8 Tips for Starting an Engineering Consultancy
Everything You Need to Know about an Engineering Consulting Firm Startup
Starting your own business is difficult. In fact, some estimates state that a third of new businesses fail within their first year of operation. It doesn’t get any easier from there. Those numbers increase to half by the end of the second year, up to three-quarters in the third.
This may put you off starting your own engineering company. After all, if so many businesses are doomed to failure, why should yours be any different?
Well, the fact is that you can make your engineering consulting firm startup a success. You just need to know how to do it. On a general level, you need a mix of ingredients. Talent is the most important. Without talent, you won’t be able to get very far. After that, you need a great passion for the engineering industry. This is what will push you to keep going when times get tough, and you feel like all you do is work. Combine that with some luck and business know-how, and you have as good a chance as anybody of succeeding in starting your own engineering company.
This article aims to help you along the way. But first, let’s take a look at some of the reasons why you might want to create an engineering consulting firm startup.
Why Start an Engineering Consultancy?
That’s a good question. After all, it’s only natural that you want to avoid becoming another statistic in the list of failed businesses. Why take the risk when you can just settle into a regular engineering job?
The main reason is autonomy. Starting your own engineering company offers you more control over the work you do. You get to decide which projects you take. As a result, you’re in a better position to follow your engineering passions and do what you entered the industry to do.
Of course, pressure is the trade-off. If you don’t deliver what you promise, you will lose clients. However, many people find they thrive under this pressure. Plus, there are few things that can compare to the sense of achievement you enjoy when you know you’ve done something right without the safety net of an employer. The challenge is rewarding in itself, plus, you may find yourself wondering what might have been if you hadn’t taken the plunge.
Then, of course, there is the money. Most engineering business owners discover that they can make much more money working as a consultant than they could as part of a company. Yes, the chances of failure are high. However, there can be no reward without risk. If you take your chances and the gamble pays off, you set yourself up for a much more comfortable life.
So let’s assume you’ve decided to create an engineering consulting firm startup. What do you do next? Follow these tips to improve your chances of success.
Tip #1 – Know Who You Are
Have you ever heard the term “value proposition”? This phrase relates to what you have to offer that makes you different from everybody else. Your value proposition tells your clients what they can expect when they work with you. It also defines the company’s values, which you can use in your branding efforts.
It’s crucial that you understand your value proposition because it is your key to attracting customers. Work out what you have to offer to the market, and make sure there is a niche for your company.
Define your value proposition before you create your engineering consulting business plan. Think of it as the starting point from which you will develop the firm. Write it down and make your value proposition your mantra.
It really could be anything. Perhaps you provide superior customer service, or you use technologies that other firms don’t. Whatever it is, your value proposition should be front and centre in any materials that relate to the company.
Tip #2 – Know What You Need
Engineering takes in all sorts of disciplines. For example, mechanical engineers build things for their clients. Civil engineers focus their efforts on improving the environment, whereas electrical engineers concerns themselves with the safety and quality of electronic products.
There’s a reason for mentioning this. Each type of engineer needs different tools to do their jobs properly. It’s likely that you will see projects through from design through to prototyping and completion.
Do you know what you need, to do that? At the same time, do you know where you can get what you need?
These are questions that you need to answer early on in the process. For example, you’ll need to research where you can buy and learn about the digital design software that will help you to create great models. Maybe you’ll also need a 3D printer so you can create prototypes of your designs.
Every engineering consulting firm startup needs to invest in the tools and materials it needs to do its job. Do some research and network extensively. Take advantage of any opportunity you have to get what you need so you can get your engineering consulting firm startup off to a good start.
Tip #3 – Create a Strong Business Plan
Your engineering consulting business plan is the detailed outline of what your business does, and how you plan to achieve your goals. The key is honesty.
You need to look at what you have, and how this will help you to achieve your goals. Be realistic about your starting point, as well as the level of competition you will face. You may not be able to compete with the established names in your industry. That’s okay. It just means you have to focus on smaller projects until you’ve developed your reputation.
Your finances should be at the forefront of your thinking. Understand how much you need to invest in the company to get it started. Furthermore, don’t be too liberal in terms of your projected earnings. This may inflate your expectations to unrealistic proportions, which could lead to spending in areas where it isn’t needed.
Finally, understand what your customers want. Your engineering consulting business plan is where you’ll start developing your marketing strategy. As such, you need to understand what your customers expect. You’ll need a relevant degree and some experience. Use your business plan to figure out how you can use these tools to demonstrate your experience.
Tip #4 – Start Making Connections
It’s never too early to start making connections with engineering industry influencers. You can start building your network from the moment you decide to start your own business. You don’t even need to have your engineering consulting business plan in place to network.
Local industry events will allow you to get in touch with people who could provide you with opportunities. It’s not just those in your industry that you should pay attention to, either. Talk to people of all professional backgrounds. You never know who may have a nugget of wisdom to share with you. Plus, you may find somebody in another industry has a business opportunity waiting for you to capitalise on.
Social networks also allow you to connect with more people. Use LinkedIn to share your ideas and connect with key influencers. It’s all about building your reputation with the right people. Network often and well, and you should find opportunities come your way.
Finally, never forget the follow-up. If you meet somebody, make sure you email them the next day. This shows that you took the interaction seriously, and opens the door for further discussions about business.
Tip #5 – Get Your Quoting Right
One of your engineering consulting startup firm’s toughest tasks is getting its quotes right. This shouldn’t come as a surprise. After all, your firm is new to the industry, and you may never have had to quote a direct price to a client before.
So many factors come into play here. You need to understand what others in the industry are charging, so you don’t go too far above or below the standard. You also have to take the client’s budget into account. Sometimes, a client who can’t spend much now could clear the path to other opportunities. However, you also cannot allow others to take advantage of you.
The best thing to do is ask what others in the industry have done. This is where your networking efforts will come to fruition. Every engineering company was a startup at some point, so ask those in the know how to go about quoting for projects.
Tip #6 – Communicate Constantly
An uncommunicative engineering consulting startup firm won’t get any business. You should keep in touch with anybody who your firm has connected with. You must develop your relationships with new clients while ensuring that any questions your current clients have get answered.
It’s a tough balancing act, as communicating takes time away from your other work. However, it’s one that you will have to manage if you are to find success.
You also need to account for different client preferences. Some will want regular updates on the project’s progress, while others are happy to let you get on with things. Your firm’s communication strategy must adapt to the needs of the client.
Furthermore, be honest in all of your communications. If you need to inform a client of a delay, it’s best to do it honestly and get it over with. Trying to cover up mistakes or issues shows a lack of transparency. If your clients pick up on this, it may ruin your firm’s reputation.
Tip #7 – Define Your Hiring Practices
An engineering consulting startup firm is only as good as its employees. If you don’t define your hiring practices, you run the risk of bringing the wrong people in. This can lead to churn, which results in your firm losing money.
The key to good hiring is to take your time. You may feel like you need to rush the process, especially if your firm is in a growth period. However, rushing leads to compromises, which means you don’t get the best talent.
Instead, take a step back and think about what your firm really needs. Ask yourself where the knowledge and skill gaps are. You can then use this information to shape your hiring decisions.
Also, consider every candidate’s future prospects. The person with the most skills right now is not always the best hire. If that individual is untrainable or doesn’t fit the company culture, you may find the working relationship falls apart. Talent is important, but so is a candidate’s ability to integrate into your firm.
