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Protecting Your Business Against Theft, Embezzlement, and Fraud, Part 12: Small Business Guide to Reducing Your Tax Burden Legally

By |2022-03-01T16:25:14-08:00October 28, 2020|Categories: Fraud Prevention, Small Business Guide to Legally Reducing Your Tax Burden|Tags: , , , , , |2 Comments

Editor’s note: Welcome to the final installment of our 12-part series — “Small Business Guide to Reducing Your Tax Burden Legally.” Admittedly, this final installment is technically outside the scope of this series in that it has little to do with saving money on taxes. However, it does have a lot to do with keeping more of the money you earn as a small-business owner.

Another difference is that we recruited a contributor to write this post — Jen Rodriguez, a Southern California-based forensic accountant with a Master of Accountancy and more than 20 years’ experience in accounting, operations, and data management. Rodriguez is also a graduate of Florida Atlantic University’s Forensic Accounting, Digital Forensics, and Data Analytics master’s program.

Protecting Your Business Against Theft, Embezzlement, and Fraud
By Jen Rodriguez, MAcc

Today’s headlines are filled with stories about small-business fraud, but a vast majority of these stories are about small-businesses committing fraud against the government. Most recently, the news media have focused on fraud involving the Paycheck Protection Program (PPP) — the federal government program designed to keep small businesses solvent during the coronavirus pandemic. The PPP provided ample opportunity for con artists and dishonest small-business owners to defraud the government — and you, the taxpayers — of millions of dollars.

Protecting a business against fraud.

What you hear much less about are the far more common crimes against small businesses, many of which are committed by trusted employees. These crimes include the following:

  • Theft: Stealing money or property from the business outright.
  • Embezzlement: Diverting money or property from the business for the employee’s own personal use.
  • Fraud: Tricking a business into “voluntarily” giving away money or property.

These crimes cut into the profits of any business, but they can be especially devastating to small businesses, and are more difficult and costly for those small businesses to protect against and recover from. In this post, I look at the high costs of these workplace crimes (often referred to as occupational fraud); suggest ways that small businesses can protect against, detect, and recover from these crimes; and highlight the importance of retaining professional services when necessary.

Recognizing the High Costs of Theft, Embezzlement, and Fraud

The U.S. economy is built on the backs of small-business owners, who collectively account for $8.5 trillion dollars of the country’s $17 trillion Gross Domestic Product (GDP). Unfortunately, as we all know, money attracts thieves, and small businesses are often the easiest targets.

Criminal schemes targeting small businesses rarely attract public attention and often go undetected for many years. That’s no surprise given the fact that crimes targeting small businesses are often inside jobs committed by trusted employees. In fact, employees are stealing more than employers are aware. Recent statistics on employee theft reports that 75 percent of employees have admitted to stealing from their employer once, and 37.5 percent have stolen twice.

To protect their businesses and their own financial health, small business owners must Continue reading… Continue reading… Continue reading…

Calculating Tax Withholding and Estimated Taxes, Part 11: Small Business Guide to Reducing Your Tax Burden Legally

By |2020-10-23T16:21:59-07:00October 23, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: , |0 Comments

Nobody looks forward to paying taxes, but it’s less painful when tax withholdings are calculated by an employer and automatically withheld from your pay. Much easier than crunching the numbers ourselves and then paying the government out of our savings. Somehow, the latter process feels like we’re working for Uncle Sam, and that’s not a pleasant feeling.

Here in the United States, ours is a pay-as-you-go tax system, meaning we taxpayers are expected and required to pay taxes on our income as we earn it — instead of paying it all at once at the end of the year. Employees have taxes automatically withheld from their paychecks by their employers, which satisfies the taxing authority’s requirement.

In contrast, if you’re a small-business owner, you face the onerous task of calculating your income and expenses, estimating the amount of tax owed on that amount, and cutting checks (or making electronic payments) for the amounts due to state and federal entities. These include the Franchise Tax Board here in California, and/or the Internal Revenue Service (IRS). And, you’re required to repeat this process four times a year, to pay your businesses quarterly estimated federal, state, and local taxes.

No one wants to get stuck with a huge tax bill (and penalties) at the end of the year. Nor do we want to overpay, which is essentially giving the government a free loan while leaving ourselves and our business with less of the money we earned. As small-business owners ourselves, we at Stees Walker & Company, LLP, feel your pain, so in this part of our Small Business Guide to Reducing Your Tax Burden Legally — the 11th in our 12-part series — we lead you through the process of estimating your taxes, hopefully making it a little less painful. But first, we need cover a few preliminary topics.

