Tax time is stressful for all of us, but when you run your own business, things become way more complicated. I’m not sure how many times, I just want to throw up my hands and give up, but we all know that’s not really an option.
When I took over all financial record keeping over 20 years ago, we didn’t have the luxury of spending extra on anything, so I began tracking expenses so we could see the big picture. After a few years, our business income became the primary income, prompting me to create a much more detailed record keeping system. Every penny is accounted for by category and subcategory, which account(s) are affected, and who was paid.
When tax season comes along, I run a detailed report including the categories I need to include for tax purposes. I visually go through the data to check for data entry errors (I’ve gotten pretty quick with that) and summarize all the numbers. It should be easy to just enter the numbers on the forms, and I’m done. Right?
Most people might not realize it, but tax laws change from year to year. And consequently, the software necessary for that changes each year as well. Tax categories seem to be fairly fluid, so for example what I put under auto services one year had to be split into separate oil change and repair categories the next, even though it’s all totaled on the final form. And I wouldn’t be surprised if it changes back at some point in the future.
To make it more complicated, while there are guidelines as to what is deductible (and at what percentage), where you account for that is not cast in stone. Office equipment, for example, includes furniture and long term assets such as printers, computers and copiers. But, if your furniture is used solely for the business, you can instead list it under supplies with paper, ink and the like. I don’t know about you, but my chair isn’t ‘used up’ at the end of the year, so this really makes no sense to me, but I’ll take advantage of the laws that benefit me.
A pass-through partnership doesn’t pay corporate taxes. Instead everything filters to our personal taxes. But, how I choose to categorize expenses changes how much we are required pay. So if I bought an office chair for the business this year, I can put it either in depreciable assets or office supplies.
- If it’s a supply, the total amount is expensed this year, and I don’t have to worry about it any more.
- If I depreciate it, depending on when we bought it, there are several options for spreading out the expense, including a one time complete expense in the current year.
On the surface this looks like I can deduct the full amount either way. But it’s listed on a different line for partner expenses, which changes how the final taxes are calculated.
To put another little twist in the fabric, things like home office and auto expenses are not included on our partnership forms. We also have to submit the self-employment schedule on our personal forms to do that. (Don’t even get me started on self-employment taxes!)
Quite a few years ago, I didn’t notice a category that had previously been on the personal form had moved to the business side. Since I had already submitted our business form, it lead to a series of corrections on both sides. So each year, I don’t file any tax forms until I know I have both business and personal for federal and state(s) completed to our best benefit. Sometimes this leads me to a several variations of calculations which can confuse the software a bit, adding a little more headache.
Since I spend most of my time actually running the business, I’m sure there are ways I could legally reduce our tax burden that I’m just not finding. I wonder how our bottom line would look if a fleet of tax lawyers took a gander.
But I’d rather have a more streamlined, unbiased and fair system. Instead of penalizing success by taxing income, wouldn’t it make more sense to look into a consumption tax system?