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Starting your own business can be equal parts thrilling and intimidating. You can get started with this checklist of items you’ll need to consider as you get started. Determine your activity as a hobby or a business. This may seem basic to some people, but the first thing you'll have to consider when starting out is whether you really are operating a business, or pursuing a hobby. A hobby can look like a business, but essentially it's something you do for its own sake that may or may not turn a profit. A true business has a reasonable expectation of turning a profit. The benefit of operating as a business is that you have more tax tools available to you, such as being able to deduct your losses. Pick your business structure. If you operate as a business, you’ll have to choose whether it will be taxed as a sole proprietorship, partnership, S corporation or C corporation. All entities except C corporations pass through their business income onto your personal tax return. The decision gets more complicated if you legally organize your business as a limited liability corporation (LLC). In this case you will need to choose your tax status as either a partnership or an S corporation. Each tax structure has its benefits and downsides – it’s best to discuss which is best for you. Apply for tax identification numbers. In most cases, your business will have to apply for an employer identification number (EIN) from both the federal government and state governments. Select an accounting method. You’ll have to choose whether to use an accrual or cash accounting method. Generally speaking, the accrual method means your business revenue and expenses are recorded when they are billed. In the cash method, revenue and expenses are instead recorded when you are paid. There are federal rules regarding which option you may use. You will also have to choose whether to operate on a calendar year or fiscal year. Create a plan to track financials. Operating a business successfully requires continuous monitoring of your financial condition. This includes forecasting your financials and tracking actual performance against your projections. Too many businesses fail in the first couple of years because they fail to understand the importance of cash flow for startup operations. Prepare for your tax requirements. Business owners generally must make quarterly estimated tax payments to the IRS. If you have employees, you’ll have to pay your share of their Social Security and Medicare taxes. You also have the obligation to pay your employee's share of taxes, Social Security and Medicare through withholdings from their wages. Your personal income tax return can also get more complicated if you operate as one of the pass-through business structures. This is just a short list of some of the things you should be ready to discuss as you start your business. Knowing your way around these rules can make the difference between success and failure -- but don’t be intimidated. Help is available, so don’t hesitate to call if you have any questions.

Here’s a roundup of several recent tax court cases and what they mean for your small business. Be Reasonable About Compensation (Hood, TC Memo 2022-15, 3/2/22) Facts: Clary Hood and his wife founded and were the sole shareholders of Clary Hood, Inc., a C corporation. In 2014, Hood and his advisors concluded that Hood had been under-compensated in prior years. Hood and his wife received a $5 million bonus from the company in 2015, and another $5 million bonus in 2016. The IRS claimed the bonuses were excessive, issued a notice of deficiency and assessed substantial underpayment penalties of $316,240 for 2015 and $322,622 for 2016. The Tax Court agreed with the IRS, permitting bonus deductions of $1.36 million in 2015 and $3.68 million in 2016. Tax Tip: While an employer may deduct compensation paid for services performed in a prior year, the compensation must be reasonable in the eyes of the IRS. So research what would be considered reasonable compensation in your industry and pay yourself timely. Keep Those Receipts! - Part 1 (Wolpert, TC Memo 2022-70, 7/7/22) Facts: Julian Wolpert, a former university professor, provided consulting services focused on civic engagement. On his 2016 and 2017 tax returns, Wolpert reported vehicle expenses, travel expenses, and payments to independent contractors totaling $63,380 and $54,150, respectively. The Tax Court upheld the IRS's decision to disallow $38,046 of expenses in 2016 and $34,188 in 2017 and the resulting additional income tax. For the vehicle expenses in question, Wolpert's travel logs lacked specificity and detail as to the purposes of each business use of the vehicles. With regards to the other disallowed expenses, Wolpert was unable to substantiate the amount and business purpose. Tax Tip: You must have adequate substantiation for all business expenses reported on your tax return. Consider either a physical or digital filing system to store all receipts and documents as corroboration of reported business expenses. Keep Those Receipts! - Part 2 (Gonzalez, TC Summary Opinion 2022-13, 7/18/22) Facts: Maribel Gonzalez, a California resident, had a full-time job but also commuted 800 miles round-trip every other weekend for her clothing design business. For the year in question, Gonzalez reported car and truck expenses of $12,256, which the IRS disallowed. The Tax Court sided with Gonzalez, as she was fully prepared with adequate evidence to support her vehicle deduction. Gonzalez submitted as evidence to the Tax Court a mileage log detailing the dates traveled, distances traveled, and the purpose of each trip. She also submitted vehicle service receipts corroborating the miles driven. Gonzalez also testified credibly to the business nature of her trips. At trial, the taxpayer submitted a mileage log providing the dates traveled, distances traveled and the purpose of each trip. She also submitted service receipts corroborating the miles driven. In addition, she was a credible witness. Tax Tip: This case illustrates how proper documentation can fend off an IRS overreach. Spending the time to accurately record information and gather documents as transactions or events occur may be tedious, but doing this can really pay off in the long run if the IRS challenges an otherwise valid business deduction.