Understanding Tax Withholdings and Estimated Taxes

According to the IRS, “Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments.” Withholdings are taxes an employer collects on behalf of the taxing authorities and sends to them on behalf of the employee. Estimated taxes are generally those paid quarterly based on a business entity’s expected business income. Taxpayers are required to pay estimated taxes in the following situations:

  • The amount of income tax withheld from your salary or pension is not enough.
  • You receive additional income such as interest, dividends, alimony, self-employment income, capital gains (for example, from selling stock for a profit), prizes, and awards from which taxes have not been withheld.
  • You are in business for yourself, in which case the estimated taxes you pay cover not only the income tax you owe but also self-employment tax and alternative minimum tax (if applicable).

If you don’t pay enough tax through withholding and estimated tax payments, you may be charged interest, calculated weekly, on what you should have paid. You also may be charged interest if your estimated tax payments are late, even if you are due a refund when you file your tax return.

To avoid having to pay interest, you must deposit a certain minimum amount by the end of the year: Continue reading… Continue reading… Continue reading…

Deducting the Costs of Business Meals, Entertainment, and Gifts, Part 10: Small Business Guide to Reducing Your Tax Burden Legally

By |2020-10-08T20:45:15-07:00October 8, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: , , |0 Comments

As a small-business owner, you know that you can easily rack up a considerable amount in expenses over the course of the year dining with and entertaining clients, colleagues, and partners. Then there’s hosting “free” seminars or presentations for prospective clients. And feeding your employees (for example, donuts and coffee for a morning meeting or pizza and soft drinks for a team that’s working overtime on a project). You may even have additional expenses related to gifts presented to customers and vendors to show your appreciation for their business and efforts on your behalf.

All this is money leaving the business and not going into your pocket, so it should be deductible, right? Yes, it is, but just how deductible it is depends on the context in which that money is spent and who received the benefit.

In this post — No. 10 of 12 in our Small Business Guide to Reducing Your Tax Burden Legally series — we break down business deductions for meals, entertainment, and gifts, to ensure that you’re taking full advantage of what the government allows, taking care to not do something that may prompt the government to question any of your deductions.

Deducting Meals, Entertainment, and Gifts

Deducting the Cost of Meals Out

If you’re in a business such as management consulting, marketing services, insurance, or personal finances, you likely spend considerable time meeting with clients over lunch, coffee, or drinks. In other businesses, you may meet with partners or colleagues to discuss plans for business ventures or projects you’re currently working on together. As long as meals you pay for under either of those scenarios are for a legitimate business purpose — with existing clients, new business prospects, and business colleagues such as vendors you work with — they’re deductible.

Costs for business meals (food and beverage) are generally deductible up to 50 percent, but expenses must meet the following conditions: Continue reading… Continue reading… Continue reading…

Deducting Qualifying Car and Truck Expenses, Part 9: Small Business Guide to Reducing Your Tax Burden Legally

By |2020-10-08T20:46:55-07:00September 30, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: , , |0 Comments

Did you know that if you have a motor vehicle and a business, you may have a tax deduction coming your way? It’s true. In many cases, you can deduct from your business profits the cost of buying, driving, and maintaining that vehicle. And if you use it exclusively or almost exclusively for work, you may be able to get the government to pay a good chunk of the expenses related to that vehicle (in the form of money you save on taxes).

That’s only fair. Every penny you put into driving to deliver product or perform a service for your customers is a penny out of your business profits!

In this blog post, Part 9 in our Small Business Guide to Reducing Your Tax Burden Legally series, we cover how it may be possible to claim a deduction on a qualifying car, truck and related expenses.

Two Ways to Claim Vehicle Expenses

In these United States, the Internal Revenue Code provides for two different ways to claim vehicle expenses:

  • Actual expenses: You claim the business use percentage (BUP) of all expenses related to a vehicle, including fuel cost, auto insurance, lease payments (or loan interest and depreciation), personal property tax, repairs/maintenance (oil changes, tires, etc.), and car washes. For example, suppose you use a vehicle 75 percent for business and 25 percent for personal use, and your total vehicle expenses are $8,000 for the year. Your deduction would be $8,000 x 0.75 = $6,000.
  • Standard mileage: You multiply the number of miles you drove the vehicle for business by the standard per-mile rate, which is 57.5 cents for the year 2020. For example, if you put 8,000 business miles on a vehicle 8,000 x 57.5 = $4,600. Using this method, you can also deduct the business use percentage of vehicle registration fees and taxes, vehicle loan interest, and tolls and parking fees. (Note: You cannot use the standard mileage method if you use five or more vehicles in your business, or you use your vehicle for hire; for example, taxi, Lyft, Uber, etc.)

Many small-business owners choose the standard mileage option because it’s so straightforward in terms of calculations and record-keeping. All you need is your odometer meter reading at the beginning and end of the year and a log of the number of miles you drove for business (which you should keep regardless of the method you use to calculate your deduction). You don’t need a receipt for every time you fuel up or take your vehicle in for an oil change.

