Small Business Tax Preparation
Posted Mon, June 1, 2020
Starting and running a small business can be very challenging, but very exciting. Probably more of a pain in the butt, yet most business owners start a company to do something they love. That passion can be a great motivator, but it can also be a detractor. Proper small business tax preparation and planning, recordkeeping of your business tax deductions and money handling is a must. This is just the operational stuff- you also have to consider entity structure, exit strategies, risk mitigation, retirement planning and all that hoopla.
Basic Types of Small Business Tax Returns
Before we get too far along, there are some basics to get out of the way. You might already know all this stuff but there are others who don’t so please bear with us as we run through some small business tax preparation scenarios-
|Trade Names, DBAs
|Schedule C, Individual Tax Return.||1040|
|Single Member LLC||Schedule C, Individual Tax Return.||1040|
Husband and Wife
|Community Property State– Schedule C, Jointly Filed Individual Tax Return.||1040|
|Common Law State– Partnership Tax Return. The Revenue Code is clear on this, yet most tax professionals and attorneys mess it up. It’s hard to enforce.||1065|
|Multi-Member LLC||Partnership Tax Return.||1065|
|C Corp or PC||C Corporation Tax Return||1120|
|S Corp Election||S corporations do not exist. Rather an underlying entity, such as an LLC or C Corp, elects to be taxed as an S Corp. Therefore a corporate tax return is filed.||1120S|
The rest of this page is written for the small business owner who does not need a partnership (Form 1065) or corporate (Forms 1120 or 1120S) tax return. If you want more information on business entity tax returns, preparation fees and how it all works, please click on the button below-
LLC Tax Preparation
If you are a sole proprietor or a single-member LLC (SMLLC) without an S corporation election, your small business transactions will be reported on Schedule C of your individual tax return (Form 1040). As you might know, a single-member LLC is considered a disregarded entity, therefore it does not have a separate small business tax return- this is a common misconception. However, this is an IRS thing and you might still have a separate state filing requirement. For example, California has a franchise tax that is reported on Form 568 even if you are considered disregarded by the IRS. Texas and other states have something similar.
Our fee for this tax return preparation is typically $500 to $700 which includes August and November tune-ups where we discuss tax planning, tax deductions and other matters. Where you fall in this range will depend on how much stuff you have going on. Good organization can overcome complexity… then again, being disorganized can make the simplest of small businesses seem like a full audit of Google. Either way we can help- it’s what we do all day, every day.
For example, many small business owners have a home office, yet they might also have another work location. This needs to be handled correctly to not have the home office disallowed. Automobiles? Should the company own it or should you? Mileage deduction or actual expenses? These too must be properly discussed and accounted for on your tax returns. We will also help with SEP IRA (old school) or solo 401k plan (new school) contributions calculations, and determine what the best course of action is.
If you created a limited liability company with your spouse, you can elect to be treated as a qualified joint venture only if you live in a community property state. The IRS views a multi-member LLC (MMLLC as opposed to SMLLC) as a partnership, and therefore the IRS is expecting a partnership tax return on Form 1065 and K-1s issued to the partners. Yuck. This is a huge distinction!
For small business tax preparation, click on the button below-
Small Business Tax Deductions
There are several tax deductions available to small business owners regardless if you are an LLC, partnership or an entity taxed as an S Corp. The obvious ones like printer paper and business cards are easy. But what about cell phones? What is the business use of a shared family plan? How about home offices? Business meals- is it 50% or 100%? When can a meal be 100% deducted? Spoiler alert- a pizza party for the office is 100% deductible, but if the office is just you, then No. But if the office is you and your spouse, then Yes. Boom!
Self-employed health insurance and health savings accounts (HSAs) can be tricky, and many small business owners leave money on the table by deducting these on Schedule A versus Form 1040. Schedule A has tall hurdles to allow for deducting medical expenses including health insurance premiums. This little “gotchya” could cost you several hundred dollars in taxes. Have you considered a Health Reimbursement Arrangement (HRA) or a Flexible Spending Account (FSA) for deducting dependent care benefits? Being a business owner has long hours and lousy pay- squeeze as much out of it as you can!
