Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Jun 5

    Bryan Martin had always dreamed of owning his own business, but, according to a Time.com article, it wasn’t until insurance giant Zurich shuttered their regional Indianapolis office where he worked that he decided to strike out on his own.

    “It’s the scariest thing I’ve ever done,” the article quoted Martin, who had just turned 51 and has a wife and 13-year old twins. “Right now, I’m just worried about financially making all this work.”

    Are you out there with Martin? Has the rising unemployment rate sent you into the entrepreneur minefield? Are you crawling along like a soldier, poking the ground with a stick, trying to find, identify, and avoid the tax mines just to pay your mortgage and put food on the table? A growing number of the nation’s jobless are doing just that.

    But as the ranks of brand new entrepreneurs swells so is the likelihood of errors and even, dare I say it—IRS audits! The IRS audits individual returns with Schedule C income at twice the rate of those without. Since the IRS’ Tax Gap analysis identifies underreporting of business income as a $109 billion problem, accounting for more than half of the total underreporting by individuals, the chances of those audits increasing are pretty good.

    Many new entrepreneurs, strapped for cash, try to cut corners and make the rookie mistake of forgoing the use of accountants and attorneys and picking up TurboTax® to handle their taxes on their own.

    The Internal Revenue Code is fraught with obstacles and the wide-eyed rookie is unlikely to recognize the danger signs. “My neighbor told me I could do this,” won’t stand up against the glare of an IRS examiner. Many budding business owners hear about the generous tax benefits for business expenses from travel and entertainment to the holy grail of tax deductions, the home office. But most have no clue what is allowed and what will send up a red flag. There are many misconceptions about the tax laws and the wrong decision can turn dreams into nightmares.

    The sheer magnitude of available tax breaks causes problems for many rookies. When you’re a self-employed small business owner, nearly everything looks like it should be deductible. After all, many feel they don’t do anything that isn’t business related.

    But the pearly-gate vision of deducting everything leads many an entrepreneur to forget the rules of mine clearing and wander off course into profit-bleeding blunders. Some of the most common mistakes include poor record-keeping, questionable tax deductions, putting expenses on the wrong tax form or line and failing to pay quarterly estimates to Uncle Sam.

    It’s critical that businesses maintain books, records, separate bank accounts and credit cards from their owners. In the event of an audit, people often lose, not because they were trying to get by with something, but because of poor records. When a taxpayer can’t produce records to match the tax return, the auditor smells blood. They have spotted a weakened wildebeest separated from the herd and they are going in for the kill.

    Make no mistake, it will be painful.

    But it doesn’t have to happen. With the proper records and the right advisor you can successfully chart a course across the tax minefield and come out unscathed.

    If you’ve entered the minefield, or are thinking of entering it, remember, our experience can help you identify the obstacles, spot the dangers and chart a successful crossing.

  • Oct 31

    Being self-employed has several advantages: you control your own destiny, you take the risk – and reap the rewards, and you set your own work schedule. One disadvantage that many despise is having their business tax burdens placed solely on them. So let’s look at a few ways to help ease that burden:

     

    • You will make the time to organize and record your business activity in a systematic fashion throughout the year. Don’t wait till the last minute to gather your business documents (including income and expenses). A sure fire way to create stress at the end of the year, or at the tax-filing deadline, is to put-off gathering all the information for someone to prepare your business and personal returns until the last minute. Waiting until the last minute makes it easy to leave out or overlook pertinent information that could potentially help save you money.
    • You will review your gross income and expenses to-date on a regular basis. If you failed to follow the first commandment, then estimate your income using last year’s income as a baseline and adjust up or down accordingly. When estimating expenses don’t forget business meals and entertainment, gifts, equipment, supplies, taxes, licenses, etc. Also, make a separate folder to retain documentation of your home office expenses which may include utilities, rent or mortgage interest paid, insurance, etc. These documents will come in handy when deciding if you should make quarterly tax estimates.
    • You will set aside money to cover your tax obligations. Self-Employed individuals often ask, “How much should I set aside for taxes?” Each tax situation is different, but as a rule-of-thumb we suggest setting aside approximately 30% of your income to cover federal, state, and self-employment taxes. The best way to do this is to create a separate bank account and deposit the money for taxes in this account. This can be used as a safe guard; out of sight, out of mind.

     

    The keys to easing this tax burden are good record keeping, staying organized, and periodically setting some time aside throughout the year for tax planning. Remember, we are always here to help answer any of your tax planning questions.

