Prep Tips to Simplify Your Business Taxes

Tax Preparedness

Whether you’re a seasoned pro, or it’s your first-time filing taxes for a business, there are commonalities in what your tax preparer will need to ensure your returns are complete and accurate. Using a checklist will not only save time, but will help your tax professional find all the deductions and credits to which you’re entitled, giving you the lowest possible tax bill. Who doesn’t want to simplify their business taxes and pay less?

First and foremost, you should already have some form of business accounting system in place, capable of tracking your transactions, and generating reports. If you’re just starting out and have a minimum number of transactions, you might be able to keep it simple, using a spreadsheet, or Quicken.

However, you’ll pay for the simplicity by having to migrate to something more robust as your business grows.  Options for sole proprietors, freelancers, and very small businesses include Fresh Books, and Wave, both of which are recommended by Investopedia, Nerd Wallet, and PC Magazine.

If you’re growing, and have, or intend to have payroll, you might prefer something that will grow with you. Top picks include Xero, Quickbooks Online, and Zoho. Prices, functionality, integration and available modules vary from one system to another. For best results, and to avoid the perils of migration sooner than necessary, let HKMP help you determine which system will suit your needs and your growth, and provide the best overall value.

Checklists Simplified

Once you’ve entered all transactions for the year into your chosen accounting system, you can prepare the following reports:

  • Income and Expense (aka P & L)
  • Balance Sheet
  • Statement of Cash Flows
  • Previous Year’s Tax Return

This will help your tax preparer determine where additional detail is needed. You can start by providing detail for the following areas:

  • Assets purchased, depreciated, or disposed of
  • Loans
  • Leases
  • Opening and closing inventory, if applicable
  • Stocks or bonds purchased or sold
  • Payroll reports

Much of this information will also be useful when  tax planning during Q4 of 2022.

Information about your loans may be a little trickier this year if you took advantage of the Paycheck Protection Program (PPP), or Economic Injury Disaster Loan Program (EIDL). Though they may be excluded from income, it’s important to report them accurately so you won’t pay unnecessary taxes on funds which helped keep your business afloat amidst the challenges imposed by COVID regulations.

Detail Made Easy

Other areas for which you might be asked to provide detail are:

  • Officers’ salaries (corporations)
  • Guaranteed payments to partners (partnerships)
  • Dividends received broken down by payer
  • Taxes and licenses
  • Professional fees
  • Interest
  • Charitable contributions

Most of the accounting programs mentioned can create schedules by payee which will satisfy your accountant’s needs. Make sure your detail includes the tax year for which your tax payments were made so any pre-payments are applied correctly.

Staying Tax Prep Ready

Tax preparation shouldn’t be something you ignore until it’s time to give your records to your tax accountant. There are a number of ways to stay ahead of the curve so your accountant can not only prepare your tax returns, but help you with tax planning before the year is over. Above all, they’ll help simplify your business tax information gathering process and the transmitting of required filings at tax time.

  • Adequate accounts for collection of costs and income (e.g. Officers’ Salaries and bonuses separate from Employees)
  • Maintain up-to-date schedules for:
  • Taxes and licenses
  • Depreciation
  • Stocks and bonds
  • Reconcile accounts at least quarterly, if not monthly

Keeping your books and records up to date will enable you to schedule a tax planning appointment during the fourth quarter. There are many opportunities to improve your tax position in both the current, and subsequent year. Don’t lose out on many tax saving strategies by failing to act before the end of the year.

Make HKMP your one-stop-shop for accounting, tax planning, and tax preparation.

Direct Your Personal Financial Health Towards Prosperity

Monitor Your Financial Health

Every year, you manage your health with an annual physical, eye exam, and diagnostic tests to monitor the wear and tear on your body and identify potential opportunities to strengthen and improve your overall health. Are you giving your financial health the same attention?

When it comes to your physical health, there are prescribed objectives based on your age, gender, and family history. Setting objectives for your personal finances is equally important, using similar factors. Are you financially healthy right now? To answer that, you need to measure where you are versus where you want and need to be to enjoy a healthy financial future.