The IRS is always scanning small business tax returns that look unusual or out of the ordinary. Here are five areas of your business to be ready to defend should the IRS start asking you questions. Business vs hobby. Be ready to provide proof your business is truly a business and not a hobby. Those who fail in the eyes of the IRS can have their expense deductions severely limited, while still required to report the income. Make sure you can answer and provide documentation for these four questions: What is your profit motive? Are you an active participant in the business? Are you conducting the activity in a business-like manner? What expertise do you have in the service or products your business provides? Reasonable shareholder salary. S corporations are in the unique situation where some compensation is excluded from payroll taxes. Many businesses take this too far. The IRS is looking closely at businesses who avoid paying a reasonable salary in order to lower their Social Security and Medicare tax bills. When determining salaries for shareholders, consider their experience, duties, responsibilities and time devoted to the business. Once you have a picture of their ongoing contributions to the business, research comparable positions and salary ranges to pinpoint a fair salary. Save your findings and calculations as backup to provide in the event of an audit. Contractors vs employees. Make sure consultants and other suppliers are not employees in disguise. The IRS looks at how much control you have over the work being done – the more control you exert, the higher likelihood you may have an employee versus a contractor. Penalties can be very steep if the IRS decides your consultant is really your employee. If in doubt, ask for a review. Meal and travel expenses. Documentation for business meal expenses, as well as travel expenses, should include receipts, who attended the meal, and the business purpose of the meal. Bringing food in for business lunches rather than going out is a safe way to show business intent. W-2 and 1099 forms. Don't forget to file all required 1099s and W-2s. Most of them are due on or before Jan. 31. The IRS is penalty crazy in this area with up to $270 per missing or incorrect form. Knowing what the IRS is looking for helps you prepare should it turn its focus to your business.

Cash theft ranks as one of the most common frauds perpetrated on small businesses. To ensure your business is protected from theft, develop and implement a strong cash-handling policy. Here are some ideas to help create a working policy to prevent your petty cash from turning into petty theft. Keep duties separate. If one employee receives cash, someone else should prepare or oversee preparation of the cash deposit. A third person may record transactions in the company books. Although such separation of duties can be hard to implement in a company with few employees, creative owners will find ways to prevent such transactions from being concentrated in the hands of a single person. For example, you might cross-train staff so that today’s accounting clerk is tomorrow’s cashier. Or a supervisor might periodically assume one of those functions. Document cash transactions. Develop a cash count sheet that records the names of people removing money from the safe. Also document the date and time money is transferred for deposit. Include signature lines for both employees involved in the task. Have another employee routinely compare deposit slips and bank statements with cash count sheets. When cash is placed in the safe, record transactions with a similar detailed record. Store cash securely. Lock cash registers when not in use. Minimize cash on hand by requiring employees to periodically transfer excess cash to point-of-sale (POS) safes. Because such a system allows for one-way access only, it helps prevent cash skimming. POS safes should be unlocked only when cash is transferred to the back office safe. Limit safe combinations to authorized employees and ensure that combinations are routinely changed. Conduct internal audits. Employees should expect their cash-handling activities to be scrutinized. Inform staff that there will be surprise cash audits and detailed reviews of company books if irregular transactions come to light. If your company uses a currency counting machine, you might also print and review a sample of cash-count reports. Communicate policies. Make sure your policy is clear and straightforward. Post it throughout the workplace. Discuss it with new hires. Share it in staff meetings. Hire wisely and train. Conduct thorough background checks. Once staff are on board, train them to implement your cash-handling policy until it becomes second nature.

