an issue. There are circumstances, however, where the balance may differ, such as an outstanding check, but any incongruency should be explainable.

Account Two: Accounts Receivable

While most small businesses should be on a cash method of accounting—meaning there shouldn’t be any accounts receivable—most accounting software still tracks open invoices and thus can show you a balance for accounts receivable. To verify balances, pull up a list of open invoices or customers with open balances. Sometimes you might find customers with negative balances, meaning the customer paid more than what you invoiced. This often happens if you bill a customer automatically but forget to create the invoice.

Account Three: Accounts Payable

While nearly all businesses have some type of accounts receivable from invoicing, most small businesses should manage their accounts payable, or unpaid bills, outside of their accounting software. There are scenarios where outstanding bills need to be tracked, but that should be handled by the accountant, not the business owner. If there is a balance for accounts payable on the balance sheet, the business owner should have a clear idea of where it’s from.

Account Four: Inventory

For businesses that hold inventory, a physical count of inventory at year-end is essential. Even if you are a cash basis taxpayer, at a minimum you must do a physical inventory at the end of the year. The change in the amount of inventory from one period to another will directly correlate to a change in profit.

Account Five: Loans

The business owner must be aware of any long-term loans. Most small businesses have few loans, if any, so this account is easy to verify. However, be sure to verify the outstanding balance of each loan—especially at year-end—since it’s easy to misclassify a loan payment as an expense.

More Information

https://www.forbes.com/sites/forbesfinancecouncil/2022/01/27/how-small-business-owners-can-perform-a-balance-sheet-audit/

https://www.forbes.com/sites/forbesfinancecouncil/2021/04/27/tips-for-optimizing-your-accounting-software/?sh=79ae33702163

Know what to keep

Bank statements

Most banks give access to online statements for years and years. That access is revoked, however, when you close the account. Instead of trying to remember to save years of data before you close an account, make it a year-end habit to save all your statements.

Checks and bank deposits

Not all bank statements contain copies of checks and deposits. If your statements don’t include this information, download the images at year-end. Most banks don’t keep this type of information online for long so save these often.

All tax documents and letters

The IRS and most state tax agencies will communicate almost exclusively by mail. Although these documents are already printed, scan them in as soon as you receive them. Remember to also keep copies of anything you mail in.

Tax returns and e-file confirmations

In our digital world, tax returns are not printed anymore. But that doesn’t mean you should neglect to save a copy. While tax preparers are required to keep records for many years, you can’t rely on readily available access in the future.

Receipts

Keeping receipts for everything is tedious. Scan each receipt while still at the register. It takes mere seconds and then it’s off your mind. If you let your receipt pile get too big, it’s likely to be neglected and the ink faded by the time this task finally makes it to the top of your to-do list.

Loan information

Not all your financial transactions pass through your bank. Sometimes you trade in one car for another or finance a large purchase. The purchase and loan documents are crucial to filling out tax forms correctly.

More Information

https://www.entrepreneur.com/money-finance/small-business-owners-heres-what-you-need-to-keep-heres/364010

Tips

Keep it simple

If you plan to do your own bookkeeping, keep it simple. A simple approach will still give you great insights into your business finances. More complexity doesn’t equate to a better system; it can easily give you false data if your bookkeeping is not accurate.

https://www.forbes.com/sites/forbesfinancecouncil/2021/12/29/eight-ways-to-simplify-and-optimize-your-accounting-system/

https://www.forbes.com/sites/forbesfinancecouncil/2021/03/04/quick-accounting-tips-for-rental-property-owners/

https://www.entrepreneur.com/article/366840

Adding in transactions on personal cards/accounts

Sometimes you make purchases from your personal cards that are for the business. Fortunately, there is a simple solution for this: reimburse yourself from the business for those purchases. Keep adequate records for what you are reimbursing.

