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Running a business can be very frustrating. There are customers and employees to deal with, little opportunity to pass the buck when there is a problem, finances to track, equipment that goes wrong, and countless other issues. Many problems are small but they can add up if you can’t release them. But who can you release your frustration to?

First, look around you. Family, friends and employees could provide a sounding board for some of your frustrations. Even if they can’t help, getting it out can make it go away. But be careful about who your tell what. Venting about a computer problem to an employee is one thing but telling that employee about your problem with another employee is a bad thing. Sharing your problems with those around you can help deal with the little things that arise from dealing with people, equipment or deadlines.

If you don’t want those around you to see you as a walking pity party, you need to find a better way to deal with the tensions of running a business. Do you have a business mentor or a colleague you can meet with and discuss your business? Besides letting you get a few things off your chest, they are in a better position to help with the bigger problems. And they should understand the frustrations you are going through better than a friend with a 9 to 5 job. Also, look on the internet for a forum or bulletin board for business owners or people in your field. Check with any organizations you are member of or the software or equipment you use to see if they offer a member’s group. You are not the only one with these kinds of problems, so talk with someone who lives the same experiences.

And don’t forget the power of time away from the business and the problems. I’m not talking about a sabbatical. Carve out time for a walk or other exercise, a hobby, even if it’s no more than making meals a no work zone. (I find 15 minutes with a “shoot at the balls” game while I eat lunch is great therapy.)

Life is frustrating. Having a business adds different issues to the mix, so you need to find a way to release those tensions. Like a pressure cooker, you need to release some of the frustrations to work effectively.

(I work by myself most of the time, so I have found that a almost private mircoblog under a pen name to be a great way to complain, whine and go on.)

Free Ads

Just passing along an article I found.

Looks like Facebook is going to giveaway advertising to small business. Whether or not it can be of use to you is a decision only you can make. However, free can be very good.

Facebook Offers Free Ads to Small Businesses.

Using Your Home For Business

A lot of small businesses don’t have an office or storefront, they work from their homes. For them, the IRS has created a special business tax deduction called the Office in Home Deduction. As part of a full disclosure, I do want to point out that a variation of this deduction is also available to employees who are required to work from home. If you think you might qualify after reading this post, please talk to your tax professional about the special guidelines and handling for employees. Also, for non-sole proprietors (partnerships and S-corps), check with your tax professional for specifics on how this needs to be handled.

The Office in Home (OIH) deduction allows the business owner to take a deduction against their business income for a percentage of the costs of operating their home. There are a few special requirements which have to be met. First, the office must be used exclusively for business. A spare bedroom that is not used for anything but the business meets the requirement. But if the bedroom is used by guests or when the grandkids sleep over, then the room doesn’t meet the exclusive test and there is no deduction. The key is to be a “special identifiable space.” So, a screened off end of the family room could qualify if the other requirements are met but not the den where you work on the business, pay personal bills and handle your investments. Next, the area must be the principle place of business for the business. Specifically, it is the place where the administrative and management functions take place. If you have an office at your shop and also have a set up to bring work home, that doesn’t qualify for OIH. But, if your shop doesn’t have an office space and all paperwork is done at home, the home space many qualify. The area must be used regularly. A dedicated business office still isn’t deductible if it’s only used occasionally. You also need to have a business that has a profit making objective. Hobby and investment activities do not qualify for OIH.

There are a couple of exceptions to these rules, after all this is taxes we’re talking about. The exclusivity test does not apply to in home day care facilities. A licensed day care can factor in the business hours the home is used into the calculations for the deduction. Also, storage areas for inventory or demonstration materials have a little looser exclusivity requirement. A few shelves in the garage or part of a closet will quality for OIH. Finally, if the home business area is a separate building from the home, it might qualify for an exception to the principle place of business test. A retail shop owner might keep season decorations and extra racks and shelves in a separate building at home and still qualify for OIH although no business takes place there.

The actual Office in Home is calculated on Form 8829 and then carries to the Schedule C or F. The first issue is to determine the use percentage. This is the square footage of the qualifying “office” divided by the square footage of the whole building. This is further modified by hours actually used if the area is used for daycare or if usage began during the year. OIH expenses types are direct and indirect. Direct expenses are those which only apply to the area used by the business. The storage shed with a business’ inventory has a broken window; the repair cost is a direct cost. But most OIH expenses are indirect costs. These include mortgage interest, qualified mortgage insurance premiums and real estate taxes. The balance after the office in home deduction is subtracted can be used on the taxpayer’s Schedule A. Other OIH expenses are home insurance, rent, utilities, repairs and maintenance to the whole property and depreciation.

