Tips for small business owners

Cathy Goldsticker

By David Baugher, Special to the Jewish Light

Cathy Goldsticker has been a tax partner at the accounting firm of Brown Smith Wallace for three years and has been in practice in the field for a quarter century. Her specialty is closely held businesses and recently she spoke to the Jewish Light about some tips to help small business proprietors reduce their tax bite in tough times.

Before tax time comes, what do I want to think about as a small business owner?

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The first thing that would come to mind is to think about when you would want to recognize your income or take your tax deductions. With changing income tax rates there are some opportunities to reduce your tax bill by managing the year in which you recognize income or take those deductions. The rates are going to change between 2010 and 2011. The key thing to think about is “Do I want my income taxed in 2010 or in 2011?”

What about my retirement plan?

Think about putting money away into retirement to maximize your retirement plan contribution, which gives you a deduction in the current year. The reason that’s a strategy to keep in mind is that if you are at your maximum income potential now theoretically you could be at a higher tax bracket, so if you are making contributions to a plan that you are taking deductions in the current year, when you take the money out at retirement when your income is lower, you would then pay a lesser tax rate imposed on that income. Within that ask, “Do I want to do a regular tax deductible contribution or do I want to do a Roth IRA?” With a Roth IRA even though you don’t get the tax deduction now, when you take the money out, the earnings will not be subject to taxes.

What deadlines should I be concerned about?

If you want to make an IRA contribution, it absolutely must be done by April 15, so if you put your tax return on extension and you are thinking, “I’m just going to postpone doing everything because I don’t want to think about it,” unfortunately when you file you are going to find that you can’t take an IRA deduction if you didn’t fund it by April 15. If you don’t have a retirement plan set up, you’ll need to do that. Most need to be set up before the last day of the year. That’s very important.

What sorts of items might I deduct when tax time comes?

If you are entertaining clients that is deductible. Albeit at 50 percent, you still get to deduct meals. If you want to update your website, that would be deductible or if you want to update your software. All of those kinds of things that could stimulate your business and increase sales are also tax deductible. There’s also compensation for your employees. Be careful when you make gifts though. There are important rules about gifting. You are very limited on what you can deduct on gifts to clients and if you make gifts to employees you must include it on their wages. Other deductible business expenses would be rent and utilities. When you set up a business, pursue a business, look for a business, those expenses are deductible in some form as well. Another thing that can be very advantageous is that if you buy computers or equipment you are able to deduct in full in the year you pay it, quite a bit, up to $250,000 worth. That’s called a Section 179 expense. Every year it threatens to be removed and each year they postpone it and let you take it for another year.

Are home offices deductible?

If you want to take a home office expense you want to make sure that you don’t have an office already that provides for you an adequate place for you to handle your business affairs. If it’s too small or you don’t have an office you can take one at home and then you’ll include a pro rata share of all your house expenses including utilities, repairs and maintenance and insurance. You also allocate the mortgage interest and real estate taxes.

If I work for myself, what should I know about self-employment tax?

Self-employment tax can be a creeper. It comes through and it just kind of slaps you in the face and you say, “Whoa, I didn’t realize I had to do that.” If you are in business and perform services in that business, you are going to have to pay the tax, which is 15.3 percent. It’s really two pieces. You’ve got Social Security and Medicare tax. Medicare tax is 2.9 percent with no maximum amount. You’ve got to pay that on the whole darn thing. Social Security tax is limited on $106,800 worth of wages and that’s taxed at 12.4 percent.

What should I think about when taking on an employee?

Before you hire you should remember that it’s not just going to cost the quoted salary or the hourly rate. You are also going to have to pay 15.3 percent for FICA. You have to pay state unemployment insurance, which could be three or three and a half percent of the first $13,000 (Missouri) of wages and you have to pay federal unemployment tax. You also have to think about health insurance and add that in as well as retirement plan contributions if you have that in your business. It really adds up.

Any other tips for small businesses?

One of the things businesses should think about is if you have money sitting in the bank what are you going to do with that money? Take that cash and grow it. Put it somewhere that it is going to give you some benefit or grow your business. Think about the long-term business growth potential.