Tag: tax

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Seven Tax Tips for Business

Article Contribute by Bernard B. Kamoroff, C.P.A, author of 422 Tax Deductions for Businesses

Tax Filing Season is here, and there are still several things you can do to reduce your taxes for 2009. Here are Seven Tax Tips that can possibly save you a lot of money on your 2009 taxes. Remember, “It’s not how much money you make, it’s how much money you keep!”

Tip #1. For businesses on the cash accounting system (most small businesses), expenses are usually deducted the year paid. However, if you charge any business expenses to your bank credit card (VISA, MasterCard, American Express, or Discover) you can deduct those expenses the year incurred even though you pay them in the next year. Go through your December charges and add them to your December expenses.

Tip #2. Normally, the cost of your inventory (goods for sale, parts) cannot be written off until sold. But if you have any damaged inventory, inventory that is out of date or out of fashion, goods unsalable for any reason, you can write off this inventory for 2009.

Tip #3. Your business expenses are deductible even if you paid them from your non-business bank account, personal credit card or debit card, or cash. Take a few minutes and go through all of your expenses for the year. If the expenses were for your business, deduct them. (Does not apply to corporations).

Tip #4. Manufacturers, and some construction, engineering and architecture firms, software developers, and video producers, are eligible for a 9% “manufacturer’s deduction” for income earned from domestic production. This “bonus” deduction is in addition to the deductions already allowed for manufacturing expenses.

Tip #5. In addition to your deductible business expenses, you may qualify for special “Tax Credits” available to businesses. Tax credits are very specific and limited, but if you qualify, the credits reduce your taxes dollar for dollar. Tax credits can be a real tax pot-of-gold.

Tip #6. You can put some of your business profit into an IRA or a SEP-IRA, and not pay income taxes on the profit until you withdraw the money. You have until April 15, 2010 to set up and contribute to an IRA or a SEP-IRA for the 2009 tax year.

Tip #7. Finally, and one almost sure way to reduce your taxes, is to re-examine every purchase, every expense you made in 2009. Make sure you’ve taken all the business tax deductions you are entitled to: expenses you didn’t record in your ledgers, expenses you didn’t think were deductible, “personal” expenses that qualify as business expenses. Neither the IRS nor your accountant is going to know about a deduction you forgot to take. It’s entirely up to you.

About the Author
Seven Tax Tips for Business are excerpted from 422 Tax Deductions for Businesses and Self-Employed Individuals by Bernard B. Kamoroff, C.P.A., 9th Edition, 2010. www.bellsprings.com. Toll free 800-515-8050

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Finance & Capital

Vat Registered Companies Can Claim Vat Three Years Before Vat Registration

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When a business registers for vat the vat rate should be added to all sales from the date of registration. The standard vat rate is 17.5 per cent of the sales value. The value added tax added to sales is known as the output tax.
Value added tax paid to suppliers on purchases is known as the input tax. When completing the vat form the amount paid to HMRC is the total output tax after deducting the input tax.
Vat on goods purchased up to three years prior to vat registration can be reclaimed against the output tax liability. A business can also claim vat paid on services incurred up to 6 months before vat registration.
To be able to claim vat paid before the vat registration a business must have kept vat accounting records of items bought and sold to enable the business to claim vat on those items still in stock at the time of the company became vat registered. The vat claim for goods and services incurred before registration should be made on the first vat form after vat registration. A good accounting software package to enable record keeping is useful for this purpose.
Claim Vat on Goods Purchased Prior to the Vat Registration
A business can vat input on purchases made by that business for up to three years prior to vat registration provided those goods are also available for resale either as stock, raw materials or work in progress at the date of the vat registration and do not relate to exempt items.
If the goods were bought by another business, for example, pre incorporation then the vat claim would not be allowed. The vat claim would also be disallowed if the goods purchased have already been sold. In the same context vat on items such as petrol, gas and electricity would also be disallowed if they have been consumed prior to vat registration.
The vat claim is restricted when goods are used for personal and business purposes. The restriction being the proportion those goods are used for non business purposes.
Claim Vat on Services Purchased Prior to the Vat Registration
A business can vat input on purchases made by that business for up six months prior to vat registration provided those services do not relate to exempt items or goods that have already been sold before vat registration.
The services must have been bought by the registered business and as with goods purchased only the business proportion may be claimed.
Vat Accounting Records
In order to claim vat on goods and services purchased prior to registration the business must have kept accounting records which include valid vat invoices and there should also be an audit trail through the accounting records to support the completion of the first vat return.
When the first vat return is submitted and contains a large refund it is not unusual for the HMRC vat office to inspect the vat accounting records before authorising a refund payment.
The vat accounting should also include detailed stock records to demonstrate the goods on which vat is being reclaimed existed at the time of registration and also show when goods have been disposed of after vat registration
Detailed vat accounting records must also be kept of any services on which the vat claim is based. Those records stating the date received, description and should be capable of supporting the fact those services had been or would be sold after the vat registration.
If the items being sold are exempt from vat then the value added input tax cannot be claimed. If part of the goods and services being sold are exempt then only the proportion not exempt may be claimed.
TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.

