Starting your own business or service can be an exciting, yet confusing time. To make it easier, we recommend working with us, as well as a financial planning team, to get off to a good start. We also recommend asking these ten questions to a professional:
#1: What should be in a basic business plan?
A business plan should outline each detail of your company including who will run it, how much you’ll charge, and what you expect to earn. Putting time into creating a thorough business plan is important. Work with your team to ensure your plan is accurate and represents your business well.
#2: Who will you need to pay taxes to?
Your local jurisdiction and state have specific taxation requirements. You’ll likely have to pay taxes on sales, but also costs associated with payroll. Ensure your accountant not only talks to you about who you need to pay, but payment deadlines as well.
#3: What is a projected cash flow for the business?
How much cash does your company need to keep on hand? The key here is to be able to anticipate how much it will cost you to operate your business. Most companies should not expect to have positive cash flow for at least a year, often longer. Your professionals can help you decide what your cash flow projections are.
#4: How much of an investment do you need to put into your company right now?
Your financial team can help you project the cost of setting up your new business. This will include costs related to establishing the physical business and paying for supplies. Your initial investment generally will be the highest amount put into the company by the founder, but it changes significantly from one company to the next.
#5: What is your break-even analysis?
This may be an important question to ask early on. How much do you need to make to break even? You’ll want to talk to your financial team about the timeline for this and what can be done to help ensure you break even as soon as possible.
#6: What liability insurance do you need?
While most tax professionals don’t offer recommendations here, having adequate policies to cover potential loss is important. Work with your team to ensure you have comprehensive protection to minimize risks against your company’s financial health.
#7: What will interest cost you?
Interest on loans is not something to overlook. You’ll want to ensure you have an accurate representation of how much you are paying in interest so you can make adjustments to pay off any borrowed debt sooner, make better decisions about borrowing, or factor in the cost.
#8: How will you manage payroll?
This is a very big component of starting up since it can be troublesome for most startups to actually know how to pay employees and meet all federal and state requirements. Working with a payroll provider is often the easiest option (and most financially secure since paying an employee to do this work tends to be more expensive).
#9: How can you reduce your taxes?
Tax professionals will work with you to determine if there are any routes to reducing taxation on your business including local incentives that may be available. You’ll also want to talk about projects taxes, investments that could reduce taxes, and having all possible deductions in place.
#10: What’s the right profit margin?
Working with a financial team often comes down to this question. How much should you charge to make the best profit possible while still ensuring your company can grow? It’s not a simple question, but having the right team by your side ensures it will be clarified as much as possible.
Make an appointment with Dagley & Co. to get your business off to the right start. We are here for you for any tax, payroll or accounting questions or issues you may have for your new business.
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When you decided to open for business, you have a vision. You identified a need and came up with a solution you could provide and sell, and you invested your time, your money, your knowledge, and your drive to make it into a reality. The only problem is, if you’re like a lot of small business owners, you did not anticipate having to handle your business’s accounting needs. Many highly intelligent, responsible business operators get caught making common small-business accounting mistakes that can trip them up and cost them in the long run. If you are afraid this might happen to you — or if it already has — the best way to avoid these costly errors, before time starts ticking and the money starts to pile up, is to learn the top four small-business accounting mistakes and how to prevent them.
The Top 4 Accounting Mistakes Made by Small Businesses
The truth is that these four mistakes are relatively easy to address. The best way to avoid them is to set aside time every week for the specific purpose of taking care of basic accounting tasks. Once you get into the habit of doing them regularly and the right way, you’ll be able to avoid the hassle of having to go back and correct these mistakes in the future.
Reporting Employees as Independent Contractors
If you hire people to work for you, it’s important for you to understand the difference between employees and contractors, and to classify them correctly. There are very specific ways that you must account for each type of worker, and if you don’t get it right you will likely have to make corrections — and possibly pay penalties — in the future. If somebody is your employee, then you have control over when they work, how they get paid, and how they do their job. You are also responsible for withholding payroll tax on their behalf. By contrast, when you bring somebody in to do work for you as an independent contractor, they have more control over their own schedule, the work that they do, and how they get paid by you. They are responsible for their own taxes.
