For whatever ghoulish reason, we’ve all embraced the phrase “death and taxes.” But the day-to-day reality of taxes truly has very little to do with death, and everything to do with life – quality of life, that is.
Keeping up with taxes (and general bookkeeping) is critical to a surviving and thriving business.
We spoke with Lorraine Kelley, CPA, of Whaley Hammonds Tomasello, and Jennifer Luce, EA, of Luce + Associates – two reputable accountants from right here in our hometown of Atlanta, GA. They shared answers to your questions posed via email and our ShootProof User Group on Facebook!
Photo by CAMILA CORDEIRO
Q: What’s the most overlooked tax deduction (specifically for small business owners)?
JENNIFER LUCE: The deductions that are often missed are those expenditures that have a very blurry line between being classified as personal and business. For example, it is not uncommon for a taxpayer to dismiss the deductibility of monies spent on items that may appear to be personal in nature on the surface, but in fact can also be classified as business. Cell phone expenses are a prime example. Though most taxpayers do indeed utilize the cell phone for personal purposes, quite often it is also used for business. In this case, it would be justifiable to deduct the percentage of the cell phone expense used for business. This theory can also extend to commonly purchased equipment such as new phones, tablets, computers, etc.
Q: Can I use one bank account for both my personal and business expenses?
JENNIFER LUCE: If you are operating as a sole-proprietor for legal and tax purposes, there is no legal or tax reason that would prohibit you from using one bank account for business and personal. However, if you are operating as a separate legal structure, such as an LLC or a corporation, it is not a good idea to commingle business and personal finances.
This practice can possibly open the entity and the taxpayer to legal and tax scrutiny in the event of a lawsuit or an IRS audit.
Photo by DINO REICHMUTH
Q: What’s the difference between a Sole Proprietorship and an LLC?
LORRAINE KELLEY: The main difference is the amount of liability the owner is exposed to under each entity. An LLC can limit the owner’s liability. According to Checkpoint Source: Tax Advisors Planning System Series II (RIA):
A Sole Proprietorship is an unincorporated form of business with one owner. For tax purposes, the income and expenses of the business are reported on in the personal tax return of the owner.
A legal Sole Proprietorship is not a separate legal entity from its owner. However, a single-member LLC is separate from its owner, even though, for tax purposes, it is not treated as a separate entity.
Q: What’s the difference between an LLC and a C-Corp or an S-Corp?
LORRAINE KELLEY: The main reason to choose an LLC over an S-corporation is the flexibility of operations. There’s less corporate governance required.
The drawback of a regular C-Corporation over an S-Corporation is the potential for C-corporation earnings to be taxed twice. The earnings of a C-corporation are taxed at the corporate level and, if the shareholders receive a dividend, they pay tax on that dividend as well. This could result in double taxation.
If operating as an S-Corporation, the shareholders pay tax on the entity’s earnings on their personal tax returns – what are known as “pass-through earnings.” Again, from Checkpoint Source:Tax Advisors Planning System Series II (RIA):
An S corporation is an incorporated business that has made an election to be taxed as an S corporation. It files its own federal tax return (Form 1120-S ), but usually does not pay federal tax, although it may pay state tax. Owners are taxed directly on corporate income. In addition, owners who work for an S corporation are employees who receive wages.
Photo by AUSTIN NEILL
Q: If I’m traveling for work, can I deduct my travel expenses – even if my family travels with me?
JENNIFER LUCE: In general, expenditures associated with business travel are deductible. The list of deductible travel expenses may include:
- Car rental, etc
The taxpayer can only deduct the expenditures as they relate directly to the business travel.
For example: A self-employed photographer is hired to shoot a destination wedding. The business trip is determined to last 3 days. The photographer decides that the destination would also be a great place to vacation with the family. In addition to the 3 days spent at the destination shooting the wedding, the photographer and family stays an extra week. The only deductible expenditures in this example will be the photographer’s airfare, and all business related expenses for the three days attributed to the “business” portion of the trip. The expenditures spent for the family and the additional week of vacation is not deductible.
Q: Why should I pay myself payroll instead of taking owner draws?
LORRAINE KELLEY: If your company is either a corporation or an LLC elected to be treated as a corporation, you are considered an employee who should receive wages (usually done if you are performing some type of services for the company). You can take a reasonable salary and in addition can take some distributions of profits from the business.
The advantage of taking a reasonable salary and distributions is that the profit distributions are not subject to payroll taxes. Using an S-corporation to avoid payroll tax is always under the IRS radar, so wages need to be reasonable.
What would you have to pay someone doing what you do for the corporation? That is the definition of the IRS’ view on “reasonable salary.”
Photo by EVAN KIRBY
Q: When does it make sense to purchase a work car with business funds?