Your business has a story to tell. And one of the ways to hear your business’s story is by reviewing performance through comparative financial statements. Pretty important stuff An up-to-date balance sheet, income statement and statement of cash flows are essential financial reports filled with great information. But these financial statements by themselves don’t tell the whole story about your business. Consider the following: Liquid Company, Inc.: Their current balance sheet shows $1 million in liquid assets with zero liabilities. Big Profits, LLC.: Their current income statement has a net profit margin of 35%. We've Got Cash, Inc.: The statement of cash flows shows that the company has consistently brought in more cash than it has spent over the past three years. But here’s the rest of the story: Liquid Company, Inc.: Liquid assets decreased from $5 million to $1 million over the past 12 months, showing their liquidity is not so fluid after all. Big Profits, LLC: Net profit margin is typically 20% for this company. However, a recent round of layoffs temporarily pushed total salaries and wages lower, thus pushing the net profit margin higher. In this case, big profits may indicate bigger staffing problems. We've Got Cash, Inc.: There is steady decline in cash flow over the past three years, suggesting a potential cash shortfall on the horizon. The key in all this is the need to compare your financials to something that provides clarity to how you feel about the results. Building your comparative financial statements Step 1: Determine your comparative reporting A standard set of comparative financial statements often includes the following: Current performance versus prior period actual results Current performance versus plan Current performance versus forecast Step 2: Consider the time-frame of your comparative financials The typical time-frames to consider are: Monthly (versus last month and same month from the prior year) Year-to-date Full-year forecast Step 3: Build your comparative reporting Be sure it includes: A dollar change column A percent change column Internal percentages as a percent of sales (income statement) and percent of total assets and/or liabilities and equity (balance sheet) Focus on analysis The reports themselves can be a daunting array of numbers. So when reviewing each report, try to focus on a few key items of change. Here are some suggestions: Changes in sales or areas of sales Cost of goods sold as a percent of sales and how it is changing Gross margin percent Net income percent Advertising and discounting as a percent of sales Personnel as a percent of sales and how it is changing over time Identify the top five expenses and see how they change as a percent of sales Cash flow as a percent of sales and how it changes over time Current assets and current liabilities Changes in debt versus equity Identify key drivers of cash flow and see how they change over time or versus plan The ability to create comparative financial statements and other useful reports in most small business accounting software products, however, is extremely lacking. Should you need assistance in building the right comparative statements for your business, please reach out for help.

The best way to deal with an IRS audit of your small business is to know what to do and not to do. Consider the following: Be professional Do: Auditors have a job to do, and it’s in your best interest to show them respect. If you’re called to their office, do show up on time, dress appropriately and have requested documents in hand. If auditors visit your place of business, encourage staff to answer questions honestly and completely. Within reason, it’s acceptable to ask for more time to locate a particular record. If you can’t find supporting documentation, say so. Don’t: Avoid arguing with the auditor. Ask for clarification if needed, but don’t question every document request. If you disagree with the auditor, state your case and understand you have appeal rights should the disagreement become costly. Be organized Do: If you keep business records on a computer, know how to create and print easy-to-follow reports. Prepare for the audit by laying out checks, invoices and other records in a logical fashion. Don’t: Dump a box of receipts into an auditor’s lap. The easier it is for an auditor to find what they need, the shorter the time period required to complete the audit. Remember, the longer an auditor spends with your records, the more likely he or she will find something amiss. Also keep in mind that it’s rarely a good idea to create records during an audit. Exceptions may be if you’re honestly trying to reconstruct transactions from memory or your records don’t exist (for example, after a natural disaster or a fire). Be honest Do: Make a straightforward effort to justify deductions. If you can’t locate a specific record, look for alternative ways to support your tax return. For example, if you’re claiming a deduction for depreciation but can’t locate the paperwork, redo the calculation for the auditor. A vendor, landlord or mortgage company may have copies of pertinent records if yours have gone missing. Don’t: Never create numbers that can’t be corroborated or reasonably explained. Ask for help Do: Get an expert in your corner if you're facing an audit. Don't: Ignore your need for help. Remember, auditors conduct audits all the time. This is a rare event for you. Too many businesses provide more information than is needed, opening themselves up to a higher tax bill. Make sure this is not you!