These are the type of things WCG will consult with you. Oftentimes the taxpayer or small business owner gets in trouble because he or she did not understand the rules. Once you know the rules and how to apply the rules, owners can take advantage of small business tax deductions without worry or concern. Please click on the button below for more information-
Self Employed 401k Plan
Once you launch your shiny new small business, you might also consider the several small business retirement plans which include solo 401k plans, profit sharing plans, cash balance and defined benefits pensions. For example, with a solo 401k plan or self employed 401k plan piggybacked with a defined benefits pension, you could sock away over $192,000 at age 50. All tax deferred if you like, which could yield a savings of over $86,000 (assuming a 45% marginal tax rate with federal and state). Wow!
Can’t contribute to a Roth IRA because you make too much? Perhaps a solo 401k plan with Roth option is your best bet with high contribution limits and no income phaseouts. Fidelity, TD Ameritrade, Schwab, etc. offer solo 401k plans, but they do not have a Roth option in the plan provision. WCG (formerly Watson CPA Group) is a 401k plan third party administrator (which means we created our own 401k plan document) that has a Roth option. In turn, the big boys at Fidelity, TD Ameritrade and Schwab will honor our 401k plan document to be the custodian of your 401k. Huh? Contact us for more information!
Note how we purposely did not mention SEP IRAs. These are old school and are usually designed to be crisis management tools (after the fact) rather than good planning tools and more product self employed retirement plans. Read more about the various self employed retirement options, including retirement tax bombs and the difference between tax deferral and tax savings below-
Business Advisory Service Plans
WCG specializes in small businesses who generally have fewer than 100 employees. Why? We want to help people, and more importantly we want to help the business owner directly. Frankly speaking, once a business gets to a certain size management layers get in the way of owner access. Access allows us to ensure the owner(s) are leveraging the most out of their business for themselves and their families.
Because small business is a core competency for us, we have created business advisory service plans which include these really cool things-
|A la Carte*||Vail||Telluride||Aspen|
2023 Tax Planning and Preparation
|Streamlined Tax Planning, Tax Projection Worksheets||$350 to $500|
|Annual Tax Reduction, Shifting and Deferral Analysis||$350 to $500|
|Small Business Tax Deductions Optimization||Included|
|Section 199A QBI Deduction Tax and Salary Optimization||$300|
|Estimated Income Taxes (via increased payroll withholdings)||Included|
|Business Entity Tax Return (Form 1065, 1120, 1120S)||$1,500 starting|
|Individual Tax Return (Form 1040, joint filing), One Owner||$800 starting|
|Expat / Foreign Income Calcs (Form 2555, FBAR, Form 8938)||$300 to $500||Add-On||Add-On||Add-On|
|Tax Resolution, Audit Defense||Varies||As Req'd||As Req'd||As Req'd|
|Financial Planning, Calculations, Discussions||$900 to $2,500||Add-On||Add-On|
|Situational Tax Law Research (up to 3 hours annually)||$750 to $1,000|
Payroll and Accounting Services
|Reasonable Shareholder Salary Calculation (RCReports)||$500|
|Monthly Shareholder Payroll Processing (includes spouse, kids extra)||$1,200|
|Employee Payroll Processing (bi-weekly, direct deposit)||Varies||Add-On||Add-On||Add-On|
|Annual Payroll Processing (W-2s, other filings, up to ten 1099s)||Included|
|Accounting Services (bookkeeping + analysis... see below)||Varies||Add-On||Add-On||Add-On|
|Quarterly QuickBooks Consulting (QuickStart Launch)||$250, $750||Add-On|
Business Advisory Services
|Business Consultation, Periodic Business Reviews (PBR)||$250 to $1,000||Annually||Routine||Routine|
|Complimentary Quick Chats (CQC)||$250 to $500||Routine||Routine||Routine|
|CPA Concierge Services||Varies||Add-On||Add-On|
|Interfacing with Lenders, Attorneys, Financial Planners||$750||Routine||Routine|
|Fractional Controller (monitoring 3rd party bookkeeping)||Varies||Add-On||Add-On||Routine|
|Quarterly Financial Statements Analysis, Comparisons||$1,200|
|Annual Cash Flow Management and Analysis||$1,500 to $2,500|
|Annual Budgeting, Forecasting, Goal Setting||$750 to $1,000|
|Annual First Research Reports, Industry-Focused Consulting||$350 to $600|
|Annual National and Metro Economic Reports||$150|
|KPI Analysis, Benchmarking, Hot Sheets, Trend Analysis||$500 to $1,500|
|Strategy and Maintenance|
|C-Level Financial Advice, Strategic Planning (Fractional CFO)||Varies|
|Succession Planning, Ownership Changes Consultation||$750 to $1,000||Routine|
|Annual Business Valuation||$2,500 to $3,000|
|Annual Corporate Governance, Resolutions, Meetings||$150 + filing fee|
|(prorated based on onboarding date)|
Custom! Unlike the modern day new car packages where you have to spend $8,000 for the moonroof, our Business Advisory Service plans can be customized specifically for you. The array above is simply a starting point. If you need more or less from us, let’s chat about it!
