You’re not alone if you feel inundated by TurboTax and H&R Block commercials imploring you to get the biggest tax return possible. It’s a frenzied and competitive scene marked by two extremes: pressure to maximize your deductions, and disappointment if you owe, or if your rebate is less than those of your friends and family members.
“It’s good marketing,” said certified public accountant Marcus Bowman. “I understand. Everybody wants a big refund. But from my perspective, it isn’t about getting the biggest refund. It’s about making sure you get the refund you are entitled to. It’s only the knowledge of the preparer that allows you to maximize that refund.”
Bowman doesn’t entirely dislike inexpensive tax-preparation software (just the aggressive marketing campaigns), and even suggests breaking even with the government. Why not keep and invest more of that money throughout the year, instead of aiming for a big tax-return jackpot?
Bowman earned a bachelor’s degree in accounting from Indiana University’s Kelley School of Business in 2003. Five years later, he moved to Washington state to start his own CPA firm. He is based in Ellensburg, but he recently folded his practice into the Bellevue office of Clifton Larsen Allen to expand his client base and serve individuals and small businesses on the Eastside. “About 40 percent of what we call our outsourcing client base is in the Bellevue area,” said Bowman.
425 Business recently spoke to Bowman to get his tips for helping small-business owners prepare their taxes.
Q: What recommendations would you make to small-business owners that might ease the tax-preparation process and maybe even give them bigger returns?
A: First, look at your tax return and know that, until (April 18), you have the ability to take that money and put it into a tax-deferred retirement account, which has kind of the circular impact of increasing your refund. Putting some of those dollars into a retirement account helps you save for the future, and it can increase your tax benefit.
Second, I think people ought to be using tax software, which does a reasonably good job of making sure your calculations are done correctly. Even if you are using tax software and following your accountant’s advice, take a minute to look at the return, understand where the numbers are coming from, and understand the calculations that are being made.
Finally — and this strikes at the last part of your question in terms of providing the biggest return — big returns often mean you’ve paid in too much. A big refund really amounts to an interest-free loan to the U.S. government. Some people like to use this as a savings plan. That’s OK. But I have conversations with clients getting big refunds, and I will say, “How would you like to hold on to more of that money? How would you like to have that in your pocket all year long?” Sometimes it would be better to have the money throughout the year instead of waiting until the end of the year, when you get your tax return filed, to get your money back. Nothing obligates you to get a refund.
Q: What advice do you have for taxpayers who might be afraid of incorrectly completing their taxes and being audited by the IRS?
A: First, save your receipts and document your deductions. People get killed in audits when it’s very clear they are making stuff up. My advice is to document, document, document. Track your mileage. Keep a notebook, and write it down. Keep your receipts. If the IRS wants to spot-check you, no problem. You’ve got the documentation you need.
Second, hire a professional. We are specialized for a reason. I don’t do my own plumbing; I don’t do my own vehicle repairs. Specialization is good. It’s not rocket science, but the tax law is so complex that it’s hard for people who don’t spend all their time in it to really have a grasp of what’s available to them.
Finally, commit yourself to a basic understanding of how the tax return works. Don’t look at dollars paid to a tax professional as an expense to be cut. Look at it as a way to make sure that you are getting what you need from a tax-preparation standpoint. Look at it as a way to get access to a tax professional’s brain, and to understand how the return works. Make it an educational process. Most preparers are happy to take a few minutes to talk about the tax return that they have prepared. Don’t be afraid to get your money’s worth when you hire a tax professional.
Q: What are common concerns or problems you hear from small-business owners when preparing their taxes?
A: One that comes up time and time again is when someone has a side job or a hobby that they earn some dollars in, and they come to me to do tax preparation, and say, “I’ve got this little side thing going on. That’s not taxable, right? That’s just a hobby.” Unfortunately, that’s not correct. The Internal Revenue Code is pretty specific. Income is income from whatever source derived. Folks with a side job may be able to take advantage of tax deductions out there, but they need to be reporting it.
Also, not knowing about the tax deductions that are available for properly substantiated business mileage. If you’ve got a vehicle and you are driving it for business purposes — and there are qualifications around that — you can take a tax deduction that is more than 50 cents per mile. Folks will say, “Well, I’m just deducting my fuel.” Number one, it’s really hard to split a tank of gas based on business versus personal mileage. It’s hard to know where one stops and the other starts. But if you track your miles, that mileage rate not only includes fuel but also insurance, depreciation on the car, licensing — every expense that you are going to have to operate a vehicle, that deduction is supposed to cover. It’s something that I see folks miss a lot.
I see some misperceptions about home-office deductions. Your dining room does not qualify as a home office. It’s got to be a separate room of the house to qualify for the benefit. Also, the real benefit to taking a home-office deduction — and one of the things that people don’t think about — is if you have a home office, then as soon as you leave your home-office location and you go driving for business purposes, mile number one is deductible. The home office serves to establish your basis for deducting mileage in some cases.
Finally, not understanding how self-employment tax can sneak up and bite you. If you’ve got a business that’s not earning enough dollars to even create any federal income tax but you’re self-employed, you still have to pay the equivalent of Social Security and Medicare taxes on those profits. I can’t tell you how many times I’ve talked to a small-business owner, or maybe they have even come to me, and they say, “We’re not making any money, but we’re paying an awful lot of tax.” Well, that’s because it’s 15.3 percent of net profit. That’s something people need to be prepared for. If you have a small business, you really ought to set aside 15 to 20 percent of your net bottom-line profit dollars to plan for the taxes on that income.
Berntson Porter CPA Michael Schmidt offers four pieces of advice for business owners during this tax season
Berntson Porter CPA Michael Schmidt started working at the downtown Bellevue accounting and wealth-management firm nearly 20 years ago. Today, he is a firm principal and leads the company’s tax department, serving clients involved in a range of industries, such as construction, real estate, manufacturing, and engineering. 425 Business asked Schmidt for a few tips and quick pieces of advice during this tax season.
R&D TAX CREDIT
“One significant change to the tax law involves a Research & Development credit. Basically, it’s an incentive based on wages and other expenses for businesses that are in development and design to get money back. A lot of people think of that credit as only for large software or pharmaceutical companies, but it can apply to a lot of businesses: manufacturing, construction, engineering, and (others). The IRS has taken away some restrictions to make it available to smaller taxpayers. Now it is available to more businesses.”
KNOWLEDGE AND PREPARATION
“The most common problems we see are small businesses missing deductions, classifying deductions incorrectly, or they might not know all the tax incentives that are out there. Also, they have no idea potentially (the size of the) check they need to write in April, or if they can do anything about minimizing that amount. If they wait until the last minute to either give us the information or do the taxes themselves, and don’t do tax planning, that can create a cash-flow problem.”
AVOIDING AN AUDIT
“A lot of it is about not running afoul of any rules and presenting things properly. For example, a Schedule C (Form 1040), which is really for small businesses, is one of the IRS’s favorite targets — especially one with a loss.”
HIRE A PROFESSIONAL
“The tax code is very complex. This is not supposed to be a plug for ourselves, but if there is any complexity, don’t do it yourself because you potentially will miss some tax-saving opportunities, or just present things incorrectly. We like to ask a lot of questions, and for people to be open about their business. The more we know, the more we can help plan. Also, the more meticulous and organized records somebody gives us or their CPA, and in a more timely fashion, the better the tax-preparation process will be.”