by Mark | Dec 28, 2022 | Business
So, you’ve decided to ditch the employee badge and become your own boss. Good for you. But now that you’re taking that big, bold, leap, have you weighed up the business structure options?
When you’re a business owner, you’re always trying to see around the next corner. Choosing the right business structure is one of the most important decisions you’ll make in the early days of your company. So, take the time to learn what the business structure options are, which is best for your business, and why.
As always, At FMA, C.P.A. we’re happy to explain it all…
What is a business legal structure?
A business legal structure is also known as a business entity, and it’s a government classification that regulates some aspects of a business. On a state level, it determines the liability, and at a federal level, it determines the tax burden.
The most common types of business structures are sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and cooperatives.
Why is choosing the right business structure important?
Making sure that you choose the right legal business structure is an important step because there are certain consequences to consider: It will determine your tax rate, paperwork and management requirements, fundraising abilities, and more.
- Tax: some businesses (sole proprietors, partnerships, and S corporations) will class their business income as personal income. Others (C corporations) class their business income as separate from the owner’s personal income. Your choice of structure will impact your tax burden.
- Liability: The business structure determines if your business faces liability if it ever faced a lawsuit. Some options (sole proprietorships and partnerships) are pretty easy to start however they may lack protection. Others (corporations) may be trickier to start but offer more liability protection.
- Paperwork: each of the business structure types has different requirements when it comes to filing tax forms. Corporations are required to submit articles of incorporation and government reports.
There are other consequences such as hierarchy, registration, and fundraising – all depending on which business structure you chose.
Factors to consider
It’s not always obvious which business structure to choose when you start a business, so it’s a good idea to meet with an expert to weigh up the options, give it careful analysis, and look at the long-term consequences.
Bear in mind also that if you feel that your initial choice of business structure was a mistake, you can change your business structure in the future.
The factors you and your advisor should weigh up include:
- Tax implications
- The future direction of your business
- The operational complexity of your business
- The level of control you need
- Whether you’ll obtain capital investment
- The protection the business needs against lawsuits
- Licenses, permits, and regulations
Business strategy gold
Make sure that your business is benefiting from its structure and maximizing its profits.
Talk to the seasoned tax experts. We want your business to flourish, and avoid the tripwires. We work with clients in the Tampa Bay area to assess the ideal business structure needed to maximize cash flow. It’s all about weighing up the operational and tax considerations and minimizing the risk exposure.
At FMA, C.P.A. we are your business advisors. This means that we’re the ones to talk to about all things business strategy, tax management, accountancy, and financial advice. The testimonials, written by the business owners that we have worked with, show that with our guidance, a business can go from surviving to thriving.
It all starts with us sitting down together at a free strategy session. So, let’s dive in!
by Mark | Sep 6, 2022 | Business
What do you do with your downtime? Most of us have a pastime, whether it’s baking, home maintenance, or crafting.
But how do you know if it’s a hobby or a business? And does it matter?
The thing about a business versus a hobby is that with a business you have tax, insurance, and legal obligations.
Suddenly, that little side hustle seems a little more complicated than you’d previously thought. Well, don’t worry. FMA, C.P.A. can explain the difference between a hobby and a business, reveal the top things to consider, and advise on what steps to take.
How to spot the difference
The golden rule is that an activity is considered a business if you pursue it with continuity and regularity, and your primary purpose is to generate income or profit.
The IRS said that “A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business intending to make a profit. Many people engage in hobby activities that turn into a source of income.”
Now that we know the difference, let’s look at 11 factors that taxpayers must consider when determining their activity to be a hobby or a business, according to the IRS.
11 Factors to consider
- The taxpayer carries out activity in a business-like manner and maintains complete and accurate books and records.
- The taxpayer puts time and effort into the activity to show they intend to make it profitable.
- The taxpayer depends on income from the activity for their livelihood.
- The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
- The taxpayer has enough income from other sources to fund the activity.
- Losses are due to circumstances beyond the taxpayer’s control or are normal for the start-up phase of their type of business.
- There is a change in methods of operation to improve profitability.
- The taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
- The taxpayer was successful in making a profit in similar activities in the past.