Tip #8 – Never Forget the Finances
Most people form their engineering consulting startup firms because they have a passion for their work. This is a crucial element for success, but you also need to be business-minded. Failure to focus on the finances could lead your company to ruin.
Your company’s cash flow dictates what it can do. If you don’t have any capital coming in, you may not be able to afford the materials to start new projects. You also need money to fund marketing efforts and employee salaries.
Furthermore, you have to know what’s going out. If you don’t keep track of your expenses, they can spiral out of control.
Focusing on your finances may add extra hours to your workday. However, it’s a sacrifice you will have to make to ensure your firm’s success.
R&D TAX CREDITS FOR ENGINEERING FIRMS
Engineering firms often do not realize that they are eligible for the R&D tax credit. The Research tax credit allows companies to realize tax savings, increase cash flow and stay competitive in the marketplace. Many of the qualifying activities are considered day-to-day operations for the construction industry. Engineering firms with a design-build team and engineers on staff will likely qualify for this incentive.
The benefits can be significant and are efficient to realize through our services. The R&D tax credit can provide a hidden but immediate source of cash for construction firms from prior years, plus a significant reduction to current and future years’ federal and state tax liabilities.
To qualify for the Research and Development Tax Credit, you will need to meet three cost components:
- Expense of direct wages;
- Expense of supplies consumed; and
- Cost of contract research.
Typical Qualifying Research Tax Credit Activities:
Below are qualifying activities for R&D Tax Credits for Engineering Firms.
- BIM Modeling – Designing a building collaboratively with one system of computer models
- Determining alternative structural design
- Improving or determining substitute heating and air conditioning systems
- Improving or developing substitute ventilation
- Developing or improving lighting
- Sustainable design
- New technology
- Value engineering
- Development of substitute electricity conduction systems
- Space management to determine the type and scale of facilities.
- Design performance testing
- Development of alternative water flow/plumbing systems
- Integrating transport systems into the design of a structure
- New material testing – measurement of the characteristics and behavior of such substances
- Environmental design
- Environmental impact studies
- Incorporating waste disposal processes into the structure
Our Research & Development Tax Credit practice consists of engineers, CPAs, and attorneys who have extensive experience conducting R&D Tax Credit Studies at both the federal and state level. Our process begins with a free assessment to ensure that the company qualifies for the credit and would be able to utilize them. Each of our studies includes a site visit to help facilitate the study process. We also include audit support for all of our studies. This is a conservative federal and state incentive that was just made permanent by Congress as part of the 2015 PATH Act. Contact ETS for more information at 800-236-6519 or email here.View Research & Development Tax Credit Case StudiesAdditional Specialty Tax Services for Engineers and ArchitectsLearn More about the Research & Development Tax Credit
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For Small Business Startups, IRS Explains New Option for Claiming Research Credit; Option Still Available for Those That Already Filed
IR-2017-70, March 30, 2017
WASHINGTON –The Internal Revenue Service (IRS) today issued interim guidance explaining how eligible small businesses can take advantage of a new option enabling them to apply part or all of their research credit against their payroll tax liability, instead of their income tax liability.
Before 2016, taxpayers could only take the research credit against their income tax liability.
Notice 2017-23, posted today on IRS.gov, provides guidance on a new provision included in the Protecting Americans From Tax Hikes (PATH) Act, enacted in December 2015.
This new option will be available for the first time to any eligible small business filing its 2016 federal income tax return this tax season. Those who already filed still have time to choose this option.
The option to elect the new payroll tax credit may especially benefit any eligible startup that has little or no income tax liability. To qualify for the new option for the current tax-year, a business must have gross receipts of less than $5 million and could not have had gross receipts prior to 2012.
An eligible small business with qualifying research expenses can choose to apply up to $250,000 of its research credit against its payroll tax liability. An eligible small business chooses this option by filling out Form 6765, Credit for Increasing Research Activities, and attaching it to a timely-filed business income tax return.
But, under a special rule for tax-year 2016, a small business that failed to choose this option and still wishes to do so, can still make the election by filing an amended return by Dec. 31, 2017. See the notice for further details.
After choosing this option, a small business claims the payroll tax credit by filling out Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This form must be attached to its payroll tax return, for example Form 941, Employer’s Quarterly Federal Tax Return. Further details on how and when to claim the credit are in the notice.
The notice provides interim guidance on controlled groups, the definition of gross receipts, and other issues. The notice also requests public comment on various payroll tax credit issues to be addressed in future guidance. See the notice for details on how and when to submit comments.
For more information on the research credit itself, see the instructions to Form 6765.
6 reasons why debt needs to be part of your finance portfolio
It is a very common sight to see companies whether on large scale or on a small scale to struggle with cash-flow problems. Some companies hesitate in taking debts considering it to be evil. The relationship between Debt and cash-flow can sometimes be a little complicated but, it certainly is not bad for the company. Debt generally represents a state of the company with an inability to fulfill the funding requirements. It may have dire consequences even on your business if not repaid on time. But, it is always not the same. Like two sides of every coin, there is a good side of debt as well. To a surprise, a majority of large companies have some level of debt. And, debt is even an integral part of the world economy. In such cases, debt is considered to be of benefit to the company. For small business debt when managed properly can actually provide some great benefits to the companies. A good debt leaves the small-scale as well as multinational companies with long-term benefits without leaving any negative impact on the overall financial position of the company. Let’s take a look at the cases where debt comes out to be a good solution:
- Debt is Cheaper than Equity
Debt-to-equity ratio = Total Liabilities/ Total AssetsBusiness can be grown in a number of different ways. The priority of expansion is to earn a higher rate of interest on capital than investing it in something else. It is expected and practiced to get a higher return on equity than the cost of debt. Moreover, debt lets the businesses to grow without diluting the ownership as banks do not require any equity while providing a loan.
- Tax Deductible Interest
The other benefit of going for debt is the lesser tax rate. The cost of debt is pretty less on an after-tax basis. So, debt is beneficial in this way as well.
- Debt Avoids Cash-flows within the Company
Maintaining a positive cash-inflow is quite a challenge for many small businesses. The amount of money with them is not sufficient to meet all the monetary requirements for the smooth functioning of the company. A well-thought amount of credit helps the businesses to continue with the trading, pay salaries and make new purchases. Debt financing helps companies to maintain a healthy level of cash-flow within and outside the company.
- Builds up Brand Credibility
Debt helps business to make a new relationship with financial institutions and other debt holders and build a credible image of the business. When the payments are made on schedule then, it is more likely people investing and lending to your business as they acknowledge that it isn’t your first time. Debt also enables the businesses to expand their credit facilities.
- Reduces the Risk
Borrowing money helps businesses to reduce the asset exposure in the case of failure thus, mitigating the risk involved. Debt is not always bad as in some cases like this, it saves the businesses from many risks involved.
- Helps to grow the Business
The ultimate aim of businesses of all scale is to grow and to grow a sufficient amount of cash is definitely the foremost requirement. Many small businesses often find themselves at the crossroads when facing rapid growth. It is the biggest barrier in the steady and scalable growth of every business. Debt is the best and affordable solution to cash crunch within the companies. It is the most effective and affordable method of accessing the cash needed to pay the bills, salary, making new purchases and increase the marketing efforts. It increases the overall profitability of the company thereby, proving the decision of taking debt to be a successful one. Access to debt in such situations is a boon for the companies.
It is very important to properly evaluate the business requirements and circumstances before taking a debt. Making the sensible use of borrowed money to grow the business is the best decision a company or an individual can take. Debt is not always bad. It is good in cases where proper evaluation of the requirements is done prior to taking on debt.