Useful tools for monitoring financial health include:

  • Understanding Net Worth
  • Managing your Debt 
  • Monitoring Spending Habits
  • Understanding Market Trends and FICO Score
  • Life Changes and financial impact

These tools let you see whether you’re meeting your financial objectives. They help you identify what’s working, and where you need to improve. Now, let’s dig a little further into each tool.

Know Your Net Worth

Your net worth is the difference between total assets and total debt. This will vary based on a number of factors including where you are in your career, how recently you made a major purchase like a home, and market fluctuations. Also significant are marital status, and where you are in the cycle of life. Are you married or single? Of child-bearing age? Have or want children? Although these factors don’t directly impact net worth, they do contribute to present and future savings, investments, debt, and the amount and type of insurance you carry.

In order to fully assess your net worth, you should make two lists. List one is your assets:

  • Current value of your home
  • Cash assets
  • Investments
  • Other significant assets (vehicles, boats, vacation homes, etc.)

List two is your debts:

  • Mortgage balances
  • Loan balances
  • Credit card debt

Are You Managing Your Debt?

First, establish a baseline so you can track what’s working, and what isn’t, based on increases or decreases in net worth over time. Catching a downward trend early allows you to act sooner rather than later, to protect and strengthen your financial health. How?

Step 1, perform an annual review of:

  • Net Worth
  • Mortgage rates
  • Credit card interest rates

Step 2, compute your debt-to-income ratio by totaling monthly payments for:

  • Mortgages
  • Loans
  • Credit cards

Divide this total by your monthly gross income. While experts vary on what constitutes financial health, a debt to income ratio of 20-30% or less is a healthy goal. Though the numbers you use in this calculation only represent a moment in time, you can use them to determine how well you’re managing your debt, as well as how to improve your credit score, and borrowing ability. Excessive debt tells its own story. It is the first place to look if your net worth is trending downward. This, however, is only part of the picture.

Is your financial health bringing you wealth

Optimize Your Spending Habits

Keeping track of your spending habits allows you to monitor and control your debt-to-income ratio. You can do this by entering all cash payments, debit, and credit card charges into either a spreadsheet, or budget and expense tracking program such as Quicken, Mint, or YNAB.

The advantage a tracking program gives you versus a spreadsheet is it links directly to your bank, and credit card accounts, minimizing the time you spend entering transactions. It also lets you automatically categorize expenses, giving you up-to-date information about spending trends, and generating a Profit and Loss Statement.

The experts at HKMP can help you determine which method will be the most effective and efficient for your activity and needs.

Knowing your monthly transactions allows you to create a budget to:

  • Manage essential and non-essential spending
  • Create a savings plan
  • Create a plan to reduce debt
  • Adjust your plans as variables change
  • Review interest rates on debt to pay off higher interest accounts first, or determine where refinancing could save you money

Mortgage interest rates have fluctuated dramatically since 2000, influenced by everything from Presidential elections to COVID, and the 2008 real estate crash. According to Freddie Mac, the annual average for a 30-year fixed rate loan in 2000 was 8.05%, vs. 2.96% in 2021. Re-financing a higher rate loan may be attractive since mortgage rates have dropped every decade. However, with the increase in applications due to COVID, lenders can set higher standards.

In order to ascertain if refinancing would improve your financial health enough to justify the effort, it’s important to educate yourself on whether your debt-to-income ratio and credit score (FICO) meet current requirements.

Most banks and credit card companies allow you to check your FICO score as often as you’d like without affecting your credit. If you’re considering refinancing, or making a large purchase, it’s a good idea to check your score regularly, see how it’s trending, and review the factors affecting your score. It’s another valuable tool for gaining insight into improving your financial health. In addition, by obtaining a credit report at least annually, you can monitor your credit card activity, review listing of secured and unsecured accounts held in your name, inquires of credit institutions and other alerts which can affect your credit score .

