Tax Accountant – Newport Beach CA

Don’t Let Taxes Trip You Up

The last thing you need as a small business owner is to have to spend time unraveling tax problems you could have avoided. There are many tax issues that can trip up small business owners — here are a few.

Mixing Business and Personal

Keeping your personal bank and credit card accounts separate from your business accounts isn’t always easy. But “commingling” business and personal accounts creates a recordkeeping nightmare. When it’s tax time, you may not be able to identify all the appropriate business expenses. As a result, it could be difficult to accurately determine your business income and you might lose deductions.

Not Keeping Track

Keeping track of business expenses can be a challenge. However, you’ll need proof of purchase for any expenses you plan to deduct. Proof can be a canceled check (or legible image of the check) or a credit card, debit card, or electronic funds transfer (EFT) statement showing the payee, the amount of the purchase or transfer, and the transaction date.

You’ll also need an invoice or a receipt identifying the purchase. If the business purpose for the purchase isn’t immediately obvious, attaching a note of explanation or writing directly on the invoice or receipt can save time later should questions arise. There are specific substantiation requirements for business travel and entertainment expenses. Check with us if you have questions.

Making the IRS Wait

The employment taxes you collect should always be remitted to the IRS in a timely manner — without exception. As an employer, you’re responsible for withholding federal income tax and FICA (Social Security and Medicare) taxes from your employees’ wages and remitting them, along with your company’s FICA contributions, to the IRS. Penalties for noncompliance can be harsh.

Misclassifying Workers

Misclassifying workers as independent contractors when they are actually employees can be a thorny issue because they are treated differently for income-tax withholding and employment-tax purposes.

 

> Employees: You must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes.

> Independent contractors: You’re not required to withhold income tax, and the worker is fully liable for his or her own self-employment taxes. FICA and unemployment taxes do not apply.

 

It’s important to get it right to avoid penalties. Generally, the more control you have, the more likely it is that the worker is an employee.

 

Taxing Decisions for Orange County Residents

Do you use your car for business driving or maintain an office in your home? In either situation, you may have a choice of methods for figuring your tax deduction.

Car Expenses

When you use your car for both business and personal purposes, you have to keep track of your mileage so that your car expenses may be divided between the two purposes. Only the business portion is deductible. That much is a given. The choice involves whether to use the actual amounts you spend on gas, oil, repairs, insurance, etc., to figure your deduction or the IRS standard mileage rate. Usually, you will want to use actual expenses if it produces a larger deduction. But, if keeping receipts is a burden, the simpler standard mileage rate may be best. (Requirements apply.)

Home Office Expenses

There are strict requirements for claiming the home office deduction, but it can be a tax saver if you qualify for it. Assuming you do, you’ll have to decide between deducting actual expenses allocated to the home office (usually based on square footage) or using a simplified method (deducting $5 per square foot for up to 300 square feet of office space). Again, you will usually want to use the actual expense method if it produces a larger deduction. But, if you want to minimize recordkeeping and don’t want tax complications when you sell your home, you may lean toward the simplified method.*

 

If you want to be more aggressive lowering your tax obligations but stay within the legal limits, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a Southern California CPA Accounting Firm with offices in Newport Beach and San Clemente CA.  Our clients are located throughout Los Angeles and Orange County.

 

 

* Capital gain attributable to depreciation of your home will be taxable. Unlike with the actual expense method, there is no depreciation claimed when using the simplified method.