Tax Patrol Services
We also have Tax Patrol! This is a wonderful tax service for those who don’t need all the business advisory bells and whistles above, but from time to time want some love from an experienced tax consultant and business advisor. Have a quick tax question? Need to know the depreciation rules as you buy that new car? Wondering what your April tax bill is going to be in August? Tax Patrol is like ski patrol… you might not use it, but you sleep better knowing you have it.
|A la Carte*||Keystone||Copper||Breck|
|Individual Tax Return Prep (Form 1040, joint filing)||$800 starting|
|Business Entity Tax Return Prep (Form 1065, 1120, 1120S)||$1,500 starting|
|Streamlined Tax Planning, Tax Projection Worksheets||$350 to $500|
|Estimated Tax Payments Calcs||Included|
|Tax Resolution, Audit Defense||NA||Add-On||Add-On||Add-On|
|Complimentary Quick Chats (CQC)||$250 to $500||Routine||Routine||Routine|
|(prorated based on onboarding date)|
Additional Business Services
The following are additional business services to get your venture launched and on the way. Some of these are teased out separately as one and done fees like formation and onboarding stuff.
|Monthly Accounting (bookkeeping + analysis)||starting at $400 / month|
|Bi-Monthly Accounting (bookkeeping + analysis every 2 months)||starting at $250 / month|
|Quad-Monthly Accounting (bookkeeping + analysis every 4 months)||starting at $150 / month|
|Sales Tax, Personal Property Tax||typically $75 / month, $150 / quarter|
|Employee Payroll (direct deposit, bi-weekly)||1 employee, $100 / month
2-5 employees, $175 / month
|Fine Print: Accounting fees are based on 2 bank account with less than 250 monthly transactions but does not include the QBO fee from Intuit. Custom quote is available if you have a lot going on such as third-party integrations (POS, time billing system), accrual accounting method, extensive benefits packages and / or industry specific issues (e.g, job costing in construction).
Even Finer Print: Employee payroll can be added only if already using our Business Advisory Service plans above (e.g, Vail). Custom quote for more than 5 employees and a referral to therapy.
|Articles of Organization or Incorporation, or Dissolution||$625 + state filing fee|
|Initial Report (if required)||$125 + state filing fee|
|Annual Report||$350 + state filing fee|
|Employer Identification Number (EIN)||Included|
|Single Member Operating Agreement (SMLLC)||Included|
|MS Word Templated Bylaws Agreement (Corporations)||Included|
|S Corp Election, Timely Election (made with formation)||Included|
|Payroll Accounts Setup, Transfer, Closing||$550 to $650 depending on state|
|Employee Data Transfer||$25 per EE, >5|
|Accounting Setup or Transfer (Fractional Controller)||Varies|
|QuickStart QuickBooks Setup and Support (90 days)||$750|
|S Corp Election, Timely Election (within 75 days)||$450|
|Late S Corp Election Back to January 2023||$600, $1,200 after Jan 1 2024|
|Examine Prior Tax Returns||Included|
|Entity Relocation Package (payroll closure and opening, entity move)||$800 (some are $1,050) + state filing fees|
|Address Changes w/o Payroll (IRS, State Dept of Revenue, Secretary of State)||$250 + state filing fees|
|Address Changes with Payroll (above + state and local payroll agencies)||$350 to $450 + state filing fees|
|Our entity relocation package includes closing your current payroll accounts, opening shiny new ones, moving your entity with the Secretary of State (if applicable) and updating addresses as necessary.
