No time of year puts quite the same amount of panic into a factoring business owner as tax time. Properly filing and paying your business taxes is one of the most important things you will do all year, and can also be one of the most complicated. With that in mind, we have five tips to keep your tax season running smoothly.
Tip #1: Get the right person to prepare your taxes. (Hint: it may not be you.)
It can be tempting to save money by filing your business taxes yourself – after all, who knows your factoring business better than you?
Before you break out the pens and calculators, though, think about whether you have the time and the tax knowledge necessary to accurately report all of your earnings and deductions. Mistakes can cost you far more in the long run, not only from audits and filing penalties but also from missed deductions.
If you are a new business owner or are not unfamiliar with accounting and tax law, it may be worth the investment to have your taxes professionally prepared. You will gain peace of mind by outsourcing this cumbersome task and knowing it is done properly, and you can also deduct your tax preparation costs in the following year. (We will cover more deductions below.)
However, if your business is small enough you may be able to prepare your own taxes with the assistance of business tax software (such as QuickBooks or TurboTax). These online and software services will guide you through the preparation and filing process, identify necessary reporting and available deductions, and will verify the accuracy of your return in the event of an audit. These costs are also tax-deductible.
Tip #2: Make sure your paperwork is in order.
If you choose to file your own business taxes you can access every form you need on the IRS Web site. At the very least, you will need to file your business income tax and estimated tax; other taxes you may need to file include:
• Self-employment tax – If you are a sole proprietor, your self-employment tax covers your contribution to social security and Medicare so you retain eligibility for these services.
• Employment taxes – If you have employees you will need to file social security and Medicare taxes on your payroll; federal income tax withholding; and federal unemployment tax.
• Excise tax – Certain products, services, and equipment are subject to excise taxes. Consult your tax preparer or the IRS Web site for more guidance.
Regardless of who prepares your business taxes, you will also need company financial documents to show your earnings, employee information, and your quarterly returns to ensure you have paid the appropriate taxes throughout the previous year.
Tip #3: Don’t forget deductions!
There are numerous business deductions available to lower your tax liability, such as:
• Home office – You can claim the physical space you use to conduct your business or store inventory, subject to certain rules. There are two ways to calculate the home office deduction; either way, it also includes applicable utilities for the space. (For example, you can deduct a portion of your electricity and heating bills, but not necessarily your water bill.)
• Marketing – Any costs you incur for marketing your business can be deducted on your taxes. Web hosting, pay-per-click credits, business cards and mailing materials may all be claimed as marketing expenses.
• Technology – If you use your cell phone or laptop to conduct business, you can deduct the cost of the hardware (either new or depreciated) as well as the cost of your cell phone and Internet services.
• Business travel – Flights, hotels, and mileage for business trips are all tax-deductible, as is a certain amount of depreciation on your personal vehicle if you use it for business as well.
• Legal costs – Not only can you deduct tax preparation costs, as we’ve discussed, but you can also deduct other legal costs associated with your business. If you work with legal professionals or seek a business lawyer’s advice throughout the year, many of those expenses are tax-deductible.
Tip #4: Keep track of your receipts…all of them.
“Trust and verify” is a keystone of the factoring industry, and you should use the same approach when filing your taxes. Save, file, and record receipts for every business purchase you make or expense you pay in a system that makes them easily accessible at tax time. In the event you receive a visit from your friendly neighborhood IRS auditor, these receipts will provide fast verification that you are entitled to every deduction you take.
To record mileage, use a notebook to record miles traveled (and, for a vehicle that is also personal-use, whether the travel was business-related). If you are digitally inclined, you can use a spreadsheet or download one of many apps available that will keep track of your mileage for you.
Deductions are reported by category, so you may choose to file your receipts that way. Another option is to file them by month and sort them into categories when it is time to file your taxes.
Tip #5: Understand estimated taxes
Whether you are filing as a sole proprietor or as a corporation, it is critical to be aware of estimated taxes and whether you are required to pay them.
Sole proprietors are required to pay estimated taxes when the expected tax liability is $1,000 or more. Use IRS Form 1040-ES to estimate and deposit your estimated taxes. Be sure to estimate as accurately as possible; when in doubt, it is best to overestimate your future liability. Corporations must pay estimated taxes with an expected liability of $500 or more and must use Form 1120-W to file and deposit.
If you are required to pay estimated taxes your payments must be received or postmarked by the established due date for each of the year’s four periods, which differs whether you operate on the calendar year or the fiscal year. Late payments are subject to a penalty regardless of whether you will receive a refund from your annual return.
Use these tax tips to prepare and file taxes for your factoring business before the April 15th deadline.
Happy Tax Season to all!
About the Author: Factor Finders specializes in finding factoring companies that can fund difficult-to-place deals. Our services help other factoring brokers capitalize on commissions that might otherwise be lost.
If you have a prospective transaction that you cannot find a funder then contact us at FactorFinders.com. We’ll find the factor for you and split commissions 50-50.
Article worth million dollars. You have explained the basic things which should be kept in mind by everyone in a very simple way. If all the factors that you have mentioned are worked on, nobody will ever face a IRS inspection. You must also explain the necessity of QuickBooks as well.