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Why Business Structure Matters

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When you start a business, there are endless decisions to make. Among the most important is how to structure your business. Why is it so significant? Because the structure you choose will affect how your business is taxed and the degree to which you (and other owners) can be held personally liable. Here’s an overview of the various structures.

Sole Proprietorship

This is a popular structure for single-owner businesses. No separate business entity is formed, although the business may have a name (often referred to as a DBA, short for “doing business as”). A sole proprietorship does not limit liability, but insurance may be purchased.

You report your business income and expenses on Schedule C, an attachment to your personal income tax return (Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.

Limited Liability Company

If you want protection for your personal assets in the event your business is sued, you might prefer a limited liability company (LLC). An LLC is a separate legal entity that can have one or more owners (called “members”). Usually, income is taxed to the owners individually, and earnings are subject to self-employment taxes.

Note: It’s not unusual for lenders to require a small LLC’s owners to personally guarantee any business loans.

Corporation

A corporation is a separate legal entity that can transact business in its own name and files corporate income tax returns. Like an LLC, a corporation can have one or more owners (shareholders). Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed.

If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This structure generally avoids federal income taxes at the corporate level.

Partnership

In certain respects, a partnership is similar to an LLC or an S corporation. However, partnerships must have at least one general partner who is personally liable for the partnership’s debts and obligations. Profits and losses are divided among the partners and taxed to them individually.

5 QuickBooks Online Reports You Should Run Regularly

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There are numerous QuickBooks Online reports that you should be consulting at regular intervals. But you need these five at least every week.

 

QuickBooks Online’s Dashboard, the first screen you see when you log in, provides an effective overview of your company’s finances. It contains at-a-glance information about your recent expenses, your sales, and the status of your invoices. It displays a simple Profit and Loss graph and a list of your account balances. Scroll down and click the See all activity button in the lower right and your Audit Log opens, a list of everything that’s been done on the site and by whom.

 

You can actually get a lot of work done from this page. Click the bar on the Invoices graph, for example, and a list view opens, allowing you access to individual transactions. Click Expenses to see the related Transaction Report. Below the list of account balances, you can Go to registers and connect new accounts.

 

Other Pressing Questions

 

The Dashboard supplies enough information that you can spot potential problems with expenses and sales, accounts, and overdue invoices. But you’re likely to have other tasks that require attention. How’s your inventory holding up? Are you staying within your budget? How about your accounts payable – will you owe money to anyone soon?

 

QuickBooks Online offers dozens of report templates that answer these questions and many more. If you’ve never explored the list, we suggest that you do so. It’s impossible to make plans for your company’s future without understanding its financial history and current state.

QuickBooks Online has many reports that can provide real-time, in-depth insight into your company’s financial health.

 

Comprehensive and Customizable

 

When you click Reports in your QuickBooks Online toolbar, the view defaults to All. The site divides its report content into 10 different sections, including Business Overview, Sales and Customers, Expenses and Vendors, and Payroll. Each has two buttons to the right of its name.

 

Click the star, and that report’s title will appear in your Favorites list at the top of the page. This will save time since you’ll be able to quickly find your most often-used reports. Click the three vertical dots and then Customize to view your customization options for that report (you’ll have access to this tool from the reports themselves).

 

Necessary Knowledge

 

You can, of course, run any report you’d like as often as you’d like. Most small businesses, though, don’t require this frequent intense scrutiny. But there are five reports that you do want to consult on a regular basis. They are:

1. Accounts Receivable Aging Detail. Displays a list of invoices that haven’t yet been paid, divided into groups like 1-30 days past due, 31-60 days past due, etc.

2. Budget vs. Actuals. Just what it sounds like: a comparison of your monthly budgeted amounts and your actual income and expenses.

 

Warning: Some reports let you choose between cash and accrual basis. Do you know the difference and which you should choose? Ask us.

You can customize QuickBooks Online reports in several ways.