The catch? The Office in Home for a business can only be used to offset income from the business. Sort of.  OIH expenses don’t come into play until all other business expenses are deducted from the business income. A tentative profit/loss is created and the OIH deduction can be taken into consideration. Form 8829 breaks the home expenses into three categories. The first are the mortgage interest, house taxes and mortgage insurance premiums. Since these are potentially deductible expenses on the Schedule A, they can create or increase a loss on the Schedule C or F. But other operating expenses (like insurance or rent) and the depreciation can’t cause or increase a loss. In that case, the unused expense deduction is carried forward to the next year.

If a small business qualifies, the Office in Home deduction can be a great benefit to the business owner. It allows him/her to deduct for the use of their home. But even better is the effect it has on commuting miles. Without the OIH, the miles to the first job or errand are commuting and not deductible. A valid OIH allows the business owner to log and deduct the miles they drive for business when they leave their home. Their commute is a very short walk.

Office in Home can be very confusing and as mentioned in this post, there several sets of rules. So, please check with your tax professional to see if you qualify. 

Small Business Development Centers

Small Business Development Centers Back in the researching your business post, I mentioned the Small Business Development Centers as a great research tool. The SBDC are part of the Small Business Administration and are located across the country. There are centers in all 50 states, DC, Puerto Rico, and US territories. The purpose of the SBDCs are to provide business owners or prospective business owners with tools to help start or grow their business at little to no cost. A center can help with a business plan, marketing, financial projections, cost analysis or buying or selling a business. The current flyer I have for the Kansas SBDC(KSBDC) I use, announces workshops in cutting costs by going green, funding your business, building a business plan, Quickbooks instructions, and state tax workshops. On top of this, their outreach center is listing workshops on using social media. If there is a cost for the workshop, it is minimal. The SBDCs also provide one on one confidential counseling with qualified business leaders. When I chose to start my own tax practice, I used the Wichita KSBDC  to learn about business plans and then worked with a counselor to polish my plan for bank submission. I kept in contact one I was up and running for business reviews and support.  So, you don't have to do your business all alone. You can always find help at your local SBDC. For locations, check here.

A Very Short Course in Depreciation

This is for basic information. Depreciation is a complex subject and it could fill a book. I want to make business owners aware of the theory so that they can plan. Please talk to your tax profession about specifics for your business.

On a trip to the local office supply store, you buy a new color laser printer and a set of replacement cartridges for your business. Since you keep your books up as you go, you add the purchase to your bookkeeping system and plan to use to whole purchase against this years income. The problem is that you really can’t do that. The ink cartridges are current expenses and fully deductible but the printer that has to be depreciated.

Depreciation is required for any asset used in a business (it could be equipment, capital improvements, or software, for example) that has a useful life of over one year and is not inventory. Simply, depreciation does two things. First it allocates the cost of purchase over the life of the asset. The IRS says that the laser printer has a life of 5 years. Divide the cost of the printer by five and that gives you’re the amount that you can depreciate for each year. The second use of depreciation is that it represents the effect of usage on the values of the asset. Say, you buy the new laser printer for $500. That’s the value that time. However, a year later, you could not sell that printer for $500 because of the wear and tear on the asset.

There are also two kinds of depreciation: “Book” and “tax.” “Book” depreciation is used for bookkeeping records and evenly spreads the reduction in value over the life of the asset. Our 5year printer would lose $100 in value each year for 5 years. It could continue to be used but it would not have any impact on the profit and loss of the business. “Tax” depreciation is a creation of the tax code and, for the most part, is considered accelerated deprecation. That is more depreciation is taken in the first years than in the final years. For simplicity, the IRS published the allowed depreciation in charts based on the life of the asset. As if depreciation wasn’t confusing enough, there are several charts of percentages. Your choice will depend many factors such as, when in the year the asset is put into service, if the asset is being used on a farm, are you calculating Alternative Minimum Tax or electing to spread out the depreciation out evenly instead of taking more at the start. To further confuse matters, there are special forms of depreciation that allow even more of the cost to be taken in the first year. Please see your tax profession about what options are available to you.

Are you confused yet?

What do you really need to know? You need to know that some of the things you buy for your business need special treatment. You need to keep track of them separately. But, use some common sense. Yes, the stapler will last more than one year and should be depreciated but that doesn’t mean that it can’t be lumped with other small equipment and depreciated that way. I do that with the off the shelf software and little things like calculators and staplers. The big thing you need to understand that you’re required to depreciate assets on your tax return. But that means that when you sell that asset the gain/loss must reflect the amount of depreciation taken. Let’s say you decide to sell that printer for $250 after you’ve had it for three years. You have taken $300 in depreciation off its value. The math looks like this: $500 original cost minus $300 in depreciation leaves a $200 basis. That is subtracted from the $250 you sell the printer for and you have a $50 gain on the sale. And that is taxable.

Keep track of long term purchases so that they can be treated correctly on your books and tax returns. And ask for help until you get the hang of depreciation.

