Tax TIme is Here

It Is Taxing – But Necessary

 April 15th, the drop dead filing day for most income generating entities, is fast approaching.  The self employed individual, whether a sole proprietor, partner, or incorporated entity, should view this annual exercise as a review of their business plan outcomes. 

 This blog looks at the IRS Schedule C, the attachment that must accompany a completed 1040. It is important to note there are 2 steps in deducting operating costs to determine taxable income.  It may help to review some terminology. 

  • Gross receipts or sales = the monies received from all items or services sold last year before any business bills are paid.
  • Gross profit = the money left AFTER the cost of all materials needed to make the product or service sold are deducted from gross receipts. 
  • Gross Income = gross profit and all revenue from other sources. This is the number from which remaining operating costs are deducted to determine taxable income.

 First Deduction                       Calculating Gross Profits

The business owner totals the value of prior inventory at the beginning of business year plus the cost of materials and labor to determine the total cost of goods (cogs)sold.  The total of COGS is deducted from gross sales/receipts to establish gross profits.

 Second Deduction                  Calculating Gross Income

Once gross profit is determined, the remaining operating costs are deducted to determine taxable income.  This step includes all other allowable deductions.

 The use of an Accountant to complete a business tax return is recommended to maximize allowable deductions. The tax code changes every year and subtle changes in deductions can mean increased deductions.  An Accountant is best prepared to know what and how to get all allowable tax deductions.  The allowable deductions for vehicles and in home offices are best determined by an Accountant. The services of an Accountant to complete a tax return are fully deductible.

 The Internal Revenue Service (IRS) does allow the avoidance of taxes.  It is the evasion of taxes that is a criminal offence.  As to the benefits of filing a tax return, this is a tool to document earned income, the basis of calculating all Social Security benefits for disability and retirement.  The higher the documented income is the higher the Social Security benefit.  Being paid under the table is an excellent way to lose or limit any potential Social Security benefit.  It is also an evasion of taxes.

 

C Moynihan

NEw England Business Associates Business Development Center

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