The beginning of a new year brings the need to recap the previous one for Uncle Sam. Here are some tips and a checklist to help get you organized. Look for your tax forms. Forms W-2, 1099, and 1098 will start hitting your inbox or mailbox in the next couple of weeks. If you have not already done so, review last year's records and create a checklist of the forms to make sure you get them all. Collect your tax documents using this checklist. Using a tax organizer or last year's tax return, sort your tax records to match the items on your tax return. Here is a list of the more common tax records: Informational tax forms (W-2s, 1099s, 1098s, 1095-A) that disclose wages, interest income, dividends and capital gain/loss activity Other forms that disclose possible income (jury duty, unemployment, IRA distributions and similar items) Business K-1 forms Social Security statements Mortgage interest statements Tuition paid statements Property tax statements Mileage log(s) for business, moving, medical and charitable driving Medical, dental and vision expenses Business expenses Records of any asset purchases and sales, including cryptocurrency Health insurance records (including Medicare and Medicaid) Charitable receipts and documentation Bank and investment statements Credit card statements Records of any out of state purchases that may require use tax Records of any estimated tax payments Home sales (or refinance) records Educational expenses (including student loan interest expense) Casualty and theft loss documentation (federally declared disasters only) Moving expenses (military only) If you aren't sure whether something is important for tax purposes, retain the documentation. It is better to save unnecessary documentation than to later wish you had the document to support your deduction. Clean up your auto log. You should have the necessary logs to support your qualified business miles, moving miles, medical miles and charitable miles driven by you. Gather the logs and make a quick review to ensure they are up to date and totaled. Coordinate your deductions. If you and someone else share a dependent, confirm you are both on the same page as to who will claim the dependent. This is true for single taxpayers, divorced taxpayers, taxpayers with elderly parents/grandparents, and parents with older children. With proper organization, your tax filing experience can be timely and uneventful.

It’s that time again when everyone has high hopes for how they are going to better themselves during the new year. The traditional way many people set goals, however, doesn't seem to be working! According to The Economic Times, only 16 percent of people follow through with New Year's resolutions. Here are seven alternatives to the traditional New Year’s resolutions that could help you in 2023. Make 3, 5, and 10-year goals. Part of the problem with resolutions is they are oftentimes open-ended, such as, I want to lose weight. Instead, write down specific goals for 3, 5, and 10 years from now. Break your goals into categories like family, career, financial, and health. Having concrete future goals is a good starting point to creating an obtainable vision. Create better connections. Social media makes it easy to stay in touch with what friends and family are doing, but it often lacks true personal connection. As we exit the pandemic era, consider committing to the intentional development of relationships with a list of people that are important in your life. Write out the list and put it in a spot you’ll see every day. Then be consistent in communicating with them and taking the time to actually reconnect in a meaningful way. Reflect on the previous year. Every year brings its share of happiness, challenges, and things you never saw coming. Reflecting on these events is a great way to realize how much you've changed and grown over the past year. Whether the changes are positive or not so positive, acknowledging and analyzing will help you grow from your experiences and set you up for a better future. Quit something. For most of us, the days are overflowing with things to do and too many bills to pay. Why not take inventory and quit something? Take back some of your income and time, to allow you to pursue something else or spend money on something more important to you. Pretend like you are moving. Walk around your house or apartment and make a list of things you’d like to improve or fix, just like you would do before moving. It can be a big thing like building a deck or a small thing like going through an old closet full of that stuff that you thought you might need someday. Donate it and keep the receipt – it might be a tax deduction!

