Income tax filing season can be a trying time for small business owners, and in a recession, even more so.
One of the biggest pitfalls owners are likely to encounter is a perennial one: poor record-keeping that not only makes it hard for them to complete their returns, but also to know where they stand financially. Another common problem is keeping up with changes in the tax laws, especially for state and local governments that are now looking for ways to increase revenue.
Ask tax professionals what their clients struggle with, and haphazard books and ledgers is often the first answer. Many business owners don't know how much money they have on hand, how much they owe and what their customers or clients owe them.
"You really need to control your books and understand what you're making," said Jeffrey Chazen, a certified public accountant with Eisner LLC in New York.
Some business owner use their checkbooks and credit card bills as their records. But it's a problem when "they can't locate all their check registers or all of their bank statements," said Gregg Wind, a CPA with Wind Bremer Hockenberg LLP in Los Angeles.
Others are even more disorganized, with boxes or piles of invoices, receipts and canceled checks that need to be sorted — CPAs ruefully refer to these owners as "shoebox clients." These owners are in danger of missing out on important deductions and can end up overpaying the government. Or, if the government questions a deduction, you could lose it if you don't have documentation.
The answer is to use a computer application to keep your books, one that interfaces with tax preparation software. But many owners don't use such programs because they don't have the time to input the information. Well, they can either spend the time throughout the year keeping their books, or spend even more time trying to figure things out before April 15.
The solution for many owners in this plight really should be getting help, whether it's a bookkeeper to take care of ledgers and a tax professional to handle returns, or both. It may be too late for 2008, but it's still early in the new year, and a good time to get organized.
Badly kept records are a particular problem for owners with home offices or who use cell phones and/or vehicles for both personal and business reasons. They need to keep good personal as well as business records.
The IRS allows owners with home businesses to deduct a portion of expenses including mortgage interest, repairs, utilities and insurance, and unless taxpayers have invoices and receipts, they can't compute the deduction accurately. Similarly, you can deduct a portion of what you pay out on cars, cell phones and other items with dual purposes, but you need to keep track of when a car, for example, is driven on personal errands or to meetings with clients. At this point, after the year has ended, it's hard to reconstruct that information.
Keep up with tax laws
Another problem for many owners is keeping up with all the changes in the tax laws — and not just at the federal level. Many states have laws that differ from the Internal Revenue Code, and owners need to be aware of them.
Leon Dutkiewicz, a CPA with Margolis & Co. in Bala Cynwyd, Pa., noted that some states treat depreciation of assets differently from the federal government. That means two separate calculations for each item that's being depreciated. Another complication is for companies that do business in different states — for example, a small retail chain. Chances are they have different tax laws, which again means separate calculations.
"Trying to keep current on federal tax law changes and state tax law changes were you do business and every locality, it becomes extremely difficult," Dutkiewicz said. "It's forever in flux at all levels."
The easiest way to keep up with those changes is to have a good tax professional whose job it is to follow the tax laws. There are some federal changes for 2008 that owners need to be aware of. Wind noted, for example, that if partnerships choose to get extensions of the April 15 filing deadline, they have to file their returns by Sept. 15, not Oct. 15 as in the past.
Many more changes are likely for the 2009 tax year, since the government is expected to have an economic stimulus plan in place, and many states are also likely to enact changes in their own tax codes.