Financial Health and Major Life Changes

Awareness of your financial health allows you to develop healthy spending and saving habits, so you can meet current and future needs. When you monitor trends, both personal and external, you’ll know when it’s best to invest in assets, or pay off current debt to improve your net worth. In addition you can pro-actively  protect yourself and your family from unexpected emergencies.

Many factors affect your personal financial health:

  • Marriage
  • Births
  • Home and car purchases
  • Number of years to retirement
  • College Tuition

Unanticipated expenses, and fluctuating markets are a reality you can’t control. Monitoring and managing your debt and spending is to your financial health like the daily vitamins you take for your physical health.

Need a financial check-up? Reach out and let HKMP help you implement a plan to ensure a healthy financial future.

Year-End Tax Planning Gives You the Advantage

Make Tax Planning Part of Your Year End

…in this world, nothing is certain except death and taxes.  – Benjamin Franklin

Filing and paying annual income taxes may be an integral part of doing business, but that doesn’t mean you have to like it, nor pay more than your fair share. Whether you face the task with acceptance, resignation, or dread, you know it’s inevitable once the year ends, and you close your books. The question is, when do you start to address your year-end tax planning?

Running a successful business means keeping abreast of new rules, laws, regulations, and lately, mandates which impact not only costs, but how you manage both day to day, and long-term activities. You have enough on your plate without trying to keep up with the changing environment for income taxes too.

Your customers or clients depend on you to be the expert in your field. Call on HKMP to keep you abreast of changes in tax laws which impact you both positively and negatively, allowing you to focus on your own areas of expertise, while protecting your business interests, and cash flow. Don’t miss the opportunity to take advantage of HKMP’s expertise to review your books and records prior to year-end, and advise you of opportunities to minimize your tax liability. Our knowledge and experience will ensure you make informed decisions like scheduling expansion, and major purchases in years when tax laws are more favorable.

Take Advantage of the Right Timing

Timing is everything. Whether it’s capital investments, year-end bonuses, hiring, or inventory, you want to make informed decisions. In many of these areas, you’re already doing your research, and mapping out a plan before reaching final decisions. Yet all too often, the impact on both your current and future tax liability is overlooked. In many ways, it’s as important as ROI.

One area which has seen significant change over the last 40 years or so is depreciation. Not only have Section 179 limits changed over the years, but so have limits on first-year depreciation. Looking back, a mere 13 years, the Section 179 limit has grown from $250,000 in 2008 to $1,050,000 in 2021. Not all years have seen increases, but don’t you want the option of deciding whether to escalate or delay a major purchase if the limit increases the following year?

Many companies experienced decreased revenue, and increased costs for the last two years thanks to COVID. As you prepare your budget for 2022, knowing how those costs will affect both actual and projected net income will keep more money in your pocket. Better still, you’ll have more money to spend on the original dream with which you launched your business in the first place.

Year-end tax planning areas

Protect Your Investments With Year-End Tax Planning

Would you wait until January of February to create next year’s budget? Probably not, as you know you’d start the year blind to objectives and opportunities. You don’t wait until January or February to start making estimated tax payments either, as you don’t want your cash flow to take one, large hit. You certainly haven’t achieved your current level of success by ignoring the numbers, or failing to see how they measure up to your projections and expectations.

Tax laws can be shark-infested waters. If you’re unprepared, they can bite off far more than you’re willing, or even able at times, to give. Knowing there’s an expert ready to take the wheel and guide you through those waters unscathed protects your assets, leaving you free to focus your attention and resources on the present challenges, and future opportunities.

Ask yourself this. If your dream was important enough to create a plan, and map out at least part of the route to making it a reality, isn’t it equally important to allocate time, energy, and resources to protect what you’ve built?

Scout Ahead to Minimize Setbacks

To put it simply, year-end tax planning is the security team’s scout who heads out before dawn to ensure the way forward is clear of perils and pitfalls. He alerts you to blocked roads, washed out bridges, and potential ambushes, giving you time to set up defenses, and re-map your route. Without him, you’d walk right into those ambushes, or find yourself mired in quicksand, causing expensive delays and missed opportunities. Clearly, the money you spend on his services will be recouped many times over.