- The activity makes a profit in some years and how much profit it makes.
- The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.
Let’s remember that all of the above factors, facts, and circumstances relating to the activity must be considered, with no factor being more important than the other.
You must declare all income
It’s important to understand that if you make an income from an activity that’s completed with no intention of making a profit, you must report the income you receive.
The IRS state that “whether it’s something they’ve been doing for years or something they just started to make extra money, taxpayers must report income earned from hobbies on next year’s tax return.”
A partner in your business growth
The area of tax can be complicated. If you need more guidance, we can happily answer all of your questions.
We serve the Tampa Bay Area and specialize in tax management, accountancy services, financial statement preparation, and financial advice. We help our clients to reach their future goals by becoming better organized and more efficient in managing the financial aspects of their business.
We believe that it’s all about tax planning, not tax preparing. Let’s set up a free strategy session to talk about what steps you can take to ensure a compliant and secure financial future.
We’re your business advisors, and we’re ready to unlock the potential of your business.
by Mark | Feb 22, 2022 | Business, Business Advisory, client, Tax Deductions, tax planning
An IRS Audit: How to Avoid the Red Flags
Although the chances of an audit are rare, the fact is tax audits are a fairly routine business for the IRS. That said, audits can be especially scary for small business owners. After all, there are certainly horror stories in which IRS audits have resulted in company closures.
Fundamentally, an IRS audit is an evaluation of your business’s financial accounts and information. As such, you’ll find most audits are a result of discrepancies on tax returns. The IRS is simply reviewing your entries to ensure everything is in order. Sometimes an audit is random, and other times it can be based on suspected suspicious activity.
So, here are some red flags that could trigger an IRS audit of your business.
1. Data Entry Errors
The more manual your accounting and expense management functions are, the more likely you are to make errors when filing your taxes. Your accounting system is crucial to understanding business performance and is also vital to tax preparation.
While most accounting functions are digitized nowadays, data entry blunders like treating expenses as income or duplicating an entry could trigger a letter from the IRS. An audit can be triggered by something as simple as misspelling your business name. This is where e-filing comes in handy because you can load vital information from past tax returns.
If your math is a little shaky, soliciting the services of a tax preparer near you could save you the headache of an IRS audit.
2. Failing to Report Some Income
Underreporting your income on your tax return is a top audit trigger. The IRS compares your income from one tax year to the next. A noticeable discrepancy without supporting information can make Uncle Sam sit up and take notice.
The IRS wants what it’s owed and will go to great lengths to verify the reported amount of tax is correct according to tax laws. So, it’s only a question of when before it spots your omission. This is especially true for cash-heavy businesses like barbershops and nail salons.
3. Questionable Business Deductions
It’s not uncommon for small business owners to have itemized deductions on their returns, like home office deductions. While these tax deductions can reduce your taxable income, they can also raise red flags when they don’t measure up to your income. Same case if you’ve made significant contributions to charity.
The IRS also compares your tax returns to those of other businesses in your industry – anything that’s out of the ordinary may subject you to further scrutiny.
4. Excessive Business Expenses
The IRS stipulates that a business expense has to be both ordinary and necessary to qualify as a deduction. For instance, a professional painter could claim paint and paintbrushes as business expenses, but a software engineer who paints as a hobby cannot.
If you have large expenses, it’s pertinent to keep all your receipts in case you are asked for verification. However, matters get a little more complicated when it comes to entertainment, travel, and meal expenses, as they may blur the lines between personal and business expenses.
5. Earning Substantial Income
One in 100 businesses get audited each year, and usually the ones that earn more than $1 million per year, especially if they report a significant change in income. It’s not unheard of for companies to start raking in millions in revenue seemingly “out of the blue”, particularly in the age of social media when branding has a direct impact on your bottom line.
Don’t be surprised if you hear from an IRS agent when you start showing a substantial increase from year to year. That’s also a great time to bring in a business advisor to develop a growth strategy.
6. Reporting Too Many Losses on a Schedule C
If you claim a business loss each time you file a tax return, you may be due for a tax audit. While it’s not uncommon for small businesses to have losses, having many years of Schedule C losses could have the IRS questioning the legitimacy of your business. If you don’t turn a profit, the IRS may consider your business a hobby which could limit your tax deductions.