JENNIFER LUCE: In general, for most small businesses, purchasing a car with business funds will not increase the allowable deductible amount. Most small businesses are only permitted to deduction auto expenditures based on the percentage used for business regardless of how the vehicle was purchased.
Q: I donate a lot of shoots to nonprofits. Can I write off the amount I would normally charge a client? If not, how do I receive “credit” for these contributions?
LORRAINE KELLEY: In general, charitable contributions are those made to a qualified organization (usually a 501(C)(3) organization). You can donate money, supplies, equipment, travel, etc., but not the amount for the value of your services.
Though the amount for your services is not deductible, you should send the non-profit a letter telling them the value of in-kind donation that they received so they can record that in their financial statements. They are required to post the in-kind donated services they receive, even if you don’t get to deduct it. One solution is to bill them for your services and have them pay for it; then you can donate that same amount back to their organization.
Photo by ALEXANDER DUMMER
Q: Bookkeeping overwhelms me and I’m never prepared at tax time. I skipped filing my taxes last year. Is that bad? How can I get back on track?
JENNIFER LUCE: As a general rule, neglecting to file taxes does not mean that you are going to jail. However, depending on your own tax situation, non-filing may be costly if penalties and interest are assessed. Find a seasoned tax professional that can guide you through setting up some processes and getting caught up BEFORE the mishap spirals out of control. Keep in mind, filing compliance will not just disappear. So it is better to face the music sooner rather than later.
Q: Do I have to make quarterly estimated tax payments?
LORRAINE KELLEY: If you have taxable earnings from either a sole proprietorship (“SP”), LLC filing as a sole proprietorship, partnership, or an S-corporation, you should make estimated tax payments to eliminate having to pay an underpayment penalty. You are not required to pay estimated taxes, but the IRS penalty can be pretty costly.
Photo by ANNIE SPRATT
Q: How do I go about finding a trustworthy accountant to help me with my taxes?
JENNIFER LUCE: Though this is not fool-proof, ask for referrals from associates and/or friends. Get several. Call several. Ask to what extent the accountant’s knowledge is on taxes. Not all accountants are tax savvy (though they may think they are).
Q: What common expenses can a photographer use as a deduction?
LORRAINE KELLEY: The biggest deductions for photographers are:
- Equipment (usually fully deducted under accelerated depreciation rules)
- Automobile expenses, two options are mileage or actual expenses
- Travel expenses; airfare, car rentals, public transportation, meals, lodging and other travel related expenses
- Rent for office or studio or home office
- Supplies, materials and processing costs
- Internet and website
- Professional fees; attorney and CPA
- Any other expenses that are ordinary and necessary in your business
Photo by ALEX WONG
Q: What happens if I owe more tax than I can afford to pay?
JENNIFER LUCE: The IRS does offer a few options to taxpayers who owe more than they have the means to pay. The first option is to request a 120 extension to pay. This will buy the taxpayer 120 days to try to pay off the debt without any aggressive collections action on the IRS’s part. There is no fee for establishing this extension. The other option is to request an installment agreement. This will allow the Taxpayer to extend the time to pay – in most cases up to 72 months. The IRS does charge a fee for this method. However, neither method stops additional late payment penalties and interests from being assessed on the unpaid balance. It is always best to pay off the tax liability as soon as possible.
Q: How do I know when to charge sales tax?
LORRAINE KELLEY: In most U.S. states, sales tax should be collected and remitted to the state on anything tangible that the photographer provided to a customer. If you deliver a CD or a flash drive, photo prints, books, and specialty printed items with photos to a customer, you will need to collect sales tax on that product. If you deliver photos digitally you will have to consult your specific state to find out about the taxable nature. As of today, about half the states in the USA require sales tax collections on digital products (though Georgia does not as of this time – January 2017).
If you are billing for labor and product all in one invoice and not separating those items on the invoice, you could be subject to sales tax on the whole invoice. It’s best to separate your services and labor from goods sold on your invoices; that will keep these surprises from haunting you down the road.
Photo by JEFF HOPPER
Our Top 5 Takeaways:
- From basic bookkeeping to tax prep, the pros can help keep you on the straight and narrow. They can even call the IRS for you if you ever need some extra help!
- There are no wrong questions. It’s better to ask, learn, and plan, than to ignore a problem and hope it goes away. Don’t be afraid to admit what you don’t know!
- Keep separate bank accounts for your personal and business expenses. For some tax entities this is required by law. For others, this is just a smart way to stay organized and on top of your financial game!
- You can’t write off charitable donations of services – only tangible goods! Consider workarounds (such as getting paid then re-donating the funds) if you want a tax deduction for your service donation!
- With a tax pro’s help, make sure you’ve structured your business properly from the start. Establishing the proper entity can save you money – and lots of headaches! If you think you did something wrong when you first started, a tax professional can help you sort things out now, ensuring a brighter (and more profitable!) future for you and your biz.
Header photo by BROOKE CAGLE
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