Speaking of address changes... these are tough. Basic address changes require IRS, State Department of Revenue and Secretary of State notifications. Address changes that include payroll add another level of complexity since departments of revenue are not the same as departments of labor, and there might be local or municipal agencies as well.
Advisory Services Fine Print
A la CarteA la Carte fee ranges are approximates. 85% of our clients fit into these fee ranges, but there are outliers. We have a handful of clients with over 30 rentals; their individual tax return is north of $4,000. We also are assuming one state; if your business spans the galaxy then additional fees will be discussed with you prior to payroll setup or tax preparation. Typically each state or tax jurisdiction is around $250 to $350 for tax preparation since it affects both your business and individual tax returns (frankly, state apportionment is a pain in the butt, but it is our pain… and states, especially California and New York, are crazy about it).
Some more things to consider- when a partial year remains, our usual annual fee is pro-rated to not charge you for services you didn’t use (like payroll and consultation). However, a large chunk of our annual fee is tax preparation which is typically a built-in fixed amount of $2,300 (both business entity and individual tax returns) plus annual tax planning. Whether we onboard you in January, July or December, we have to prepare a full year tax return. This increases the monthly fee for the remaining months of 2023 but the monthly fee will later decrease in January of 2024 to reflect the amounts above. Yeah, we make it sound like 2024 is just around the corner.
We make very little profits on payroll processing… we offer it as a convenience to our clients. One throat to choke with a single call can be reassuring but if you want to run your payroll, go for it! Everyone thinks payroll is a piece of cake; write a check and done. Nope… we see a lot of mistakes being made by clients especially the handling of health insurance and HSA contributions since there are special rules for greater than 2% S Corp shareholders. Then again, we don’t mind fixing what was broken.
You can prepare your own individual tax return as well… but the benefit WCG preparing both individual and business tax returns is that we slide things around depending on income limitations, phaseouts, alternative minimum tax (AMT), Section 199A deduction optimization, pass-through entity tax deductions (PTET), etc. Having our arms around both can yield some good tax savings!
Note: An individual tax return is what the IRS calls Form 1040 and refers to the entity filing the tax return (you, the individual, are the entity). However, a married couple are deemed to be one entity for the sake of an individual tax return. So, when we say we will prepare your individual tax return, it is meant to include your spouse in a jointly filed tax return.
Break-Even Analysis (does an S Corp make sense?)
Break-even analysis is based on our annual fee of $4,320. If an S corporation saves you 8% to 10% (on average) in taxes over the garden-variety LLC, then $4,320 divided by 9% equals $50,000 of net ordinary business income (profit) after expenses and deductions.
More sales pitch! Keep in mind that our fee of $4,320 includes your individual tax return which you might already be paying another tax professional to prepare. WCG has a handful of clients who are right at the break-even point of $50,000 but leverage an S Corp and our services to get tax preparation, tax planning and consultation.
We are not salespeople. We are not putting lipstick on a pig, and trying to convince you to love it, even if Tom Ford’s Wild Ginger looks amazing. Our job remains being professionally detached, giving you information and letting you decide.
We see far too many crazy schemes and half-baked ideas from attorneys and wealth managers. In some cases, they are good ideas. In most cases, all the entities, layering and mixed ownership is only the illusion of precision. Just because you can complicate the crap out of your life doesn’t mean you must. Just like Chris Rock says, just because you can drive your car with your feet doesn’t make it a good idea.
