Bookkeeping Basics: Determining Your Accounting Method

Bookkeeping Basics: Determining Your Accounting Method

When you start a new business, you have to make a decision regarding how you will approach your financial management. Two basic methods are available to you: cash basis or accrual basis. Although the two methods clash, there are also see some similarities.

Cash basis is an accounting method that counts income only after cash or a check is received and expenses are not counted until they have been paid. This method is the most popular accounting method among entrepreneurs and small businesses.

Accrual basis is an accounting method that counts income when orders are placed or services are requested, regardless of payment being received. Expenses are counted when your request for good or services is fulfilled.

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6 Year-End Tax Tips That Will Save Your Small Business Money

6 Year-End Tax Tips That Will Save Your Small Business Money

As the end of the year draws near, it’s time to start thinking about your tax strategy. If you’re a small business owner, there are a few things you can do to reduce your tax bill and maximize your deductions. Planning ahead and doing some year-end housekeeping can help you make the most of any tax break that your business qualifies for. We have identified six smart tax moves to consider before the clock strikes midnight on December 31st.

 

Write Off Bad Debt

The IRS allows you to write off bad (un-collectible) debts before the end of the year and deduct those that are unpaid from your taxable business income. By writing off this debt, you can reduce your company’s tax burden for the current tax year.

Note, that if the customer ends up paying their invoice in the future, you will need to reverse  the write-off and declare the payment as income. It’s best to discuss this with your tax advisor to ensure the process is handled properly.

 

Stock Up

At the end of the fiscal year, businesses can reduce their taxable income by purchasing business equipment, supplies and other assets that will be used in the coming year. If your business is in a good financial position, replenishing office supplies or stocking up on inventory, could give you a larger deduction.

 

Prepay Expenses

Businesses can choose to prepay for services they will use in the coming year. For example, insurance coverage, subscription services, business rent, association dues and other fixed expenses can be paid in advance, reducing your businesses taxable income for the year.

 

Defer Income

Small businesses typically use the cash method of accounting, meaning a company recognizes income when cash actually changes hands. This method allows for the option of taking income this year or next year. If you anticipate being in a lower tax bracket next year, you might want to defer income to take advantage of the lower tax rate. Waiting until close to the end of the year to invoice clients will defer income to the next year and lower your current tax bill.

 

401(k) Plan for Employees

Setting up or contributing to an employee retirement account can reduce your business’s taxable income. Business owners can claim a tax credit for the cost of setting up and administering a 401(k) plan. The potential tax savings are usually more than enough to cover the cost of setting up and funding the plan.

 

Employee Bonuses

Many businesses give end of the year bonuses to their employees. These not only serve as extra incentive for employees, but they are also commonly tax-deductible for businesses that operate as corporations. You can deduct the cost of any bonuses paid to employees, if the bonus was given as additional compensation for services, not as a business gift – decreasing your overall tax obligation.

 

Now is the time to start planning your end of the year tax strategy. Don’t miss out on the opportunity to reduce your business’s taxable income and keep more of your hard-earned profits. Taking advantage of these year-end tax planning strategies will aid in minimizing your taxes and help make next tax season a little less taxing.

The small business tax professionals at Motl Accounting are here to ensure that your business is taking full advantage of deductions, write-offs and other tax benefits to end the year right.

What Every American Expat Needs to Know About Paying Taxes

What Every American Expat Needs to Know About Paying Taxes

As a U.S. citizen living abroad, you may be wondering if you are still required to file taxes. The answer is YES. All U.S. citizens are required to file tax returns with the IRS and report 100% of their worldwide income every year. In this blog, we provide an overview of your filing obligations as a U.S. expat and discuss tax exclusions and credits that can reduce your U.S. tax liability.

The United States is one of only two countries that follows a citizenship-based tax system. This means that all citizens of the U.S. are taxed under the same personal tax system, regardless of whether they live in the U.S. or abroad. The only way to stop having to file, and for some expats pay, U.S. taxes is to renounce your U.S. citizenship.

With that said, paying taxes twice on the same income is a common concern for U.S. citizens working abroad. Luckily, expats can qualify for special credits, exemptions and deductions, allowing them to avoid double taxation on their annual U.S. tax return.

Foreign Earned Income Exclusion

One of the most valuable exemptions for expats is the Foreign Earned Income Exclusion(FEIE). For tax year 2022, FEIE allows expats to exclude up to $112,000 of their foreign earned income from their U.S. taxable income. This exclusion can be a significant tax break for expats and can help to reduce their overall tax liability.