3. Unpaid Bills. Helps you avoid missing accounts payable due dates by displaying what’s due and when.

4. Sales by Product/Service Detail. Tells you what’s selling and what’s not by displaying date, transaction type, quantity, rate, amount, and total. 5. Product/Service List. An accounting of the products and/or services you sell, with columns for price, cost, and quantity on hand.

 

Customization, Complex Reports

 

Note that there’s a category of reports in QuickBooks Online named For My Accountant. That’s where we come in. The site includes templates for reports that you can run yourself, but that you’d have difficulty customizing and analyzing. These standard financial reports—which, by the way, you’ll need if you create a business plan or try to get funding for your business—include Balance Sheet, Statement of Cash Flows, and Trial Balance.

 

You don’t need to have these reports generated frequently, but you should be learning from the insight they provide monthly or quarterly. We can handle this part of your accounting tasks for you, as well as any other aspect of financial management where you need assistance. Contact us, and we’ll see where we might help provide the feedback and bookkeeping expertise that can help you make better decisions for the future of your business.

 

Social media posts

 

QuickBooks Online reports pick up where the Dashboard leaves off, providing dozens of templates ready for your company data. Do you know how to best use them?

 

You can create some QuickBooks Online reports using either cash or accrual basis. Do you know the difference? Ask us if you don’t.

 

Overwhelmed by the number of reports QuickBooks Online offers? Click the star next to the ones you run most often, and they’ll appear in Favorites.

 

QuickBooks Online contains several reports in a section titled For My Accountant. These are complex financial reports that we can run and analyze for you.

Payroll Taxes: Who’s Responsible?

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payroll conceptAny business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

  • An officer or an employee of a corporation
  • A member or employee of a partnership
  • A corporate director or shareholder
  • Another person with authority and control over funds to direct their disbursement
  • Another corporation or third-party payer
  • Payroll service providers

The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working With the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to a tax professional if you need to know more about the requirements.

Contact us at 801-553-1120 today. When you schedule a consultation, you’ll receive a book called The Great Tax Escape as our special gift.

Grow Your Wealth with Tax-Advantaged Income

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Businessmen handshakeWhen it comes to minimizing taxes, most people focus their efforts on maximizing deductions. They look for opportunities to reduce their taxable income by taking advantage of tax laws that allow a wide variety of expenses to be claimed as costs of doing business. This technique is a critical component of your comprehensive tax strategy, but it isn’t the only opportunity to bring your tax bill down. Think bigger, by looking for ways to shift current income or generate new income that enjoys favorable tax treatment.

Your Certified Tax Coach is an expert at thinking outside the tax box to reduce your tax liability. You can partner with these professionals to identify methods of creating tax-deferred or tax-free income to grow your wealth more quickly.

The Trouble with Traditional Investment Income

Average taxpayers rely on traditional financial products for saving and investing. Examples include standard savings and money market accounts, certificates of deposit (CDs), mutual funds, and brokerage accounts. The problem is that income earned from interest, dividends, and increased share value is subject to fairly high tax rates. Certainly, these options play an important role in your financial plan, but there is no need to rely on them exclusively. Instead, maximize use of tax-deferred and tax-free programs to reduce your total tax liability.

Options for Tax-Deferred Income

It’s no secret that it is getting harder to achieve the retirement lifestyle you want. Setting money aside to ensure you can enjoy the years after you leave the workforce is a top priority. The good news is that there are retirement savings programs specifically designed to make this goal more achievable. They offer an opportunity to earn tax-deferred or tax-free income, which lowers the total amount you hand over to the IRS.

Traditional IRAs, certain employer-sponsored retirement programs, and specific types of annuities enjoy tax-deferred status. Essentially, you contribute a portion of your current income on a pre-tax basis. You don’t pay income taxes on that amount today. Instead, taxes are assessed when you eventually take distributions.