R&D Tax Credit Case Studies:
HOW TO START A BUSINESS IN PENNSYLVANIA
A REPORT FROM OUR ASSOCIATES: TRUIC
With the 4th-highest business survival rate in the nation, Pennsylvania is a great place to launch your business. Start your business today with our simple step-by-step guide and get on the fast track to financial and personal independence. If you get stuck along the way, connect with a business resources in your local area for help.
STEPS TO STARTING YOUR PENNSYLVANIA BUSINESS
- Step 1. Choose an Idea
- Step 2. Plan Your Business
- Step 3. Form Your Business
- Step 4. Register for Taxes
- Step 5. Open a Bank Account
- Step 6. Set Up Accounting
- Step 7. Obtain Permits & Licenses
- Step 8. Get Insurance
- Step 9. Define Your Brand
- Step 10. Establish a Web Presence
TO START A BUSINESS IN PENNSYLVANIA, FOLLOW THESE STEPS:
Step 1: Choose the Right Business Idea
The first step toward business ownership is deciding what kind of business to start. Look for an idea that suits your interests, your personal goals, and your natural abilities. This will help you stay motivated when the going gets tough and will greatly improve your odds of success.
Step 2: Plan Your Business
Successful businesses are built through careful planning. Before committing a significant amount of money and other resources toward your business, critically analyze your idea and create a game plan. At a minimum, you should have good answers to the following questions.
What problem does your business solve? What will set your product or service apart from the competition?
Sales & Marketing
Who are your potential customers? How will you get their attention and convert them into buyers?
People and Partnerships
What roles will you need to hire and what professional relationships will you need to form in order to succeed?
How many clients or sales will you need in order to break even? How much money will it take to get there, and where will you get the funding?
Our Business Planning Guide helps you analyze your business idea and gets you access to free planning tools.
Need Help? Find organizations in your local area that can assist you with planning.
Step 3: Form your Business
Registering your company as an Pennsylvania business entity, such as an LLC or a Corporation, has two major advantages:
- Increased credibility
- Protection from personal liability in the event your business is sued
For most small businesses, registering an LLC is a great option. In comparison to other business entities, LLCs are easier to set up and manage and they have favorable tax treatment. You can set up an LLC in Pennsylvania for between $225-$325.
Form an LLC in Pennsylvania
If you choose not to register your company as a business entity, you will be held personally responsible for the debts and liabilities of your business. In addition, unregistered business owners may need to file a Trade Name, also known as a “DBA.” Find out if your business is required to file a DBA.
Secure your Domain
We recommend that you check to see if the business name you are planning is available as a web domain. Even if you aren’t ready to make a business website today, you may want to buy the URL in order to prevent others from acquiring it.Find a Domain Now .com .us .biz .info .net .org .ws .mobi .me .CO.UK .IN .at .asia
Step 4: Register for Taxes
With limited exceptions, most businesses require an Employer Identification Number (EIN), also known as a Tax ID Number. An EIN is used to identify a business in its federal tax filings. Without an EIN, you can’t hire employees or open a business bank account.
You should also be aware of important pennsylvania taxes that may apply to you business:
- If you are selling a physical product, you’ll typically need to register for Pennsylvania Sales Tax.
- If you hire employees, you will have to register for Unemployment Insurance Tax and Employee Withholding Tax on behalf of your employees.
Register for Pennsylvania State Taxes
Step 5: Create Business Banking and Credit Accounts
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
You can protect your business with these two steps:
1. Opening a business bank account:
- Separates your personal assets from your company’s assets, which is necessary for personal asset protection.
- Makes accounting and tax filing easier.
Recommended: Get $200 when you open a business checking account with Chase. Learn more.
2. Getting a business credit card:
- Helps you separate personal and business expenses.
- Builds your company’s credit history, which can be useful to raise capital later on.
Step 6: Set Up Accounting
An accounting system helps you track the performance of your business and simplifies annual tax filings. Quality accounting software lets you download your bank and credit card transactions, making accounting fast and easy. Learn more about the importance of accounting and how to get started with accounting today.
Recommended: QuickBooks has all the accounting features your small business will need.
Step 7: Obtain Permits and Licenses
To operate your new business legally, you will need to comply with federal, state, and local government regulations. In many cases, this involves obtaining one or more business permits and/or licenses. For example, a restaurant will likely need health permits, building permits, signage permits, etc.
– or –
Step 8: Get Insured
Business insurance helps you manage risks and focus on growing your business. The most common types of business insurance you should consider are:
We recommend that all small businesses, including home based businesses, purchase a general liability policy. Businesses selling professional advice or services, such as consulting and accounting firms, should also consider a professional liability policy. In Pennsylvania, businesses with one or more employees, excluding business owners, are required by law to have workers compensation insurance.
Our recommended insurance provider can set you up with an insurance policy that is right for your business
Step 9: Define Your Brand
The strongest and most memorable businesses are built on a solid brand.
When developing your brand, think about what your business stands for. What are the core values that drive your business? Customers and clients are looking for companies that have a compelling brand, as much as they are shopping for high quality products and services.
Your business name is the cornerstone of good branding and a successful business. To learn more about creating the best name for your business, read our How to Name a Business guide.
Step 10: Establish a Web Presence
A professional website is critical to the long-term success of your business, regardless of what industry you are in. A website allows potential customers to find your business online and discover the products or services you offer, and it also enhances your business’ credibility.
In addition to a website, you should also consider other avenues for promoting your business online:
- Setting up social media profiles (Facebook, Twitter, etc)
- Creating accounts on review sites (Yelp, Google Reviews, etc)
- Registering for a local Google profile
More than ever, people are looking for reviews before doing business. Yelp is an important aspect of social validation for your business, claim your page today and get $300 in Yelp advertising credit.
8 Steps to Follow When Becoming an Employer
by Shalleen Mayes on May 8, 2019
Hiring your first employee is a huge milestone for you and your business. However, becoming an employer comes with many additional responsibilities. If you’re ready to become an employer, you must know which steps to follow.
8 Steps for becoming an employer
Use these eight steps to learn how to become an employer.
1. Find out state and local requirements
Every state and locality has different rules for small businesses. Depending on your location and type of business, requirements can vary.
New employer requirements differ from state to state. Most businesses need to register with their state for new employer accounts. Your small business might also need to register for certain licenses, permits, and other registrations. In most cases, you can apply for this information online.
Employers need to register for state unemployment tax insurance, otherwise known as SUTA (State Unemployment Tax Act) tax. After you sign up, your business receives a SUTA tax rate. Your rate is a state unemployment percentage based on your industry and experience (e.g., 2.7%).
Some states may also require state disability insurance. For example, New York requires most employers to have disability insurance for their employees.
View our state payroll guide to see requirements for your state. Contact your state for additional new employer requirements.
Your city or locality may require additional types of employment registration. And, you might need to withhold local taxes from your employees’ wages.
Oftentimes, employers are responsible for withholding and depositing local income taxes for their employees.
Contact your local government office for more information about whether you or not you must register.
2. Apply for an Employer Identification Number
After you decide to become an employer, you need to apply for an Employer Identification Number (EIN). An EIN is a unique nine-digit number the IRS assigns your business. You must apply for an EIN if you plan to hire employees.
EINs are formatted like this: 12-3456789.
The quickest way to apply for an EIN is online. You don’t need to fill out any forms. And, you can print an instant confirmation for your records.