Reimburse business expenses from personal accounts once per month or once per quarter.

https://www.entrepreneur.com/money-finance/5-ways-to-never-miss-a-tax-deduction-again/375823

Invoicing

Automate your invoicing system. If you can’t email invoices from your accounting system and allow clients to pay those invoices online, it’s time to upgrade. Most cloud-based accounting systems have this feature, and it’s a must-have for small businesses.

Accounts payable

Avoid using the bill tracking feature in your bookkeeping software. For small businesses, it’s much simpler to just pay your bills as you receive them. This also ensures that you don’t incur fees for not paying on time.

Inventory

If your business has inventory, use dedicated industry-specific software or even a generic inventory management system. Your accounting system should just track purchases. Adjustment for the cost of goods sold can be made at year-end by your accountant.

Payroll

General

The forms

You must file two primary payroll reports with the federal and state governments when you have employees: one form to report tax withholdings from employee’s paychecks and one to report and pay unemployment taxes. Some states have additional reporting requirements such as for paid family leave or similar benefits.

Federal payroll forms

Form 941/944: Form 941 and 944 are used to report the amount of wages paid, how much was withheld from employee’s paychecks, and to calculate the social security and Medicare tax. You use either Form 941 or 944, never both. Form 941 is used if you need to file quarterly, which applies to most taxpayers. Form 944 is used for taxpayers with less than $1,000 in tax due. The tax deposits from your payroll are typically biweekly or monthly, not quarterly.

Form 940: Form 940 is used to calculate the amount of federal unemployment tax due.

Form W2: Form W2 is used to report the total amount of wages paid per employee. The total amount on this form needs to match the amounts on Form 941/944.

Form W3: Form W3 is rarely used anymore since most W2s are filed electronically. This form is a summary of all the W2s filed.

Form W4: Form W4 is filled out by the employee to provide information about their filing status and credits in order to determine the appropriate amount of withholdings that should be deducted from their paycheck. Many payroll platforms will have the employee fill out this information online.

State payroll forms

Like the federal forms, most states will have a quarterly wage reporting form and an unemployment tax form. States with no income tax will typically just have an unemployment tax form. States with broader employee benefits like Colorado and Massachusetts have additional taxes like paid family leave.

Filing due dates

Form 941: Quarterly: by the end of the month following the close of the quarter. For calendar year taxpayers this is April 30, July 31, October 31, and January 31.

Form 940: Annually before January 31

Form W2/W3: Annually before January 31

State forms: Dates vary by state, but typically state withholding and state unemployment forms are filed quarterly.

Deposit due dates

Deposit schedules for payroll taxes differ from the filing frequency. For example, most employers need to deposit their federal taxes twice weekly. You must follow your state’s schedule. The best way to ensure you stay compliant with your deposits is to use a payroll service provider that does the deposits for you like Gusto.

Setup

Find a provider

There are many great payroll providers that can handle your deposits and filings for a small fee (can be as little as $40 per month). The distinguishing factor for many providers is their customer service and help with setting up your payroll.

Recommendation: Gusto

Professional employer organization (PEO)

A professional employer organization (also called an employer of record) is a company that hires workers for you. The technicality is that your employee is working for the PEO and will be issued a W2 from the PEO, not from your own company. The benefit to the business is the ability to offer out-of-the-box benefits and other HR features that are hard to obtain for small businesses.

Another benefit of PEOs is that your business avoids the sometimes lengthy and complex payroll registration process. This can allow your business to easily hire out-of-state remote workers without having to register your business in each new state.

Traditionally, PEOs charge a percentage of payroll, which is often more expensive than running your own payroll. However, some providers such as JustWorks provide this service for a fixed price.

Recommendation: JustWorks

Register with your state

Registering with the state where you have employees is the most complex and confusing part for most business owners. A business must typically register with the state’s department of revenue for a tax account as well as with the state’s department of labor for unemployment. This process differs from state to state. Gusto has a handy guide to help you if you choose the DIY option.