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How-To Guides

Using Tax Accounting Software To Produce Self employed Tax Returns

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Tax accounting software has its basics in each of the three elements of the title. Accounting being the production of the financial accounts in a template format suitable for the tax system. Tax and tax software denotes the inclusion of the tax rules with software being a description of the fact that the process is automated.
Self employed accounting
To be most effective the self employed accounts should be in a format that can eventually be used by the accounts program to produce the financial information required to complete the tax returns. Since in the UK as in many countries there are several types of tax returns then the accounting software should cope with all variations.
Database accounting software is frequently based upon a chart of accounts which is not necessarily tax return friendly. An accounting spreadsheet being more fixed in nature do offer an opportunity to be tax friendly.
Facility should be available to distinguish between revenue transactions and the purchase of fixed assets as fixed assets are treated differently for tax purposes being subject to capital allowances which are tax allowances written off against the net taxable profit according to the tax rules as opposed to being able to deduct the whole cost of that asset in the one financial year.
Income Tax and Vat Tax Return Software
In the UK the self employed accounts need to supply the numbers for up to three different variations of the self employed tax return. One of two tax returns has to be completed each financial year, those returns being known as the short tax return and the full tax return which have replaced the self assessment tax return.
The short tax return is completed according to the sales turnover of the business. Less detail then the full return is required with only totals required for businesses with a sales turnover under 30,000 pounds.
In addition to the financial year end tax return self employed business whose sales are above the vat threshold must also complete a quarterly vat return. With various types of vat schemes available the accounts package and tax software should be capable of dealing with different vat schemes.
Database accounting packages invariably have the facility to deal with value added tax and various schemes where other types of accounting software may be limited. It is important that tax accounting software provides the user with the specific tax accounting requirements.
Tax Software
To be effective in satisfying the description of tax accounting software the system should also include the tax rates and rules applicable. The tax accounting can then take those tax rates and produce an estimate of the potential tax liability which is a principal concern of all self employed business when the time for filing taxes approaches.
The term software indicates automation based upon data input which the computer package then processes to produce the desired output. Tax software produces the tax requirements of the user.
A tax accounting software package takes the prime financial transactions, converts those numbers to the format required to produce the year end self employed tax returns and quarterly vat returns as required. In addition the tax software function would also use the tax rates to automatically calculate the income tax and national insurance liability
TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.