  • May 30

    Too often natural disasters strike and serve as reminders that it’s important for both individuals and businesses to protect themselves against the potential financial consequences of such events. A few smart steps we recommend include making electronic backups of important records, including your insurance policies, tax returns, bank and credit card account information, and vital records. It is critical that you store this backup at a separate location that will be easy to access if your area suffers damage. You should also take the time to take pictures or videos of your home or business and store them separately, in case you need to make an insurance claim.

    If you run a business, you must consider how you will get up and running again after a disaster. It’s a good idea to develop contingency plans that will enable employees to work from home or elsewhere if your location is damaged or inaccessible. Both businesses and families should consider using phone trees, or other methods, to maintain contact in an emergency. Review your contact and contingency plans every year to be sure they are up to date.

  • Jan 24

    Approximately 3.4 million taxpayers claimed the home office deduction in 2010. Would you believe the IRS just made it easier? I know – hard to believe, but they did. This year the IRS has issued a simplified method of deducting the home office. Of course you still have to meet the same home office requirements that have always been in place, regular and exclusive use as your main office, but it’s now easier with less paperwork and little time spent on record-keeping.

    The simplified method allows you to deduct five dollars per square foot of your home office up to a maximum of 300 square feet. However, the home office deduction cannot exceed your business income. The new simplified method allows you to deduct the home office without keeping track of all your utilities, maintenance and other expenses. And don’t fret, you could still deduct the mortgage interest paid, real estate taxes, and casualty losses on Schedule A as an itemized deduction.

    There are, however, some disadvantages to using the simplified method versus the actual expense method. You should know that under the simplified method you are forfeiting any previous home office deduction carryforwards and the ability to carry forward any excess deduction to a future year. Also, the simplified method does not take into consideration depreciation for your home office. With the actual expense method you can apply previous year carryforwards (limited to business income), carry the excess deduction to future years, and calculate depreciation on your home office.

    Afraid of making a mistake? No need to worry, the decision is not permanent. If you choose the simplified method and then believe it wasn’t the best decision for you, next year you can change the home office deduction method back to the actual expense method. Just know that after you file your return, the IRS will not allow you to amend your return to reflect the change in the method of the home office deduction. So, let us help you to decide if the simplified or the actual method for the home office deduction is best for you in your situation.

  • Jul 30

    Well, the dream of freedom, birthed on the 4th, does still live. But let’s face it, our government is poised to become a deeper, larger influence in our lives. Perhaps no agency more so than the IRS.

    It’s ironic, in this month of Independence, to recognize how much power the IRS has. It is perhaps, one of the most powerful organizations in our country. It, and it alone, is responsible for collecting the vast majority of all Federal taxes and imposing related penalties. The IRS poses one of the biggest financial threats to individuals and entrepreneurs alike.

    The Internal Revenue Service has a unique position in its roles as an information resource and has a unique legal standing as a law enforcement agency. The IRS has the authority to issue regulations, interpret legislation and the freedom to make mistakes without consequences. (They’re protected from penalties for false accusations!)

    So what can we do to protect ourselves from the IRS’ power and potential for financial wrath???

    Well, if there was a concrete answer to that, the IRS wouldn’t be near as intimidating as they are, would they? But, there is one thing each of us can do to keep the IRS off our back: Keep Good Records!!

    I know, I know, a bit lame sounding, but it’s true.

    Our best defense against audits and false accusations is accurate, detailed records of the flow of money into and out of our lives or business.

    A few years back, I received a frantic phone call from a potential client. She was being audited. Could I help? This small business owner ran a completely online business and all of her transactions, all of her payments and all of her revenue, ran through her Pay Pal account. Not necessarily a problem, but as it turns out, these were the only “records” she had. She didn’t keep a running total of how she spent her money and didn’t reconcile the account like you would a bank account.

    In short, she had no system. No way of knowing exactly how much income she had or how she spent her money. When queried she couldn’t even reproduce whatever she had given to her tax preparer who somehow managed to come up with something to put on the tax return. And the preparer was no help either. She no longer had any records that identified where she got the numbers from.

    Not the way you want to go into an audit.

    After an investigation, we determined that she had understated her business income and overstated her business expenses, each by more than 20 percent. Great combination, huh? After the IRS expanded the audit to include another year, she owed a whopping $40,000 in back taxes, penalties and interest.

    She ended up selling her house in order to pay the taxes.

    But, it could have been avoided. Now I know, depending on your situation, that recordkeeping can be complicated, time-consuming and downright boring. But it is a necessary evil. In addition to helping you prepare an accurate tax return, your good record keeping provides you the feedback you need in order to know how well you’re doing. It’s your scorecard.

    Where to begin? A great place to start is by calling our office. We can help you develop an effective system that will build a strong defensive wall around you. Generally speaking, the better your records, the better your chances are in an All-Out Battle with the IRS!