Link: Gusto

Workers’ compensation insurance

Workers’ compensation insurance is unlike typical business insurance: in most states, the rate is determined by the state and it’s a percentage of your payroll. To save time, work with your payroll provider to get workers’ compensation insurance since they already have all your payroll information.

Most states will provide an exemption from workers’ compensation insurance for businesses where the owner is the only employee. Some states may have a higher threshold of 3 or 5 employees before workers’ compensation insurance is required.

Reasonable Compensation

S-corp and C-corp

S-corps and C-corps need a reasonable compensation report to determine how much to pay their owners. The reasonable amounts serve different purposes depending on the tax structure.

S-corps should minimize W2 to maximize FICA tax savings. The reasonable compensation amount for S-corps serves as the minimum amount of wages the owner should receive.

C-corps should maximize W2 to avoid double taxation of dividends. The reasonable amount for C-corps should serve as the largest wage allowable.

How to determine reasonable compensation

Cost: The cost method breaks down a business owner’s activities into the many hats that small business owners inevitably wear: from janitor to sales manager. This is the best approach for most small businesses because it will generally yield the smallest reasonable compensation.

Market: The market approach looks at what similar positions at other companies pay for the same role. This method is desirable when the owner mostly performs the sole role of managing the business.

Investment: The investment method takes into account what returns an investor should expect from a similar business. The calculated return is then used to determine how much money would be left to pay the owner’s wage.

Percent of net income: As an industry practice, many accountants will take a percentage of net income or distributions, usually between 25% and 40%, to use as a reasonable compensation. While not an official method, it can suffice for smaller businesses.

Paying Yourself

Payroll compliance requirements when the owner is the only employee are the same as for any other company.

Simplify your payroll by running payroll monthly or quarterly. Avoid weekly because mistakes will be harder to fix. Some states require payroll to be paid weekly or every 2 weeks, so this simplification only works when the owner is the only employee.

Income Tax

Filing Requirements

Individuals

W2: If you make over $13,850 in 2023, which is the standard deduction amount, then you must file taxes by April 15.

1099-NEC: If you make over $400 in self-employment or business income, then you must file your tax return by April 15.

There are other requirements that might require a taxpayer to file a tax return. Most small business owners will need to file a tax return if there was any activity in their business.

Businesses

S-corps need to file a tax return each year by March 15, even if the business was dormant and had no activity in the prior year.

Partnerships must file their taxes each year by March 15, but are not obligated to file a return if there was no reportable activity. However, as a general rule it’s better to file a return each year even if there was no activity.

C-corps must file their taxes each year by April 15, even if the business was dormant and had no activity.

Legal Structure

A business’s legal structure determines how that business is treated in the eyes of the legal system. A sole proprietor is someone who is doing business under their personal name, which is commonly how freelancers operate. Two individuals getting together to create a business is a de facto partnership, though one without any liability protection. In the US, this is legal, and in most states, no additional registrations are required for either of these structures.

You can, however, choose to set up a separate legal entity, which usually comes with the added protection of limited liability. One common structure is the limited liability company (LLC), but other structures include limited liability partnerships (LLP) and corporations. Each business type will have different legal requirements and methods of operating.

Understanding your business structure will ensure you have the right documents in place to operate legally. Keep in mind that most businesses where one person owns 100% will only see a nuanced difference in how their business is legally organized. Consult a professional to help you pick the right structure based on the specifics of your business.

https://www.forbes.com/sites/forbesfinancecouncil/2022/11/04/accounting-topics-every-small-business-owner-should-understand-part-1/

Tax Structures

Sole proprietor

If you are doing business under your own name and social security number, then you will be paying taxes as a sole proprietor. File a Schedule C on your personal taxes to report business activity.

Partnership

Partnerships file Form 1065 and furnish a K1 to each partner at year-end. Partnership is also the default tax structure for a multimember LLC.

Partnership income is flow-through income. This means taxes are usually paid by the individual partners not the partnership itself.

Flow-through income from a partnership is considered earned income if the partner has an active role in the business.