Keep all your business documentation that shows your company’s revenue and expenses throughout the year to cover all your bases.
7. Being Self-Employed
Unfortunately, the IRS tends to scrutinize self-employed individuals, especially if they fail to report a profit for at least three out of five years. This applies to freelancers and anyone working in the gig economy as well. Yet again, the IRS could claim your business to be a hobby, which would disqualify you from claiming certain business deductions.
As a small business owner, you should consider forming an LLC to lower your audit risk. Consult a tax professional near you to determine which entity would work best for you.
8. Misclassification of Employees
Some businesses intentionally misclassify employees as part-time workers or independent contractors for several reasons:
- To lower labor costs
- To avoid paying certain small business taxes
- To reduce business insurance expenses
It’s important to classify your employees appropriately and keep documentation of any independent contractors you hire.
Avoid the Dreaded IRS Tax Audit with FMA CPA
Talk to FMA CPA about your accounting practices, income, or deductions to determine what could trigger an IRS audit. We’re a CPA firm in Clearwater offering business advisory services designed to help you understand your business better and keep you on Uncle Sam’s good side.
Contact us for comprehensive tax preparation services and any questions you might have.
by Mark | Jan 8, 2022 | Business, Business Advisory, tax planning
Business Development Strategy: Boost Your Performance & Optimize Your Processes
Having a business development strategy is critical to the growth and success of your business. It’s a process that ensures everyone in your company is working toward a common goal and is used to identify and nurture new business opportunities.
Most small businesses, no matter how niche-specific their products and services, operate in a competitive business environment. Working with a strategic business advisor can help align your short-term operations with your long-term vision to drive growth and profitability. Although most organizations have the same overarching goals of increasing revenues and building strategic partnerships, the scope of business development is wide-ranging and varies from one corporation to another.
In brief, business development is all about identifying the initiatives and business operations that will make your business better. Not all businesses get strategic planning straight away. It’s a complex process that spans a multitude of departments, from sales and marketing to project management and vendor management. A business advisory firm will help you develop a framework that aligns the different departments to create a competitive advantage and prevent your teams from losing sight of the company’s objectives.
Grow Your Business with Small Business Advisory Services
Small business owners wear many hats and take on many different roles, including that of chief executive officer, hiring manager, and sales representative. Taking on these roles and dealing with the occasional crisis can take up too much of your time and, in turn, derail the growth and the sustainability of your enterprise. This is where business advisory services come in.
Business advisors are experts in financial planning and forecasting and can provide the insights needed to guide your operations and decision-making. They do this by identifying redundancies and inefficiencies in the way you do business and providing strategic solutions to unlock growth and elevate your business to the next level.
That doesn’t mean you should only bring in a business advisor when you have a fire to put out; their advice and expertise are fundamental for business growth, whether you’re just starting out or looking to expand your business.
Here’s what you stand to gain from small business advisory services.
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Understand Your Competitive Landscape
The success of your business is dependent on far more than your internal processes. You must have a solid understanding of the competitive landscape in your industry and keep up with a constantly evolving business environment. Getting a crystal-clear perspective on the changing factors in your market and industry is how you differentiate your brand and gain an edge over your competitors.
For business advisors, keeping up with changing trends, methodologies, and business strategies is just part of the job. Leveraging their services means you’ll always have the latest research at your fingertips.
The day-to-day requirements of running a business don’t leave enough time to plan for the future. Without a clear plan, you risk stagnation or, worse, obsoletion. A business advisory firm provides you with a board of experts from diverse industries and fields whose aim is to help you develop a strategic plan and roadmap for the future.
They can advise on how to enter a new market, acquire a new business, or whether to drop a certain department or product from your portfolio.
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Accounting and Bookkeeping services
Typically, businesses seek advice from a CPA firm at least once a year when organizing their books. However, an accountant can provide advice on a myriad of matters, including tax filing and audits, business investment strategies, payroll management, and financial legal advice.
With a business advisor, you get a clear and unbiased perspective on your finances as well as the best possible advice that will help you achieve your business objectives.