Not Reconciling Bank Accounts Regularly
Just as there are certain tasks that need to be done to keep your business running smoothly, there are certain accounting tasks that need to be addressed on a regular basis. Reconciling your bank accounts is one of those things. You need to make sure that every expense and every deposit is recorded in your books, and the best way to do that is to compare what you’ve written down to the statement that the bank provides. When you do this regularly, you are able to more immediately identify and address items that don’t match up so that you can correct any mistakes and take full advantage of available deductions. Far too often small business owners assume that this task is a waste of time and wait until the end of the year to do it. Not only is this much more time consuming, but it is harder to catch all mistakes and figure out what is missing when you have a full year’s worth of information to go through.
Forgetting to Record Payments Against Open Invoices
You receive a check in the mail or make a deposit into your bank account for an open invoice. If you don’t go back and check off the box showing that receivable as paid, your accounting data will be incorrect and incomplete. Get into the habit of immediately linking payments to their open invoices in order to avoid problems in the future.
Not Understanding the Differences Between Cash Flow and Profit
The money that comes in from your customers and the money that goes out as you make expenditures to operate your business represents cash flow. It’s important to have a positive cash flow, as that is a good indication that your company is healthy. It also means that you can pay your bills. But cash flow is not the same thing as profit. Profitability is a measure of whether you are making more from the sale of your service or product than you spend in bringing it to market. You may be profitable, but if the cash isn’t in hand then you can still have a negative cash flow. And people can pay you quickly so that you have cash on hand but you still may not be making a profit.
The single best and easiest way to avoid these mistakes it is by taking advantage of all of the tools and functions that your accounting software package offers. Most accounting programs include powerful tools and how-to guides, but in many cases small business owners just invest in the packages without taking the time to learn all that they can do — or to learn it well. By taking a little time on the front end to go through the available tutorials, you’ll find that you’ll save yourself both time and trouble on the back end. Our best advice is to set aside time one day of the week, first to learn the software and then, going forward, to go through that week’s records. Set aside the same time slot each week as if it is a meeting or appointment. It’s a good habit to get into.
If you are struggling to learn your software, don’t hesitate to give us a call at Dagley and Co. at (202) 417-6640 for tips and training. Once you learn what you’re doing, make sure that you include backing up your files!
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Planning a new business start-up? Incurring some expenses? You probably anticipate deducting those expenses in the first year of the business’s operation. Unfortunately it is a little more complicated than that. At the beginning of a new business, expenses can include equipment purchases, vehicle purchases and use, leasehold improvements, organizational costs and start-up expenses, and each receives a different tax treatment.
- Equipment – The equipment you buy can’t be deducted until it is placed in service. For that reason, you can’t make any equipment deductions until the business is actually functioning. However, deductions for most equipment purchases are very liberal. For most small businesses, this means the entire cost of equipment and office furnishings can generally be written off in the year of purchase, if that is also the year when the equipment is put into service, using the Sec 179 expensing election. However, the deductible amount is limited to taxable income from all the taxpayer’s active trades or businesses (including a spouse’s active trades or businesses if married and filing jointly). Income from trades also includes W-2 income.
Sometimes it may not be appropriate to write off the entire cost in the first year, in which case the equipment can be depreciated over its useful life (according to recovery periods established by the IRS). Most office furniture, fixtures and equipment are assigned a 7 year recovery period, but the depreciable period for computers is 5 years. The recovery period of equipment may vary depending on the type of business activity. There is also a 50% bonus depreciation election for the first year the equipment is placed in service.
- Vehicles – Automobiles and small trucks that are purchased for use by the business are treated like equipment, as above, except their recovery period is 5 years and they are subject to the so-called luxury auto rules. These rules limit the depreciation to a maximum of $3,160 ($3,560 for light trucks and vans) for the first year. If bonus depreciation is elected, add $8,000 to the first-year maximum.