Partners don’t receive a W2 but are paid Guaranteed Payments which are reported as a separate line item on their K1.

S-corp

S-corps file Form 1120S and furnish a K1 to each owner at year-end.

The S-corp is an elective tax structure available to LLCs, partnerships, and corporations. There isn’t a legal structure that is an S-corp by default.

Meet IRS requirements:

  • US LLC or corporation without any corporate, partnerships, or non-resident owners
  • No more than 100 owners

File Form 2553 with IRS to elect S-corp

Owner must receive reasonable compensation for services on a W2

https://www.forbes.com/sites/forbesfinancecouncil/2022/03/10/common-pitfalls-s-corps-need-to-consider/

C-corp

C-corps file Form 1120.

Any dividend payments made to owners must be reported on a 1099-DIV.

C-corp is the default tax structure for corporations.

There is no flow-through income and the business must pay taxes on the income it generates.

Special case: LLC

An LLC is not a tax structure by itself. Since there were enough tax structures established by the time the LLC became a widely accepted legal structure, the IRS decided to slot the LLC into established structures based on how many members there were

For single-member LLCs, the IRS will treat the LLC as a sole proprietor.

For multimember LLCs, the IRS will treat the LLC as a partnership for tax purposes.

LLCs can elect to be taxed as S-corps or C-corps.

https://www.forbes.com/sites/forbesfinancecouncil/2022/11/30/accounting-topics-every-small-business-owner-should-understand-part-2/

Filing Due Dates

Federal

Individuals and C-corps need to file taxes by April 15.

Partnerships and S-corps need to file taxes by March 15.

An automatic 6-month extension to file is granted by filing the correct extension forms and paying any outstanding tax by April 15.

An extension to file is not an extension of time to pay, so penalties for failure to pay by April 15 will continue to accrue until the tax is paid.

State

Filing due dates for most states will be on the same date, or after, the federal tax return deadline.

Some states grant an automatic extension to file, without filing any additional forms, as long as your taxes are paid on time. Other states will recognize the federal extension.

Estimated Taxes

If you owe more than $1,000 in taxes, or $500 for C-corps, you must pay estimated taxes quarterly to the IRS. Most states have similar requirements with varying thresholds.

Due dates for estimated tax payments:

  • First Quarter: April 15
  • Second Quarter: June 15
  • Third Quarter: September 15
  • Fourth Quarter: January 15

Failure to make payments on time will result in estimated tax penalties.

Use last year’s tax amount to estimate your taxes in the current year.

Sales Tax

Collecting Sales Tax

Sales taxes are state taxes, and thus depend on where you reside or your client resides.

In most states, you’ll need to collect sales taxes if you sell physical products.

Personal services are typically not taxed. Thus, most freelancers do not need to collect sales tax.

Avoiding Sales Tax Collection

If you sell exclusively through an online marketplace (e.g., Amazon, Etsy, eBay), sales taxes are likely collected and paid by the marketplace.

Retirement

Planning to Save

Before developing a retirement savings tax strategy, first determine how much money you want to save for retirement. This can be a tricky calculation. Consult a retirement professional or financial planner to help you meet specific monetary retirement goals. Online retirement calculators can also offer general guidance about how much money to save.

https://www.entrepreneur.com/leadership/6-secrets-to-retirement-security-for-business-owners/359245

Traditional vs. Roth

Traditional retirement plans allow you to deduct the contribution against your current income. This is how most retirement plans have been funded, with pre-tax dollars. When you withdraw the money during your retirement, you will pay tax on the distributions.

Roth plans allow you to make after-tax contributions to your retirement. Thus, you will not get an immediate tax benefit for the contribution but you will be allowed to take tax-free distributions during your retirement.

IRA

An IRA is the easiest retirement account to set up. It requires very little paperwork and can be opened at most major investment brokerages.

The limits for contributions can be quite small: only $6,500 in 2023.

The contributions are not tax deductible if you make too much money.

