Searle Business Solutions

One of the zillions of events recently canceled because of the coronavirus is my Small Business Tax Workshop hosted by the Virginia Department of Small Business and Supplier Diversity (SBSD), the City of Falls Church Economic Development Authority and the Falls Church Chamber of Commerce. My Small Business Tax Workshop was designed to help small business owners understand their tax filing and payment responsibilities, and to gain awareness on getting assistance. We planned to cover several key elements of business tax and financial practices that are essential to understanding and controlling business finances. 

I was all ready to go when we got the official word about workshops and other gatherings being canceled. So, here is an overview of what I planned to share in the workshop:

• What and When to File 

Small businesses usually operate in one of three ways for tax purposes. By default, one person operates as a sole proprietor who files a Schedule C with her or his individual income tax return. Two people, by default, operate as a partnership and file an IRS Form 1065, U.S. Return of Partnership Income, due on the 15^th day of the third month after the tax year ends (i.e., March 15 for a calendar year-end). Businesses with up to 100 domestic owners can form a Subchapter S Corporation, which files an IRS Form 1120S, U.S. Income Tax Return for a Subchapter S Corporation, also due on the 15^th day of the third month after the tax year ends. Confused? The IRS spells it all out in detail here – https://www.irs.gov/businesses/small-businesses-self-employed/business-structures. 

• Tax Payments

Employees pay taxes through the payroll process. It’s done for you. Like everything else in your business, tax payments are DIY. The tax agencies require payments to cover your annual tax liability on a quarterly basis. That means tracking your finances, projecting your taxable business income and making payments on April 15, June 15, September 15 and January 15. The IRS and state tax agencies accept payment via check/coupon, electronic bank account withdrawal, and other options. In addition to income taxes, business owners need to pay self-employment taxes, equal to 15.3% of net profits. More details are right here – https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

• Business Expense Deductions

Businesses can deduct from income the “reasonable and customary” expenses needed to operate her or his business. The 2017 tax law contained several favorable changes for small businesses, including higher asset depreciation limits and the new Qualified Business Income Deduction. The IRS has an incredible amount of information about business expenses at  https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses.

My Small Business Tax Workshop will probably be rescheduled. Until then, I hope that this overview helps to make your aware of the tax and financial practices that are essential to understanding and controlling your business finances. 

Tax season isn’t “nose to the grindstone” every minute. I got a fun break from my computer last week when I taught a financial recordkeeping workshop for the Arts Enterprise Institute, a unit of Arlington Economic Development. The workshop, Business Skills for Artists, provided artists who create beauty in many forms – sculpture, painting, and ceramics – awareness about business finances with their needs in mind. 

The twelve creators in the workshop started their businesses to create art, not to keep financial records. They came to the workshop to understand their business finances and to make informed financial decisions. I am very happy to say that the attendees said that they got what they came for from the workshop. Yay!

We covered a lot of ground in two hours. Here are a few artist-focused highlights:

• Cost and Pricing – Pricing artistic creations was a popular topic. There is no easy formula, so we focused on what to consider. We started with knowing the direct and indirect costs of creating your art. Your time investment is important, but it is not possible to be remunerated for your time. Price should reflect the special piece of your heart and soul that goes into your creations. Another consideration is the market for art in your area or within your creative niche or genre.

• Hobby or Business – Many creative endeavors do not make a profit, even after working hard at it several years in a row. That doesn’t necessarily mean that you are dabbling in a hobby. If you satisfy nine IRS tests, you are running a business. The nine IRS tests include whether you maintain complete and accurate books and records, whether the time and effort you put into the activity indicate you intend to make it profitable and whether your losses are due to circumstances beyond your control (fairly typical for an artist).

• Track Income and Expenses – Like any other type of business, collecting the details of all funds that are coming in and going out is essential to understanding the financial health of your creative business endeavor. How do you know the status of your business finances without a complete and up-to-date report of where your money is? Many user-friendly tools are available to help you track and report financial information.

Artists who attended my Business Skills for Artists workshop certainly didn’t start their businesses to keep financial records. They showed a lot of commitment to the financial success of their art to invest time and effort learning to understand their business finances and make informed financial decisions. Based on the feedback that I received after the workshop, they considered their time investment well spent.