If you choose to apply with a paper application, complete Form SS-4 and mail or fax it to the IRS. Keep in mind that mailing or faxing your application takes more time to receive your EIN.
3. Get workers’ compensation insurance
Regardless of your type of business, employees stand the chance of getting a job-related illness or injury. To cover unpredictable events (e.g., falling on a wet floor), you must have workers’ compensation insurance.
So, what is workers’ compensation insurance? Workers’ compensation, also known as workers’ comp or workmans’ comp, is insurance that provides wage replacement and medical benefits to employees who get sick or hurt while at work. And, workers’ compensation covers employees regardless of who causes the incident (e.g., you, a co-worker, the employee, etc.).
Workers’ compensation may cover the following issues for employees:
- Chronic back pain
- Carpal tunnel
- Hearing loss
- Lung disease
- Injuries caused by work-related stress
Your employees may be eligible for workers’ comp benefits like payment for diagnosis, treatment, and rehabilitation.
The cost of workers’ comp varies depending on your business, payroll amounts, type of work, and past workers’ comp claims.
Each state has its own workers’ compensation programs and laws to follow.
Most states require that you get workers’ compensation insurance. However, some states let employers elect coverage until they have a certain number of employees.
Many states give employers the freedom to choose their workers’ compensation coverage. However, employers in North Dakota, Ohio, Washington, and Wyoming must purchase workers’ comp coverage through their own state fund.
Check with your state for more information about workers’ compensation requirements.
4. Determine how to handle payroll
Before you can begin hiring and paying employees, determine how you plan to handle payroll. Consider aspects like cost and how much time it takes to run payroll.
Some ways to manage payroll include:
- Running payroll by hand
- Outsourcing payroll (e.g., accountant or bookkeeper)
- Using a payroll software or provider
Running payroll by hand is the most cost-effective way to manage payroll. However, it can also be the most time-consuming option and lead to costly mistakes. When you run payroll by hand, you need to calculate the taxes to withhold for each employee. And, you must file and deposit your payroll taxes to the correct agencies.
Using an accountant or bookkeeper to handle payroll requires you to give up control of your payroll. And, outsourcing your payroll can be expensive for your small business. Although it’s more costly than other options, outsourcing payroll can save you a lot of time. And, you can have peace of mind knowing that your payroll deposits are accurate.
Payroll software can be a happy medium between running payroll by hand and outsourcing it. Software is a less expensive option than outsourcing payroll. And, payroll software is accurate and saves time. Most payroll software systems allow you to run payroll within a few minutes. When looking at payroll software, compare your options. Look at providers’ pricing, features, ease of use, security, and reviews.
5. Hire employees
Now that you’ve laid the groundwork, it’s time to begin hiring some employees.
Many new employers use traditional hiring methods (e.g., direct hiring). When hiring your first employee, determine what characteristics and requirements you’re looking for in an employee.
Create a clear and appealing job description. Pinpoint position requirements and qualifications to include in your description. Some qualifications you may list include experience (e.g., two years in an IT-related position) and education (e.g., Bachelor’s degree in Marketing).
If possible, include things like benefits (e.g., retirement contributions) to encourage candidates to apply.
Post your job description to platforms like your business website, online job boards, and social media pages. Review applications that candidates submit. Weed out unqualified applicants and contact candidates who seem like a good fit.
Interview the qualified candidates. The interview process might consist of several rounds of interviews until you find your ideal candidate.
When you are ready to hire, extend a job offer to the candidate. If the candidate accepts your offer, begin the onboarding process and new hire paperwork (which we talk about more in the next step).
As your business grows, you can form a hiring committee to hire additional employees.
6. Complete new hire paperwork
Before new employees can begin working at your business, you and your employee both need to complete new hire paperwork.
As an employer, you must report new hires. Federal law states that you must report new hires within 20 days of hiring them. However, state laws for new hires can differ. Check with your state to find out new hire time frames and laws.
Employees must complete Form W-4, Employee’s Withholding Allowance Certificate, for federal tax withholding. Form W-4 determines how much you withhold from employee wages for federal income taxes. Some information an employee needs to list on their Form W-4 includes their name, address, Social Security number, marital status, and number of withholding allowances.
To ensure employees are eligible to work in the United States, they must fill out Form I-9, Employment Eligibility Verification. When you collect an I-9 form, the employee must also provide documents proving their identity and eligibility (e.g., driver’s license, passport, Social Security card, etc.).
You might also need to collect additional documents from employees, such as a signed employee handbook, benefits information, and emergency contact forms.
7. Pay payroll taxes
One of the biggest employer responsibilities you have is paying payroll taxes. If you don’t pay your payroll taxes on time, you may receive penalties such as fines or imprisonment.
Payroll taxes include federal income, Social Security and Medicare, and federal unemployment taxes. As mentioned, some employers might need to pay state and local taxes, too.
Federal income tax
How frequently you pay federal income tax varies from business to business. You must withhold federal income tax from employee wages. And, you must pay it on a monthly or semiweekly basis on behalf of the employee.
Your schedule for paying federal income tax is based on a lookback period of Form 941. Form 941 reports your federal income, Social Security, and Medicare tax liabilities.
New businesses automatically have a monthly depositing frequency. Keep in mind that your deposit schedule can change each year.
For monthly depositors, the federal income tax payment is due the 15th of each following month. For example, federal income tax withheld for November is due by December 15.
Federal income tax deposits must be made through an electronic funds transfer (e.g., EFTPS).
Social Security and Medicare taxes
Social Security and Medicare taxes make up FICA tax. Both you and your employees contribute Social Security and Medicare taxes.
The Social Security tax withholding rate is 6.2%. You must withhold 6.2% from each employee’s wages for Social Security. And, pay the matching employer contribution of 6.2%.
Medicare tax is 1.45% for both you and your employees. Withhold 1.45% from employee wages and contribute a matching employer portion of 1.45%.
Deposit FICA tax along with federal income tax. Use the same deposit frequencies as federal income tax (e.g., monthly or semiweekly). Be sure you deposit both the employee and employer portions of FICA.
Federal unemployment tax
Most employers must also pay federal unemployment tax, otherwise known as FUTA tax.
You must pay FUTA tax if one of the following is true:
- You paid $1,500 or more in wages during any calendar quarter
- You had at least one employee for at least part of a day in any 20 or more different weeks
Federal payroll deposit rules state you must make quarterly deposits. However, only make a FUTA deposit if your federal unemployment tax liability is more than $500 during a quarter.
Like federal income and FICA taxes, you must deposit FUTA tax via electronic funds transfer.
Here is the schedule for FUTA tax deposit due dates:
- April 30 for Quarter 1 (January – March)
- July 31 for Quarter 2 (April – June)
- October 31 for Quarter 3 (July – September)
- January 31 for Quarter 4 (October – December)
State and local taxes
Again, depending on your state, you might also need to withhold state and local income taxes and state unemployment tax.
Check with your state and local departments of taxation for payment information about state and local payroll taxes.
8. File payroll reports
In addition to paying payroll taxes, you must also file payroll reports. Payroll reports are forms that notify the government of your payroll tax liabilities.
The payroll reports you need to file depend on your business. Report both the taxes you withhold from employee wages and the taxes you contribute. You need to submit payroll reports for both federal and state taxes.
How frequently you file payroll forms depends on the type of form. Some forms might be due quarterly, while others are due annually.
Quarterly payroll reports
Form 941, Employer’s Quarterly Federal Tax Return, reports federal income, Social Security, and Medicare taxes along with employee wages.
