Tax Considerations for Married Couples in Business Together

A lot of businesses are family operations. When you need some extra help, the first people you look to are often the ones you know and trust more than anyone else. Or if you’re just starting a business, opening it with a loved one can make the adventure more comfortable and exciting than going about it all on your own.

One of the most common types of family operations is the husband and wife business. Married couples are truly partners in life and teaming up to make a living together can make a lot of sense.

While marriage is a partnership, business operations aren’t always as cut and dry. If you’ve been running a business on your own and your spouse starts helping out, they’re most likely an employee. But if you both launched your business together, there is a good chance you’re co-owners. There are differences between these two situations from a tax perspective so it’s important to be clear which applies to you and your spouse.

One spouse is the owner and the other is an employee

If one spouse runs the business on their own and hires the other to help out, the tax situation is pretty straightforward. The spouse that works for the other is an employee and subject to income tax withholding and taxes for Social Security and Medicare.

We’re partners!

Your business is considered a partnership if you and your spouse run it together and started it using shared finances or contributed equally to its launch.

Married couples that run a business together are often able to qualify as a joint venture instead of as a partnership for tax purposes. This means that each spouse files as a sole proprietor of the business and separately reports their share of the business’s income, gains/losses, deductions and credits on their own Schedule C form.

The main benefit of filing as a joint venture is both spouses receive credit for Social Security and Medicare. The Schedule C form only has one Social Security Number field, so the spouse that completes the form often gets credited for these benefits and the other does not. Filing as a joint venture means that both spouses complete a Schedule C, avoiding this problem.

In order to qualify as a joint venture, you and your spouse must “materially participate” in the business, be the only two partners of the business, file a joint tax return, and both elect to be a joint venture.

Working with your spouse has a lot of benefits. You get to be business partners with your life partner and earn a living together. Just makes sure you clearly define if they’re an employee or co-owner so you avoid any tax issues.

Determining if You Have a Business or Hobby

Many business owners started off with a hobby that became a business over time. Some people set out with the intention of building a business from their hobby while others are pleasantly surprised to discover there is opportunity to make a living from their passion. Whatever the motivation, it’s important to know when a hobby is still hobby and not quite a legitimate business yet. This is because businesses are allowed to deducted operating expenses from their taxes but individuals making additional income from their hobby cannot.

So do I have a business or a profitable hobby?

The IRS offers a set of guidelines that can help you figure out if your hobby has transformed into a business. If you have the skills and background to run the type of business you want to, you’re working with the intention of generating a profit, and you depend on the income, there is a good chance you’re operating a business.

But the IRS guidelines may still leave you feeling uncertain. Maybe you enjoy teaching exercise classes after work but don’t depend on the income because you’re already gainfully employed. And does running an ecommerce business on Amazon or Ebay actually require any special skills?

A more objective way to determine if you have a legitimate business or not is by applying what’s often called the "3 out of 5 test.” The IRS will view your operation as an income-driven business if you’ve made a profit from it in three of the last five years, one of which must be the present year. This means in your first five years of operation, you can have two years where you lose money or break even, which is not uncommon for businesses in the startup phase.

If you don’t pass the “3 out of 5 test” or haven’t been in operation for five years yet, it doesn’t necessarily mean you’re not running a business and can’t claim operating expenses. In this case, you should speak with a tax accountant who can take a look at your situation and recommend the best course of action.

What can I do to turn my hobby into a business?

Deciding to pursue your passion and turn your hobby into a business is exciting. In order to be successful, you should of course set out with the goal of running a profitable business. But you should also take all the necessary steps of opening a new business, including:

  • Keep accurate and up-to-date financial records
  • Open a business bank account
  • Decide on a legal structure
  • Get any necessary licenses and permits
  • Purchase insurance
  • Obtain a tax ID number and register with state and local tax agencies

Following these tips helps ensure your business gets off on the right foot. It also shows the IRS you intend to run a legitimate business.

BookKeeping Express (BKE) offers full-service bookkeeping for different types of businesses. Contact us today to learn how we can help you setup your books and keep track of your finances.

What Business Records Should You Keep and For How Long?

Most business owners know they should hold onto important documents related to their company’s finances. But have you ever wondered what documents you really need to keep and when it’s finally okay to throw them away?

The truth is, it really depends. It depends on the specific document and what you use it for. The IRS says that you should keep documents “that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.” That means that any document that backs up the information you’ve included on your tax return should be kept through the “period of limitations” set by the IRS.

What’s the “period of limitations”?

The period of limitations is the timeframe you or the IRS can revisit a tax return you’ve filed. If you find that you left something beneficial off your taxes, you’re allowed to amend your return and claim a credit, as long as you do so within the period of limitations and have the proper documentation.

However, during this time, the IRS can also take a deeper look at your return and charge you for taxes you previously failed to pay. If you believe your return is correct, having the right records will prove you’re right. The IRS provides specific periods of limitations for different scenarios on their website.