Business owners – just like most taxpayers – are constantly on the hunt for ways to reduce their tax bills. I know, because my tax clients ask about it regularly. Another topic that my tax clients ask me about is saving for retirement. Then I get to tell them the good news – they can save taxes and save for their future retirement at the same time! 

When you work for someone else, your employer may offer a retirement plan where you can contribute and reduce your taxable income. When you work for yourself, you can do the same thing. There are several retirement plan types where you (and your eligible employees, if you have any) can contribute on a pre-tax basis. If you want to explore all of the options, knock yourself out at this IRS website – https://www.irs.gov/retirement-plans.

One popular option selected by many small business owners is a retirement plan called a “Simplified Employee Pension Individual Retirement Arrangement,” commonly called a SEP IRA. Here are three reasons why:

• Easy and Flexible

A SEP IRA is easy to set-up with your bank, your investment advisor or a mutual fund. Set it up and make your contributions by the tax return due date, including extensions. Annual contributions amounts are flexible, which is good if your business cash flow varies from year-to-year.

• Generous Contribution Limits

A SEP IRA allows you an annual contribution of up to 25 percent of net business profits, after netting out the deductible half of self-employment taxes. That calculation is a little tricky, so you’ll need some help to get it right. There is an annual dollar limit, too. For 2020, it’s up to $57,000. Contributions must be made for eligible employees.

• No Costs

A SEP IRA has no start-up or operating costs that can be required for a conventional retirement plan. However, any investments selected to fund the account may have a management or investment advisory fee. It’s important to get a clear understanding of any fees or charges that will defray your retirement funds.

Other costs need to be considered when deciding if a SEP IRA is for you, like taxes and early withdrawal penalties. Distributions from a SEP IRA works just like a traditional IRA – any funds taken out before age 59½ are subject to a 10% early withdrawal penalty. That’s on top of the federal and state income tax. 

Small business owners on the hunt for ways to reduce their tax bills can save on taxes and for future retirement by setting up and funding a SEP IRA. Saving for today and tomorrow at the same time could be the best news that you get all year.

During tax season, NPR on WAMU-FM is my constant companion while I prepare tax returns for my clients. I don’t hear every word, but some interviews are so riveting that they pull my attention away from my work. It happened again last week when Susan Fowler was interviewed about her 2017 blog post and 2020 book, “Whistleblower: My Journey to Silicon Valley and Fight for Justice at Uber,” where she outed Uber about its unethical and misogynist work environment. 

Ms. Fowler’s experiences really make you shake your head, wondering how any organization could function with the level of sexual harassment and retaliation against female employees that she described. Unsurprisingly, Ms. Fowler observed that Uber’s leaders ignored and excused bad behavior because the perpetrators were “top performers.” 

Focusing on money rather than ethics proved to be a huge risk for Uber. What about your organization? Ignoring that rules are being broken, even by a top performer, costs money and reputation. Plus, it tells all your workers that inappropriate, or even illegal, behavior is tolerated, or even encouraged, to make a buck. That’s a very dangerous message that some workers will take advantage of. Workers who won’t tolerate lax ethics could resign.

Organizations use three weapons to battle the risk of unethical or illegal behaviors:

• Codes of Ethics and Policies

People don’t do the right thing just because you have expectations written down in your policies and codes of ethics. However, if expectations aren’t written down, no one can be held accountable. Enforcement is essential for policies to be effective. Above all, leadership must set the tone that inappropriate behavior will not be tolerated.

• Structure and Defined Roles

Reporting relationships and defined oversight roles must be set up to ensure that independent reviews and approvals exist. No one person should have unchecked control over a contract, transaction, or other financial decision. Lack of oversight provides opportunities to commit fraud by misdirecting funds or altering key information.

• Incentive-Based Pay

Commissions and other incentive-based pay programs are intended to reward workers for achieving specified goals. Those incentives can end up backfiring. Workers could pad their numbers or reverse sales to inflate their commission. Design incentive-based pay programs with safeguards that reduce opportunities to engage in fraud.

Don’t ignore the warning signs that a worker, even a top performer, is a risk to your organization. Learn from the mistakes of others…use these three weapons to battle the financial and reputational cost of ignoring the signs of inappropriate, or even illegal, behavior.