Talking $$$ and Sense

Peace and blessings everyone. This is Kinji Ridley, “The Wealth Builder” bringing you your weekly Talking $$$ and Sense. All I can say is WOW!! The past 12 months this country has been a constant struggle with the invisible threat-Covid-19 aka “the Corona Virus”. Between multiple rounds of stimulus funding, THREE rounds of Paycheck Protection Program better known as “PPP” funding or Economic Injury Disaster Loans (EIDL), and Pandemic Unemployment Assistance (PUA), small business owners, gig workers, and independent contractors have no shortage of items required to make sure that they prepared with all of the correct documentation needed for no one’s favorite time of the year: TAX SEASON! With the first filing date coming up (March 15th for Corporations), here are some practical tips to get you ready for tax season.
Tip #1: Make sure you have the right type of business structure to match with your business activity.
This first tip is relevant to all businesses as each business structure has certain advantages when it comes to not only the amount of liability you as a business owner may face, but also the amount of tax liability you may incur. For instance, if you’re running a successful business that nets a hefty profit after all of the expenditures have been figured, if you’re a LLC or S-Corp and you don’t choose to have to be treated as a C-Corp for tax purposes, the profits will be included in your taxable income AND be subjected to self-employment taxes. While the attractiveness of the ease of filing one return and having your profits considered as your income can be a boon for many small business owners, that tax bill can be a headache. By electing to be treated as a C-Corp for tax purposes, you will have to file a separate return for the business, HOWEVER, you will not be personally responsible for tax owed on the net profit for the business. You will only be personally responsible for any income the business provides you (either earned income aka wages or via a dividend). NOTE: if you were to look at the wealthiest business owners tax returns, you’d see that this is how their income is being reported.
Tip #2: Utilize bookkeeping services or software to keep track of the financial activity
Over the past 20 years of preparing taxes for small business owners, you would not believe the amount of times someone has brought all of their receipts, invoices and tax documents to my office in a shoebox, plastic bag and even a plastic tote. They’ll have crumpled docs, notebooks filled with entries here and there and even things on cocktail napkins! While these items are what may be needed to both account and substantiate your expenses, these can prove to be both time consuming and problematic. A simple solution is to either invest in a good bookkeeping service or software. If you’re a fan of do-it-yourself, utilizing bookkeeping software to keep a good track record of your income and expenditures will prevent headaches at tax time. Using a bookkeeper-accountant (the two are not the same) will not only make the process of preparing for tax season easier, it will also make the preparation of your tax returns smoother and faster. Why? Because all of the documentation has been accumulated over the year, has been imputed into a system and will be exported into the tax preparation software. It will also make it easier to substantiate the information provided on a return in the case of an audit as the information is in a ledger system that can be provided anytime.
These were just two quick tips that I hope you’re able to incorporate and utilize in order to make this year and future tax seasons a little easier and less stressful.
Until next time, please continue to stay safe, positive and keep the faith.