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Finance & Capital

Top Self-Employed Tax Questions Preparing UK Tax

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HMRC enquire into approximately 75,000 self assessment tax return each year which often results in extra tax being payable because business turnover has been understated or non allowable business expenses have been claimed, resulting in interest and penalties on the extra tax for that year and sometimes previous years. Avoid extra taxes, interest and penalties with these top tax questions.
What is Business Turnover?
Sales turnover is the amount the business earns before deducting business expenses including receipts of any kind for goods sold or work done such as commission, tips, payments in kind, fees and insurance proceeds. The turnover to be included in your financial accounts is the date it was invoiced or earned and not the date it was received.
What is excluded from Business Turnover?
Sales turnover excludes sales of fixed assets such as premises, vehicles and plant and equipment. Also exclude business start up allowances which are entered separately on the self assessment tax return. Money introduced to the business is excluded being capital introduced and not sales turnover.
What business expenses are allowable?
All running costs incurred solely for the purpose of the business may be deducted as allowable business expenses for Tax purposes including goods bought for resale, employee wages, premises rent and overheads, administration costs, vehicle running costs. Interest on loans and overdrafts can be claimed as business expenses excluding the capital element of repayments. Higher business expense levels accurately recorded can keep taxable profit below the higher tax rate.
Can the cost of buying and repairing plant and machinery be claimed?
Repairs and maintenance costs are allowable business expenses. The purchase cost including improvements and replacement costs are not allowable business expenses, these costs being subject instead to capital allowances. Depreciation is not allowed and replaced by Capital Allowances for the purposes of calculating the tax payable.
What are Capital Allowances?
Capital allowances are designed to write off the cost of purchasing a fixed asset over the life of the asset rather than in the financial year in which it was purchased. Capital allowances on the majority of assets are based upon a higher rate of allowance in the year of purchase, First Year Allowance with the balance of the cost being written off at a lower rate, Writing Down Allowance. The full cost of any asset may be claimed as an expense in the year it is sold or scrapped less the total of accumulated capital allowances that have been claimed against taxable profits. Any sales proceeds over and above the written down value after Capital Allowances is added back to net profits and becomes taxable. Cars are subject to writing down allowances but not First Year Allowances unless they are classed as commercial vehicles. DIY Accounting has small business software templates that automate the calculation of capital tax allowances.
Can expenses incurred for both business and personal purposes be claimed?
No. HMRC only allow such expenses if the business expenses element of the cost can be separated from the personal element. If you claim the travelling expenses to buy business goods they can be claimed for tax purposes but would be disallowed if you also showed evidence of personal items being purchased on the same journey. Using your home phone is an allowable business expense if you claim specific identified business calls in which case you would also be able to claim a similar proportion of the rental cost.
Can vehicle costs be claimed when that vehicle is also used for personal use?
Vehicle running costs and expenses such as fuel, excise duty, insurance, repairs and breakdown membership may be claimed as business expenses if the vehicle is used solely for business purposes. Travel from home to work is not business use and disallowed. Vehicle running costs, and capital allowances on vehicles, are split between claimable costs and a disallowed cost depending on the proportion the vehicle is used for business and personal use. Parking fees for business purposes may be claimed, parking fines and penalties for motoring expenses are not claimable as business expenses for tax purposes. An alternative to claiming vehicle running costs and vehicle capital allowances would be to claim mileage allowances which at the time of writing are 40p for the first 10,000 miles and 25p per mile thereafter a feature of which the DIY Accounting small business software automates
Can Business trips be claimed?
Travelling expenses and modest lunch expenses may be claimed. Hotel and reasonable costs of subsistence may also be claimed. A subsistence allowance can be claimed if staying with friends or family as an alternative to an hotel. The cost of lunch may not be allowed when staying away overnight. Lunch with clients is regarded as entertainment and is not allowed. If you are accompanied on a business trip by family only your cost is allowable and specifically only if the trip was purely for business purposes. Expenses on combined business and personal trips are not allowed to be deducted as business expenses on tax returns.
Can home costs be claimed?
If part of your home is identifiable as solely for business purposes then running costs can be claimed. The cost allowed is the proportion of the total area of the home the business area occupies. For example, excluding shared facilities of kitchen and toilet if the home has three bedrooms, living and dining room and one bedroom is used solely as an office then 1/5 of home costs could be claimed. The costs to claim would be heat and light, insurance, general and water rates and mortgage interest excluding repayment amounts. Where mortgage interest is claimed the revenue might also claim as a capital gain the increase in value of that proportion of the home, such Capital Gains Tax being subject to tapering relief over time.
How do I treat business goods taken for my own use?
Any business goods taken for personal use should be added to sales at normal selling prices including items supplied to family and friends at less than normal prices. He cost of providing services for family and friends is not allowable as a business expense.
Can I deduct my salary or drawings as a business expense?
You cannot deduct your own wages, personal national insurance or drawings from the business as a business expense as these are distributions of the business income after net taxable profit has been calculated and not allowable expenses before tax..
Can I deduct my partners wages?
Yes partners wages can be deducted as a business expense although there are rules which would be applied in such circumstances to ensure the amount paid is both real and reasonable. The business would need to operate a PAYE scheme for that employee, deducting income tax and national insurance, the work carried out must be real not invented and the rate paid reasonable for the nature of the work and the time spent. Evidence may also be required that the amounts were actually physically paid to that partner, for example in the form of a cheque.
Should Tax Credits be included?
No these are excluded from business profits although the level of credit received may subsequently be changed in the light of the actual business profit earned compared with the amount declared when the Tax Credit was applied for. HMRC do check that the net taxable profit shown on the tax return is the same as that declared when the Tax Credit was claimed.
Can I claim expenditure incurred prior to trading commencing?
Yes business expenses incurred up to seven years prior to trading commencing can be claimed. The actual date of the expenditure should be recorded although all pre-trading expenditure is treated as having been incurred on the first day of trading.
Are pool cars taxable?
Company cars are taxable as a taxable benefit while pool cars are not taxable. To qualify as a pool car, private use should be incidental to business use, the vehicle should not normally be kept at the employee home and the vehicle must be available and used by more than one employee.

TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.

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Finance & Capital

Accounting Periods And Basis Periods For Self Employed Business

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Accounts are required each year for tax and financial control purposes with preset dates by which those accounting records must be submitted and penalties for failure to deliver on time.
While in the UK self employed business can use its own accounting period the tax position can become more complex if the accounts use a basis period rather than the standard financial tax year.
Self employed business in the UK is required to produce a set of financial accounts for a 12 month trading period. The format of the accounts is the personal decision of the proprietor and can be a full set of annual accounts including profit and loss account and balance sheet including using control accounts and cash and bank records and the self assessment tax return.
An appropriate accounting system for many self employed business would not be to prepare a full set of annual accounts but instead to prepare a simple income and expenditure account. Preparing an income and expenditure account allows a much simpler accounting or bookkeeping system where simple accounting software can be used.
The objective of any bookkeeping software being to maintain accurate financial records and produce the accounting records and totals required to complete the inland revenue self assessment tax return each year. Financial control is very important and the bookkeeping software should also produce regular financial statements showing the profit and loss of the business throughout the accounting trading periods.
The financial tax year varies depending upon which country business is conducted. In the US accounts are prepared during an accounting period from 1 January to 31 December each year. In the UK the standard financial year adopted by the inland revenue is from 6 April each year to the 5 April the following year.
In the UK tax rules are set for each financial year and by adopting the standard tax year a small business can benefit by preparing the financial accounts under a single set of tax rules and preparing the self assessment tax return accordingly. Adopting a different financial period involves straddling the official tax year and more than one set of tax rules might be applicable to the tax calculation resulting from the net profit being declared.
After choosing the April to April financial tax year accounts are required to be submitted by the submission deadline of 31 January the following year. Earlier submission is recommended as by submitting the final accounts and tax returns online by 31 October each year the inland revenue will calculate the income tax and national insurance payable.
When a self employed business has been in business for two or three years and has chosen a different 12 month accounting period to the financial tax year the 12 month tax is calculated according to a basis period. Up until that point the accounts may be subject to apportionment to calculate the tax due.
The basis period under which the business tax is calculated is the 12 month accounting period ending in the specific tax year. A business which has a 12 month trading period ending 31 December 2007 would be taxed under the basis period 2007 to 2008 being the basis period 6 April 2007 to 5 April 2008. The same rules apply if the accounting periods are shorter or longer than the standard 12 month period.
If the accounting date is changed by a sole trader the inland revenue are informed of the change on the self assessment tax return and the reasons for the change. If as a result the self assessment tax return arrives late the tax will be assessed on the previous basis period.
Changing an accounting date that overlaps two basis years results in the business being taxed twice for the same accounting profit as the business would be taxed under both basis years. The extra tax paid can be highly unwelcome but can be reclaimed at a later date through the self employed tax return.
The penalty for late submission of the self assessment tax return in the UK is 100 pounds and interest is also charged on any outstanding income tax and national insurance from the first day after submission was due.

TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.