IRS Videos

Information resources are vital to small business owners who have to wear so many hats. To help all taxpayers, especially small businesses, the IRS has created a website, the IRS Video Portal, to house all the non-written info they have created. The website has audio and video programs on a wide variety of topics. The programs can last a few minutes to hours and cover not just business topics but info for individuals too. There are some videos in Spanish too.

Topics range from starting or closing a business to contractors to audits. Of special interest to someone just starting a business,  is the Virtual Small Business Tax Workshop. This is a program the IRS has long shared with the public on CDs and is an excellent overview of the tax issues a business can face. (Note-The CD is in several languages but only in English on the video)

All the info on the Video Portal can be found in written form on the IRS's website but let's face it, sometimes hearing or seeing the info can help us understand what we're read better. So bookmark the page and check it out when you have a tax related question.

 

Income and Expenses

In this series, I’m focusing on providing an overview to give a new business owner something to think about and to show them where they need to get more info. This is especially true in the areas of income and expenses accounting. I can’t count the number of times that I have had a client tell me they’ve started a new business and they lost money. As the interview continues, it becomes clear that they can’t tell me how much they lost because they can’t tell me how much income or expenses they had. It sound very basic but that’s what really happens sometimes.

If you’ve set up your business books, you’re well on the way to being able to track your income and expenses. There are a few accounting terms that might good to discuss. Actual accounting procedures will depend on reporting year (calendar vs. fiscal) or if the business is a cash business or accrual business. Most individuals and small business are calendar based cash businesses. We report the income and expense in the year it is paid. Our year starts in January and ends in December. If a client pays me in January for a return I prepared in December, the income is reported in January because I am a cash business. An accrual business reports income in the year it is earned and expenses in the year they are incurred. In the example, that income would be reported as December income (even though I didn’t get it until January) if I was set up as accrual. (The only exception is that inventory is always treated as accrual. So I could be cash for everything else and accrual when it comes to my inventory. The IRS calls this a hybrid accounting method.) A fiscal year is any year that is not January through December.

Business income is the income that the business takes in during the course of doing business. This does not include any personal income; wages, interest, rentals, capital gain, etc.  A business can have more than one type of income. A repair shop would have  income from the sale of the parts used in the repairs, the income from the service labor, travel income and the cost of disposal that is passed on to the consumer. As you set up your business books, you need to decide if you’re going to lump income types together or have separate categories. My suggestion is to keep them separate. It gives you a better idea where your income is coming from and lets you check your markup on the parts vs. their cost. And if you have more than one business, these need to be kept separate.

The IRS says that legitimate tax deducible expenses meet the ordinary and necessary tests. And those are good rules for general business expenses too. Ordinary expenses are costs that are common in that type of business. If you are selling handmade jewelry, then the cost of making the products will be a key cost. Also the costs to sell the jewelry, like advertising, are ordinary costs. Necessary costs are helpful and appropriate to running the business. I could see our jewelry maker taking a trip to the plant which makes her supplies to learn about the products and how they are made. This would be an expense necessary to build a relationship with the firm and learn more about her materials for marketing and manufacturing. It is very good practice to keep expenses separated by type; travel, advertising, cost of goods, office supplies, to name a few. Most importantly you want to keep major purchases separate because they are handled differently. (You got it, another post.)

Let’s talk taxes for a second. I don’t want to scare anyone away from starting a business with a threat of an audit. In fact, good procedures will go a long way to keeping an audit away and letting you sail though one if you get hit. Besides keeping good records you need to keep the source documents. That’s a fancy way of saying you need to keep your receipts. Sorry, you can’t throw those away once you enter them into the computer or on your books. You need to create a system to keep those receipts should there ever be a question about an entry in your books. Let’s say our jewelry maker writes a check at Hobby Lobby for $150 for beads and she enters it into her checkbook and bookkeeping program as bead inventory. She’s done all she needs to operate the business efficiently. But if the IRS questions it, they’ll want proof that it was for beads and not Christmas decorations for her home. That’s where the receipt comes into play. This is especially true for any cash purchases and if a credit card is used. A credit card statement might not list the business name but the clearing house that actually processed the transaction. It’s easier to keep all your receipts safe and sound just in case there is a question later.

Shall we review? After careful research, you start your business and get separate bank accounts (and credit cards) for them. You create a bookkeeping system that you will use and will provide you with the info that you will need to operate the business and prepare your taxes. Does that mean success?  That depends on you and the business. But you now have the tools you need to analyze, adapt and grow your business. I only have a few more business issues to talk about and they all deal with taxes. The purpose of this series has always been to put on paper what I do face to face with clients who want to set up a business or need help with business tax issues. There is more to running a business but there are all kinds or resources available to help you with those issues.