Eight Tax-Saving Tips for Small Businesses

Article written by EricBank

If you are a sole proprietor, a small partnership, LLC or S corporation, or run a small business from your home, it's especially important to take advantage of all the tax deductions and benefits due you, since small businesses usually have limited financial resources. We've assembled eight tax-saving tips that will help reduce your tax bill and keep more money working inside the business.

·         Keep Excellent Records -- Every time you lose a receipt or transaction record for a deductible expense, you are throwing money away. It usually a matter of having good bookkeeping habits and using either a qualified tax preparer or tax-preparation software. The latter can be economical, but the former can help represent you in front of the IRS, an important consideration.

·         Professional Fees -- It's easy to remember to deduct any business taxes and licensing fees you've paid during the year. But also remember to deduct the costs of memberships to business-related organizations and the cost of books and subscriptions used by the business. This can add up to hundreds of dollars a year.

·         Borrowing Expenses -- Many a small business requires a loan or line of credit to help get through rough times or to finance operations and growth. Make sure you account for and deduct all the interest you pay for business-related loans during the year. Don't forget to deduct any debt-related fees, including ones for applications, rate-reductions, appraisals and legal activity.

·         Insurance Costs -- No, you can't deduct life insurance premiums, even on policies for key people within the company, but there are plenty of business-related insurance costs that are deductible. These include insurance policies that cover business assets -- machinery, property, equipment and so forth -- and liability insurance for a wide variety of business-related contingencies. Also, be aware that self-employed individuals can deduct health care insurance costs directly from gross income rather than as an itemized deduction.

·         Maintenance and Repair Expenses -- If you have property you use to earn income, the upkeep and repair expenses are deductible. Normally, this includes the total cost of materials and labor. If you do the labor yourself, you can only deduct the cost of materials.

·         Office Supplies -- Sheets of paper and the clips that hold them together are deductible when used for business purposes. The same is true for staplers, pens and all those other supplies necessary to keep your business humming. Different businesses often need special supplies that are deductible -- printing ink for photographers, drugs and syringes for veterinarians, etc.

·         Management and Administration -- Any money the business spends on management and administration fees is deductible. This includes banking fees and the costs of tax return preparation.

·         Home-Office Expenses -- You can deduct many of the costs of running your business from your home. This includes a pro-rated portion of mortgage interest, utilities, insurance, repairs and depreciation. The IRS even provides a simplified option to quickly figure the tax deduction based on the square footage of the office. Check IRS Publication 587 for all the details.

Four Important Factors Affecting Inventory Management

Article written by EricBank

Small merchandisers and manufacturers rely heavily on the profitable sale of inventory to stay in business, because these companies often have limited funding and sources of credit. Your gross margin -- the difference between selling price and acquisition cost -- can be affected by several factors, both internal and external. Here are four of the most important ones:

o   Economic Environment: It's always wise to run a tight ship, but never more so than when the economy slows down. In this case, a "tight ship" means buying or making only enough inventory for sale in a relatively short time period. On the other hand, when business is strong, interest rates may climb to the point where you can't afford the interest payments on the money you borrow to acquire inventory. You might have to cut back on your inventory if this happens, an unfortunate decision in a strong economy. Instead, prepare for higher interest rates by establishing a fixed-rate line of credit when rates are still reasonable. If the economy turns inflationary, consider using last-in, first-out inventory costing. By doing so, your cost of goods sold will mirror the most recent inflationary price hikes and therefore result in lower taxable income and income taxes.

o   Market Environment: Today's taste may be tomorrow's waste -- that's the way it can go with a fickle consumer base. When some of your inventory goes out of style, you'll have to mark down its price and take an accounting loss. This means restating your inventory value at the lower of cost or market, which in this case is market. Doing so boosts your COGS and thereby cuts your annual taxable income -- or even hands you a net loss for the year. Either way, it reduces your tax bill. You might have to write off inventory because of external factors like product recalls, boycotts, obsolescence, bad publicity and tariffs, to name a few. 

o   Inventory Management: Shrinkage -- theft, spoilage, damage, short shipments, misplacement -- is a big enemy of profits. Fight back with cycle counting, in which you perform a daily physical count of a different part of your inventory. Repeat the cycle until you've surveyed all of your inventory, then begin again. The advantage is that you'll detect shrinkage much sooner than if you had waited for year-end inventorying. The sooner you discover a problem, the sooner you can address it. You might have to adjust storage and security procedures, change management or security personnel, choose new suppliers, or perhaps fire a worker or two.

o   Inventory Tracking: Consider automating your inventory tracking from inception (on the manufacturing floor and/or receiving dock) to sale. High-tech features such as bar code scanners and radio frequency guns can track all movements of your stock items, allowing you to establish a perpetual inventory system. By doing so, you'll always have timely information about goods on hand and COGS. You also might be able to delay physical inventory counts, and in any event, you can integrate the information into your accounting and procurement systems

10 Energy-Saving Tips for Small Businesses

Article written by EricBank

A small business must aggressively work to cut its monthly bills -- often this can make the difference between profits and losses. Here are 10 suggestions to save money each month by lowering your energy bills and increasing your energy efficiency:

 

.   Request an Energy Audit: In most locations, your utility company will provide a free energy audit for your office or home office. The company evaluates your business' energy usage and recommends energy reductions that can save you money. This process usually involves an onsite visit and can save you hundreds or thousands of dollars a year.