Here is a brief summary of the next steps should you want to engage WCG with Business Advisory Services or Tax Patrol-
1. We schedule an appointment to discuss your needs and ensure that we have the proper resources to help you.
2. We draft a proposal outlining the scope of services and our fixed annual fee.
3. If necessary, we schedule another appointment to review the proposal and perhaps tighten things up or make changes.
4. Once the proposal is signed, the fun begins with onboarding. We have an extensive checklist and internal task list to properly onboard you and your business. Some things are concurrent (such as gathering housekeeping docs and setting up payroll) and some things are sequential (for example, collecting financial data and then offering salary recommendations and creating a tax plan). Onboarding is like having a baby; a SWAT team shows up and does a zillion things, and poof, everyone is gone except for mom and baby.
5. After onboarding (usually 4-6 weeks), things settle down into a rhythm- Tax preparation in the spring, tax planning in the summer, with payroll and routine consultation bouncing along throughout the year.
Our Business Expertise
As mentioned elsewhere we primarily focus on small business owners and their unique consultation and tax preparation needs. With over 40 full-time consultation professionals including Certified Public Accountants, Enrolled Agents and Certified Financial Planners on your team, WCG consults on custom business structures, multiple entity arrangements, S corp elections (even late S corp elections back to January), tax strategies, business coaching, industry analysis, executive benefits, retirement planning including individual 401k plans, exit strategies, business valuations, income tax planning and modeling, and tax representation.
We also work with business law attorneys for business owners who have additional needs such as drafting Operating Agreements, fee for service contracts, buying or selling a business including employee stock ownership plans and partner buy-ins. In addition, WCG coordinates with third party plan administrators such as Polycomp and RPS to create age-based profit sharing plans and cash balance (defined benefit) plans. We can run point on whatever your business needs to ensure that communication is effective and efficient allowing you to sell widgets.
Here are some additional resources you might find useful.
Do you have questions about small business tax preparation? What about S Corp vs LLC and the what that means? Let’s chat!
Keeping accurate records is actually pretty easy, especially if you have a dedicated checking account for the business. Two elements are required to meet IRS standards- a written log or record of the business purpose, and evidence of the amount paid, date and to whom. Bank account or credit card statements in conjunction with financial or accounting software such as Money, Quicken, QuickBooks and Xero will cover most of your business expenditures. A trip to WalMart or Home Depot would probably require a detailed receipt since you can buy paper and diapers at a WalMart. Read more about proper small business recordkeeping here-
The biggest and most repeated mistake that small business owners commit is to spend company funds on personal items. Do not pay the house mortgage with your business checkbook! Write a check to yourself (or make a transfer), and then write the mortgage check. Items such as gas for your car seem business related- unless the vehicle is 100% business use and owned (and titled) in the business name, then it becomes a mixed use vehicle, and the gas purchase should be handled the same way as the mortgage check. Then, you turn in expense reimbursements to your company for the expense. This is called an Accountable Plan- contact us for more details.
Hobby Versus Business
Is your business really a hobby? There several step by step criteria that the IRS and Tax Courts will use to determine if you have a genuine profit motive, or if you are just playing around with your business. There is no hard and fast rule such as the ubiquitous three years of consecutive losses rule. Recently the Tax Court upheld a track coach’s eight years of consecutive losses as a legitimate business. Read more about hobbies here-
Business Coach, Advisors, Consultants, et al
WCG can also help you with business decisions such as marketing, hiring and training a staff, logistics, supply chain, and other issues that entrepreneurs face every day. We also have experience with business acquisitions, valuation, SBA loans and lending, and designing exit strategies. Most business owners don’t think about exit strategies, but this becomes critical when getting involved with another partner.
Other things to consider are expense reimbursements, liability issues, retirement plans including annuities, life insurance, key person insurance, defined benefits plans, death clauses, divorce clauses, long-term care, health insurance, etc. Schedule a consult today!
We are your Colorado Springs Accountants, and your Denver Accountants too. We look forward to working with you! And even if you don’t live in Colorado, we can still provide excellent service through modern technology and our client portal. Over 80% of our clients are outside Colorado! Weird, but that’s the way we’ve grown. If you live somewhere really cool like Santa Barbara or New York, our team is more than willing to travel. Even Chicago has its moments.