This benefits you in two ways. First, your money stays with you longer, so you can generate interest on funds that would otherwise be lost to tax. Second, most people find themselves in lower tax brackets after retirement. That means you pay less later than you would if you paid today.

The Tax-Free Alternative

If your goal is to generate income that is completely free from taxes, you have options. Certain types of life insurance, specific annuities, and retirement savings plans like the Roth IRA make it possible to eliminate taxes on a portion of your income. Unlike tax-deferred plans, your contributions to these types of programs are made from after-tax dollars. In other words, you pay income tax on the funds you set aside in these accounts in the same year that income is earned. However, once you have paid that initial income tax, you don’t owe another penny. Any increase in value from interest, dividends, and similar is completely tax-free.

The bottom line is that minimizing taxes is more than finding deductible expenses. You can drive your tax bill down by incorporating a variety of techniques into your overall strategy. Shifting income or creating new income that enjoys favorable tax treatment is another tool you can use to reduce taxes and grow your wealth.

Learn more about transitioning to tax-advantaged income by working with a Certified Tax Coach.

To set up your consultation, contact us at 801-553-1120 today. When you schedule a consultation, you’ll receive a book called The Great Tax Escape as our special gift.

Why You Need Year Round Tax Planning…

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Tax Planning text on Note pad…and tips on how to do it.

The IRS may have granted us a reprieve for filing our income taxes this year, but we hope you’re well into your preparation for 2020 income taxes – or finished with them. Tax planning shouldn’t be a task on your to-do list every April. It should start January 1.

You won’t know what legislation Congress will pass before December 31 that will affect your taxes, but the planning and recordkeeping you do throughout the year will help minimize last-minute panic and frustration. It can also reduce your total tax obligation.

There are other reasons why you should treat tax preparation as a part of your overall financial planning. As the year progresses and you monitor your income and expenses, you can make adjustments that will have impact on your tax bill.

If you’re filing an individual return, you need to learn how major life events like marriage, children, unexpected unemployment, a new side gig, or a change in home ownership will affect you, and how to adjust accordingly. If you have a small business, this attention to money in and money out is even more critical. You don’t want to come to the end of the year and discover that your income is significantly higher than the total of your expenses, and you haven’t paid nearly enough in estimated taxes.

QuickBooks tips

If you’re starting a new side gig or sole proprietorship in 2021, you’ll be filing an IRS Schedule C along with your Form 1040 (above image from 2020 Schedule C).

Waiting until the last minute is unwise for other reasons. For example, you may learn that you’re missing critical documents like receipts and official tax forms from employers. Further, what happens if an emergency comes up in early April and you’re unable to finish? Yes, you can file for an extension, but that also requires that paperwork and possibly a payment be submitted by the deadline.

Year-round tax planning gives you the opportunity to control what you can while anticipating what could happen. Sometimes, tax legislation comes early in the year, like the American Rescue Plan did in 2021. You probably already know how that will affect your 2021 taxes. If you’re conscientious about your bookkeeping throughout the year, you’ll be in a better position to gauge how both tax law changes and your own unfolding financial situation might alter your tax obligation.

How Do You Plan for Taxes?

Here’s the best answer we can give you to that question: Treat every day like it’s April 14. You don’t have to scrutinize every single expense and determine its tax implications (though you should, for major purchases), but there are a number of ways you can prepare.

Consider using a financial software program or website, or at least Excel. If you’re filing individually, you can start tracking your income and expenses in a free service like Mint or pay to use, for example, Quicken or Simplifi. These applications allow you to import transactions from your financial institutions, categorize them so you know what is tax-related, and run reports that can help you in your tax preparation.

Develop a manual system for organizing your taxes. If you don’t want to go digital, visit an office supply store and invest in suitable paper or a ledger book, file folders, and anything else that you can dedicate to only tax-related documentation. Keep all receipts in one place.