.   Use an Energy Savings Calculator: There are several free online calculators available in which you enter information about your small business and receive advice about how to cut energy costs. The tips should include your upfront costs and payback periods. See for example the Energy Star Portfolio Manager.

.   Cut Lighting Bills: Switch all of your lighting to either compact fluorescent lamps or light-emitting diodes. Consider the use of motion detectors that automatically turn off lights in empty rooms. If possible, install skylights.

.   Conserve Energy Usage: You can use timed power strips, a programmable thermostat and Energy Star appliances to lower your energy usage. Replace desk computers with laptops, which are more energy efficient. Upgrade your plumbing to include an efficient water heater (perhaps solar), low-flow toilets and high efficiency urinals.

.   Slash Delivery Costs: If your small business must make deliveries throughout the day, try to combine trips and to use special GPS-based software to work out the shortest routes and routes that avoid traffic. A hybrid or all-electric vehicle is a great money-saver if you have to make many short deliveries around town each day.

.   Allow Work from Home: Can your business thrive with employees working from home part of the time? If so, you can save on energy costs in the office. You'll also save money this way if your company reimburses commuting costs. 

.   Adopt Virtual Meetings: If your business operates from more than one location or must meet with clients or potential clients, consider setting up virtual meeting technology. The price has fallen in recent years and the technology saves time, energy and resources that you'd waste on travel. 

.   Educate and Reward Employees: You should make energy conservation a company policy. Discuss it with employees and hand out written materials describing what you expect of each worker. Hold a monthly contest for the best new energy-saving ideas and hand out rewards to the winners.

.   Think Green: If you are building or expanding your workspace, think green. This means using thick insulation and drywall, putting in skylights and thermal windows, use low-energy lighting and heating systems, consider solar panels, and, if applicable, landscape your grounds with plants that require little water or care. 

.   Grab the Credit: Tax credits are available to small businesses that increase their energy efficiency. Governments at all levels want to reward you for using more efficient appliances and equipment or adding extra insulation to your office space. See the database of energy-related tax incentives at the U.S. Department of Energy webpage

 

Physical vs Perpetual Inventory

Article written by EricBank

Companies, especially merchandisers and manufacturers, use much of their working capital to obtain or produce merchandise. The decision of how to manage and account for inventoried goods can have profound effects on your cost of operations, the accuracy of your accounting data and your tax bill. You must provide the IRS with accurate valuations for the goods you have on hand and the cost of goods sold (COGS) so that it knows how to tax you properly. The method you use to count your inventory items is one of the most basic decisions you can make relative to inventory management.

 

IRS Requirements

What exactly does the IRS want?

• You must track the costs of goods on hand by practicing sound accounting methods.
• You must assign to your inventory account the costs of your acquired goods.
• You must record  the value of inventory items you transfer, use, or sell.
• Calculate ending inventory's value using the value of beginning inventory, the cost of goods acquired or manufactured during the period and the COGS.
• You should, at reasonable intervals, take physical counts of your inventory and use the information to update your inventory value so that it reflects reality.

Periodic Inventory

The essence of the periodic inventory system is to perform physical counts to determine your stock levels. One feature of this system is that you use a purchases account and debit it with all your inventory purchases. Once the period ends, you clear out the purchases account by adding its balance to the inventory account and resetting the purchases account to zero.

You make a physical count at the close of the period to determine the inventory on hand. This is the point where you adjust your book inventory balance to match the physical count. All sorts of discrepancies can appear, including ones arising from theft, damage, spoilage, obsolescence and sloppy record keeping.

 

Perpetual Inventory

Perpetual inventory systems attempt to keep track of each item from acquisition to disposition. If you have a tiny business, you can perform this task daily by hand. Larger businesses use fancy automated equipment such as point-of-sale cash registers and electronic inventory readers. The inventory receives electronic tags, either bar codes or radio frequency ID tags, which allow readers to track inventory movements.

You don't keep an inventory purchases account under the perpetual system. Instead, you immediately update the inventory account when purchases or sales occur. This system gives you immediate information about stock levels, discounts, returns and allowances.

Comparison of Methods

If your business requires timely information about COGS and inventory on hand, you'll find the perpetual inventory system better suited to your needs. As an added bonus, many of these systems place restocking orders automatically when counts run low. Because you track sales in real time, you always know your COGS. The better you keep detailed and accurate records, the longer you can wait to take a physical inventory, a costly and disruptive procedure. 

If you run a small business without the need for real-time information, you can save the cost of fancy gadgets by adopting the periodic method. And a teeny tiny business can always use the time-honored method of recording stock with pencil and paper to implement the periodic method.