- Leasehold Improvements – Generally, leasehold improvements are depreciated over 15 years. But through 2019, bonus depreciation may be elected, allowing between 30% and 50% of the cost of interior qualified improvements to non-residential property after the building is placed in service to be deducted in the first year. In addition, the Sec 179 expense deduction is allowed for qualified leasehold property, qualified restaurant property and qualified retail improvements.
- Start-Up Costs – Taxpayers can elect to deduct up to $5,000 of start-up costs in the first year of a business. However, the $5,000 amount is reduced by the amount of the start-up costs in excess of $50,000. If the election is made, the start-up costs over and above the first-year deductible amount are amortized over 15 years. If the election is not made, the start-up costs must be capitalized, meaning the expenses can only be recovered upon the termination or disposition of the business. Start-up costs include:
- Surveys/analyses of potential markets, labor supply, products, transportation, facilities, ;
- Wages paid to employees, and their instructors, while they are being trained;
- Advertisements related to opening the business;
- Fees and salaries paid to consultants or others for professional services; and
- Travel and related costs to secure prospective customers, distributors and suppliers.
- Organizational Expenses – If the new business involves a partnership or corporation, the business can elect to deduct up to $5,000 of organization expenses in the first year of a business. This is in addition to the election for start-up expenses. Like start-up expenses, the $5,000 amount is reduced by the amount of the start-up costs in excess of $50,000. If the election is made, the start-up costs over and above the first-year deductible amount are amortized over 15 years. If the election is not made, the start-up costs must be capitalized. Organizational expenses include outlays for legal services, incorporation fees, temporary directors’ fees and organizational meeting costs, etc.
Major decisions need to be made that can have a lasting impact on the new business. We encourage you to consult with our office for additional details and assistance in preparing a tax plan for your new business. Give us a call a 202-417-6640.
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If you want to start a business, you’re probably about get down and dirty with the registration process. The simplest and least expensive form of business is a sole proprietorship. A sole proprietorship is a one-person business that reports its income directly on the individual’s personal tax return (Form 1040) using a Schedule C. There is no need to file a separate tax return as is required by a partnership or corporation (if the business is set up as an LLC with just one member, filing is still done on Schedule C, although an LLC return may also be required by the state). Generally, there are very few bureaucratic hoops to jump through to get started.
However, we strongly recommend that you open a checking account that is used solely for depositing business income and paying business expenses. You will also need to check and see if there is a need to register for a local government business license and permit (if required for your business).
If you are conducting a retail business, you will need to obtain a resale permit and collect and remit local and state sales taxes.
If you hire employees, you will need to set up payroll withholding and remit payroll taxes to the government. Before you can do that, however, you’ll need to apply to the IRS for an employer identification number (EIN) because you can’t just use your Social Security number for payroll tax purposes. An EIN can be obtained online at the IRS web site or by completing a paper Form SS-4 and submitting it to the IRS.
As a sole proprietor, you can also very simply set aside tax-deductible contributions for your retirement.
Example: Paul has been working for a computer firm as an installation specialist but has decided to go out on his own. Unless he sets up a partnership, LLC or corporation, Paul is automatically classified as a sole proprietor. He does not need to file any legal paperwork. His business is automatically classified and treated as a sole proprietorship in the eyes of the IRS and his state government.
However, there is a big downside to conducting business as a sole proprietor, and that drawback is liability. Sole proprietors are 100% personally liable for all business debts and legal claims. As an example, in the case that a customer or vendor has an accident and is injured on your business property and then sues, you the owner are responsible for paying any resulting court award. Thus, all your assets, both business and personal, can be taken by a court order and sold to repay business debts and judgments. That would include your car, home, bank accounts and other personal assets.
Other forms of business, such as LLCs and corporations, can protect your personal assets from business liabilities. If you feel that your business is susceptible to lawsuits and would like to explore alternative forms of business, please give Dagley & Co. a call so we can discuss the tax ramifications of the various business entities with you. If you decide on something other than a sole proprietorship, you’ll need legal assistance to formally set up your new business.
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