Common mistakes can mean considerable missed savings for businesses

By Michael Minyard, MBA, CPA, Phoenix, Arizona

Small-business owners all across the nation are missing out on substantial tax savings because they often fail to take simple actions that could provide major reductions in their business tax burden. In other cases, overlooking — or purposely sidestepping — some Internal Revenue Service (IRS) provisions leads not only to a much greater drain on revenue but to legal difficulties.

In working with hundreds of small businesses, I have found five pieces of advice that apply to the most common errors that small businesses make — and which, if corrected, can put a smile on owners’ faces instead of an audit on their calendars.

Capture all of your expenses

Any business credit-card charges that are incurred near the end of the year can be deducted as business expenses for that year, even if you don’t pay the credit-card bill until January or later in the following year. Businesses often record bills at the time they pay them instead of when they are received; but even if your company operates on a cash basis, you should be sure to include your charged expenses if they were incurred within the taxable calendar year. Some of the typical end-of-year expenses you might tend to push forward needlessly are renewals of business licenses, office supplies, calendars and mileage logs for the coming year, promotional materials your company will use over the next few months, payroll forms, check reorders, and products that are offered at end-of-year sale prices. If you pay your rent for January before the turn of the year, however, you cannot deduct January’s rent as an expense for the previous year.

Be certain to depreciate assets

Too often, business owners enter the purchase of equipment or machinery as an expense. Capital assets such as computers, software and office equipment should be considered for accelerated depreciation, rather than a simple expense. If the recording of a depreciable item as an expense (rather than as a capital asset) is discovered in an audit, the IRS not only will disallow the expense deduction, but it will refuse to allow the owner to apply accelerated depreciation to the item. If you categorize an appropriate purchase as an asset and take accelerated depreciation, often the result is a savings equal to the savings from expensing the item. If you don’t do this and are audited, however, you lose all those advantages and will be required to depreciate the item over a number of years.

Establish the right business form from the start

When you launch a new business, it’s important that you consult professionals about the best structure to meet your objectives. You’ll need to choose from among a C Corporation, S Corporation, LLC, partnership or proprietorship. Then set up the books the right way from the start to accommodate the form of business you have selected. For example, in a C Corporation, you should not have an equity account or a draw account, although the draw account may be appropriate for an S Corporation. We often see books set up that show a “beginning balance equity,” which is not an account and doesn’t belong there. Setting up the books correctly is one of the most commonly misunderstood aspects of operating a business.

Account for your non-cash expenses

Over the course of the year, you are likely to be engaged in dozens of transactions that increase your expenses but which do not flow through your bank account. You may contribute tools or equipment to your business, for example. With the proliferation of Internet businesses, many people use a storage shed they place on their property exclusively to store components or products awaiting shipment. Others rent a temporary storage container or space in a commercial storage locker. The expenses involved in such storage operations are deductible — not only the cost of the shed but also the expense of the building permit, the slab that is poured for it, the electricity that goes into it and other related costs. If the shed is on your residential lot, you may be able to claim part of its cost as a home-office expense. All these expenses can reduce your taxes if you rent or contribute the items to the business. Often, when a business grows from a proprietorship to a corporation, the owner fails to account for pre-existing items that can be contributed to the company, along with the ongoing expenses associated with them. Items that proprietors often bring with them to the corporation include computers, vehicles, buildings or tenant improvements. Accounting professionals can show you how to get these expenses onto your corporate books legally and appropriately.

Always submit your payroll taxes on time and in full

The best way to get in trouble with the IRS is to try to dodge payroll taxes. I constantly come across business owners who try to keep employees qualified as contractors or who pay only in cash. Ultimately all this does is cause everyone a lot of problems, and eventually those who try to avoid paying their taxes will get caught and subjected to huge fines that can run into the hundreds of thousands of dollars. The IRS may consider a business owner to be a “responsible person,” meaning that he or she has the ability to control the application of money within the organization. If you use government funds to pay bills instead of taxes, you can be declared a responsible person and be held personally liable for 100 percent of the taxes and penalties imposed on the corporation. Even if the corporation goes bankrupt, the government can go after your personal assets in this instance. This is why it’s wise to set up payroll accounting and payroll accounts with the IRS and the state as soon as you establish your business. Pay your withheld taxes — FICA and other payroll taxes — as they become due. Delays or improper execution will result in a blizzard of notices and paperwork that will deplete your ability to conduct your business.

If you get your paperwork done on time, use professionals where you can and be complete in disclosing information to tax authorities, you’ll not only increase your compliance but likely will uncover a range of deductions you had never previously considered.

About the author

Mr. Minyard is the founder and President of Michael Minyard & Co., P.C. He has more than 35 years of diverse business and entrepreneurial experience including technology, agricultural, construction, real estate, and professional services. Mr. Minyard began his professional career in the U.S. army, where he served in Data Processing Headquarters in Europe. His industry experience includes computer systems management, farming and commodity trading, residential and commercial construction and development, and oil and gas. He has guided numerous firms from formation, thorough capital acquisition and growth phases to pre-IPO. He has experience in multinational financial transactions, tax mitigation and corporate restructuring.

Mr. Minyard holds a B.S. in Business and an MBA from the University of Arizona and is a Certified Public Accountant. He is a member of the American Institute of CPAs, the Arizona Society of CPAs and the National Society of Tax Preparers.

Note: The following information is provided to you by third parties for informational purposes only and shall not constitute tax or legal advice. Microsoft Corp. has not checked or verified any of the information provided and makes no representations or warranties as to its accuracy. Each individual’s tax situation is unique, and you should check with your accountant or other tax professional for particular advice on your situation.