Employment tax recordkeeping

You should keep records related to employment taxes for at least four years after your last quarter filing. Employment tax records should be comprehensive and include specific details about each employee, like their name, social security number, dates of employment and the wages and benefits they were paid. You should also hold onto copies of past returns you’ve filed and the tax documents your employees completed when they were hired.

Records concerning property

If your business owns any property or equipment, you should keep all relevant documents related to it until the period of limitation passes for the year you sell or dispose of the property. This is because your records support any depreciation, amortization or depletion deduction or the gain or loss you incur when selling the property. Again, the IRS website can help you determine the correct period of limitations for your situation.

Records that aren’t used for taxes

Even if records aren’t used for tax purposes, there still might be good reasons to hold onto them. For instance, an insurance company might request certain documents while preparing a policy quote for you. Also, your current lenders might want particular records to understand how their investment is doing and potential lenders could make a similar request before deciding to invest.

Use online document storage

Keeping documents stored and organized has long been a hassle for business owners. Paper tends to pile up and can quickly make your desk a cluttered mess. And some documents get lost, damaged or accidentally thrown away before they even make it into the pile. You can use a filing cabinet but even that takes up space and requires time to organize and later search through.

The good news is you can now store all your documents online in the cloud. Most services offer a variety of convenient ways to upload your records and it’s easy to find the document you need when the time comes.

Tax News: Due Dates For ACA Forms Extended

Back in November, we published a blog post notifying large employers that the Employer Shared Responsibility provision of the Affordable Care Act (ACA) would take effect in 2016. The provision requires businesses that employed at least 50 full-time employees or full-time equivalents (FTEs) in 2015 to report on the health insurance coverage they offered to their staff.

Employers report the health coverage they provided using Forms 1095-C and 1094-C. However, the IRS recently delayed the due dates for these forms.

The 1095-C due date is now March 31, 2016: 1095-C forms (Employer-Provided Health Insurance) are provided to employees and outline the coverage offered to them in 2015, including the lowest-cost premium they could select and the months of the year the coverage was available. Employees submit their 1095-C form with their individual tax filing.

Businesses were previously required to mail 1095-C forms to each employee that was eligible for health insurance coverage in 2015 by January 31, 2016.

The 1094-C due date is now May 31, 2016: The 1094-C form (Transmittal of Employer-Provided Health Insurance) is a cover letter businesses send to the IRS that consists of their contact and identification information, as well as a list of eligible employees who were sent 1095-C forms.

Businesses were previously required to submit their 1094-C form to the IRS by February 29, 2016.

Missing these due dates or making mistakes on these forms can result in a minimum penalty of $100. Fortunately, large employers now have an additional two months to meet their requirements under the Employer Shared Responsibility provision. If you use payroll software or work with an outsourced payroll provider, there’s a good chance they’ll automatically generate these forms for you, much like they do with W-2 and 1099 forms.

The Home Office Deduction: How to Qualify and Calculate

When you first start a business, running it from home makes a lot of sense. Renting a workplace often isn’t practical when you’re trying to keep costs low. And it’s easier than ever to reach potential customers and stay in touch with colleagues and partners from the comfort of your own home.

Most business owners who have an office or workspace at home understand they can possibly deduct the expense from their taxes. But they might not completely understand the requirements and how to go about calculating the deduction.

Determining if you have a home office

The IRS has two clear requirements for deducting a home office expense from your taxes. The first rule states that the area of the home you work from must be exclusively used for business activity, on a regular basis. That means you can’t consider your living room or kitchen a home office for tax purposes. Even if you really do run your business from your couch or kitchen table, those areas of your home aren’t used solely for business activity. You can convert an extra room into a home office, such as your basement or a spare bedroom, but it needs to used only for business operations. Also, if you have a separate structure on your property devoted to business activity, like a barn, studio, or workshop, you’re likely in good shape.

The second requirement says that your home must be your principal place of business. This doesn’t necessarily mean you can’t claim a home office if you also have a dedicated workspace off your personal property. You just have to use your home office “substantially and regularly,” in the words of the IRS. This means the bulk of your business activity should be conducted from your home.  

What’s deductible?

You’ve determined that you really do have a home office that is used exclusively for your business, on a regular basis. Great! But what exactly can you claim on your taxes?

Costs directly associated with the home office can be fully deducted. For example, if you renovate your home office you can claim it as an asset and depreciate it over time.

You can also deduct a portion of your regular home expenses. Your mortgage/rent, utilities, property taxes, repairs, condo/neighborhood association fees, and depreciation can all be partially deducted. Even if the repair happened in a part of your home that is separate from your office, you can still partially deduct it.

Calculating your deduction

You can claim $5 per square foot for up to 300 square feet for your home office deduction. In order to calculate, start by determining the percentage of square footage of your home that is used for business activity. Then figure out the total annual cost of your home by adding up all your expenses from the previous year. Whatever percentage of your home is devoted to business use is the same percentage of your total annual home cost that can be deducted from your business taxes.