Taxpayers qualify for this exemption in one of two ways:

Bona fide residence test – You must reside in a country for the entirety of a tax year, January 1st to December 31st.

Physical presence test – You must live in a foreign country for a full 330 days within a 12-month period.

Foreign Tax Credit

Another tax saving alternative for American expats is the Foreign Tax Credit (FTC). The Foreign Tax Credit allows expats to credit up to $300, $600 if filing jointly, of foreign taxes paid against their U.S. tax liability. This credit can help to offset some of the tax burden for expats who are paying taxes in both the U.S. and another country.

Generally, the following four tests must be met for any foreign tax to qualify for the credit:

You can’t claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit against the same income. You must choose one or the other. Work with your expat tax advisor to determine which one is most beneficial for you to claim. 

Foreign Housing Exclusion

The Foreign Housing Exclusion allows U.S. taxpayers living abroad to write off overseas expenses associated with housing costs from their gross income on their U.S. tax return. This expat-friendly tax deduction can be used together with the Foreign Earned Income Exclusion. 

Just like the FEIE, taxpayers must qualify under the bona fide residence test or the physical presence test. 

If you qualify for the Foreign Housing Exclusion, the following expenses can usually be excluded on your U.S. tax return:

    • Rent in a foreign country
    • Utilities minus your phone, TV and internet
    • Homeowner’s or renter’s insurance
    • Property or leasing fees
    • Furniture and parking rentals
    • Rental repairs 

Calculating the amount that can be excluded under the Foreign Housing Exclusion is complicated. Work with a professional expat tax advisor to make sure you are excluding the maximum amount allowed. 

If you are an American expat, it is important to understand your tax responsibilities. The good news is that there are several resources available to help you navigate the complex world of international taxation. At Motl Accounting, we have extensive experience helping Americans living and working abroad meet their tax obligations. We can provide you with all the information you need to file your taxes accurately and on time. 

We are here to help make this process as easy as possible so you can focus on living your best life overseas. Contact us today!

Source: IRS.gov

Tips to Cut Your Tax Bill

Tips to Cut Your Tax Bill

This article provides some helpful tips on how you can cut your tax bill by making smart depreciation choices, maxing out your retirement contributions and buying the right items. Saving money is critical for everyone, but if you are self-employed or own a small business, these savings can be especially important.

If you follow these tips then you should be able to reduce your tax bill.

  • Tip 1  – Reduce taxes, cut taxes, tax refund
  • Tip 2  – Reduce taxable income, reduce business profits
  • Tip 3 –  Hire an accountant

Tip 1 – Reduce taxes, cut taxes, tax refund

For many years, you could reduce your taxes by depreciating the purchase of vehicles or equipment. However, in recent years, this deduction has been severely limited, thanks to the Tax Cuts and Jobs Act passed at the end of 2017. Before making any major purchases for your business, consider if it would be better to wait until when these limitations are likely to be repealed. However, speak with your accountant to know when that could be and to make the final determination. 

Tip 2 – Reduce taxable income, reduce business profits

Even if you can no longer reduce your taxes by depreciating items, you may still be able to reduce the amount of tax on profits from your business. You may reduce this amount by contributing as much as possible to a retirement account. You can reduce your taxable business income this way if the retirement plan provides a tax deduction for contributions and defers tax on earnings and contributions. There are also other ways to reduce taxes like deferring income and accelerating deductions, but it’s best you speak with your accountant to ensure you are doing it the right way.

Tip 3 – Hire an accountant

Getting an experienced accountant to help you manage your books and look for deductions you deserve is highly recommended. Our accountants at Motl accounting have identified several deductions for businesses they weren’t aware of. Accountants have the knowledge and experience to analyze your finances and get you the best deductions. So consider hiring a well experienced accountant like us to get the most out of your deductions.  

Tax laws are constantly changing based on politics, economic situations and events. Many of these changes present opportunities that you can act on if you know they exist. At Motl Accounting, we constantly take note of the changes in these laws and apply them to help our clients. We also provide our clients with the best advice on cutting their tax bill. So if you’d like us to look at how you are structured and treating all transactions, contact an experienced tax professional here at 847-426-2100. 