File Form 941 every quarter if you have employees, even if you do not have taxes or wages to report. Do not file Form 941 if you’re a seasonal employer or employ household (e.g., nanny tax) or farm employees (e.g., Form 943).
Due dates for Form 941 include:
- April 30 for Quarter 1
- July 31 for Quarter 2
- October 31 for Quarter 3
- January 31 for Quarter 4
State payroll reports
You might also need to file quarterly reports for state income and state unemployment taxes (SUTA).
Due dates can range widely from state to state. Although most states require you to file quarterly, you should contact your state for specific payroll reporting requirements.
Annual payroll reports
Annual payroll reports are due once per year by January 31. Some common annual payroll reports include Forms 944, 940, and W-2 and W-3.
Some employers might be able to file Form 944, Employer’s Annual Federal Tax Return, instead of Form 941.
Like Form 941, you can use Form 944 to report federal income, Social Security, and Medicare taxes on an annual basis.
The IRS tells you if you’re allowed to use Form 944. Typically, you qualify if your business’s annual liability for Social Security, Medicare, and federal income taxes are $1,000 or less.
Use Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to report federal unemployment tax (FUTA).
File Form 940 annually to report your federal unemployment tax liability. Remember, only employers pay FUTA taxes.
Form W-2 and Form W-3
Form W-2, Wage and Tax Statement, is an annual tax form you must give each employee by January 31. Form W-2 summarizes an employee’s wages and taxes for the year. Employees use Form W-2 to file their individual tax return. You must also file a copy of Form W-2 with the IRS.
Form W-3, Transmittal of Wage and Tax Statement, is the transmittal form for Form W-2. Form W-3 is a summary of the information from your employees’ Forms W-2. Do not send Form W-3 to your employees. Send a copy of Form W-3 to the IRS each year by January 31.
Looking for an easy way to process payroll after becoming an employer? Patriot Software lets you run accurate payrolls in three simple steps. And our expert support is only a phone call, chat or email away. Get started with your self-guided demo today!
This article has been updated from its original publication date of July 5, 2013.
This is not intended as legal advice; for more information, please click here.
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MAXIMIZING THE VALUE OF RESEARCH AND DEVELOPMENT – A SIMPLE CASE STUDY
Tyler Sweatt August 22, 2019
Getting research and development (R&D) right is hard. With the right processes, building and sustaining R&D value is possible, but it begins with core challenges. In their 2019 Research and Development Leadership Council report, 2019 Top Priorities for Research and Development Gartner highlights some of these challenges. They cover many recurring challenges for innovators:
- WHY perform R&D? The team faces a weak or ambiguous business case for transformational innovation.
- WHERE to prioritize? With limits on capacity and funding, teams face uncertainty about which innovation opportunity spaces to pursue.
- HOW to build efficiencies? Teams must win the struggle to reduce development cycle times.
- WHAT resources are needed? The right digital tools are required to improve R&D efficiency.
- WHO are the stakeholders? Across the project lifecycle, teams must communicate a vision of technology strategy for vital members of the project community.
This list reflects the pressing nature of the kinds of hurdles R&D leaders, as well as the diversity of those challenges. They often generate the question of how organizations can ensure (often multi-year) R&D cycles are nested within the organization and that they deliver results with the necessary speed and impact. Moreover, how can the leaders of these R&D teams build alignment and stakeholder buy-in for their strategies so they don’t stall or halt while awaiting approvals?
A Practical Case Study in R&D Success
The complexity of the R&D environment may make answering those questions seem impossible. A federal S&T team (name redacted to protect the innocent ) showed that it is possible to work with agility within the organization to perform extended R&D with support from key stakeholders.
In 2017, this agency was tasked with developing a new R&D strategy during an environment of rapidly changing threats, an uncertain operational future, and broad diffusion of technology. They recognized that they could not simply develop a plan and roll it out. Instead, they chose an approach that engaged more than 40 organizations, leveraged artificial intelligence (AI), and laid a foundation for near- and long-term S&T investments for years to come.
Four key concepts guided how they determined if an idea was viable, and then turned the ideas successfully into actions.
Concept One: An Unconstrained Baseline
The team began the process by having a third-party organization conduct a broad, unconstrained look at the evolving operational environment. Their findings and recommendations formed a baseline context for the future in which the organization would operate. They detailed likely threats and adversaries, ways the organization would deliver services, and the characteristics of the customers that would receive those services.
This process produced a recorded assessment of the key trends that would impact the future operational environment, including customers, competitors, and adversaries.
Concept Two: Leverage Technology to Focus
Once the team established their baseline, they leveraged AI-driven decision analysis tools and voting software to crowdsource potential areas of interest. They conducted this research virtually to reduce geographic challenges and increase the diversity of the participants. Segments included a variety of user groups (tactical operators, operational leaders, strategic executives, and a hybrid of users). The goal of this quantitative study was to understand what internal and external stakeholders prioritized.
This step generated a hypothesis of key threats, opportunities, technology focus areas, and operational use cases to consider for further analysis and or investment.
Concept Three: Harness Diversity
Recognizing that the perspectives on the future vary widely between different groups, the team invited members of more than 45 different organizations for a one-day hands-on session. The workshop consisted of scenario-based exercises, AI-enabled prioritization of key issues, participant-led briefings and debates, and an open discussion about imminent challenges and some possible methods for overcoming them. The event concluded with a facilitated executive dinner event that provided the agency S&T leaders with perspectives from commercial and government leaders with whom they normally would not have had the opportunity to interact.
The effort enabled the agency to prioritize R&D lines of effort, including emerging capabilities and threats to focus R&D efforts on in support of future agency operations. It also laid a foundation for relationships with key commercial and government stakeholders.
Concept Four: Connect to Now
Recognizing that most S&T organizations continually face the ‘tyranny of today’ in addition to long-term priorities (and the importance of quick wins), the team set out to connect its future vision to current operations. Focused on aligning near, mid, and long-term activities across the lines of effort, they built a roadmap for the agency to follow as it built support and alignment around key initiatives and focus areas.
The effort produced an ability to link long-term plans with current operations to increase acceptance and buy-in, improve the quality of current operations, and drive immediate and long-term value for the organization.
As this case study offers, even in the face of the deep and complex challenges that studies like the Gartner report details, it’s possible for organizations to build and sustain a successful R&D approach. The effort takes structure and a process of integrating objective outside perspectives, challenging conventional wisdom, and working intentionally to increase strategic relationships inside and outside of the government.
It’s a formula your organization can follow as you work to build a foundation for sustaining agility and adding value both in the near- and long-term.
What is Valuation in Accounting?
Valuation in accounting is a common procedure used to determine the value of an asset for the purposes of financial reporting. This may seem like a relatively simple task overall, but assessing the present value (PV) of certain types of assets can require advanced calculations and thorough understanding of applicable regulations. As with most business accounting practices, there are established standards and regulations that determine how value is determined and reported. However, accountants performing the valuation have several distinct methods they can use depending on the demands of the situation.
Importance of Asset Valuation
There are many reasons for an individual or business to get an accounting valuation of some or all of their assets. Larger business conduct broad valuations during mergers or acquisitions to ensure that the numbers used in a contract are accurate. Determining the value of an individual’s assets is also necessary when dividing property among beneficiaries of a will or during a divorce settlement. It can also be necessary for those required to forfeit assets as a result of a a civil claim or as part of bankruptcy proceedings.