Let’s say you have a home that is 2,500 total square feet and you run your business from an office that is 250 square feet. The office space takes up 10 percent of your home, so you can deduct 10 percent of your total annual home costs from your business taxes. Be sure to keep in mind that your deduction cannot exceed $1,250 in this case because that would be more than $5 per square foot.

Keep your records

Most business owners don’t pay personal expenses, like mortgage payments or utilities bills, from their business bank account. Instead, they likely get paid a salary or take a draw from the business and use those funds to pay for living expenses. In this case, it’s very important to hold on to the proper records, like utility bills or paid invoices for repairs. In the event the IRS audits your tax filing, having the proper documentation will prove that your home office deduction is accurate.

Any home-based business owner should take advantage of home office deductions. Just remember to make sure you qualify, calculate your deductions correctly and to hold onto the proper documents.

The Differences Between Bookkeepers and Accountants

By Lauren Crum Email Lauren

By Lauren Crum
Email Lauren

Many people think the terms “bookkeeper” and “accountant” are interchangeable and can be used to describe people who do the same job. While there is some crossover, bookkeepers and accountants perform distinctly different roles for the businesses they serve. Business owners that don’t realize the differences can end up hiring the wrong firm, which can be very costly.

For instance, many business owners end up receiving big bills from their tax accountant because they pass them unorganized financial records. The tax accountant has to clean-up the books before they can prepare the taxes and they of course bill for the additional work. Paying an accountant to organize your books is like buying a luxury car when you would have been fine with the compact. The bottom line is a bookkeeper should maintain your financial records and paying a tax accountant to do it can cost you about three times more.

Bookkeepers versus accountants

Like the name implies, bookkeepers are responsible for maintaining their client’s books (or general ledger, as it’s technically called). This means they’re in the books on a daily basis, entering and organizing every single financial transaction that occurs within the business.

A bookkeeper’s common responsibilities are listed below.

  • Compiles data daily
  • Categorizes expenses in the general ledger
  • Analyzes general ledger for accuracy
  • Reconciles bank statements
  • Prepares adjusting entries
  • Generates financial statements

Accountants, on the other hand, take the work done by bookkeepers and build on it. Using an updated and accurate general ledger, they perform the following tasks.

  • Analyzes the company’s financial data
  • Prepares income tax returns
  • Provides beneficial tax planning advice

In general, bookkeepers require a big picture understanding of the businesses they work with. Bookkeepers should also be familiar with Generally Accepted Accounting Principles (GAAP), which outline the standards and procedures for keeping proper financial records.       

An accountant requires more in-depth knowledge of GAAP and the Income Tax Act. Accountants receive certifications and ongoing education in order to stay current with GAAP and tax changes. Using their extensive knowledge of tax regulations, they are able to offer advisory services that help the small business owner set up internal controls and perform strategic tax planning. Accountants also take internal financial statements and prepare them for external use by third parties, such as lenders and investors.

In summary, a bookkeeper takes care of the general ledger while accountants give context to it by analyzing the data and providing strategic advice.

Do I need a bookkeeper or accountant?

If you want to have a successful business, you’re going to need both eventually. All your financial transactions have to be recorded in your general ledger no matter what stage your business is at, so working with a bookkeeper is never a bad idea. In fact, employing a bookkeeper early on ensures your general ledger and chart of accounts are setup correctly. Many business owners take on the responsibility when they’re first starting and later outsource it as the business grows. Maintaining the books is a time-consuming and tedious responsibility that needs to be done regularly so ask yourself if you really have the time and energy to handle it all on your own.

You’ll certainly need an accountant come tax time and as your business grows. Just don’t fall into the trap of thinking you can get two for the price of one by expecting your accountant to be your bookkeeper too. As you’ve learned from the example at the beginning of this blog post, accountants tend to charge much more than bookkeepers.

BookKeeping Express (BKE) provides full-service bookkeeping. If you want to learn more about how we can serve your business, contact us today.

Hubdoc Names BKE CEO Keith Mueller a Top 50 Cloud Accountant of 2015

Our friends at Hubdoc recently released their “Top 50 Cloud Accountants of 2015 (North America)” and we’re proud to see BookKeeping Express (BKE) CEO Keith Mueller made the list. Here’s the nice comment Hubdoc had to share about Keith and the BKE team.

"Keith knows first hand the pain businesses face to get their books in order from his many years at Accenture. And, as one of the largest cloud bookkeeping practices in the U.S., Keith and his team are clearly succeeding at solving that pain point. Keep rocking it Keith!"

We definitely plan to keep rocking it in 2016 and beyond. The cloud has improved how bookkeepers and business owners work together and we’re pleased to be part of the change. Using tools like Hubdoc, the bookkeeping team at BKE is able to spend less time on data entry and work more closely with our clients, regardless of where they’re located.

Big thanks to Hubdoc for including us on their Top 50 Cloud Accountants of 2015 list. Keep rocking it too, Hubdoc!