A big jump in cost-of-living calculations means a big jump in how much you can contribute to retirement accounts in 2023! Now is the time to plan your retirement contributions to take full advantage of this tax benefit. Here are the annual contribution limits for several of the more popular retirement plans: What you can do Look for your retirement savings plan from the table and note the annual savings limit of the plan. If you are 50 years or older, add the catch-up amount to your potential savings total. Then make adjustments to your employer-provided retirement savings plan as soon as possible in 2023 to adjust your contribution amount. Double-check to ensure you are taking full advantage of any employee matching contributions into your account. Use this time to review and re-balance your investment choices as appropriate for your situation. Set up new accounts for a spouse and/or dependents. Enable them to take advantage of the higher limits, too. Consider IRAs. Many employees maintain employer-provided plans without realizing they could also establish a traditional or Roth IRA. Use this time to review your situation and see if these additional accounts might benefit you or someone else in your family. Review contributions to other tax-advantaged plans, including flexible spending accounts (FSAs) and health savings accounts (HSAs). The best way to take advantage of increases in annual contribution limits is to start early in the year. The sooner, the better.

Here are moves you can make to reduce your taxable income. But the year is quickly coming to a close, so plan accordingly. Tax loss harvesting. If you own stock outside a tax-deferred retirement plan, you can sell your under-performing stocks by December 31st and use these losses to reduce any taxable capital gains. If your net capital losses exceed your gains, you can net up to $3,000 against other income such as wages. Losses over $3,000 can be used in future years. Selling appreciated assets. Planfully sell appreciated assets in the tax year that helps you the most. While this strategy may be hard to accomplish this late in the year, it is still worthy of consideration. To do this, estimate your current year taxable income and compare it to next year's projected income. Then sell the appreciated asset in the year that will yield the lowest tax. Remember to account for the 3.8% net investment income tax in your estimates. Max out pre-tax retirement savings. The deadline to contribute to a 401(k) plan for a 2022 taxable income reduction is December 31st. So if your employer's plan allows it, consider making a last-minute lump sum contribution. For 2022, you can contribute up to $20,500 to a 401(k), plus another $6,500 if you're age 50 or older. Even better, you have until April 18, 2023, to contribute up to $6,000 into a traditional IRA. And as long as your income does not exceed phaseout limits, you can reduce your taxable income on your 2022 tax return. Bunch deductions so you can itemize. If your personal deductions are near the following standard deduction amounts for 2022: $12,950 for singles, $19,400 for head of household, and $25,900 for married filing joint, consider bringing some of 2023's spending into 2022 so you can itemize this year. For most, the easiest way is to do this is to make 2023's planned charitable contributions before the end of 2022. You can also include gifts of appreciated stock where you get to deduct the fair market value without paying capital gains tax. Review health spending accounts. If you participate in a Health Savings Account (HSA), try to maximize your annual contribution to reduce your taxable income. Remember, these funds allow you to pay for qualified health expenses with pre-tax dollars. More importantly, unlike Flexible Spending Accounts (FSA), you can carry over all unused funds into future years. If you do have an FSA, you can carry forward a maximum of $570 from 2022 into 2023. The deadline for contributing to your Health Savings Account (HSA) and still getting a deduction for the 2022 tax year is April 18, 2023. The maximum contribution for 2022 is $3,650 if single and $7,300 for married couples. While the year is quickly coming to an end, there is still time to reduce your 2022 tax liability, but only if you act now.

