Is It Tax Time Already?

Having a profitable business is a good thing — obviously. As tax season gets rolling and your tax documents accumulate, let's look at some actions you can take now to help maintain profitability.

I met with a client who had turned a nice profit on a small business he recently started. Having a profitable business is good, so I worked through his previous year's tax return to see how his costs stacked up. I was more than a little surprised to see he only had four different expenses to operate his business.

He operated his business out of his home, yet had no expenses listed for maintaining a home office. The Internal Revenue Service has become more reasonable in allowing home office expenses as long as you follow IRS rules.

He used a vehicle in his business, yet chose not to use the standard mileage deduction the IRS allows for legitimate business use of a vehicle. Each year the IRS establishes a set cost-per-mile designed to reflect the actual cost to operate a vehicle so you don't have to track individual expenses like gas, depreciation, etc. For 2009, the rate is 55 cents per mile.

I questioned my client about his tax forms and noted some expenses I would have expected to see but were not listed. He captured his gas cost for the vehicle, but no repair and maintenance or depreciation. He had no expenses listed for his phone use, which was extensive in his business. He purchased various supplies to run his business, yet did not list these costs as business expenses. Fortunately, he listed his advertising expense.

He explained that he didn't know anything about taxes and turned all the paperwork over to a professional to prepare. It was then I understood his tax professional only had the information the client offered and used that to prepare the taxes. Since the client didn't provide any additional expenses to list, they never showed up on the form.

When I am asked about a tax question, I refer clients to the professionals in my community who make it their jobs to fully understand taxes and accounting issues that can affect businesses. But here's a tip you can use to help your tax professional: the more you understand how the IRS treats business income and expenses, the better you can work as a partner with your tax professional.

The IRS offers a wealth of information to help you better understand taxes, and much of it is on a Web site for businesses at www.irs.gov . Or, you can phone the IRS "Customer Service for Business" phone number at 800-829-4933. I phoned this number to test it, and after working through a few automated menus, I talked to a very helpful representative. He suggested small businesses just starting out should consider getting the following publications:

Publication 334 - Tax Guide for Small Business
Publication 583 - Starting a Business and Keeping Records
Publication 535 - Business Expenses
Publication 463 - Travel, Entertainment, Gift and Car Expenses

He pointed out that many people who operate small businesses as sole proprietors don't understand the self-employment tax or how to fill out a Schedule C form. He said IRS representatives are happy to work with callers and help them understand the forms. They are also happy to mail you the publications listed above (and others) free of charge to help you better understand taxes.

Do yourself a favor and learn a little bit more about how business taxes work so you can "partner" with your tax professional at tax time. Finally, remember that the accounting professionals in your community are able to advise you on an ongoing basis of modifications to the tax laws and the best way to make changes in your business to take advantage of those modifications. They can help you in many more ways than just filling out tax forms. The money you invest in them for their expert advice can pay dividends throughout the year, not just at tax time.

Your local Small Business and Technology Development Center is happy to help you with your small business success. Appointments may be made for free business consultations on small business issues by contacting the SBTDC office near you.

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- Lyle Wright, former business specialist, SBTDC