Category Archives: Tax Issues

What Tax Documents Should You Keep?

And which ones should you shred?

If your filing cabinet is bursting at the seams, you’re not alone. As a small business owner, you have a lot of paperwork to keep track of – everything from business licenses, employee records, lunch receipts – the list goes on.

Some of the more challenging records to manage are your business’ tax documents and all of their supporting paperwork. Navigating tax document requirements is complicated and is often unchartered territory for a small business.

As a default, many business owners end up unnecessarily saving every last receipt for years and years. Or, they become overwhelmed and throw away important information.

Properly storing tax documents comes down to these four keys to success.

  • Know how long to store your tax documents
  • Understand which ones to store
  • Understand which ones are safe to shred
  • Devise a plan to do things right

How long should you hold onto tax documents?

The IRS can audit your return for up to seven years after you file if they suspect tax filings were made inaccurately or if you claimed a deduction you didn’t deserve. The period of limitations – the period of time you have to amend your tax return – expires three years after a return is filed. So, hang onto your tax returns and all supporting documents for at least seven years.

Which must stay and which can go?

Tax rules pertaining to financial records seem to change every year. The guide below will help you better understand the latest requirements and break down which documents you should store, which you can shred, and which belong under lock and key.

Store paper copies of these six documents.

The following documents are those you’ll want to keep literal tabs on – print, file and store these six tax documents every year.

  1. Form 1040
    Small businesses should store 1040 forms and any other supporting documentation for a minimum of three years.
  2. Schedule K-1
    Small businesses that file as an S-Corp or Partnership need to hold onto schedule K-1 documentation for a minimum of six years to show evidence of partnership shares.
  3. Employee Records
    Store your employee records, payroll reports and other similar employee record documentation for a minimum of seven years to be safe.
  4. Partnership Agreements
    It’s critical to maintain all partnership or LLC partnership agreements, and any amendments to those agreements, in hard copy for life of the partnership.
  1. S-Corp Acceptance Letters and Form 2552
    Maintain a copy of both letters and forms indefinitely if you have an S-Corp.
  2. Required Licenses
    Maintain hard copies of all state and local licenses that are required for you to operate your business.

Store these electronically. 

Not every business record requires you to maintain a physical paper trail. If you’re like many businesses and prefer to maintain your records and documentation electronically, you can keep these documents on a server or on the cloud.

  1. Transaction Statements
    Bank or credit card statements or other similar transaction statements are your back-up documentation to most, if not all, of your payables. Paper or electronic transaction statements should be filed and stored for at least three years after the filing of the transaction’s tax season.
  2. Legal Agreements
    Contracts or legally-binding documents should be stored for the life of the contact, and for years after in the event that those documents need to be revisited.
  3. Federal and State Tax Filings
    Maintain your electronic records for a minimum of three years – more if your business owns property, has employees, or has any inaccurate filings from the past.

If you do decide to store these documents electronically, it’s critical to the safety of your business that you protect your information with trusted, proven data security. A recent SCORE Webinar, ‘What Small Businesses Need to Know About Cybersecurity,’ touches on the back-up and recovery of sensitive documents.

Whatever electronic or cloud-based storage option you choose, it’s worth your time to research that platform’s data security and their process for safeguarding your business, as well as recovering your data should there be a security breach. Check out this list of business cloud storage providers to help you determine the safest way for your business to store sensitive information electronically and keep your tax documents and other business records in order.

These you can shred. 

There are several types of business records that do not need to be physically or electronically stored. In fact, some records containing personal information are many times better shredded than not. This excludes any tax documentation, legal documents, and most of the records listed above.

Always check with your financial advisor and accountant before you begin to shred what may be important documentation for your business to maintain. Typically, though, most businesses can shred non-essential documentation that lists personal information.

If you’re still not sure whether to keep those business records or store them away, even after the period of limitations has expired, hanging onto them for a while longer is never a bad option. And, digitizing your records will make it even easier to store past documents, taking the stress off of your filing cabinet.

Create a system to keep things organized.