As you gather with family and friends this holiday season, have fun with our annual holiday quiz. This year's edition focuses on popular holiday songs. Get one point for each correct answer, except as noted. Good luck and good cheers! Want some more fun? Have the songs ready to play and start them as you ask the question. Name the movie that introduced the song White Christmas. Bonus – Who sang it? (2 points) Double Bonus – In what year? (2 points) Link to song Holiday Inn. If you guessed the classic holiday movie White Christmas...good guess. The song was so popular it became the name of a second hit movie! The song White Christmas was actually introduced in the movie Holiday Inn, and sung by an up-and-coming singer named Bing Crosby, and written by Irving Berlin. The movie was released in 1942. Who sings the popular version of Blue Christmas? [Hint: Play Doye O'Dell's version of the song, while asking this question.] Link to song Elvis Presley. Most will remember this popular song as Elvis Presley’s most famous Christmas recording, but it was initially recorded almost 10 years earlier by country music singer Doye O’Dell in 1948. How old was the singer of the original hit Rockin’ Around the Christmas Tree? Give yourself a point if you can get within 2 years. Link to song The singer is Brenda Lee who was 13 years old. An interesting fact: The song was written by Johnny Marks, who was Jewish and did not celebrate Christmas. Name three songs that have reindeer in them. (One point for each answer up to 3 points) [Suggestion: Play Gene Autry's Rudolph the Red-Nosed Reindeer during this question.] Link to song Here are seven, but there are definitely more! Grandma Got Run Over by a Reindeer Rudolph the Red-Nosed Reindeer The Night Before Christmas Little Saint Nick Up on the Housetop Run Rudolph Run The Christmas Song The song Jingle Bells began its life under a different name with different lyrics. Name the original tune. Bonus – Name the artists who sing the most popular recording of this tune. Link to song One Horse Open Sleigh. The song, written by James Lord Peirpoint in 1850, was originally purported to be written around Thanksgiving for his father's Sunday School class. It was so popular, it received new lyrics and was used again during Christmas. It turns out some of the original lyrics were considered too suggestive to sing...but that's another story. Bonus – The artists on the most popular recording of this tune are Bing Crosby and the Andrew Sisters. Not all the classics come from bygone years. Mariah Carey added her own holiday music classic in 1994. What is the name of the song? Link to song All I Want for Christmas is You. In 2017, The Economist reported that Carey has earned over $60 million in royalties from that song in the United States alone! Who recorded the best-selling Christmas album of all time? Which is second place? According to Billboard, the most popular Christmas album of all time belongs to Elvis Presley: Elvis's Christmas Album. (Link to album) Second place goes to Kenny G’s Miracles: The Holiday Album, which has sold over 7.3 million albums. (Link to album) Total possible points: 17 points 14 or more points: You are a holiday genius! You must be in a musical group. 9 to 13 points: It's in you, just bring it out! 4 to 8 points: Take heart. Even the Grinch needed to start someplace. 0 to 3 points: Pay attention and stop eating the cookies! Disclaimer: All songs mentioned here are to be used solely as part of this quiz for personal use. All songs mentioned here are the rights of their respective copyright holders. No ownership rights or other rights are intended or implied. If you love the songs, please support the respective artists and their respective owners.

The vast amount of information shared online during tax season makes it a haven for identity thieves, and they're doing everything they can to take advantage of the opportunity! Here are several ways that identity thieves are targeting you, common signs of ID theft, and steps to take if you become a victim. How Identity Thieves Target You Impersonating the IRS. Thieves calling you and claiming to be the IRS will try and intimidate you into making an immediate payment using a gift card or wire service. Remember, the IRS will physically mail you a letter as a means of first contact. And the IRS will never call you to demand immediate payment. Filing a fraudulent tax return. Identity thieves often try to file a tax return using your Social Security number before you do. So consider filing your tax return as quickly as you can to beat identity thieves at their own game. Phishing schemes. Be on the lookout for unsolicited emails, texts, and social media posts that prompt you to share personal and financial information. These messages could also contain viruses, spyware, or other malware that could infect your electronic devices. Common signs of ID theft Here are some of the common signs of identity theft according to the IRS: In early 2023, you receive a refund before filing your 2022 tax return. You receive a tax transcript you didn’t request from the IRS. A notice that someone created an IRS online account without your consent. You find out that more than one tax return was filed using your Social Security number. You receive tax documents from an employer you do not know. Other signs of identity theft include: Unexplained withdrawals on bank statements. Mysterious credit card charges. Your credit report shows accounts you didn’t open. You are billed for services you didn’t use or receive calls about phantom debts. What you can do If you discover that you’re a victim of identity theft, consider taking the following action: Notify creditors and banks. Most credit card companies offer protections to cardholders affected by ID theft. You can generally avoid liability for unauthorized charges exceeding $50. But if your ATM or debit card is stolen, report the theft immediately to avoid dire consequences. Place a fraud alert on your credit report. To avoid long-lasting impact, contact any one of the three major credit reporting agencies—Equifax, Experian or TransUnion—to request a fraud alert. This alert covers all three of your credit files. Report the theft to the Federal Trade Commission (FTC). Visit identitytheft.gov or call 877-438-4338. The FTC will provide a recovery plan and offer updates if you set up an account on the website. Please call if you suspect any tax-related identity theft. If any of the previously mentioned signs of tax-related identity theft have happened to you, please call to schedule an appointment to discuss the next steps.