However, using the easy method could cost you money. Every year, the American Automobile Association (AAA or more commonly “Triple A”) conducts in-depth research into vehicle operating costs. If you’re choosing to take the standard deduction for a vehicle that costs more than 57.5 cents/mile, could be losing money by not claiming your Continue reading… Continue reading… Continue reading…

Maximizing Your Home Office Deduction, Part 8: Small Business Guide to Reducing Your Tax Burden Legally

By |2020-10-08T20:47:46-07:00September 21, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: , , |0 Comments

If you’re self-employed or run a small business out of your home, you can reduce your income tax bill by claiming a home office deduction. This deduction enables you to subtract from your income a portion of expenses attributable to the area of your home that you use for business.

For example, if you run a pet grooming business out of 20 percent of your home and use that other 80 percent as living space, under the right circumstances, you may be able to deduct 20 percent of your mortgage interest, property taxes, homeowner’s insurance, homeowner association fees, and utilities (such as electricity, gas, water, sewer, and trash). You might even be able to deduct depreciation on that portion of your home.

Hey, it’s only fair. Other businesses get to deduct the cost of maintaining a building or renting office space, so you should get a tax break for the portion of your home you use for conducting business.

Unfortunately, many small-business owners don’t claim this deduction because they fear that doing so will raise red flags and increase their odds of becoming a target for a dreaded tax audit. Others avoid claiming it because they’re afraid that the calculations or record-keeping would be too complicated. However, the calculations and record-keeping are straightforward, and there’s no evidence that claiming the home office deduction increases your odds of being audited. Besides, as long as you’re honest about the business use of your home, and you have records to back up the expenses you claim, even if you do get audited, you have nothing to fear.

In addition to being able to claim the home office expense, if you are using your home office as the base for business auto mileage, it is a good idea to establish your home office as your “tax home.” This supports your claim for auto expenses any time you travel from your home office to another business location.

Pro Tip: You may be able to use expenses associated with a home office to reduce self-employment income and taxable income from your business — but not below zero. If your home office expenses for a particular year are more than your net income from your business, you may be able to carry forward the loss to future years.

Deciding Whether Your Office Space Qualifies

To qualify for a home office deduction, a portion of your home must be used in one of the following ways:

  1. Exclusively and regularly as your principle place of business
  2. Exclusively and regularly as a place where you meet and deal with your customers in the normal course of your business
  3. A separate structure that’s not attached to your home and is used exclusively and regularly in connection with your business
  4. On a regular basis, the space is used for storage of inventory or product samples used in your business for selling products at retail or wholesale (note: this usage does not have to be exclusive)
  5. For rental use
  6. As a daycare facility

Let’s translate this into plain English: Continue reading… Continue reading… Continue reading…

Hiring Your Kids to Cut Taxes, Part 6: Small Business Guide to Reducing Your Tax Burden Legally

By |2020-10-08T20:49:28-07:00August 25, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden, Uncategorized|Tags: , |0 Comments

Do you ever get the feeling that your kids are taking you to the cleaners? We’re not talking about the cost of necessities such as daycare, living space, food, school supplies, and clothing. It’s those discretionary expenses, like cell phone service, sports leagues, music lessons, games and entertainment, outings with friends, and car and driving expenses.

If you’re paying for all that, you’re doing so with after-tax dollars. And you should be putting the brakes on that habit immediately if not sooner.

As a small-business owner, you’re allowed to hire your family members (including children,  grandchildren, parents, siblings, nieces, nephews) to work for your business, pay them a fair and reasonable wage, and then have them pay for their own bells and whistles. In addition, they can sock away some of that money to use later for college or to buy a car, pay for their own lavish wedding, start a business or support the start-up costs associated with starting a family, retire, pay for college or whatever else they decide to do when they’re ready to do it.

Even better, you won’t have to pay income tax or self-employment tax on the wages you pay them, and chances are good, in the case of your children, that neither will they. Also, when you hire your own children to work for you, the wages you pay them are exempt from FICA (Social Security and Medicaid) withholdings and federal unemployment (FUTA) tax unless your business is incorporated. Some restrictions apply, of course, but this tax loophole is perfectly legal and something that all small-business owners with children should consider.

So, How Does This Work?

Here’s how it works: You hire your child and the business pays them. Their first $12,400 of earned income is taxed at zero. That’s because $12,400 is the standard deduction for a single taxpayer, even if you claim them as your dependent. Their next $9,876 of taxable income is taxed at just 10 percent.