You could choose to fly by the seat of your pants, hoping your business grows, and thrives. You can navigate the expensive mistakes, in the belief they’re simply a cost of doing business. Or you can build a team which includes people who are there to protect what you’ve built, and clear the way forward. I’m guessing you didn’t take unnecessary chances when you first started out, nor did you try to do more than you had to by yourself.

If you’re ready to clear a few obstacles from your path, HKMP is the scout you need to navigate the tax waters, and avoid the sharks.

Sales and Use Tax For Online Sellers After the Wayfair Case

It has been nearly three years since the U.S. Supreme Court decision was handed down that changed sales and use tax rules for online sellers. Known as South Dakota v. Wayfair, Inc., or simply as the Wayfair case, the ruling removed the physical presence requirement for sales tax nexus.

As a result, states can now require businesses to collect sales tax on goods and services sold in the state even if the business has no physical presence in the state. The ruling primarily affects online businesses and companies that sell via mail or telephone order (sometimes referred to as MOTO businesses).

Surprisingly, many companies have yet to adapt to the ruling. Often companies have heard of Wayfair but haven’t done anything about it.

Here are some of the most common questions clients have about how they can keep up with their sales and use tax obligations.

How does a company know where to file sales and use tax?

To know if it has a filing responsibility, a company needs to understand state law and how it applies to the company’s activities in the state.

Wayfair expanded states’ ability to require out-of-state companies to collect the state’s sales tax. Now, states can require out-of-state companies to collect the state’s sales tax if the company has sufficient “economic presence” in the state.

The most common economic threshold for a sales tax requirement is $100,000 in sales or 200 transactions in a state. The traditional parameters, however, such as whether a company has an employee presence or physical locations in the state, still apply. Complicating the situation, each state has its own parameters for determining when sales and use tax needs to be collected.

How can companies be sure they’re calculating sales and use tax correctly?

Calculating sales and use tax requires an analysis of state law and an understanding of the state’s sourcing rules. Depending on the state, some transactions are taxed all the time while some are circumstantially exempt.

Typically, a state will source a sale to the jurisdiction where the good is sold or delivered. Identifying that particular jurisdiction, however, can be tricky. Most states have a tax rate lookup system that enables companies to search for the correct jurisdiction and rate. However, it can be daunting when a company has thousands of customers with different addresses. Complete accuracy would require a check of every single transaction.

Alternatively, a company can invest in sales tax automation software. Whether that software produces the correct result depends on whether the correct information was input at the start.

What are the greatest challenges for companies that want to handle sales and use tax compliance in-house?

These companies face three main challenges: personnel, cost and risk. Calculating sales tax in-house requires at least one individual who is more than just knowledgeable about sales taxes. Companies that invest in such a person risk that person moving on and taking their knowledge with them. Also, calculating sales tax isn’t really a full-time job. Returns are typically due around the 20th of the month, so there’s a lot of downtime for an inhouse sales tax expert.

In addition, compliance and research software costs may be associated with handling sales and use tax in-house. Finally, if the person handling sales tax doesn’t rise to the expert level, there’s increased risk that the decisions made will turn out to be incorrect. This may lead to taxes, penalties and interest upon audit.

What tools can companies use to help with sales and use tax compliance?

Software can help, but the more complicated the software, the more expensive it gets. Also, software needs to be set up correctly and checked often to ensure its accuracy. This requires an expert.

Another option is to outsource the function or employ a hybrid solution. For example, a company could work with a sales tax expert on a quarterly basis to make sure filings are occurring in the right states, tax is being charged when it should be, and tax is being calculated correctly and for the right jurisdiction.

Although sales tax is often the smallest item on the invoice, companies should take it seriously. States will be motivated to go after out-of-state companies that haven’t been filing when they should have.

Contact us if you’d like assistance getting a handle on your sales and use tax obligations.