A new year approaches and one is ending. The annual ritual of reporting income and expenses to the federal government will soon be upon us. Take time this month to prepare for tax time over the next four months. Here are a few tips that may reduce stress and dismiss myths of tax obligations.
• Myth or fact: Independent contractors are not required to report income if Form 1099 MISC is not received. This is false. Income generated from providing a product or service within a business is taxable income and should be reported to the Internal Revenue Service.
• Myth or fact: When services are exchanged for other services or products and currency is not exchanged it is non-reportable. This is false. It is called bartering. The fair market value of the service or product at the time of the exchange must be reported as income.
The IRS allows a business to deduct costs (expenses) generated as a result of doing business. Some of the more notable costs: utilities, telephone, advertising, rent, wages, payroll taxes, supplies, professional services and inventory are easy to identify. However, travel and lodging expenses can seem unclear.
• True or False: If a family goes on a business trip the entire cost is a business deductible. Answer: it depends. According to the IRS, if the family members are employees or co-owners of the business and have a bona-fide reason to be on the business trip the cost is a business deduction. However, only 50 percent of meals are an allowable expense.
Another cost to businesses that is overlooked is the use of a personal vehicle for business purposes. The IRS standard mileage rate can be used to determine allowable business expense when accurate records of miles driven during the year are maintained.
One should organize all business documents before taking them to an accountant for tax preparation. Organizing consists of separating the receipts by expense category; taking each category of receipts and adding the amounts; and using a spreadsheet program or calculator with tape. For income determination sales receipts should be added as well. Consider filing receipts by category or month using multiple colored folders.
It is not wise for a business owner to attempt to prepare their own tax return. One should allow an experienced tax preparer to perform this task since tax laws change and the day-to-day duties of running a business is time consuming.
Sandra Taylor-Sawyer is director of the Small Business Development Center at Clovis Community College. Call the center at 769-4136 or visit www.nmsbdc.org/clovis