Here are the basic rules: Continue reading… Continue reading… Continue reading…

Leveraging the Tax Savings Power of Retirement Accounts, Part 5: Small Business Guide to Reducing Your Tax Burden Legally

By |2020-10-08T20:50:40-07:00August 20, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: , , , , , , , |0 Comments

Some of the most powerful tools for cutting taxes are tax-deferred retirement accounts, which enable you to invest money tax-free now, then pay taxes on it when you withdraw it in your retirement years. As a small-business owner, you can take advantage of several different types of tax-deferred retirement accounts, including individual retirement accounts (IRA), a simplified employee pension (SEP), a Savings Incentive Match Plan for Employees (SIMPLE) IRA, 401(k), Defined Benefit Plans, and even the option of a hybrid plan. Roth IRAs and permanent life insurance plans are two more tools that can benefit you when planning for retirement.

Many people have one or more retirement accounts, which is great, but few have a retirement plan — a highly specific approach for using retirement accounts to maximize their tax savings and achieve their retirement goals. Without a properly crafted retirement plan in place, mistakes are more likely, such as choosing an account type with a contribution limit that’s too low, exposing yourself to high taxes when you retire, or paying too much in account/plan management fees.

For example, depending on your income and the type of retirement account, your contribution limit varies considerably. If you earn $90,000, for example, you can contribute $16,200 to a SIMPLE IRA, or $22,500 to a simplified employee pension (SEP), or $42,000 to a 401(k). (Note: That’s before any catch-up contributions you can start making at the age of Continue reading… Continue reading… Continue reading…

Deducting a Percentage of Your Qualified Business Income, Part 4: Small Business Guide to Reducing Your Tax Burden Legally

By |2020-10-08T20:51:38-07:00August 6, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: |0 Comments

The 2017 Tax Cuts and Jobs Act (TCJA) lowered the top tax rate on C corporation income from 35 percent to 21 percent. This is considerably lower than the top rate of 37 percent on pass-through income from sole proprietorships, partnerships, and S corporations.

Cutting taxes for C corporations without also cutting taxes for small businesses, would probably have caused a stir with small-business owners justifiably exclaiming, “No fair!” To balance the scales, the TCJA allows small-business owners to deduct up to 20 percent of their qualified business income (QBI) from their taxable income for the year, calculated on an activity-by-activity basis.

This is a major change for most small-business owners, but it may leave you wondering what QBI is, how this change is likely to impact your taxes, and what the heck “calculated on an activity by activity basis” means? In this post, the fourth in our Small Business Guide to Reducing Your Tax Burden Legally series, we bring you up to speed on the QBI deduction.

Understanding the Different Income Types

The tax code has always distinguished different types of income and taxed them differently. TCJA created an entirely new type of business income, called qualified business income (QBI), and taxes it in a unique way. In this section, we define and compare the different types of income, including QBI.

Ordinary income

Ordinary income is what you earn from your work or your business. If you draw pension or IRA income, that’s ordinary income too. Here are a few key points about ordinary income:

  • Ordinary income is taxed at ordinary income tax rates.
  • Any salary you earn from your small business is ordinary income.
  • If your small business is a sole proprietorship, your entire net profit from the business is taxed as ordinary income. (You can change your business entity from sole proprietor to S corporation to reduce the amount taxed as ordinary income. See Part 3 in this series to find out more about business entities.)
  • You pay taxes on net So, for instance, if you file as married, you earn a salary from a job, and should your spouse lose money in a business, your spouse’s business loss reduces your net income (subject to tax) as a married couple.

Investment income

Investment income is money you earn from your investment portfolio, and different types of investment income are taxed at different rates: Continue reading… Continue reading… Continue reading…

Selecting a Business Entity — Small Business Guide to Legally Reducing Your Tax Burden, Part 3

By |2020-10-08T20:52:41-07:00July 30, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: , , , , , , , |0 Comments

Welcome to Part 3 of our 12-part series on how to legally reduce your income tax burden. Here, we describe the five ways you can choose to organize your small business, and then we provide guidance on how to choose the best business entity for your business in the current environment.

Here’s a common scenario to get us started. You set up a limited liability company (LLC) or S corporation for your small business, and now you are all set in terms of protecting your personal assets from lawsuits and minimizing your tax burden, right?

Not so fast.

One of the most expensive mistakes small-business owners make is choosing the wrong business entity — the legal/financial structure within which the business operates.

Most business owners start as sole proprietors. Then, as they grow, they establish an LLC to help protect their personal assets from any lawsuits filed against the business. Many of these same business owners make the common mistake of assuming that an LLC allows them to file their taxes as a corporation and use that filing status to save on taxes. The fact is that an LLC is a legal entity, not a tax entity. Operating a sole proprietorship as an LLC won’t save you any money in taxes.

You want a business entity (or more than one business entity) that not only provides legal protection, but also maximizes your Continue reading… Continue reading… Continue reading…

© 2014- Stees, Walker & Company, LLP (SWC). All rights reserved.
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