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Financial Planning and Forecasting
From tax planning to improving cash flow and financial modeling, a business advisor helps you better understand your financials and take measures to improve your company’s financial health. Financial planning allows for increased productivity and stronger business decisions. Having a financial plan sets forth a process to ensure your business goals are achievable from a financial point of view.
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Create a Social Media and Digital Marketing Strategy
It takes a lot of research to keep pace with the latest marketing trends. Today, every business needs a business marketing strategy to remain competitive. A business advisor can equip you with the knowledge and tools to launch and maintain a successful marketing strategy.
Working with a business advisor helps in creating an organizational plan and marketing strategy that caters to the needs of your customers. It also allows you to prioritize your products and services in a way that maximizes profitability.
Contact FMA CPA for Business Advisory Services and Business Development Strategies
FMA CPA is a CPA firm in Clearwater specializing in helping small businesses create business development strategies to increase their bottom-line revenues and sustain long-term growth. Contact us today to schedule your free consultation for our business development strategy services.
by Mark | Dec 30, 2021 | Business, Business Advisory, tax planning
5 Reasons You Need a Business Advisory Plan
A business advisory plan is key in a dynamic business environment. Regulations and technology change much faster, creating new opportunities and challenges. Today, global competition continues to increase, forcing business owners to rethink their strategies.
As a business owner, you may not have all the knowledge required to deal with these changes in the business environment. You need help from people with a deeper understanding of business dynamics. These are the business advisors.
Business advisors are professionals who possess critical knowledge of various aspects of a business. They help you with strategic planning, taxation, investment, and estate planning.
A trusted business advisor works with your accountant and attorneys to provide you with more relevant assistance. So why do small businesses need advisory plans?
Let’s explore five reasons.
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To Save Time
You may not have all the knowledge required to make your business take the lead in the market. As a small business owner, your skills may somewhat be limited to one field of study.
For instance, if you’re an expert in marketing, you might need assistance with auditing and taxation. It takes a lot of time to study and build our knowledge in any of these fields. Now, since time is limited, the best option is to have a business advisory plan.
With a business advisory plan, your work is in the hands of experienced people. They can do the work much faster and save you much time. These services mean you can concentrate on what you do best without worrying about delayed reports and tax returns.
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To Boost Profits
A business advisor can help you come up with wise financial plans. These plans benefit you in two ways: maximizing revenues and minimizing expenses. To maximize revenue, a business advisor can help you in several ways. These include:
- Identifying new opportunities
- Diversifying your business
- Making wise investment decisions
Business advisory services can help minimize costs in various ways. A common approach is to help spot a legal advantage that can help lower your taxes.
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To Make Strategic Plans
Small business owners, especially new ones, may lack the essential skills needed in strategic planning. A business advisory plan helps tap into the minds of experienced professionals to come up with sound plans. These professionals help point out various aspects of a business that need your attention.
Strategic plans may also act as the fuel that propels your business to higher growth. Some of these plans may require presentation to third parties. For instance, a lending institution may request such documents to approve a loan. So, when you prepare these documents with the help of an expert, they become more presentable to third parties.
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To Compete with Large Businesses
Unlike large companies, small businesses may lack the resources to hire highly skilled professionals. But that doesn’t mean you can’t get professional services. With a business advisory plan, you have access to expert services. That’s to say, you’ll have the same advantage large companies have at a reasonable cost.
As a result, you can survive in the same market. Best of all, your expenses don’t increase too much after outsourcing expert services. These professionals work on a contractual basis or an hourly basis. Whatever the case, you get their services at a lower cost than hiring a full-time expert.
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To Comply with Government Regulations
Businesses must follow many laws from the state and federal governments. Business laws, especially auditing and taxation, tend to be bulky and complicated. But with a business advisory plan, they shouldn’t be a problem.
An advisory plan can help you with various legal issues. These include registering intellectual properties and drafting legal documents for business formations. A business advisory plan also provides consultations on new legal matters that affect your business.
Where to Get Business Advisory Services
Business advisors are professional individuals who keep monitoring emerging business trends. They possess specific knowledge which is always up to date. Plus, they understand the high level of service that clients need. A trusted advisor focuses on your situation and comes up with tailored solutions designed just for you.