How Working from Home Affects Taxes

How Working from Home Affects Taxes

The pandemic led to a large number of professionals working from home instead of their office space. Many may be wondering how this will affect their taxes and if they’ll get a tax break.

The general thinking could be leaning towards you getting a break as an employee working from home, but that may not be the case. Tax breaks of the sort ended with the 2017 tax cuts with little exemptions. This means employees who don’t get reimbursed for their expenses by their employers can’t claim those expenses the way they used to. It’s more complex If you are self-employed and there are rules to be mindful of. You can still deduct a home office and some other expenses related to working from home, but want to ensure you are following the guidelines. It helps to speak with an accountant to get more clarity, but here is some helpful information:

What Can I Claim On My Taxes Working from Home?

Employee

You are not supposed to deduct your expenses when you work from home as an employee if your taxes, social security and medicare are deducted from your paycheck. Prior to the 2017 Tax Cuts and Jobs Act passed by the United States Congress, employees could deduct expenses like mileage, home office supplies, work outfits and more. The IRS now tends to qualify remote employee expenses of that manner as “miscellaneous itemized deductions” and since 2018 itemized deductions can only be taken if they exceed the standardized deductions. 

Self Employed 

Self employed professionals and business owners can still deduct for their office, meals, mileage supplies, marketing and more. Expenses you get in regards to working from home are tax deductible. It’s important to note that the expenses need to be exclusive to the business’s operations. A space used as an office by day and bedroom any other time would likely not be compliant. The space being used needs to be exclusively used for your business. 

Tax Breaks Due to Covid-19?

There aren’t currently any special tax breaks for those working from home due to the pandemic. You can however count on a good accountant to ensure you get any tax breaks related to the pandemic if there are changes in the future. 

In conclusion, the changes to the tax laws with regards to working from home may be confusing as time goes on. Having a professional assist you with your finances as an employee or business owner can make a difference. Accountant’s like us here at Motl Accounting are mostly aware of these changes and can help you get the most out of your taxes. 

If you need to know more about what you can claim on your taxes, contact a professional at We’ve helped several individuals, families and businesses with getting the most they deserve out of their taxes.

Benefits of Paying Taxes Quarterly

Benefits of Paying Taxes Quarterly

Many individuals are familiar with filling out W-4 forms provided by their employers to file taxes. Business owners, self employed individuals and contractors however don’t fill out traditional W-4 forms. They are professionals who might receive income without taxes taken out right away and are therefore expected to make payments quarterly. According to the IRS, you are expected to make quarterly estimated tax payments if the following apply.

  • You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
  • You expect your withholding and refundable credits to be less than the smaller of:
    • 90% of the tax to be shown on your current year’s tax return, or
    • 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

Simply put, if you know you are going to owe a good amount of money, it’s beneficial to pay your estimated taxes. Here are a few reasons why.

Penalties

No one likes penalties and paying your taxes each quarter prevents that. Per the IRS if you owe over $1,000 you could be penalized for underpayment of your taxes. Knowing the exact figure could be challenging and hiring an accountant could help in estimating how much your payments should be. Your accountant should have all the right numbers and processes in place to give a figure to pay that should prevent you from underpaying your taxes.

Tax Bill

Paying your taxes quarterly let’s you avoid the potential surprise of a larger tax bill during tax season. Not paying could lead to having a large and unexpected bill at tax season. Paying your taxes quarterly can give you peace of mind knowing you aren’t likely to get an unexpected bill. This might be a task to deal with every quarter due to the nature of your business and how busy you are. If that’s the case, consider hiring an accountant who can assist you. For all you know, the cost of paying penalties could be more than what an accountant might charge to help you.

Efficiency 

Paying your estimated taxes each quarter should give a good overview of your books and less stress in managing your accounting. This is where a bookkeeper comes in handy as they can provide insights on your accounting through the year. Tax season is less of a headache when you’ve been managing your books and making quarterly payments throughout the year. 

In conclusion, the benefits to paying your estimated quarterly taxes can make life easier and provide you peace of mind. Quarterly taxes are typically due on April 15, June 15, September 15, and January 15, for the current calendar year. Most accountants and bookkeepers are aware of these dates and should work with you to get your payments in on time as needed. 

Want to know more about how accountants and bookkeepers can help with your taxes and grow your business? Contact one of our professionals here at Motl Accounting. We assist businesses and individuals with their accounting needs and look forward to assisting you.