401(k)

Limits for 2023

  • $22,500 employee deferral
  • $43,500 company contribution
  • Plus $7,500 catch-up contribution if you are over 50

Benefits vs costs

  • Unlike an IRA account, there is a cost to setting up a 401(k) plan.
  • If you are the only employee in your business, you can set up a solo 401(k) for a few hundred dollars and minimal annual maintenance fees.
  • If you have multiple employees, it can cost a few thousand to set up and maintain since you must use a third-party trustee to handle the funds.

https://www.forbes.com/sites/forbesfinancecouncil/2021/09/20/supercharge-your-small-business-retirement-account/

Other Retirement Accounts

Defined benefits plan

A cash balance plan is a sub-type of a defined benefit plan.

In 2023, the most you can contribute to a defined benefit plan is an amount that will yield $265,000 or the average compensation for the highest 3 years at retirement. Thus, the actual contribution amount can vary with your age.

Benefits vs costs

Setting up a defined benefits plan can be costly. Expect to pay at least a few thousand even for a simple one-employee plan, plus a similar amount annually to maintain the plan.

This plan is only suitable if you wish to contribute more than what a 401(k) allows.

Tax Strategies

S-Corp Election

Description: The S-corp election tax strategy allows small businesses to save money on taxes by reducing the income amount that is subject to self-employment tax, which, in 2023, is 15.3% on earned income up to $160,200. While sole-proprietor income (Schedule C) and partnership income (Form 1065) are typically considered earned income, S-corp income (Form 1120S) is not, which allows taxpayers to reduce the amount of self-employment tax paid. This strategy does not avoid the tax altogether because all corporations are required to pay wages on a W2, and W2 wages are subject to FICA taxes. A well-executed S-corp tax strategy should reduce your self-employment tax by 50% to 75%.

Requirements:

  • Meet IRS Requirements
    • US LLC or Corporation without any corporate, partnerships, or non-resident owners
    • No more than 100 owners
  • File Form 2553 with IRS
  • Owner must receive reasonable compensation for services on a W2

https://www.forbes.com/sites/forbesfinancecouncil/2020/10/15/a-commonly-missed-tax-saving-move-for-self-employed-workers/#10749c9f5189

Home Office Deduction

Description: The S-corp election tax strategy allows small businesses to save money on taxes by reducing the income amount that is subject to self-employment tax, which, in 2023, is 15.3% on earned income up to $160,200. While sole-proprietor income (Schedule C) and partnership income (Form 1065) are typically considered earned income, S-corp income (Form 1120S) is not, which allows taxpayers to reduce the amount of self-employment tax paid. This strategy does not avoid the tax altogether because all corporations are required to pay wages on a W2, and W2 wages are subject to FICA taxes. A well-executed S-corp tax strategy should reduce your self-employment tax by 50% to 75%.

Requirements:

  • The home office space is used exclusively by the business
  • The home office is either the primary place of business or used regularly for meetings

http://www.forbes.com/sites/forbesfinancecouncil/2023/01/12/if-you-run-a-home-based-business-dont-miss-the-home-office-deduction/

Business Mileage

Description: Using a vehicle for your business entitles you to take a deduction. The most common approach for small businesses is to deduct part of the cost of a vehicle designated for both personal and business use. There are two IRS-approved methods to calculate your vehicle deduction. The first is the actual expense method, where you use the actual expenses incurred to calculate your deduction. The second is the standard mileage method, where you calculate your deduction amount using a standard rate per mile. There is an option to deduct the total cost of the vehicle but only when certain conditions are met, such as the vehicle being used for business exclusively. This means that you must have another vehicle available for personal use.