Discounted Cash Flow
The discounted cash flow (DCF) model focuses on calculating intrinsic value of assets to determine future cash flows of an organization. This is the most comprehensive of the three main valuation methods and requires a significant amount of research, analysis and data. DCF accounting practices are characterized by the reduction of future value to establish a present value. Accountants using this method discount the worth of an asset based on present and future factors, including elements of risk that may lower its overall worth.
Accountants can also use a relative pricing model that defines the value of companies or assets based on the price of comparable alternatives. Potential investors may use this model to assess several different companies to find the one with the highest relative value. The method can also be used to calculate an estimation of market value of a particular piece of property or financial instrument. In many cases, relative value models are used alongside more comprehensive methods when valuing a company.
Option pricing, also known as continent claim valuation, is typically used to find the value of specific financial items. It is particularly useful for defining the worth of long-term assets, like stock options and securities. There are actually several different types of option pricing models currently in use, including the Black-Scholes-Merton and lattice models. The Association of International Certified Professional Accountants (AICPA) provides detailed guidelines regarding option pricing and other valuation methods for accounting professionals.
Related Resource: Top 10 Master’s in Financial Planning Online Degree Programs 2018
Assessing the worth of contracts, property and financial instruments is far from a simple task. For investors or companies conducting these evaluations, accuracy of the results could have a major impact on the long-term success of their financial ventures. Understanding the complexity of valuation in accounting is essential for any certified accountant, but a familiarity with the basic principles behind these methods is a useful skill for all kinds business or finance professionals.
The accounting for research and development involves those activities that create or improve products or processes. The core accounting rule in this area is that expenditures be charged to expense as incurred. Examples of activities typically considered to fall within the research and development functional area include the following:
- Research to discover new knowledge
- Applying new research findings
- Formulating product and process designs
- Testing products and processes
- Modifying formulas, products, or processes
- Designing and testing prototypes
- Designing tools that involve new technology
- Designing and operating a pilot plant
Research and Development Accounting
The basic problem with research and development expenditures is that the future benefits associated with them are sufficiently uncertain that it is difficult to record them as an asset. Given these uncertainties, GAAP mandates that all research and development expenditures be charged to expense as incurred. The chief variance from this guidance is in a business combination, where the acquirer can recognize the fair value of research and development assets.
The basic rule of charging all research and development expenditures to expense is not entirely pervasive, since there are exceptions, as noted below:
- Assets. If materials or fixed assets have been acquired that have alternative future uses, record them as assets. The materials should be charged to expense as consumed, while depreciation should be used to gradually reduce the carrying amount of the fixed assets. Conversely, if there are no alternative future uses, charge these costs to expense as incurred.
- Computer software. If computer software is acquired for use in a research and development project, charge its cost to expense as incurred. However, if there are future alternative uses for the software, capitalize its cost and depreciate the software over its useful life.
- Contracted services. If the company is billed by third parties for research work conducted on behalf of the company, charge these invoices to expense.
- Indirect costs. A reasonable amount of overhead expenses should be allocated to research and development activities.
- Purchased intangibles. If intangible assets are acquired from third parties and these assets have alternative uses, they are to be accounted for as intangible assets. However, if the intangibles are purchased for a specific research project and there are no alternative future uses, charge them to expense as incurred.
- Software development. If software is developed for use in research and development activities, charge the associated costs to expense as incurred, without exception.
- Wages. Charge the costs of salaries, wages, and related costs to expense as incurred.
There may also be research and development arrangements where a third party (a sponsor) provides funding for the research and development activities of a business. The arrangements may be designed to shift licensing rights, intellectual property ownership, an equity stake, or a share in the profits to the sponsors. The business conducting the research and development activities may be paid a fixed fee or some form of cost reimbursement arrangement by the sponsors.
These arrangements are frequently constructed as limited partnerships, where a related party fulfills the role of general partner. The general partner may be authorized to obtain additional funding by selling limited-partner interests, or extending loans or advances to the partnership that may be repaid from future royalties.
When an entity is a party to a research and development arrangement, several accounting issues must be resolved, which are:
- Loans or advances issued. If the business lends or advances funds to third parties, and repayment is based entirely on whether there are economic benefits associated with the research and development work, charge these amounts to expense.
- Nonrefundable advances. Defer the recognition of any nonrefundable advance payments that will be used for research and development activities, and recognize them as expenses when the related goods are delivered or services performed. If at any point it is not expected that the goods will be delivered or services performed, charge the remaining deferred amount to expense.
- Obligation to perform services. If repayment of the funds provided by the funding parties is solely dependent upon the results of the related research and development activities, account for the repayment obligation as a contract to perform work for others.
- Repayment obligation. If there is an obligation to repay the funding parties or the business has indicated an intent to do so, no matter what the outcome of the research and development may be, recognize a liability for the amount of the repayment, and charge research and development costs to expense as incurred. This accounting is also required if there is a significant related party relationship between the business and the funding entities. This scenario also applies if the funding parties can require the business to purchase their interest in the partnership, or if the funding parties automatically receive securities from the business upon termination of the arrangement.
- Warrants issuance. If the business issues warrants as part of a funding arrangement, allocate a portion of paid-in funds to paid-in capital. The amount allocated to warrants should be their fair value as of the date of the arrangement.
The valuation of inventory is not a minor issue, because the accounting method used to create a valuation has a direct bearing on the amount of expense charged to the cost of goods sold in an accounting period, and therefore on the amount of income earned. The basic formula for determining the cost of goods sold in an accounting period is:
The four main ways to account for inventory are the specific identification, first in first out, last in first out, and weighted average methods. As background, inventory includes the raw materials, work-in-process, and finished goods that a company has on hand for its own production processes or for sale to customers. Inventory is considered an asset, so the accountant must consistently use a valid method for assigning costs to inventory in order to record it as an asset.
Thus, the cost of goods sold is largely based on the cost assigned to ending inventory, which brings us back to the accounting method used to do so. There are several possible inventory costing methods, which are:
- Specific identification method. Under this approach, you separately track the cost of each item in inventory, and charge the specific cost of an item to the cost of goods sold when you sell the specific item to which that cost has been assigned. This approach requires a massive amount of data tracking, so it is only usable for very high-cost, unique items, such as automobiles or works of art. It is not a viable method in most other situations.
When you buy inventory from suppliers, the price tends to change over time, so you end up with a group of the same item in stock, but with some units costing more than others. As you sell items from stock, you have to decide on a policy of whether to charge items to the cost of goods sold that were presumably bought first, or bought last, or based on an average of the costs of all items in stock. Your choice of a policy will result in using either the first in first out method (FIFO), the last in first out method (LIFO), or the weighted average method. The following bullet points explain each concept:
- First in, first out method. Under the FIFO method, you are assuming that items bought first are also used or sold first, which also means that the items still in stock are the newest ones. This policy closely matches the actual movement of inventory in most companies, and so is preferable simply from a theoretical perspective. In periods of rising prices (which is most of the time in most economies), assuming that the earliest units bought are the first ones used also means that the least expensive units are charged to the cost of goods sold first. This means that the cost of goods sold tends to be lower, which therefore leads to a higher amount of operating earnings, and more income taxes paid. Also, it means that there tend to be fewer inventory layers than under the LIFO method (see next), since you will continually use up the oldest layers.
- Last in, first out method. Under the LIFO method, you are assuming that items bought last are sold first, which also means that the items still in stock are the oldest ones. This policy does not follow the natural flow of inventory in most companies; in fact, the method is banned under International Financial Reporting Standards. In periods of rising prices, assuming that the last units bought are the first ones used also means that the cost of goods sold tends to be higher, which therefore leads to a lower amount of operating earnings, and fewer income taxes paid. There tend to be more inventory layers than under the FIFO method, since the oldest layers may not be flushed out for years.
