It’s that time of year again. You know the drill. You hope to pay as little as possible while staying within the rules. Your CPA, accountant, enrolled agent, or tax preparer does the calculating, gives you the results and you write out the checks. This year, don’t just comply with his instructions. Make the exercise a painless process as well as a learning experience. Here’s how to go about it:
Don’t make your accountant the bookkeeper. Keep the books yourself, or hire someone, so that the accountant can come in and work with the summaries.
One possibility is that the accountant trains a staffer to keep the books. This separation of paperwork and interpretation will save you quite a bit of money.
Pay estimates on time. Estimated taxes are an educated guess at how much taxes you will owe at the end of the year. If you don’t put in enough estimates, you will be penalized. So be sure to put in, on the due dates –– April 15, June 15, September 15, and January 15 –– 100 percent of what you will owe, or not less than 90 percent of last year’s tax liability. If you comply, you won’t be penalized. But the penalty isn’t the worst problem. It’s easy to get behind the eight ball at tax time, making it hard to catch up.
Set up a home office in your home and obtain a write-off. Since millions of employees work at home, this is now a commonplace strategy. It is no longer a red flag. Most could comply by setting up a desk in a room and using it to do paperwork regularly and exclusively. The home office deduction allows one to deduct a percent of home costs (mortgage, taxes, insurance, maintenance/ repairs, and depreciation) as a personal deduction on Schedule A. The percent is determined by the home office square footage divided by total house square footage. So if it costs $30,000 to maintain a house and your home office calculation is 15 percent, you have a $4,500 deduction.
Because of your home office, you can now take all commuter mileage. Commuting back and forth from work is generally not a deduction. But because your home office is now your principal place of business, all miles to and from count. So if you drive 30 round-trip miles six days a week, that’s about 9,000 commuting miles a year, which would result in a $5,000 expense.
Include travel that could be business related. Go to conventions? Attend association meetings? Visit other pizza shops? Do you combine business with pleasure on vacations? Some of the expenses associated with this travel could be deductible, as long as there is a business component. So if you take a road trip, but visit several pizza shops, some of the cost could be a travel expense. Your accountant should make the determination. For example, only your portion of cost could be included as an expense, not your spouse’s.
Use Section 179 to take full capital deductions up to $250,000. Purchase new ovens? Buy expensive equipment? The costs can be allocated over time (usually five to seven years) or can be, through Section 179, taken in full in the year of purchase. So if you’re showing too much profit, you might reduce the sum by taking off 100 percent of the capital purchase. It’s a judgment call between your cash flow needs this year and anticipated profits in the future.
Hire your children and gain a write-off. You could hire your children, pay them up to $5,750, take out Social Security, but they wouldn’t have to pay income taxes because the amount is under the standard deduction. In this way, the company receives a write-off, and your children learn the value of hard work.
Of course, they do have to work.
Re-examine the rent vs. own decision of your property. Times change. What was a prudent decision a few years ago might be foolhardy now. If you’ve owned the property for years, this might be a good time to sell, and arrange for a long-term rental contract. If you’ve been renting, building values are really low today. This might be a perfect time to buy, and increase your deductions. It pays to sit down every few years and re-examine this issue.
Search for other expenses. If you search through your checkbook, you will probably find other deductions. Such charges as professional subscriptions, Rotary membership, taking staffers out to eat, helping employees in other ways, and donating pizzas for town races and the like are often overlooked.
Take advantage of the self-employed health insurance deduction. Now, self-employed owners are allowed to deduct 100 percent of their health insurance premiums. It appears as a deduction in the adjusted gross income section of your 1040. This is a dollar-for-dollar reduction of income, so it is not to be missed. Of course, if you’re incorporated, your health insurance will be a fully deductible expense.
Have your accountant explain the income and balance statements. Don’t just write a check. Make your financial expert show you why profits were down, what the depreciation charge consists of, or why utilities were 25 percent above last year’s. In the after-tax review, arrive with a list of questions. Should I open a second shop? Am I over-paying my crew? What would I gain by offering delivery? Is a store make-over cost-effective?
Ask what else the accountant can do for you. Remember, your accountant is also a savvy businessman. Can he help you hire a key manager? Does he have any advice on resolving an employee dispute? If his clients include other pizza shops, can he print out a comparative evaluation without revealing names? Would he help you set up an ownership group? Might he advise you on your retirement planning? Does he have advice for the difficult divorce you’re going through? Tap all of your accountant’s knowledge.
Do all this and you’ll get your money’s worth at tax time.
Massachusetts-based Howard Scott is a long-time tax preparer specializing in small businesses. He is also a writer who has published 1,400 magazine articles and four books.