Keep abreast of tax legislation. Tax law changes are reported in newspapers and magazines, on websites, and on television news. Pay close attention, especially to those that will affect you.

Change your withholding if necessary. If you’re a W-2 employee and you’re getting large refunds, talk to a benefits representative at your company about changing the number of allowances you claim. Refunds are nice, but you could be putting that money to use yourself during the year.

Look at IRS tax forms. If you’re taking on a side gig or starting your own small business as a sole proprietor in 2021, you’re going to want to acquaint yourself with the IRS Schedule C. You can look at the 2020 version now to see what information you’ll have to supply. Pay close attention to the types of expenses that are deductible and track them carefully. You might even look at the instructions.

Consult with a professional. This is an especially good idea if you’re starting a new business this year and/or you’ve experienced life changes that could affect your taxes. We can help you come up with a plan to prepare for tax filing throughout the year. With that in hand, we’d also be happy to do your tax preparation for you when the time comes. Contact us, and we’ll schedule some time to meet.

Request your consultation today by calling us at 801-553-1120. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.

What You Need to Know About Incorporating Your Business

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Confident young man at his deskIncorporating your small business the right way can bring tax benefits and protect your personal assets. Read on to learn more about what incorporation is, why you might want to incorporate, and how an accountant can help you navigate the questions that come with selecting the right business structure.

What is Incorporation?

When discussing “incorporation” in terms of a business, the term denotes how the business is organized or structured.

Regardless of the structure you choose for your business, incorporation is a legal process that brings your business into existence. The following are business structures commonly used in a small business.

Sole proprietorship

If you conduct business as an individual and do not register as any other type of business, you are a sole proprietor. With this business structure, your personal and business assets and liabilities are not separate. Sole proprietorships are relatively simple structures and a good choice for low-risk businesses or entrepreneurs testing a business idea. However, this business structure does not offer liability protection, so the owner is personally responsible for business debts and obligations. Another drawback is that it can be more challenging to get bank financing and business credit with this structure.

Partnership

When two or more individuals own a business together, the simplest structure is the partnership. There are limited partnerships (LP) and limited liability partnerships (LLP). LPs consist of a general partner with unlimited liability; the remaining partners have limited liability and limited control in the business. The partner without limited liability pays self-employment taxes. In LLPs, every owner has limited liability, protecting them from business debts and the actions of the other partners.

Partnerships can be a good choice for multiple-owned businesses and professional groups like physicians, attorneys, and veterinarians.

C-corp

Sometimes called a C-corp, a corporation is a separate legal entity from the business owner(s). The benefit of a corporation is that they offer the most robust protection for owners from personal liability; however, it costs more to form a corporation than it does to establish other business structures, and business profits are taxed at the personal and corporate level. Further, the record-keeping, operations, and reporting are more involved for a corporation. This structure is usually best for higher-risk businesses or those that raise money or plan to become publicly traded in the stock market.

S-corp

An S-corporation, or S-corp, is designed to avoid the double-taxation of a C-corp. This avoidance is possible because, in an S-corp, profits and some losses go through the owner’s personal income to avoid corporate taxes. S-corps are taxed differently in different states, so it is essential to have your accountant help you understand the guidelines and laws in your state.

LLC

A limited liability company (LLC) has the benefits of a corporation and a partnership. The owner is protected from personal liability in situations like bankruptcy or lawsuits and can avoid corporate taxes because profits and losses can pass through their personal income. However, there are self-employment taxes and Medicare and Social Security contributions since LLC members are considered self-employed.

An LLC is an option for owners with significant assets that need protection and who want the benefit of a lower tax rate than a corporation pays.

How to Incorporate

When you’re ready to incorporate your business, consult your trusted CPA or accountant so that you have a full view of what incorporating will mean for you and your business initially and for years to come.

To set up your consultation, contact us at 801-553-1120 today. When you schedule a consultation, you’ll receive a book called The Great Tax Escape as our special gift.