- Weighted average method. Under the weighted average method, there is only one inventory layer, since the cost of any new inventory purchases are rolled into the cost of any existing inventory to derive a new weighted average cost, which in turn is adjusted again as more inventory is purchased.
Both the FIFO and LIFO methods require the use of inventory layers, under which you have a separate cost for each cluster of inventory items that were purchased at a specific price. This requires a considerable amount of tracking in a database, so both methods work best if inventory is tracked in a computer system.
THE ULTIMATE LIST OF SMALL BUSINESS TAX DEDUCTIONS
Every small business owner wants to save money — and small business tax deductions are one way to do just that.
Small business owners spend time each quarter reviewing invoices and receipts as a first step toward filing their taxes. But this process typically results in spending money rather than saving it. Let’s flip this concept on its head for a moment. In reality, tax time can be a time when you save money if you take advantage of all the small business tax deductions that are available and appropriate for your business.
Instead of sending money to the government, you could be channeling it back into your business. Wouldn’t that be amazing? Since we know you agree, take a look at the top 37 small business deductions you should take advantage of this year.
1. Vehicle Expenses.
Keep records during the year to prove the use of your car, truck or van, for business, especially if you also use the vehicle for personal reasons. When it’s time to pay taxes, you can choose to deduct your actual expenses (including gasoline, maintenance, parking, and tolls), or you can take the more straightforward route of using the IRS standard mileage rate — 54.5 cents per mile in 2018.
Whether you’re running errands in your own car or making deliveries in your bakery van, track the mileage and run some numbers to see which method gives you the higher deduction. If you drive a lot of miles each year, it makes more sense to use the standard mileage deduction when filing taxes. However, if you have an older vehicle that regularly needs maintenance, or isn’t fuel efficient, you might be able to get a larger deduction by using your actual expenses vs. the IRS mileage rate.
Either way, We all know that gas, repairs, parking, and mileage add up, so taking advantage of the standard mileage rate, or deducting your actual expenses, is a no-brainer way to put some of that money back in your pocket. Just make sure you keep records diligently to avoid mixing personal expenses with business ones.
2. Home Office.
Do you run part of your small business out of your home, maybe doing the books in the evenings after you’ve parked your food truck for the night? Or perhaps you run an entirely home-based business. For many self-employed individuals and sole proprietors it’s pretty standard to have a space at home that’s devoted to your work. The key here is the word devoted. Sometimes doing work on at the kitchen table while your kids do their homework doesn’t count as a home office. You must have a specific room that’s dedicated to being your office in order for it to be tax deductible.
Calculating the size of your deduction is primarily related to the amount of your home that’s used as an office. For example:
Total square footage of your home / divided square footage used as an office = the percentage of direct and indirect expenses (rent, utilities, insurance, repairs, etc.) that can be deducted.
We highly recommend that you read the IRS’ literature on this particular tax deduction, and/or speak with a tax professional before filing taxes with this deduction. It’s one of the more complicated ones available to small business owners, and there have been numerous court cases and controversies over the years. When dealing with the potential for a costly audit, it pays to be safe by consulting a professional tax preparer rather than sorry.
3. Bonus Depreciation.
If you buy new capital equipment, such as a new oven for your pizzeria, you get a depreciation tax break that lets you deduct 50 percent of your costs upon purchase. However, pay attention to an upcoming change: The bonus depreciation small business deduction drops to 40 percent in 2018, and it sunsets in 2019 — something to keep in mind as you plan for new equipment purchases in the next few years.
It’s important to note that according to the IRS, the asset you purchase must meet the following three requirements:
- It must be used in the business or held to produce income.
- The useful life of the asset must be greater than one year.
- It must be an asset that wears out, gets used up, or loses its value over time.
A few things that don’t count as assets include:
- Air conditioning or heating units.
You also can not deduct an amount that’s greater than your net taxable income.
4. Professional Services.
As a small business, you don’t have in-house accountants or attorneys, but that doesn’t mean you can’t deduct their services. If you hire a consultant to help you grow your gift shop’s outreach, the fees and overall expense you pay for those services are deductible. Make sure the fees you’re paying are reasonable and necessary for the deduction to count by checking with the appropriate IRS publication or a tax professional. But, you’d do that anyway, wouldn’t you?
5. Salaries and Wages.
If you’re a sole proprietor or your company is an LLC, you may not be able to deduct draws and income that you take from your business. However, salaries and wages that you pay to those faithful part-time and full-time employees behind the cash register are indeed deductible.
However, this doesn’t just stop at standard salaries and wages. Other payments like bonuses, meals, lodging, per diem, allowances, and some employer-paid taxes. You can even deduct the cost of payroll software and systems in many cases.
6. Work Opportunity Tax Credit.
Have you hired military veterans or other long-term unemployed people to work behind your counter? If so, you may be eligible to take advantage of the Work Opportunity Tax Credit of 40 percent of your first $6,000 in wages.
7. Office Supplies and Expenses.
If you’re running a frozen yogurt shop, when you hear the word “supplies,” you probably think of plastic spoons. However, even if your business doesn’t have a traditional office, you can still deduct conventional business supplies and office expenses, as long as they are used within the year they’re purchased, so set up a file for your receipts. Many times you can also deduct the cost of postage, shipping, and delivery services so if mail-order is a part of your business, be sure to keep track of this cost.
8. Client and Employee Entertainment.
Yes, you can take small business deductions for schmoozing your clients, as long as you do indeed discuss business with them, and as long as the entertainment occurs in a business setting and for business purposes. In some cases, you can’t deduct the full amount of your entertainment expenses, but every bit helps.
Here are some tips to guide when and what you can deduct:
- For client meals and entertainment, you can typically deduct up to 50% of the cost provided that at least one employee was present and the meal was not lavish.
- You can deduct up to 100% of the cost of recreational and social events or activities held for employees.
- You can also deduct meals provided to your team in a company cafeteria or you if go out for a team dinner.
9. Freelance/Independent Contractor Labor.
If you bring in independent contractors to keep your checkout lines moving during the holidays or to create new marketing materials for your shop, you can deduct your costs. Make sure you issue Form 1099-MISC to anyone who earned $600 or more from you during the tax year.
10. Furniture and Equipment.
Did you buy new chairs for your eat-in bakery or new juicing blenders for your juice bar this year? You have a choice regarding how you take your small business tax deduction for furniture and equipment. You can either deduct the entire cost for the tax year in which it was purchased, or you can depreciate the purchases over a seven-year period. The IRS has specific regulations that govern your choices here, so make sure you’re following the rules and make the right choice between depreciation and full deduction.
11. Employee Benefits.
The benefits that businesses like yours offer to employees do more than attract high-quality talent to your team. They also have tax benefits. Keep track of all contributions you make to your employees’ health plans, life insurance, pensions, profit-sharing, education reimbursement programs, and more. They’re all tax-deductible.
12. Computer Software.
You can now deduct the full cost of business software as a small business tax deduction, rather than depreciating it as in years past. This includes your POS software and all software you use to run your business.
13. Rent on Your Business Location.
You undoubtedly pay rent for your pet store or candy shop. Make sure you deduct it.
14. Startup Expenses.
If you’ve just opened your gift shop or convenience store, you may be able to deduct up to $5,000 in start-up costs and expenses that you incurred before you opened your doors for business. These can include marketing and advertising costs, travel, and employee pay for training.