Now that you’ve organized your business’ financial records and know which documents to store as physical copies, which ones can be stored electronically and which ones can be shredded, the next step is to come up with a system for filing and storing the right documentation. 

If you have a question about your business records, reach out to a SCORE mentor today!

Top 10 bookkeeping mistakes by small businesses.

couple working on finances

From one-person entities to Fortune 500 companies, no business can escape the dreaded task of bookkeeping. While it’s definitely not one of the more glamorous parts of the job, bookkeeping is at the heart of small business success, which means errors can be crippling.

To avoid the financial headaches that come with bookkeeping mismanagement, it’s important first to be aware of the pitfalls that can ensnare you. Continue reading

Sole Proprietor vs. Single-member LLC

man in front of a startup sign

New entrepreneurs have a long list of to-dos when starting their businesses. Among the tasks to check off that list is deciding their business structure. For small businesses with a sole owner and no (or very few) employees, the two most popular options are:

  • Sole proprietorship
  • Single-member LLC (Limited Liability Company)

So, which one might be the best choice for your business?

I advise you to consider talking with an attorney and accountant to dig into the advantages and disadvantages of each for your specific situation.

In the meantime, let’s take a look at some of the basic characteristics of each so that you’ll have some fundamental information as you start your research. Continue reading

Business Structure: Which works best for you?

business ownershipWhen you start a new business, one of the first decisions you’ll have to make is how to structure your company. This choice can be critical to the future health of your business. Taking time up front to consider the pros and cons of each possible structure will likely save you many headaches in the future. In certain cases, it can mean the difference between your business’s success or failure.

Below you’ll find the upsides and downsides to some common business structures: Sole Proprietorships, LLCs, C-corporations, and S-corporations.

Sole Proprietorship

Upside:

  • Easy to Form – Sole Proprietorships are the easiest, most common, and least expensive business structure. A person is essentially a walking, talking sole proprietorship in waiting. All you need to do is sell something—a product, a service, anything—and boom … suddenly you’re a sole proprietor. Aside from obtaining any required business licenses, a Sole Proprietorship requires no paperwork and no filing fees.
  • Decision Making – As suggested by the name, you are the sole decision-maker. You run your business the way you want to run your business, and you don’t have to ask permission from anybody.
  • Taxes – The IRS doesn’t view your Sole Proprietorship as a separate tax entity, so there’s no special or additional tax paperwork. You’ll simply file your taxes on the same 1040 form as any other individual.

Downside:

  • Liability – The lack of separation between you and your business leaves you liable for all debts and legal claims against the business. You can even be responsible for your employees’ actions (if you have employees) while they are on the job.
  • Funding – Sole Proprietorships lack a specific structure for raising funds. You have no stock to sell, no set percentages to offer, and banks are often reluctant to offer loans to sole proprietors. Continue reading

Washington State’s new paid family and medical leave.

by Johnnie Hawkins, CPA
Parker Mooers & Cena, Silverdale

Starting in 2020, Washington will be the fifth state in the nation to offer paid family and medical leave benefits. This benefit offers partially paid leave to care for yourself or a loved one in times of serious illness or injury, to bond with a new child joining your home through birth, adoption or foster placement, and for certain military-connected events if you have a family member in active duty service.  This isn’t like paid sick leave; you will file your claim with the Employment Security Department (ESD), and your payment will come from ESD. Typically, you’ll have access to up to 12 weeks of paid leave.

Premium collection starts on Jan 1, 2019. In 2019, the premium is 0.4% of wages, or $3.85 per week for someone making $50,000 a year. Employers can either pay the full premium or opt to withhold a portion of the premium from their employees. Employers who choose to withhold premiums from their employees may withhold up to 63 percent of the total premium, or $2.44 per week for an employee making $50,000 annually. The employer is responsible for paying the other 37 percent. Businesses with fewer than 50 employees are exempt from the employer portion of the premium but must still collect or opt to pay the employee portion of the premium.

You can learn more about the program at www.paidleave.wa.gov/employers or contact us with questions at 360-692-8808. Continue reading

Tax Time: A Guide to Completing the Schedule C

 

Before the cold sweat and anxiety of tax season gives you a clammy embrace, make sure you know what you need to complete your Schedule C Tax Return.

tax time clockIf you operate a sole proprietorship or single-member limited liability company (LLC), tax time can be worrisome, especially if you’re doing your own taxes.