Requirements:

  • Keep a mileage log
  • Track expenses if using the actual cost method

http://www.forbes.com/sites/forbesfinancecouncil/2023/02/07/mileage-deduction-tips-for-business-owners-plus-a-bonus-tax-strategy/

Deferred Income

Description: Deferred income is another term used to describe saving for retirement. These plans are commonly referred to as qualified retirement accounts, which means they allow for tax deferral of gains as well as either a tax deduction for the contribution, known as Traditional plans, or a tax-free withdrawal, known as Roth plans. The most common plans are: IRAs, SEP IRAs, 401(k)s, and defined benefit plans. These plans typically incur penalties if money is withdrawn before the beneficiary is 59.5 years old.

Requirements

  • Each plan has specific eligibility requirements
  • General contribution limits for 2023:
    • IRA: $6,500 + $1,000 catch up
    • SEP IRA: 25% of earned business income
    • 401(k): $66,000 + $7,500 catch up
    • Defined benefit plan: $265,000

https://www.forbes.com/sites/forbesfinancecouncil/2021/09/20/supercharge-your-small-business-retirement-account/?sh=4dfdd5fd5d11

Section 179 Deduction

Description: Section 179 allows your business to write off the costs of new-to-you equipment, machinery, and computers. This includes vehicles with some additional restrictions based on GVWR or special use vehicles like work vans or shuttles. This deduction can be used alongside bonus and regular depreciation to maximize upfront tax savings from asset purchases.

Requirements:

  • The business must be profitable
  • Vehicles have lower deduction limits based on GVWR
  • Usually used for equipment, machinery, and computers

https://www.forbes.com/sites/forbesfinancecouncil/2023/07/05/boost-your-tax-strategy-with-asset-purchases/?sh=602daac56694

Augusta Rule

Description: The Augusta Rule allows homeowners to rent out their home tax-free for 14 days or less in a year. While not originally designed to allow a business owner to rent their home to their business, it applies nonetheless.

Requirements:

  • The rent must be a reasonable amount that is supported by market research
  • The property must be in the US
  • Business has to issue 1099-MISC for the rent paid
  • Homeowner has to claim income on personal return and exclude it under Section 280A
  • Does not apply to Schedule C filers
  • Home cannot be a primary place of business

https://www.forbes.com/sites/forbesfinancecouncil/2023/02/28/how-business-owners-can-use-the-augusta-rule-tax-strategy/?sh=744c2e6564fd

Income or Expense Acceleration or Delay

Description: Near the end of the year, delaying select customer payments will shift some of your income to the next year. Alternatively, prepaying some expenses this year will also shift some of your income to next year by increasing this year’s expenses. This strategy is only beneficial if you expect your income between this year and the next to be in different tax brackets.

Requirements:

  • Must be a cash-basis taxpayer
  • The cash must be paid or received in the correct year

https://www.forbes.com/sites/forbesfinancecouncil/2021/11/30/five-considerations-before-shifting-taxable-business-income-to-next-year/?sh=6511d7e63ac5

529 Educational Savings Plan

Description: A 529 plan is similar to a Roth IRA account. The contributions made are not deductible for federal taxes, the growth is tax free, and the withdrawals are tax exempt if used for education. Other than the tax-free growth, there are no other benefits for federal taxes. However, there can be immediate tax benefits if you live in a state with income tax. Some states offer either a deduction or tax credit for the contributions.

Requirements:

  • Contributions must be made to the plan by due date
  • Benefits depend on your state of residence

https://www.forbes.com/sites/forbesfinancecouncil/2023/08/01/college-savings-tax-planning-for-business-owners/?sh=2a326cd74a1d

Hire Your Children

Description: When your children are old enough to start helping out in your business, there are many tax benefits to reasonably compensate them for the work. Under optimal conditions you can pay your kids up to $13,850 in 2023, the standard deduction amount, tax free.

Requirements:

  • Follow state child labor laws
  • Determine reasonable compensation
  • File appropriate payroll tax forms
  • Not as beneficial for S-corps and C-corps because wages will still be subject to FICA

https://www.forbes.com/sites/forbesfinancecouncil/2023/06/05/five-things-you-need-to-consider-before-hiring-your-children/?sh=6a389b3246e6

Qualified Education Assistance

Description: Education assistance can be a great tax-free benefit to offer employees. The business gets a deduction for this assistance while the employee enjoys the tax-free benefit as long as it’s used appropriately.