Don’t miss the small business tax deductions for your electricity, mobile phone, and other utilities. If you use the home office deduction, your landline must be dedicated to your business to be deductible.
16. Travel Expenses.
Most industries offer some form of trade show or professional event where similar businesses can gather to discuss trends, meet with vendors, sell goods and discuss industry news. If you’re traveling to a trade show, you can take a small business deduction for all your expenses, including airfare, hotels, meals on the road, automobile expenses – whether you use the IRS standard mileage rate or actual expenses – and even tipping your cab driver.
There are also deductions for expenses that might not immediately come to mind, like:
- The cost of making telephone calls or using a fax machine.
- Shipping items such as samples or displays (like you would use at a trade show or convention).
- Any tolls and parking you pay.
In order for your trip to qualify for a travel deduction, it must meet the following criteria:
- Your responsibilities during the trip must keep you away from your regular place of business for substantially longer than a regular day’s work.
- You need sleep or rest to meet the demands of your work while away.
As with all deductions, it’s imperative that you keep receipts and records of all business travel expenses you plan to deduct in case of an audit.
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Deducting taxes is a little tricky because the small business deduction depends on the type of tax. Deduct all licenses and fees, as well as taxes on any real estate your business owns. You should also deduct all sales taxes that you have collected from the customers at your deli. You can also deduct your share of the FICA, FUTA, and state unemployment taxes that you pay on behalf of your employees.
If you have salespeople working on commission, those payments are tax-deductible. You can also take a small business tax deduction for third-party commissions, such as those you might pay in an affiliate marketing set-up.
19. Machinery and Equipment Rental.
Sometimes renting equipment for your coffee shop or concession stand is beneficial to your bottom line, since you can deduct these business expenses in the year they occur with no depreciation.
20. Interest on Loans.
If you take out a business line of credit, the interest you pay is completely deductible as a small business tax deduction. If you take out a personal loan and funnel some of the proceeds into your business, however, the tax application becomes somewhat more complicated.
21. Inventory for Service-Based Businesses.
Inventory normally isn’t deductible. However, if you’re a service-based business and you use the cash method of accounting (instead of the standard accrual method typically used for businesses with inventory), you can treat some inventory as supplies and deduct them. For instance, if you’re an ice cream shop but you sell your special hot fudge sauce as a product, your inventory may be deductible.
22. Bad Debts.
Did you advance money to an employee or vendor, and then not receive repayment or the goods or services you thought you were contracting for? If so, you may be able to treat this bad business debt as a small business deduction.
23. Employee Education and Child Care Assistance.
If you go above and beyond with your employee benefits, you may be able to take small business tax deductions for education assistance and dependent care assistance. The IRS is pretty much rewarding you here for being a great employer. So take a bow, and the deduction.
24. Mortgage Interest.
If your business owns its own building, even if it’s just a hot dog stand, you can deduct all your mortgage interest.
25. Bank Charges.
Don’t forget to deduct the fees your bank charges you for your business accounts. Even any ATM fees are deductible.
26. Disaster and Theft Losses.
If your business is unfortunate enough to suffer theft or to be the victim of a natural disaster during the year, you may be able to turn any losses that your insurance company didn’t reimburse into a small business tax deduction.
27. Carryovers From Previous Years.
Some small business tax deductions carry over from year to year. For instance, if you had a capital loss in a previous year, you may be able to take it in the current year. Specifics often change from year to year, to make sure you’re up to date on the latest IRS regulations.
The insurance premiums you pay for coverage on your business is all tax-deductible. To qualify, your insurance must provide coverage that is “ordinary and necessary.”
This could include coverage for:
- Accidents and health.
- Automobiles (for vehicles used in your business).
There are a few insurance types that you can’t deduct, the most common being life insurance. If you’re not sure whether you can deduct a certain type of insurance, and that deduction is an important factor in your decision, please speak with a tax professional first and save yourself any unnecessary expenses.
29. Home Renovations and Insurance.
Did you take a deduction for a home office already? If so, business expenses related to any renovations to that part of your home are also deductible, and so is the percentage of your homeowner’s insurance that covers that part of your home. Remember, all small business deductions related to home offices only apply if you use part of your home exclusively for business.
The IRS distinguishes between tools and equipment. While you may have to capitalize on equipment rather than deducting it in one year, you can deduct tools that aren’t expensive or that have a life of only a year or less. And for the IRS, “tools” doesn’t just refer to hammers or screwdrivers; your spatulas and cookie sheets are tools as well.
31. Unpaid Goods.
If your business produces goods rather than providing a service, you can deduct the cost of any goods that you haven’t been paid for yet.
Did you attend any seminars, workshops or classes in the past year that were designed to help you improve your job skills? Your work-related educational expenses may be deductible, especially if they’re required to keep up or renew a professional license. Remember, they have to be work-related. If you own a bar or cafe, you won’t be able to deduct skiing lessons.
33. Advertising and Marketing.
You already know that providing amazing goods and services isn’t enough to make your business succeed. You also need to advertise so your potential customers can find you. Advertising and marketing dollars can add up fast, but fortunately, they are all tax-deductible.
This is great news since advertising and marketing are often of the biggest business expenses that small businesses need to deal with as they get off the ground. Rest assured, you can deduct everything from flyers to billboards to business cards, and even a new website. Political advertising is the biggest exception to this rule. Those expenses are not deductible.
34. Charitable Deductions.
Yes, your small business can donate to charity and take a deduction for it. It can donate supplies, money, or property to a recognized charity, but pay attention to the rules before you go crazy giving stuff away. Donations of your time don’t count, and you can’t wipe out your business income with donations. Also, check with the IRS before you make a charitable deduction to make sure the organization you want to support qualifies for the deduction.
35. Cleaning and Janitorial Expenses.
You know all too well that the workday isn’t over when you flip the sign on the door to say “Closed.” If you hire any type of cleaning service, make sure you take your small business tax deduction.
36. Moving Expenses.
Did you need to move to start your business? If you’re a sole proprietor or self-employed worker and you had to move more than 50 miles for business, you may be able to deduct some of your moving expenses from your taxes. Specifically, you may be able to deduct packing and transportation costs, utility and service connection fees, and travel costs. However, you can’t deduct the cost of any meals or security deposits you’ve had to pay.
Lastly, to qualify for these deductions, you will need to remain a full-time employee of the business that required you to move for at least 78 weeks out of the following two years.
37. Intangibles like Licenses, Trademarks, and other Intellectual Property.
Most of the time, expenses related to the registering or protection of intellectual property are deductible. However, the process you go about it can differ depending on what you’re trying to deduct. Some costs must be depreciated over multiple years, while others can be fully deducted within the year in which they were incurred. For example, licensing fees are typically considered capital expenses that must be depreciated. However, trademarks can often be deducted in the same tax year. If you’re uncertain, we recommend working with a tax professional to ensure you’re in compliance with the regulations governing your specific situation.
No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.
Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.
To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both the employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.
Whether you’re filing your taxes quarterly or holding off for the next annual deadline, you should begin preparing for your taxes by keeping records of your expenses as of January of each year. Make sure to document each of these small business tax deductions by keeping physical receipts and writing down the business reason for the expense on your receipts as soon as you receive it.
With this comprehensive list of small business tax deductions, you’ll be well on your way to saving on your taxes this year. However, deductions can be tricky, it’s always best to consult a tax expert for any questions that might arise to ensure you are complying with all regulation and avoid any penalties.