Tax FAQs

Small Business Owner Questions:

Q: What is important about my books, as the input for tax returns?

A: Your books used for tax returns are required to meet IRS standards as detailed in the terms and conditions. In plain language, this means in part that you have included all customer revenue generated, and that you have source documentation for business expenses, and that those expenses meet the standard for deductibility. Most business owners find it invaluable to work with a bookkeeper regularly. This helps you as a business owner to ensure that your books are reconciled (that transactions agree to the bank/credit card statements), and that your transactions are accurately classified. I am always glad to address questions clients have about their books, and related tax implications.

Q: Does taxation differ for my California business based on my entity? How does tax differ for an S-corporation or LLC as compared to an unincorporated sole proprietor business?

A: While the way in which income gets taxed differs slightly among entity type, the most tax-efficient entity is none at all, or to be a sole proprietor. There is considerable propaganda and advice by some that incorporating in and of itself, changes/increases deductions or reduces tax. However, most of the supposed tax savings, is a form of evading self-employment tax on earnings. The decision to incorporate is typically driven by customers who prefer to do business with an incorporated entity, or a perceived legal benefit. The decision to be a C-corporate or S-corporate or LLC business, will necessarily involve a separate business tax return, and additional CA corporate tax in the form of franchise or LLC tax.

Q: How does using a vehicle in my business affect my tax return, and what recordkeeping is required?

A: Using a vehicle in business is exceptionally common. There are two methods to calculate the deduction for business use of a vehicle, and each requires that you track both the miles you drove for business during the year, as well as the total miles the vehicle was driven in the year (business and personal combined, or total odometer roll). One method is the mileage method, which allows you to claim a standard amount per business mile driven. The other method is the actual expense method. This method allows you to claim actual operating costs such as fuel, insurance, repairs, etc. The amount of the deduction is the business use percentage (business miles divided by total miles), multiplied by each of the actual operating expenses. The actual expense method also allows you to include a deduction for depreciation based on the price you paid for the vehicle, taken over time.