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A Small Business 2020 Year-End Check-Up with a CPA

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A Small Business 2020 Year-End Check-Up with a CPA

Guide

Brian-

My name is Brian Kim. I am a Certified Public Accountant and owner of multiple tax practices.

I want to give you the tax accountant experience without the tax accountant cost.

This is perfect for you if you are self-employed, an independent contractor, a sole proprietor, or a single-member LLC.

As a business, you want to make sure of the following:

  1. You’re saving as much money as possible
  2. You’re not missing any deductions
  3. You’re not going to get in trouble with the IRS

When the year ends, I’m going to need to see your income and your expenses for your business. You can have that information prepared by using software, such as QuickBooks or Freshbooks; or you can do it yourself using a spreadsheet, such as Microsoft Excel or Google Docs.

A couple with a checklist

Should I use a software? Or should I do it on a spreadsheet by myself?

The answer: it depends on your situation.

If you have a lot of transactions going on for your business, then a software such as QuickBooks or Freshbooks would be beneficial to you.

For example, if you have hundreds or thousands of expenses going through your credit cards or bank accounts each month, using software that automates all of those transactions would save you so much time.

If you don’t have too many transactions going on, it may be quicker and cheaper to just keep track of your income and expenses on a spreadsheet such as Microsoft Excel or Google Spreadsheets.

If I’m going to keep track of my expenses on a spreadsheet, how should I do it?

If you’re going to keep track of your expenses on a spreadsheet, my recommendation would be to create three columns. The column headers that you would list would be: the date of the expense, the amount of the expense, and the expense category.

In terms of categories, you can label them whatever you want. Don’t make them too broad and don’t make them too specific.

For example, let’s say if you buy ink for a printer. Don’t create an expense category labeled “printer ink expense,” that’s too specific.

My suggestion would be to label that category as “supplies” because it would not be too broad and it’s not too specific.

Common categories will include transportation, meals, supplies, contractors, legal, travel, etc.

After this conversation, you should be able to put together your income and your expenses, and see if you were profitable or not.

If your business is operating at a profit, then my question to you would be: “Did you send in estimated tax payments?”

Tell me about estimated tax payments…

Important information to know:

If you’re an employee, your employer takes out taxes from your paycheck.

If you’re self-employed, nobody’s taking taxes out of your paycheck and it’s your responsibility to do so throughout the course of the year.

What happens if I don’t send in estimated tax payments during the year?

I f you are making a profit and you don’t send in estimated tax payments, then you’re more likely than not going to get charged a penalty. The reason is because the IRS wants their money as you make it during the course of the year. The same reasoning applies to your state, if you’re in an income tax paying state.

You can make the estimated tax payments online on the IRS website and on your state’s tax website.

How much should I send in for estimated tax payments?

The answer: it depends on your income.

As a general rule, I would recommend sending in 20% to 30% of your profits to the IRS. On the state side, the tax rate depends on which state you live in.

Tax deductions

Now let’s talk about tax deductions

Don’t forget to deduct things like:

  • meals where you discuss business with a client or coworker
  • health insurance premiums
  • home office deductions
  • your vehicle use
  • your phone plan
  • your internet
  • electronics such as a new phone, tablets, laptops, computers, etc.
  • travel expenses
  • insurance expenses
  • education expenses

I know that this is just a very high level overview of the deductions available to you and a lot of deductions will depend on your profession. Make sure you subscribe to my YouTube channel: ClearValue Taxand turn on your notifications so that you can ask us more specific questions during our live streams.

You may have some expenses that are in the gray area. Those expenses may not be as clear-cut as the categories above. For a lot of those gray area expenses, it really depends on how much of a stretch it is and your level of risk tolerance.

Do I need to keep receipts of everything?

The answer: Yes, you should.

The more documentation you have to back up your expenses, the better protected you will be in the event of an audit by the IRS or the state. Please note that sometimes, credit card statements or charges on your bank statement may be sufficient.

With that said, audits are done on a case by case scenario. For example, if you don’t have a receipt for a postage expense, but you have a credit card charge at the United States Post Office, the IRS or state are less likely going to question that expense compared to a credit card charge at Walmart.

If the credit card charge simply says “Walmart”, then it’s not known whether you bought business related items or if the charge was for personal items.

Additionally, sometimes having the receipt is not sufficient in an audit. For example, an IRS agent questioned “travel” expenses for my client. The client had the receipts of the airfare and lodging but the IRS agent said that was not good enough and they wanted documentation of the business purpose such as brochures, emails, or itineraries.

Again, audits are done on a case by case scenario but the more documentation you have, the more protected you will be in the case you get audited.

Besides those deductions, what else can I do to pay less in taxes?

Besides tax deductions, you can save money with:

  • structuring
  • retirement plan contributions
  • avoiding penalties
  • timing

Structuring

If you’re making more than $100,000 dollars, then you should really consider structuring your business as an S-Corporation in order to save money on your Social Security and Medicare taxes.

If you’re making a $100K in profit, you’ll probably save about $7,500 in taxes with an S-Corporation structure.

A 401k Roth IRA

Retirement Plan Contributions

By contributing money into your retirement plan, you will receive a tax deduction.

You’re going to have to decide between a 401K and an IRA.

Generally speaking, especially if you don’t have employees, a solo 401K will give you a better bang for your buck.

The reason why I say this is that how much you can contribute into your retirement plan will depend on how much profit you make.

Based on the scenario that you make the same amount of profit, you can contribute more money with a 401K plan than with an IRA plan.

Avoiding Penalties

A penny saved is a penny earned. Make sure you’re sending in the correct amount of estimated tax payments to avoid underpayment penalties.

If you can’t file your taxes on time, make sure you file an extension to avoid late filing penalties. Even if you file an extension, make sure you pay your taxes on time to avoid late payment penalties. Filing an extension only gives you additional time to file your tax return, but payments would still be due by the original tax filing deadline.

Additionally, if you do incur one or more of these penalties, you will be charged interest. The same rule applies on the state level, if you’re in an income tax paying state.

Timing

If it’s late in the year, such as December, and if your cash flow allows, prepay any business expenses that you’re expecting in the next year so that you can claim the write-off for this tax year instead of waiting to experience that benefit next year.

This is the concept of the time value of money.

Thank you for reading through my free tax accountant consultation.

Please check back in our website as we post new articles frequently. Also, please subscribe to my YouTube channel: ClearValue Tax, where there are a lot of tax and personal finance videos. By subscribing, you can be notified when I’m broadcasting live and answering questions from subscribers.

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