A little preparation and you’ll likely find there’s nothing much to worry about.

What is the Schedule C Form?

At its core, the Schedule C is nothing more than a profits and losses worksheet for sole proprietors and single-member LLCs (as long as the LLC hasn’t elected to be taxed as a corporation).

Before jumping into the details of Schedule C, it’s important to note that if you have $5,000 or less in business expenses, you may be able to file a Schedule C-EZ instead. Schedule C-EZ is a similar but much simpler form. It’s worth taking a moment to look at the list of requirements at the top of the form to see if your business qualifies.

The rest of this article, however, focuses on the more complex Schedule C. Continue reading

Should you use crowdfunding to help finance your business?

Should You Use Crowdfunding to Help Finance Your Business?

Starting a small business can be costly, but did you know that you can use crowdfunding to help alleviate some of those costs?

Our latest infographic, “Is Crowdfunding Right for Your Small Business?,” shows what types of crowdfunding are available and the different benefits of each.

In 2018, the United States alone raised $1,038,000 in crowdfunding. This amount is expected to show an annual growth rate of 10.4%, resulting in a total amount raised of $1,298,000 by the year 2022. From a global perspective, that amount is even higher – China raised $7,463,000 in 2018!

What Types of Crowdfunding Are There?

There are three types of crowdfunding options available for your business: reward-based, equity, and debt.

Continue reading

Self-Employment Tax 101 for Small Business Owners

When you’ve made the transition from working for someone else to being your own boss, you gain the freedom to create your own professional path. You also get additional responsibilities, like paying self-employment tax.  

Self-employed individuals are required to not only submit the income tax they owe to the federal, state, and local governments, they must also submit self-employment tax to the IRS. 

Who Is a “Self-Employed Individual”?

The IRS defines a self-employed individual as someone who conducts business as a sole proprietor, independent contractor, member of a partnership, or as someone who otherwise is in business for herself or himself. 

What is Self-Employment Tax?

According to IRS.gov, “Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.”

Employees of a company pay half of their Social Security and Medicare taxes (usually withheld from their wages) and the employer pays the other half. However, as a self-employed individual, a business owner must remit the entire amount.   Continue reading

Personal Property Tax: The forgotten tax for many small businesses?

by Joe Heinrich, Volunteer Business Mentor, Seattle SCORE

Most small business owners are perfectly aware of the Federal, Washington and city taxes they are obliged to pay. However, the one that tends to fall through the cracks is the local Personal Property Tax on businesses by the county in which the business is located. This article explains what personal property is, how to self-report a business’s personal property, how the tax is assessed and how much a business may have to pay in Personal Property Tax.

What is “personal property” of a business?

Taxable Personal Property typically includes items used by a company to conduct business. Examples of personal property which may be assessed include furniture, fixtures, electronic equipment, telephones and machinery. Leasehold improvements and leased equipment are also included as personal property. However, personal property does not include property which is attached to a building or to the land which a business owns as that is considered “real property”.

Exempt personal property includes inventory (i.e., items owned to be resold or used as raw materials to products to be manufactured and sold) and vehicles used on the roadways.  Continue reading

What are the qualified business deductions under the Tax Cuts and Jobs Act?

tax deductionsThe Tax Cuts and Jobs Act (TCJA) created a new 20% deduction for pass-through entities. Though the IRS has not fully interpreted the new rules—which won’t go into effect until the 2019 tax season—many of the implications are clear. This article’s companion piece examined what qualifies as a Pass-Through Entity (PTE).

This blog hopefully sheds some light on how PTEs will be impacted by the new law.

Why a Deduction for Pass-Through Entities?

Since their inception, pass-through entities have been a popular choice for entrepreneurs, especially after the 1986 Tax Reform Act (TRA). Better known as President Reagan’s second tax cut, the TRA was passed by Congress to simplify the tax code and adjust the federal tax brackets.  Continue reading