If you’re looking for business advisory services, FMA-CPA is here for you. Our CPA firm in Clearwater provides business advisory services to help your business thrive. Need help with taxation and accounting services? Don’t hesitate to reach out to us today for a free consultation.
by Mark | Dec 20, 2021 | Business, Business Advisory, Tax Deductions, tax planning
Independent Contractor Taxes: A Guide on How to Pay Your Taxes
With an evergreen tax code that measures thousands of pages long, it’s understandable if you’re unsure of what’s expected of you regarding independent contractor taxes. Being an independent contractor offers several tax advantages, but it requires excellent record keeping.
For instance, if you’re a physician, you might be able to deduct professional membership dues. All self-employed individuals’ circumstances are different, which is why it’s crucial to work with a business advisor to understand what you can and cannot deduct.
Things get a little more complicated when you’re filing and paying independent contractor taxes. You’ll have additional forms to file, and you’ll need to pay quarterly estimated taxes. To calculate and make estimated tax payments, you must fill out Form 1040-ES.
Are you thinking of being your own boss? Here’s what that means for your taxes.
Understanding Independent Contractor Taxes
As an independent contractor, you have some unique responsibilities where taxes are concerned. Working with a CPA can help you optimize your tax strategy so you can reduce your tax bill and avoid issues with the IRS.
Here’s a breakdown of what you stand to benefit from:
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Report self-employment income and pay self-employment tax
An independent contractor is any person running a one-person business. As such, you’re required to provide details of your profit and loss like other business owners. To do this, you’ll have to file a Schedule C along with your personal tax return, filed with Form 1040.
In addition to paying income taxes, you’re also required to cover the full portion of Social Security and Medicare taxes yourself. The current self-employment tax rate is 15.3% – 12.4% for Social Security and 2.9% for Medicare – which you’ll report by filing Schedule SE.
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Tax Deductions
A self-employment tax of 15.3% is high, but there’s an upside – you qualify for certain business deductions as an independent contractor. These deductions can include health insurance, home office deductions, and business expenses like credit cards, phone, internet, and mileage expenses.
The IRS allows you to deduct direct and indirect taxes on your business. If travel is part of your business, keeping track of mileage and hotel receipts can help reduce your tax bills. Other possible deductions that can reduce your taxable income include retirement savings and costs for professional service fees like lawyers and accountants.
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Quarterly Estimated Tax Payments
The U.S. tax system is a pay-as-you-go system that requires you to pay taxes as you earn income during the year. As an independent contractor, you must pay taxes on a quarterly basis – April, June, September, and January. Estimated tax is used to pay both income tax and self-employment tax. Even if you don’t know how much tax you owe until you file your taxes, you may be charged a penalty if you don’t pay enough estimated taxes or if you pay them late.
To calculate and make estimated tax payments, you must fill out Form 1040-ES. You can estimate how much you need to pay by saving a portion of each payment you make.
Additionally, you can also check what you paid in previous tax years to estimate your tax payment. It can be difficult to estimate how much to pay as you must consider both federal and state taxes. Your best bet is to work with a CPA with an extensive understanding of the tax code to ensure you’re not subject to penalties.
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Set up a legal structure for your business
Once you’re earning a level of income, you may want to consider setting up a legal entity for your business, like a Sole Proprietorship or a Limited Liability Company. Doing so can help you reduce your tax liability. For instance, as a sole proprietor, you might qualify for the Qualified Business Income deduction. QBI deductions allow you to minus up to 20% of your business income on your individual tax return.
FMA CPA can help you determine whether you qualify for the deduction as the threshold of qualification differs depending on the type of business.
Save Money with Outsourced Tax Planning
Taxes are complicated and often intimidating, especially when you’re your own boss. FMA CPA is a CPA firm in Clearwater offering business advisory services to help individuals understand the basics of independent contractor taxes.
If you think you might be paying too much to the IRS, talk to us about strategic tax planning. We provide information for people who want to establish, sustain, and grow their businesses as independent contractors. Here’s the best part: a portion of our fees may even be deductible as a business expense. Contact us today to schedule a consultation and ease any fears you may have regarding independent contractor taxes.