Requirements:

  • Limited to $5,250 per year
  • Owners and their family are not eligible
  • Non-dependent children of owner over 21 can be eligible
  • Money must be used to pay for qualified education expenses

https://www.forbes.com/sites/forbesfinancecouncil/2023/05/08/three-ways-to-save-on-taxes-by-paying-for-education/?sh=75a55bb143a5

HSA Contributions

Description: Health expenses for most taxpayers are not tax deductible. An HSA, however, allows you to bypass restrictions by making the contributions deductible while allowing you to use the distributions to pay for qualified medical expenses pre-tax. Even if you don’t plan to use the HSA to save for future medical expenses, contributing to and using your HSA to cover out-of-pocket medical expenses will save you money. You can even reimburse yourself from your account after you’ve paid out of pocket. This lets you create a tax benefit by contributing to your HSA after you’ve incurred the expense, and then immediately reimbursing yourself.

Requirements:

  • Health insurance plan with HSA account

https://www.forbes.com/sites/forbesfinancecouncil/2023/03/23/health-insurance-tax-benefits-for-small-business-owners/?sh=2c1009771191

Health Insurance

Description: Just like a traditional employee can pay their health insurance pre-tax, business owners can deduct their health insurance premiums.

Requirements:

  • Schedule C: Deduct premiums on personal return
  • Partnership (Form 1065): Report premiums paid on K1
  • S-Corp (Form 1120S): Insurance premiums are added to W2 income and deducted on personal return
  • C-Corp (Form 1120): Deducted as business expense

https://www.forbes.com/sites/forbesfinancecouncil/2023/03/23/health-insurance-tax-benefits-for-small-business-owners/?sh=2c1009771191

Charitable Contributions

Description: As a business owner, you can deduct charitable donations on your taxes. Donating appreciated property is a great way to maximize this benefit. Using donations to offset taxes only applies to business owners who plan to make large donations.

Requirements:

  • Must itemize your deductions
  • Donations limited to by income

http://www.forbes.com/sites/forbesfinancecouncil/2023/08/22/charitable-donation-tax-considerations-for-business-owners/

Tax-Loss Harvesting

Description: Tax-loss harvesting involves selling underperforming assets to create a tax loss while simultaneously buying comparable assets to maintain a substantially similar investment position.

Requirements:

  • Won’t offset non-investment income
  • Wash sale rules must be followed

https://www.forbes.com/sites/forbesfinancecouncil/2023/04/13/five-things-you-should-know-about-tax-loss-harvesting/?sh=583eb2ca7020

Cost Segregation

Description: A cost segregation study will break down the costs of a larger investment, usually real estate related, into its component parts. This allows for separate tax treatment of the individual components. The tax benefit is that some of the individual components will qualify for faster depreciation, bonus depreciation, and/or Section 179 deduction, thus allowing for a larger upfront tax benefit.

Requirements:

  • Professional cost segregation study

https://www.forbes.com/sites/forbesfinancecouncil/2021/03/04/quick-accounting-tips-for-rental-property-owners/?sh=220bf11a5a3b

401(k) to IRA Rollover for College

Description: You can avoid the 10% penalty for early withdrawals from an IRA if you use it to pay for college. If using a 401(k), first roll over the funds to an IRA since 401(k) withdrawals will be subject to the 10% penalty even if the funds are used for college. Taxes will still be owed on the distribution if it’s from a traditional IRA. Roth IRAs will be tax free to the extent that you are taking out contributions instead of gains.

Requirements:

  • 401(k) must allow a rollover to IRA
  • Funds must be used for yourself, spouse, child, or grandchild
  • Funds must be used for qualified education expenses: tuition, fees, books, supplies, required equipment, room and board if student is enrolled at least half-time